1. What is Riba ? Types of Riba?

RIBA - Commonly referred as Sood (in Urdu) Riba literally means excess, increase or addition Sood refers to -Lending of money -For a specified period -At a specific rate This is indeed Riba However, Riba is not limited to Sood It has a much wider connotation The actual reach of the Riba prohibition goes far beyond compensation for lending money It includes many transactions of sale and purchase where there is no element of credit Classification of Riba (a) Riba-un-Nasiyah or Riba-al-Jahiliya (b) Riba-al-Fadl or Riba-al-Bai Riba-un-Nasiyah or Riba-al-Jahiliya Real and primary form of riba.Premium paid to the lender in return for his waiting/giving or taking of every excess amount in exchange of a loan at an agreed rate irrespective of whether it is low or high. Types of Riba-un-Nasiyah or Riba-al-Jahiliya Tijarti Sood(Commercial interest) interest paid on loan taken for productive and profitable purpose Sarfi Sood (Usury) interest paid on loan taken for personal need and expenses Riba al Nasiah is also classified as: Sood-e-Mufrad( Simple Interest) interest calculated only on the initial investment Sood-e-Murakkab(Compound Interest) reinvestment of each interest payment on money invested to earn more interest. Riba-al-Fadl Excess taken in exchange of specific commodities which are homogeneous. Legal definition differs in every fiqh.

Hadith prohibiting Riba-al-Fadl sell gold in exchange of equivalent gold sell silver in exchange of equivalent silver sell dates in exchange of equivalent dates sell wheat in exchange of equivalent wheat sell salt in exchange of equivalent salt sell barley in exchange of equivalent barley 2. Define Islamic Factors of Production ? 1. Capital That is, those means of production which cannot be used in the process of production until and unless during this process they are either wholly consumed or completely altered in form, and which, therefore, cannot be let or leased (for example, liquid money or food stuffs etc.) Compensation: Profit 2. Land that is, those means of production which are so used in the process of production that their original and external form remains unaltered, and which can hence be let or leased (for example, lands, houses, machines etc.) Compensation: Rentals 3. Labour -that is, human exertion, whether of the bodily organs or of the mind or of the heart. This exertion thus includes organization and planning too. Compensation: Wages 3. Define Conditions in Contract? CONDITIONS IN CONTRACTS 1. A condition, which is not against the contract, is a valid condition. For example a condition of security in case of Credit Purchases 2. A condition, which seems to be against the contract, but it is in the market practice, is not void, if its voidness is not proved with the clear injunctions of the Holy Quran and Sunnah. For example a condition that the seller will provide five-year guarantee and one year free service. 3. A condition that is against the contract and not in market practice but is in favor of one of the contractors or subject matter, the condition is void. For example if A sells a car with a condition that will use it on a fixed date every month, this contract will be void.

4. A condition, which is against the contract, not in the market practice and not in favor of any contractor, that is not a void condition. For example if both A and B decide to give to charity, a certain percentage of both subject matter and consideration, upon completion of sale 4. Define Sale and its Types? Sale is defined in Shariah as Exchange of a thing of value, by another thing of value, with mutual consent Types of Sales Some types of sales have acquired their own names Salam: Forward purchase Requires full payment of price before the parties separate Murabaha Where the transaction is done on a cost plus profit basis i.e. the seller discloses the cost to the buyer and adds a certain profit to it to arrive at the final selling price. Sarf: Currency exchange Stringently regulated because of Riba rules Both parties must exchange the currency during the session in which the trading is concluded Istisna Commissioned manufacture Arbun Option contract Buyer makes a non-refundable deposit against price Getting the right to confirm or rescind the sale Ijarah Sale of usufruct both persons and property For Hanafis, whose definition of property or Maal excludes usufruct, Ijara is an exception to general rule Both counter-values in these contracts must be specified precisely, else gharar renders the contract invalid. 5. Define Rule of sales ? Rule 1 The subject of sale must exist at the time of sale For Example, A sells the unborn calf of his cow to B,the sale is invalid. Rule 2 The subject of sale must be in the ownership of seller at the time of sale. Hence, what is not owned by the seller cannot be sold.

For Example, A sells to B a car which is presently owned by C, but which A intends to purchase from C. Since the car is not owned by A at the time of sale, the sale is void. Rule 3 The subject of sale must be in the physical or constructive ownership of seller at the time of sale. Constructive Possession means where the buyer has not taken physical delivery of goods, but the goods are under his control. And all rights and liabilities of the goods have passed to him,i.e. the goods are at his risk. For Example, A has purchased a car from B , B has not physically handed over the car to A but has placed it at a garage which is in control of A. A can access the car whenever he wants to do so. The risk of the car has practically passed to A, the car is in the Constructive Possession of A,now A can sell the car to third party. Rule 4 The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. For Example, A says to B on the 1st of January: I sell my car to you on the 1st of February. The sale is void, because it is contingent on a future event. Rule 5 The subject of sale should be an object of value. A thing having no value according to the usage of trade cannot be sold. Rule 6 The subject of sale should not be a thing used for a Haram purpose, e.g. pork, wine etc. The subject should be Maal-e-mutaqawwam Rule 7 The subject of sale should be specifically known and identified to the buyer. The subject of sale must be identified by pointing out or by detailed specification which can distinguish it from other things not sold. For Example, A points to a building and says to B: I sell one of the apartments in this building to you. The sale is void unless the apartment is specifically identified to the buyer. Rule 8 The delivery of the sold commodity to the buyer should be certain and should not depend on a contingency or chance. For Example, A sells his stolen car to a person in hope that he will manage to get it back, the sale is void. Rule 9 The certainty of price is a necessary condition for the validity of sale.

For Example, A says to B: If you pay in one month, the price is Rs50, but if you pay in 2 months the price is Rs55. The price is uncertain and the sale is void. A can give the two options to B, but then B must select one option to validate the sale. Rule 10 The sale must be unconditional. A conditional sale is invalid, unless the condition is recognized as a usual practice of trade For Example, A buys a refrigerator from B with a condition that B undertakes its free service for 2 years. The condition, being recognized as a part of the transaction, is valid and the sale is lawful. 6. Define Khiayrs ? Khiyar: The option or right of the buyer & seller to rescind a contract of sale. Khiyar-e-Shart: At the time of sale Buyer or Seller can put a condition That he has an option to rescind the sale Within a specific number of days Specification of number of days is necessary Within this period the sale can be rescinded without giving any reason Khiyar-e-Roiyyat (Option of inspecting goods): Where the goods can be returned after inspection. This applies automatically to all contracts e.g. A buys machinery from B without seeing A has the option of returning the machinery after inspection Khiyar-e-Aib (Option of defect): Where the goods can be returned if found defective It is the responsibility of the seller to supply goods free of defect or point out the defect to the buyer. Not disclosing the defect of the goods constitutes a fraud. The buyer has the right to return the good in case of a defect which is considered a defect in the market and which depreciates the value of the goods. Khiyar-e-Wasf (Option of quality): Where the goods are sold by specifying a certain quality by the Seller, but which is absent in the goods Khiyar-e-Ghaban (Option of price): If the seller sells the goods at a price which is far expensive than the market price, The Buyer has the right to return the goods to the seller. Iqala (Recession of Contract): Where parties freely consent to rescind the contract i.e. each party gives back the consideration received by it.

In one of the hadiths, Prophet has stated "He who does the Iqala with a Muslim who is not happy with his transaction, Allah will forgive his sins on the Day of Judgment." 7. Define Murabaha? Since Murabaha is a sale transaction, rules of Shariah regarding sale should be understood. Murabaha is a particular kind of sale and not a financing in its origin. Where the transaction is done on a cost plus profit basis i.e. the seller discloses the cost to the buyer and adds a certain profit to it to arrive at the final selling price. The distinguishing feature of Murabaha from ordinary sale is: - The seller discloses the cost to the buyer. - And a known profit is added. Payment of Murabaha price may be: 1) At spot 2) In installments 3) In lump sum after a certain time Hence, Murabaha does not necessarily imply the concept of deferred payment. Basic rules for Murabaha financing: Asset to be sold must exist. Sale price should be determined. Sale must be unconditional. Assets to be sold: a) Should not be used for un-Islamic purpose. b) Should be in ownership of the seller at the time of sale; physical or constructive. Re-negotiation of price and roll over of Murabaha are not permitted. Discounting of Murabaha instrument is not permitted. Step by step Murabaha financing 1. Client and bank sign an agreement to enter into Murabaha (MMFA). 2. Client appointed as agent to purchase goods on banks behalf Bank Client 3. Upon submission of Order form Bank gives money to agent/supplier for purchase of goods. 4. The agent takes possession of goods on banks behalf and informs bank through a Declaration form. 5 (a) Client makes an offer to purchase the goods from bank through a Murabaha Contract. 5 (b) Bank accepts the offer and sale is concluded Murabaha Contract 6. Client pays agreed price to bank according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal)

8. Practical issues in Murabaha? 1. Timing of Offer & Acceptance 2. Rollover in Murabaha 3. Rebate on Early payment 4. Penalty in Late payment 5. Subject Matter 6. Purchase Evidence 7. Direct Payment 8. Profit recognition 9. Training of Customer & Bank staff 10. Process of Murabaha differ from product to products 1. Timing of Offer & Acceptance A Murabaha financing arrangement consists of a series of documents to be executed at various stages, the sequence and timing of which is extremely important. Through this, client and the bank execute an important step of a valid Murabaha sale i.e. Offer & Acceptance. This is to be signed by the customer when it has purchased and taken possession of the goods as the Banks agent. Offer & Acceptance must be signed while the goods are still in existence and have not been used in the production process or sold to some other entity. 2. Rollover in Murabaha Rollover in Murabaha is not allowed since each Murabaha transaction is for the purchase of a particular asset. A new Murabaha can only be executed for the purchase of new assets. It is advisable that whenever practicable there must be a gap of 1-2 days between maturity of the previous Murabaha and disbursement of the new one. 3. Rebate on early payments If the customer makes early payment and there is no commitment from the institution in respect of any discount in the price of Murabaha, than the institution has the sole discretion in allowing them the rebate It is not recommended to make it a practice and must be avoided in normal course of business. Such issue, if arises, should be brought in the knowledge of Shariah advisor 4. Penalty on late payments As soon as the Murabaha is executed, the Murabaha price becomes a receivable (Dayn) for the Bank. Hence, any amount charged over and above the dayn amount will be Riba. However, it is permissible to have an undertaking from the customer to pay an amount of money or a percentage of the debt to be donated to charitable causes in the event of delay in payment/installments.

5. Subject matter of Murabaha Goods must exists at the time of execution of Murabaha. Murabaha cannot be done in all commodities, e.g. such as currencies, gold, silver. Murabaha cannot be used for paying utility bills, wages, overhead expenses, etc. General rules of sale related to subject matter must be followed 6. Purchase Evidence In order to ensure that the customer actually purchased the assets as claimed, the customer is required to submit asset purchase evidence along with Offer & Acceptance. The purchase evidence must confirm that the asset purchase took place after the agency agreement. Asset purchase may be in the form of Invoices, delivery orders, truck receipts etc. In some cases, however, it may be too burdensome for the client to submit all the invoices as the number of invoices may run into hundreds. For example, cotton purchases are generally in small quantities from various sources and hence for each Sub- Murabaha there may be too many invoices to submit. It is suggested to furnish considerable sample of invoices along with summary of all purchases. 7. Direct Payment in Murabaha In many cases, the disbursement is made to the customer as an agent of the bank. In order to ensure transparency of the Murabaha, it is preferable that disbursement / payment be made directly to the supplier. 8. Profit Recognition in Murabaha Generally in Murabaha transaction there are in two stages: Investment Stage (Agency to Purchase) Financing Stage (Declaration to payment) The profit for the Murabaha transaction can be recognized after the goods are sold by the bank to the customer. 9. Training of Customers & Bank staff Proper training & understanding of is very important for Bank staff dealing with the Murabaha Customers purchase officers & accounts staff. 10.Process of Murabaha differ from product to product Application of Murabaha is not simple for all products Its application differs from products to products like Sugar cane Shares Leather Cotton Gas Petrol

9. What is Ijarah? How it differs from Lease financing? Literally Ijarah means To give something on rent The term Ijarah is used in two context: 1. To employ the services of a person on wages e.g. A hires a porter at the airport to carry his luggage. 2. Another type of Ijarah relates to paying rent for use of an asset or property defined as LAND in Islamic Economics Ijarah is an Islamic alternative of Leasing. Leasing backed by an acceptable contract is an acceptable transaction under Shariah. The question of whether or not the transaction of leasing is Shariah compliant depends on the terms and conditions of the contract. Several characteristics of conventional agreements may not conform to Shariah, thus making the transaction un-Islamic and thereby invoking a prohibition 10. What is Musharkah ? Types of Musharkah? Musharakah is basically a kind of partnership in which the partners join together with different contributions, work or obligation for the common objective of undertaking business and trade in accordance with the principles of Shariah Shirkat has been divided into two kinds: 1. SHIRKAT-UL-MILK It means joint ownership of two or more persons in a particular property/asset. 2. SHIRKAT-UL-AQD This is the second type of Shirkah which means a partnership effected by a mutual contract for . 1. SHIRKAT-UL-MILK It means joint ownership of two or more persons in a particular property. This kind of Shirkah may come into existence in two different ways: 1. OPTIONAL SHIRKAT-UL-MILK (Ikhtiari) -If two or more person purchase an equipment, it will be owned jointly by both of them and the relationship between them with regard to that property is called Shirkat -ul-milk. - Here this relationship has come into existence at their own option, as they themselves elected to purchase the equipment jointly. 2. UNOPTIONAL SHIRKAT-UL-MILK (Ghair Ikhtiari) -There are cases where this kind of Shirkah comes to operate automatically without any action taken by the parties. For example, after the death of a person, all his heirs inherit his property which comes into their joint ownership as an automatic consequence of the death of that person.

2. SHIRKAT-UL-AQD This is the second type of Shirkah which means: A partnership effected by a mutual contract in which the partners join together with different contributions, work or obligation for the purpose of earning profit.For the purpose of brevity it may also be translated as Joint commercial enterprise. Shirkat-ul-aqd is further divided into three kinds: 1. Shirkat-ul-amwal (contractual partnership) 2. Shirkat-ul-Amal (liability partnership) 3. Shirkat-ul-wujooh (vocational partnership 1. Shirkat-ul-amwal: Where all the partners invest some Capital into a Commercial enterprise. It is the most important & commonly used form of Shirkat 2. Shirkat-ul-Amal : Where all the partners jointly undertake to render some services for their customers. The fee charged from them is distributed among them according to an agreed ratio. If two persons agree to undertake tailoring services for their customers on the condition that the wages so earned will go to a joint pool which shall be distributed between them irrespective of the size of work each partner has actually done. 3. Shirkat-ul-wujooh The word Wujoohcomes from Wajahat meaning goodwill Hence this is a partnership in Goodwill Here the partners contribute in the business not through capital but through their goodwill and share profit at an agreed ratio All they do is that they purchase the commodities on a deferred price and sell them at spot. The profit so earned is distributed between them at an agreed ratio. Each of the above three types of Shirkat-ul-Aqd are further divided into two types: Shirkat-Al-Mufawada(Capital & labour at par): All partners share capital, management, profit, and risk in absolute equals. It is a necessary condition for all four categories to be shared amongst the partners Every partner who shares equally is a Trustee, Guarantor and Agent on behalf of the other partners Shirkat-ul-Ainan : A more common type of Shirkat -ul-Aqd where equality in capital, management or liability might be equal in one case but not in all respect meaning either profit is equal but not labour or vice versa.

11. Define Mudarbah ? This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called Rab-ul-Mal (Investor) The management and work is an exclusive responsibility of the other, who is called Mudarib (Working Partner) Profit is shared as per pre -agreed ratio In case of Mudarbah all losses are borne by Rab-ul- Maal 1. Al Mudarabah Al Muqayyadah (Restricted Mudarabah) 2. Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah) 1. Al Mudarabah Al Muqayyadah (Restricted Mudarabah) Rab-ul-Mal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. 2. Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah) Rab-ul-mal gives full freedom to Mudarib to undertake whatever business he deems fit Rab-ul- Mal has authority to: a) Oversee the Mudaribs activities and b) Work with Mudarib if the Mudarib consents. Capacities of Mudarib 1. Ameen (Trustee): The money given by Rab-ul-Maal (investor) and the assets required therewith are held by him as a trust. 2. Wakeel (Agent): In purchasing goods for trade, he is an agent of Rab-ul-Maal. 3. Shareek (Partner): In case the enterprise earns a profit, he is a partner of Rab-ulMaal who shares the profit in agreed ratio. 4. Zamin (Liable): If the enterprise suffers a loss due to his negligence or misconduct, he is liable to compensate the loss. 5. Ajeer (Employee):If the Mudarabah becomes void due to any reason, the Mudarib is entitled to get a fee for his services. 12. Define any two 1. Istisna Istisnaa is a contract of sale of specified items to be manufactured (or constructed), with an obligation on the part of the manufacturer (or contractor) to deliver them to the Customer upon completion. Istisnaa is the second exception to the rules of sale where a sale is allowed without immediate delivery of the goods sold.

An Istisnaa contract is permitted only for raw materials that can be transformed from their natural state by a manufacturing or construction process involving labor. It is not permissible that the subject matter of an Istisnaa contract be an existing and identified capital asset. If complete specifications (such as type, kind, quality and quantity) of the subject matter have been given to the manufacturer along with the contract price, then the manufacturer is bound to manufacture the Asset and cannot terminate the contract unilaterally. The ultimate purchaser cannot be regarded as the owner of the materials in the possession of the manufacturer for the purpose of producing the subject matter. The time of delivery of goods does not necessarily have to be fixed in Istisnaa however, a maximum time may be agreed upon between the parties. The delivery of the subject matter may take place through constructive possession. At this point, the liability of the manufacturer in respect of the subject matter comes to an end and the liability of the ultimate purchaser begins. It is necessary for the validity of Istisnaa that the price is fixed with the consent of the parties. The Istisnaa price can either be paid in advance, or in installments or at the time of delivery of goods. The price of Istisnaa transactions may vary in accordance with variations in the delivery date. 2. Tijarah Tijarah is as ale & Agency based financing facility for Customers who sell Finished Goods on Credit basis. The facility will enable the Customers to sell their Finished Goods stock, meet their working capital requirements and enjoy the benefits of Cash sales. Under this concept the Bank will purchase the finished goods of the Customers and will appoint the Customer as its agent to sell the same goods in the market generally on Credit basis. It is necessary for the validity of Finished Goods transaction that the price is fixed with the consent of the parties and that the necessary specification of the required items is fully settled between them. The Finished Goods price is ideally paid on Spot with immediate delivery of Goods. Salient Features of Tijarah under the Finished Goods Financing Agreement A Finished Goods contract is permitted for Completed/ Finished Goods that have been transformed from their natural state by a manufacturing or construction process involving labor. The price of a Finished Goods contract is ideally paid on the spot with immediate delivery of goods. The delivery of the subject matter may take place through constructive possession. At this point, the liability of the Customer in respect of the subject matter comes to an end and the liability of the Bank begins until its sale to the ultimate purchaser., The parties may agree on a period during which the Customer will be liable for any defects.

Finished Goods Agreement can be used for providing financing facility in transactions where final / transformed goods are available for sale. It is just like a normal sale purchase transaction where a seller (the Customer) sells a good to a buyer (the Bank) on cash basis. The Bank then appoints the Customer as its Agent to sell the same goods to a third party. Finished Goods as a Mode of Finance The Goods through Finished Goods Agreement can be sold by the Bank in one of the following manners: 1. Outright sale by the Bank to some 3rd party after receipt of delivery of Goods. 2. Appoint the Customer as an Agent to sell the goods in the market. 3. The Bank can also have a promise to buy Finished Goods from some 3rd party for the goods having same specifications as the ones available with the Bank. Option 2 - Appoint the Customer as an Agent to sell the goods in the market. A Customer (Manufacturer/ trader) has a stock of specified goods that are generally sold on credit. Since the Customer will be short of funds during the credit period and this will affect his working capital. The Customer has approached Bank for financing facility based on Sale & Agency. 3. Bai Salam It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of effecting the sale. In the absence of full payment, it will be tantamount to sale of a debt against a debt which is expressly prohibited by the Holy Prophet. Moreover the basic wisdom for allowing Salam is to fulfill the instant need of the seller. If its not paid in full, the basic purpose will not be achieved. Conditions of Salam Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified eg. precious stones cannot be sold on the basis of Salam because each stone differ in quality, size, weight and their exact specification is not possible. Salam cannot be effected on a particular commodity or on a product of a particular field or farm e.g.. supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and given such possibility, the delivery remains uncertain. All details in respect to quality of goods sold must be expressly specified leaving no ambiguity which may lead to a dispute. It is necessary that the quantity of the commodity is agreed upon in absolute terms. It should be measured or weighed in its usual measure only meaning what is normally weighed cannot be quantified and vice versa. The exact date and place of delivery must be specified in the contract. Salam cannot be effected in respect of things, which must be delivered at spot.

The commodity for Salam contract should remain in the market right from day of contract up to the date of delivery or at least at the date of delivery. The time of delivery should be at least fifteen days or one month from the date of agreement. Price in Salam is generally lower than the price in spot sale. The period should be long enough to affect prices. But Holy Prophet SAW did not specify any minimum period for the validity of Salam. It is all right to have a earlier date of delivery if the seller consents to it. Since price in Salam is generally lower than the price in spot sale; the difference in the two prices may be a valid profit for the Bank. A security in form of a guarantee, mortgage or hypothecation may be required for a Salam in order to ensure that the seller delivers. The seller at the time of delivery delivers commodities and not money to the buyer who would have to establish a special cell for dealing in commodities.