ASSIGNMENT # 1 ISLAMIC FINANCIAL SYSTEM

SUBMITTED TO: SIR FARRUKH QURESHI

STUDENT ID #10232
STUDENT NAME: Jawad Hashmat

Question -1:
Which type of partnership is formed in above scenario and also
calculate profit/loss sharing ratio for all partners.
ANSWER 1: -
The suggestion partnership is formed in the given scenario. Musharakah is a term often
used in connection with Islamic financing methods. "Shirkah" means "sharing" and in
Islamic jurisprudence terms.
The scenario is based on SHIRKAT-UL-AQD. This is the second type of
shirkah, meaning "a partnership that is affected by a mutual agreement." For genocide,
it can also be translated as "normal trading company".
SHIRKAT -UL-AQD is further divided into three kinds and the above-
mentioned scenario of Musharakah is related to the term “SHIRKAT -UL - AMWAL”
where all the partners invest some capital into a commercial enterprise.

PROFIT AND LOSS RATIO:

In this type of Musharakah contract, the profit is distributed according to the
agreed ratio and the losses are carried into the business according to the
ratio of their capital investments.
The win rate agreed for Sikander is 30% and the win rate for Sulaiman is
25%. Total profit = 100% -55% = 45% The profit ratio for Shahrukh and
Saleem corresponds to the remaining profit at 45% / 2 = 22.5%.

LOSS RATIO: 
 Loss ratio is calculated as per the capital invested in business
by partners. 

Sulaiman’s ratio 10000000/18000000*100=55.5%

Sikander’s ratio 1000000/18000000*100=5.5%
Shahrukh’s ratio 3000000/18000000*100=16.7%
Saleem’s ratio 4000000/18000000*100=22.22%

Question – 2: In context with question-1, if Mr. Suleman wants to

terminate this partnership, what will be the treatment of termination of
partnership and distribution of profit and loss?

ANSWER 2: -

TERMINATION OF MUSHARAKAH:

Musharakah can be terminated in the following two ways.

1)Termination of Musharakah with closing the business.

2)Termination of Musharakah without closing the business.

1) Termination of Musharakah with closing the business:

Every partner has a right to terminate the Musharakah at any time after giving his partner a
notice to this effort, whereby the Mushaarkah will come to an end.
In this case if the assets of the musharakah are in cash form, all of them will be distributed
between the partners. But if the assets are not liquidated, the partners may agree either on the
liquidation of the assets, or on their distribution or partition between the partners as they are.

2)Termination of Musharakah without closing the business:

If one of the partners wants termination of the Musharakah, while the other partner or partners
likes to continue with the business, this purpose can be achieved by mutual agreement. The
partners who want to run the business may purchase the share of the partner who wants to
terminate his partnership, because the termination of musharakah with one partner does not
imply its termination between the other partners.

DISTRIBUTION OF PROFIT AND LOSS AFTER TERMINATION OF MUSHARAKAH

CONTRACT:
a) Profit Ratio:
The profit ratio of each partner must be determined in proportion to the actual profit accrued to
the business, and not in proportion to the capital invested by him.it is not allowed to fix a lump
sum amount for any one other partners, or any rate of profit tied up with his investment.
It is prohibited to set a fixed amount for any partner or attach any specific rate of profit to his
investment.
It is allowed for both partners to agree on profit percentage according to their investment, no
matter if the partner is working or not.
b) Loss Sharing:
Loss is distributed exactly according to the ratio of investment.

Question – 3: What do you understand by Diminishing Musharakah?

Describe step by step
transaction of a house financing agreement drawn on the basis of
Diminishing Musharakah?

DIMINISHING MUSHARAKAH:
According to this concept a financier and his client participate either
in the joint ownership of a property or an equipment or in a joint commercial
enterprise. The share of the financier is further divided into a number of units
and it is understood that the client will purchase the units of the share of the
financier one by one periodically, thus increasing his own share till all the
units of the financier are purchased by him so as to make him the sole
owner of the property, or the commercial enterprise as the case may be.

STEPS INVOLVED IN HOUSE FINANCING ON THE BASIS OF

DIMINISHING MUSHARAKAH

1)To create joint ownership in the property:

The first step is to create a joint ownership in the property. As “Shirkat -ul -milk can come into
existence in different ways including joint purchase by the parties.so no objection can be raised
against creating this joint ownership.

2)Giving the share of the financier to the client on rent:

The second part of the arrangement is that the financier leases his share in the house to his
client and charges rent from him. The property is leased to the partner himself, all of them are
unanimous on the validity of “ijarah”.

3)Promise from the client to purchase the unit of share of the

financier:

The third step is that the client purchases different units of the undivided share of the
financier. If the undivided share relates to both land and buildings, the sale of both is
allowed. Similarly, if the undivided share of the building is intended to be sold to the
partner; it is also allowed.

4)Actual purchase of the units at different stages:

It is believed that a promise to do something creates only a moral obligation on the promiser
which cannot be enforced. this sale is called “bai-bilwafa”. This bai-bilwafa is a special
agreement of sale of a house whereby the buyer promises to the seller that whenever the latter
gives him back the price of the house, hr. will resell the house to him.

5)Adjustment of the rental according to the remaining share of the

financier in the property.

Question – 4: Describe step wise procedure of Murabaha Transaction.

Differentiate between Conventional leasing and Murabaha?

ANSWER 4:

MURABAHA CONTRACT:
Murabaha is a particular type of sale and not a mode of financing. There are two essential
points which must be fully understood in this respect:
1)Murabaha is not a mode of financing. It is only a device to escape from interest. Therefore, it
should only be used when Murabaha and musharkah are not practicable.

2)Second important point is that Shariah scholars allowed Murabaha with some conditions.
Unless these conditions are fully observed, Murabaha is not permissible.
PROCEDURE OF MURABAHA CONTRACT:
1)The client and the institution sign an overall agreement whereby the institution promises to
sell and the client promises to buy the commodities on agreed ratio. The agreement specifies
the limit also.
2)When a specific commodity is required by the customer, the institution appoints the client as
his agent for purchasing the commodity on its behalf and an agreement is signed by both the
parties.
3)The client purchases the commodity on behalf of the institution and takes its possession as an
agent of the institution.
4)The client informs the institution that he has purchased the commodity on his behalf and at
the same time make an offer to purchase it from the institution.
5)The institution accepts the offer and the sale is concluded whereby the ownership as well as
the risk of the commodity is transferred to the client.

DIFFERENCE BETWEEN CONVENTIONAL LEASING AND MURABAHA:

The basic difference in the contract is that Murabaha is a sale contract whereas the
conventional finance overdraft facility is an interest-based lending agreement and transaction. In
case of Murabaha, the bank sales an asset and charges profit which is a trade activity declared
halaal(valid) in the Islamic Shariah.whereas giving loan and charging interest thereupon is pure
interest-based transaction declared haram(prohibited) by Islamic Shariah.