Islamic Financing, offers a range of Ethical and Sharia – Compliant Investment products… Mudaraba is an equity-based instrument where one party (Rabbul Maal) is the investor and the other (Mudarib), the fund manager. The ratio of profit sharing is determined at the time of making the investment. In this partnership, the investor provides the funds and the Fund Manager provides the Management skills. The profits generated from the pool of investments are shared between the two in a manner where the investor is rewarded for the risk he/she bears and the Fund Manager is compensated for his Management skill.
In an unlikely event of a loss from an investment, the profits distributed to the investors are after the absorption of that loss by the pool of investors.
As a Mudarib, The institute providing islamic finance is a trustee as well as an agent for the Investors and it uses its infrastructure, contacts, competence, know-how and goodwill in a prudent manner to obtain the best investment returns.
The institute will use the fund only to finance Sharia compliant and ethical business activities.
Murabaha as a Mode of Financing
Murabaha refers to the sale of a commodity in which the seller agrees with the buyer to provide him a specific commodity on a certain profit added to his cost. The basic principle of Murabaha is that the seller must disclose the actual cost he has incurred in acquiring the commodity and his profit mark-up thereon. The profit may be a specified amount or be based on a percentage.
Most Islamic banks and financial institutions use Murabaha as a convenient mode of Islamic finance. It can be used as a mode of finance for almost any type of asset-backed financing, including trade finance, import & export, vehicle financing etc.
Murabaha financing also allows for payment on deferred tenors. In such cases, the profit mark up may vary according to the nature of the transaction.
Basic Rules
Murabaha is not a loan given on interest but it is the sale of a commodity; therefore it has to fulfill all conditions necessary for a valid Islamic sale. Although there are many rules regarding contract of sale, the following 3 rules are most important to make any sale valid.
(1)The goods must exist at the time of sale
(2)The goods must be in the ownership of the Seller at the time of the sale.
(3)The goods must be in the physical or constructive possession of the seller at the time of sale.
Financing by way of Murabaha is only acceptable if there is no "Buy Back" arrangement. Such an arrangement is generally used as a device to earn interest. Therefore, Investor should be supplied to and then sell to its client.
Step by step procedure of financing by way of Murabaha
(1)Customer and Investor sign an agreement to enter into a Murabaha transaction.
(2)Investor appoints the customer as an agent to purchase goods on its behalf.
(3)Investor gives money to the customer for the purchase of goods on its behalf.
(4)Customer purchase goods on behalf of Investor and take possession as an agent.
(5)Customer make an offer to purchase the goods from Investor.
(6)Investor accept the offer and the sale is concluded.
(7)Customer pays the agreed price to the Investor on the spot or deferred payment basis on what mutually agreed between them.
The Murabaha Transaction
THE MOST ESSENTIAL ELEMENT OF THE TRANSACTION IS THAT THE COMMODITY MUST REMAIN AT INVESTOR’S RISK AFTER PURCHASE FROM THE SUPPLIER AND BEFORE THE SECOND SALE TO THE CUSTOMER.
Security/Collateral
Normally, the custoemr is required to provide adequate security / collateral to cover Investor’s exposure on the Tradeslanka.
Salient Features
Asset - based financing
Transparent fixed pricing
Investor takes full ownership risk between buying & selling goods
Sharia compliant
No hidden costs & processing fees.
No interest rate fluctuation risk
Musharaka literally means sharing. In the context of business it means a joint venture in which all partners share the profit and loss of the joint venture. Musharaka is an ideal alternative to interest based financing with positive and far reaching effects on production and distribution.
Musharaka as a Mode of Finance
The general presumption regarding Musharaka is that it is a contract for initiating a joint venture right from its inception and to continue right up to the end of the business venture, but in fact, it is a versatile instrument which can be and is being applied in a wide variety of forms all over the world. Musharaka is used today to finance "going concerns" where partners may join and leave without adversely affecting the continuity of the business. The concept of Musharaka is based on some principles and so far as these principles are not violated, the form and procedure of Musharaka can take any shape.
The principles set by Sharia for a Musharaka transaction are as follows:
All rules for a valid mutual contract should be observed. e.g. The parties should be capable of entering into a contract, the contract should take place with the free consent of the parties without any duress etc....
The proportion of profit to be distributed between the partners must be agreed upon at the time of entering the contract.
The ratio of profit must be determined in proportion to the actual profit earned and not in relation to the capital invested by a partner.
It is not allowed to pay a fixed lump sum profit amount to any of the partners or any rate of profit linked to the amount of the investment made by a partner.
The ratio of profit may differ from the ratio of capital contribution provided the partner who has put an express condition that he will not work does not receive more than his ratio of capital contribution.
Losses shall be shared in the exact proportion of the capital contribution of each partner.
The Structure of a Musharaka Contract
Management of Musharaka
The normal principle of Musharaka is that every partner has a right to take part in the management and to work for it. However, the management of the project may be carried out by all the partners or by just one partner.
Finance using the structure of the Musharaka is available to exporters who require pre-shipment finance (packing credit) and post-shipment finance (export bill negotiation) under export Letters of Credit. Musharaka financing is also available for imports, local trading, working capital financing, real estate, etc., on a selective basis.
Security / Collateral
Security can be taken in a Musharaka transaction but shall be only enforced in circumstances involving fraud, negligence or mismanagement by the managing partner.
Musawamma is a simple sale transaction where the seller sells his commodity without disclosing his costs.
Musawamma, as a mode of financing is almost identical to Murabaha financing.
custoemr offers this product in situations where the shipment has arrived before the receipt of the shipping documents and a shipping guarantee has to be issued to clear the goods from the port. It is difficult to compute the exact cost of the goods at that stage. Hence Murabaha cannot be done. The Musawamma is a financing technique which allows for selling of the goods at a lump-sum price, facilitating the clearance of the goods from the port to the
customers warehouse.
Security / Collateral
Normally, the customer is required to provide adequate security / collateral to cover Investors exposure on the customer.
Salient Features
Asset based financing
Fixed pricing
Investor takes full ownership risk between buying & selling goods
No hidden costs
Sharia - compliant
No interest rate fluctuation risk
No processing fees
12 Month Mudaraba with Profits at Maturity.
There can be a minimum Investment amount.
Profit Sharing shall be on a sharing basis. (ex investor 60% institute 40%)
Profits payable on Maturity.
Special Conditions : No withdrawals of capital for a specific period. Say one year.
12 Month Mudaraba with Monthly Profits
There can be a minimum Investment.
Profit Sharing shall be on a sharing basis.(ex investor 50% institute 50%)
Profits payable at End of each month
Special Conditions : No withdrawals for the spcified period. Say one year.
Flex Mudaraba
There can be a minimum Investment.
Profit Sharing on a sharing basis. (ex. 50% to Investors - 50% Retained by Institute)
Profits payable Biannually
Special Conditions : Only 4 withdrawals permitted per year.
