Islamic Banking

Shariah Compliance
Framework
(SCF)

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 Shariah and Banking

_ Shariah - a Law
_ Shariah - the Law
_ It covers all aspects of human life
including Financial matters
_ Islamic Banking is a Banking
_ The Difference - Shariah
 Why SCF

_ SCF-the need
_ The Structure
Ñ „t Central Bank-Central SBs
Ñ „t IBIs- S„s, SBs

_ Different practices- |
   

 

_ The Role & Responsibilities Shariah Bodies

_ The Criteria- Qualification, Experience etc.
_ F&P Criteria for „ppointment of «
 ither Steps

_ Shariah Inspection of IBIs/IFIs

Ñ -SpeciallyDesigned Manual
_ Shariah „udit
_ To Provide Guidelines, (Micro finance, „gri.
Finance)
_ To Prepare Essentials of Islamic Modes
_ Standardization of IB Practices-
International Standards („„iIFI-IFSB)
 The IB Systems ± Two Models

_ Full-Fledged- (Iran, Sudan)

_ Parallel Banking ± Pakistan,
Malaysia, Bahrain and many other
countries)
ÑThree Pronged Strategy
 Pre Requisites

_Training of Banking staff

_Training of Shariah staff
_General „wareness,
_Certificate/Degree Courses
Islamic Modes of
Financing
 Islamic Banking Modes

 

 | !: _ Tawarruq may also be used in exceptional
cases requiring specific prior approval of Islamic
_ i) Mudaraba Banking Department of SBP

_ ii) Musharaka $! | !#

_ iii) Diminishing Musharaka _ xi) Qard
_ iv) Equity Participation in the _ d. ither Modes:
form of shares in a corporate entity
_ xii) Wakalah
 
"| !#
_ xiii) „ssignment of Debt
_ v) Ijarah
_ xiv) Kafalah
_ vi) Murabaha
_ Isl. „gri. fin:
_ vii) Musawamah
Ñ Musaqah,
_ viii) Salam
Ñ Muzara¶a
_ ix) Istisna
Ñ Mughaerasa
 Murabaha

„ margin of profit based sale

where the seller expressly
mentions the cost of commodity
and adds agreed margin of profit.
Price must be fixed in an
unambiguous manner. If deferred,
due date should be known and
specific.
 «Murabaha

A Subject of sale must exist and it should be in

ownership of the seller at the time of sale.
A Bank makes purchases through agent;
A Payment to supplier and issuance of invoice by him;
A Price once agreed cannot change;
A Penalty in case of delay. To go to charity;
A Buyer may be asked to furnish security;
A No rollover is possible;
A Buyback arrangement is prohibited
A „ll conditions of sale must be met;
 Ijara

_ Ijara is an alternative to financing in which a

financer buys and rent a productive asset to a person
short of funds and is in need of such asset. The aim
of such arrangement is to obtain the rentals and
proceeds by receiving the benefits of the assets
through time.
 «Ijara
o Lessors¶s ownership;
· - Delivery of assets to lessee essential to claim
rentals;
· - Lessor¶s ownership during the entire term of
lease;
· - Rental in absolute terms.
Predetermined lease period
· - Penalty for delay;
· - Lessee bear the operating expenses;;
· - Unilateral promises
 Istisna¶

„ mode of sale, being an exception

to the norm, whereby an order is
placed by the buyer, with the
seller, to assemble, construct or
manufacture, or cause so to do,
anything to be delivered at a
future date, at an agreed price.
 «Istisna¶

_ Known and specified commodity;

- Fixation of price in absolute / unambiguous manner.

- Flexibility in manner of payment.

_ ibtaining of material cannot be the buyer¶s
responsibility;
_ Penalty for delay.
 Salam

_ „ sale where the seller agrees to

supply specific goods by a future
date in consideration of a price fully
paid in advance, at the time of
contract.
_ Suitable for „gr. finance.
 «Salam

Full payment of price at the time of contract

a must
- Firm agreement on quality, quantity,
specifications
- Date and place of delivery must be specified
- Commodities which can be offered in Salam
- „vailability of commodity;
- Salam cannot be tied
- No buy back with the Seller
- Security can be asked for
 Mudaraba

„n arrangement where one or more

persons participate with their
investment and other(s) with their
efforts/skills to participate in profit in a
predetermined ratio. The Manager
(Mudarib) can be a natural person, a
group of persons or legal entity.
 «Mudaraba

- Conduct of business within a

framework;
- Sharing of profit in agreed
proportion;
- Financial loss on capital only;
- Liability of investor limited to his
investment;
 Musharaka

_ Relationship established under a contract through

mutual consent of the parties for sharing of profits,
losses from a joint enterprise, venture. Investment
comes from all partners.

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- „ll assets joint property of all partners;
- Capital contribution in terms of money or
species at an agreed valuation.
 «Musharaka


#
- in strict proportion, mutually agreed
- no lump sum payment for anyone or at a rate
tied to capital invested;

#
- Losses to be shared in strict proportion of
investment.
 Diminishing Musharaka (DM)
(For Shrikatul-Milk)

DM is a form of co-ownership in which two or more

persons share the ownership of a tangible asset in an
agreed proportion and one of the co-owners
undertakes to buy in periodic installments the
proportionate share of the other co-owner until the
title to such tangible asset is completely transferred
to the purchasing co-owner.
 Wakalah

Wakalah is a contract of agency in which one person

appoints another person to perform a certain task on
his behalf on agreed terms and conditions, usually
against a certain fee. „ contract of Wakalah can take
place only in respect of such acts which the principal
is competent to perform himself, provided such act
can be performed by the agent.
 Kafalah

Kafalah is a contract in which a third party becomes

surety i.e. provides guarantee for the payment of
debt on behalf of the debtor. It is a pledge given by a
third party to a creditor to the effect that if the
debtor defaults in payment of the debt, it will be paid
by such third party as Kafeel i.e. Surety
 Tawarruq

Tawarruq literally means to

liquidate. In the Fiqhi term it is to
sell a commodity on Cash after its
purchase on deferred basis.
In practice, ë
 is an arrangement in which one party sells a commodity
to the other party on deferred payment at cost plus profit. The other party,
namely, the buyer, then sells the commodity to a third party on cash with a
purpose of having access to liquidity.
„dditional Information
 ë  

o ë   is an „rabic word meaning

³guaranteeing each other´ or joint guarantee.
o The principles of Takaful insurance are as
follows:
o Policyholders cooperate among themselves for
their common good.
o Every policyholder pays his subscription to help
those that need assistance.
o Losses are divided and liabilities spread
according to the community pooling system.
o Uncertainty is eliminated in respect of
subscription and compensation.
 Islamic „gri. Finance

o Guidelines on Islamic „gri. finance issued by

SBP.
o Islamic Banking Department and „griculture
Credit department of SBP on February 3rd, 2009
issued ³Guidelines on Islamic Financing for
„griculture´ to help banks develop specific
Shariah compliant products in order to meet the
financing needs of the farming community.
These Guidelines have been developed in
consultation with stakeholders while keeping in
view the potential and demand for Islamic
banking products in the field of agriculture.
„ 

_ Syed.zubair@alhudacibe.com
_ „mmar.afzal@alhudacibe.com