Investment
Principles & Investment Products
Islamic
banks do not directly deal in money. They run business with money. The funds of
Islamic banks are mainly invested in the following modes:
1) Mudaraba;
2) Musharaka;
3) Bai-Murabaha (Murabaha to the purchase
orders);
4) Bai-Muajjal;
5) Salam and parallel Salam;
6) Istisna and parallel Istisna;
7) Ijara;
8) Ijarah Muntahia Bittamleek (Hire
Purchase);
9) Hire Purchase Musharaka Mutanaqisa
(HPMM);
10) Direct Investment;
11) Investment Auctioning etc.
12) Quard
13) Quard Hassan etc.
1.Mudaraba: Mudaraba
is a shared venture between labour and capital. Here Bank provides with entire
capital and the investment client conducts the business. The Bank, provider of
capital, is called Sahib-Al-Maal and the client is called Mudarib. The profit
is to be distributed between the Bank and the investment client at a
predetermined ratio while the bank has to bear the entire loss, if any.
2. Musharaka: Musharaka means partnership business. Every
partner has to provide more or less equity funds in this partnership business.
Both the Bank and the investment client reserve the right to share in the
management of the business. But the Bank may opt to permit the investment client
to operate the whole business. In practice, the investment client normally
conducts the business. The profit is divided
between
the bank and the investment client at a predetermined ratio. Loss, if any, is
to be borne by the bank and the investment client according to capital ratio.
3. Bai-Murabaha: Contractual buying and selling at a mark-up
profit is called Murabaha. In this case, the client requests the Bank to
purchase certain goods for him. The Bank purchases the goods as per
specification and requirement of the client. The client receives the goods on
payment of the price which includes mark-up profit as per contract. Under this
mode of investment the purchase/ cost price and profit are to be disclosed
separately.
4.Bai-Muajjal:
Meaning:
"Bai-Muajjal" means sale for which payment is made at a future fixed
date or within a fixed period. In short, it is a sale on Credit. It is a
contract between a buyer and a seller under which the seller sells certain
specific goods (permissible under Shariah and Law of the Country), to the buyer
at an agreed fixed price payable at a certain fixed future date in lump sum or
within a fixed period by fixed installments. The seller may also sell the goods
purchased by him as per order and specification of the buyer.
In
Bank's perspective, Bai-Muajjal is treated as a contract between the Bank and
the Client under which the bank sells to the Client certain specified goods,
purchased as per order and specification of the Client at an agreed price
payable within a fixed future date in lump sum or by fixed installments.
5. Salam
and Parallel Salam:
Salam means advance purchase. It is a mode of business under which the buyer
pays the price of the goods in advance on the condition that the goods would be
supplied / delivered at a particular future time. The seller supplies the goods
within the fixed time.
Parallel
Salam:
Parallel
Salam is a Salam contract whereby the seller depends, for executing his obligation,
on receiving what is due to him - in his capacity as purchaser from a sale in a
previous Salam contract, without making the execution of the second Salam
contract dependent on the execution of the first one.
The
following conditions are essential in the contracts of Murabaha, Bai-Muajjal
and Salam. The respective contracts must include the following aspects
regarding the goods:
* Number/Quantity * Quality *
Sample
* Price and amount of profit * Date of supply/time limit * Place of supply
* Who will bear the cost of supply?
* Timeframe for payment in case of
Bai-Murabaha and Bai-Muajjal.
6. Istisna
and parallel Istisna:
A contract executed between a buyer and a seller under which the seller pledges
to manufacture and supply certain goods according to specification of the buyer
is called Istisna. An Istisna agreement is executed when a manufacturer or a
factory owner accepts a proposal placed to him by a person or an Institution to
produce/manufacture certain goods for the latter at a certain negotiated price.
Here,
the person giving the order is called Mustasni, the receiver of the order is
called Sani and the goods manufactured as per order is called Masnu.
An
order placed for manufacturing or producing those goods which under prevailing customs
and practice are produced or manufactured will be treated as Istisna contract.
Conditions
& characteristics of Istisna are enumerated below:
a)The
concerned Agreement must contain the details, such as, the type, class,
quantity and features of the goods to be produced, so that no misunderstanding
is created later on.
b) The price has to be settled; payment
time/schedule and modes thereof is to be predetermined.
c) When, where and on whose cost the goods to be
supplied has to be clearly mentioned.
d) If agreed by both parties, payment may be
made in advance to the seller in part or in full
or may be deferred to be paid in due course/ agreed time.
e) Generally
timeframe is not
mandatory for supplying
the goods under
Istisna agreement. It may be
executed without determining timeframe. But in case of bank, timeframe for supplying goods must be
determined to avoid any dispute in future.
f) Condition for imposing stipulated
compensation/penalty may be included in the Istisna agreement against the party
who breaches the terms of the agreement causing the other party to suffer. But
no compensation/penalty would be imposed on any party if it happens for any
valid reason or unavoidable circumstances.
g) As per opinion of the contemporary jurists,
the compensation in case of Istisna may be treated as legal income.
Parallel
Istisna:
If
it is not stipulated in the contract that the seller himself would
produce/provide the goods or services, then the seller can enter into another
contract with third party for getting the goods or services produced/ provided
by the third party. Such a contract is called Parallel Istisna. This may be
treated as a sub-contract. The main features of this contract are:-
i)
The original Istisna contract remains valid even if the Parallel Istisna
contract fails and the seller will be legally liable to produce/ provide the
goods or services mentioned in the Istisna contract.
ii)
Istisna and Parallel Istisna contracts are treated as two separate contracts.
iii)
The seller under the Istisna contract will remain liable for failure of the
sub-contract.
7. Ijara : The mode under which any
asset owned by the bank, by creation, acquirement / or building-up is rented out is called Ijara or
leasing. In this mode, the leasee pays the Bank rents at a determined rate for
using the assets/properties and returns the same to the Bank at the expiry of
the agreement. The Bank retains absolute ownership of the assets/properties in such a case. However,
at the end of the leased period, the asset may be sold to the client at an
agreed price.
8. Ijarah
Muntahia Bittamleak (Hire-Purchase): Under
this mode, the bank purchases vehicles, machineries and instruments, building, apartment etc. and
allowed clients to use those on payment of fixed rents in installments with the
ultimate objective to sell the asset to the
client at the end of the rental period . The client acquires the
ownership/ title of the assets/ properties subject to full payment/ adjustment
of all the installments.
9. Hire-purchase Musharaka
Mutanaqasa (HPMM):
Hire-purchase Musharaka Mutanaqasa means purchasing and acquiring ownership by
one party by sharing in equity and paying rents for the rest of the equity held
by the Bank/or other party. Under this mode, the Bank and the client on
contract basis jointly purchase vehicles, machineries, building, apartment etc.
The client uses the portion of the assets owned by the bank on rental basis and
acquires the ownership of the same assets by way of paying banks portion of the
equity on the assets in installments together with its rents as agreed upon.
The
features of this mode are elaborated below:
a)
The client applies to the Bank expressing his/her wishes to purchase the assets/properties
and the bank accords its approval after proper evaluation/ scrutiny.
b)
The client deposits his/her share of equity with the bank after obtaining approval
and the bank pays total price of the assets/properties together with its equity.
c)
Before purchase of the assets/properties an agreement is executed stipulating
the actual prices, monthly rents, price of the bank's portion of the
assets/properties, payment schedule and installment amount and the nature of
the security etc.
d)
The bank shall rent out its own portion of the assets/properties to the client
as
per
terms & conditions of the agreement.
e) The client (Hirer) pays off in installments
bank's portion of equity on the assets together with its fixed rent as per the
terms and conditions of the agreement.
f) With the payment of installments by the
client, the ownership of the bank in the assets/properties gradually
diminishes, while that of the client increases.
g)
The amount of
the rent receivable
by the bank,
reduces gradually proportionate
to the increase in the ownership of the client on the assets/properties.
h)
The client acquires full ownership of the goods/assets after payment of the entire
dues of the bank.
i)
The client may acquire the full ownership of the assets/properties before expiry
of the deal by paying off the entire dues to the bank.
j)
The rent remains payable in proportion to Bank's ownership, if the client fails
to pay the due installment(s).
k) The bank can take of the assets / properties
under its control, if the client fails to pay the installment(s) as per the
terms and conditions of the agreement.
L) The ownership of the assets/properties
remains with the bank until the entire equity provided by the bank together
with the fixed rent is fully paid off.
On full payment/ adjustment of Bank's dues, it transfers the ownership
to the client.
m) The amount which the bank receives as rent is
its income. The rent should not treat as a part of the equity in any way.
10. Direct Investment: Under
this mode, the
bank can under
its full proprietorship conduct
business by directly investing in the industries, trading, transports etc. In
these cases, the profit/loss fully goes to the bank.
11.Investment
Auctioning:
Selling by auction of those assets/goods acquired by the bank through direct
investment is called Investment auctioning. Generally, the bank establishes
industrial units by direct investment, makes the same operationally profitable
and then sells out on auction. This mode of investment is very helpful for industrialization
of the country.
12. Quard:
It
is a mode to provide financial assistance/ loan with the stipulation to return
the principal amount in the future without any increase thereon.
13. Quard
Hassan: This
is a benevolent loan that obliges a borrower to repay the lender the principal
amount
borrowed on maturity. The borrower, however, has the discretion to reward the
lender for his loan by paying any amount over and above the amount of the principal
provided there will be no reference (explicit or implicit) in this regard.
If
a bank provides its client any loan, it can receive actual expenditure relating
to the loan as service charge only once. It can not charge annually at a
percentage rate.
If
a loan is provided against the money deposited by a client in the bank, it has
the right not to pay any profit against the amount of money given as loan. But
profit should be paid on the rest of the amount deposited as per previous
agreement.
