Investment or credit in Islamic shariah means ‘to layout of money’ or fund provided for a legal purpose and for a certain period with a risk of profit or loss. In Islamic Banking Investment means utilization of fund or deployment of fund for a special legal purpose on profit/loss sharing basis for a certain period. Islami Bank as per shariah deals with goods & services, not money. Shariah law prohibits speculative trading that involves risk and uncertainity. Shariah also forbidden investing in haram businesses such as gambling, alcohol etc.
Investment or credit in Islamic shariah and its various modes:
Mudaraba:
Mudaraba means partnership business. He who supplies capital is called ‘Shaheb-e-mal’ (financer) and the organiser of the business is called ‘Mudarib’ (manager). Mudarib run the business independently without any wages. He can engage employee for the business. Shaheb-e-mal can inspect the business accounts at any time. If any loss incurred in the business, Shaheb-e-mal bears the entire loss and profit of the business, if any, will be distributed among them as per predetermined agreed ratio.
Mudaraba again two types:
1. There should be two parties: Bank & Businessman as per written agreement. Bank is called Shaheb-e-mal (Financer/Investor) and businessman is Mudarib (Manager).
2. There should be written agreement/contract between the Bank and the businessman which includes nature of business, period/time, sharing of profit etc.
3. Bank will finance and the businessman will run the business.
4. The Bank will not interfere in the business.
5. The businessman will appoint employee(s) and he will run the business independently.
6. The businessman will not take any salary or wages for his labour and he will maintain proper record of the income expenditure/sale-purchase etc.
7. The Shaheb-e-mal/Financier/Investor reserves the right to check/verify the accounts of the business at any time.
8. At the end of the business period or at a certain date of every year profit will be distributed as per terms of contract. If the business incurred any loss, the entire loss will be beared by the Bank/investor/shaheb-e-mal.
Mudaraba Mutlak: In which type of Mudaraba agreement, the place of business, time, nature of business, number of business partners etc are not specific – is called Mudaraba Mutlak. Here the Mudarib get full liberty about the business.
Mudaraba Muqqayada: In this type, as per contract the Mudarib has not full liberty to run the business. The nature of business, time, place etc are specific in Mudaraba Muqqayada.
Investment in Islamic shariah: Musharaka/Shirkat:
It is a type of partnership business of two or more persons – where capital of the partners may be equal, more/less. All the partners have every right to participate in the business, but not compulsory, as per agreement signed. It is a system where labour will be given as per terms of contract. Profit will also be distributed as per contract. But loss will be shared as per size of investment.
Musharaka or Shirkat are four types.
The features of these are follows:
Shirkat-al-Inan:
1.Capital of the partners may be more or less.
2. Profit may be more or less as per contract considering the labour, expenditure, qualification etc. of the partners.
Shirkat-al-Mufawada:
1. Profit or loss compulsorily equal to all.
2. The social status, experience, education etc of all partner should be equal.
3. The Asset & liability of all partners should be equal.
Shirkat-al-Shanai:
1. All partners should be from a same trade/profession.
2. Experience of partners should be equal.
3. Profit or loss distribution may be more or less as per contract.
Shirkat-al-Wazuh:
1. It is a business of honesty & dignity of the partners.
2. The partners will purchase goods on investment/credit and `sale in cash.
3. Profit or loss will be shared in more or less as per contract.
4. In this type, partners have the right to withdraw himself from the partnership business.
5. If any partner died, he will be removed from the partnership.
Investment in Islamic shariah : Bai-Murabaha:
Investment or credit in Islamic shariah: another types is Bai- Murabaha, Bai-Murabaha comes from a combination of two Arabic words. Bai means purchase & sale, while Ribhum means agreed upon profit. So, Bai-Murabaha means sale on agreed upon profit. It is a system of investment by a Shariah based Islami Bank through which Bank purchases goods as per terms of contract with the client from the market (not from the client or his sister/allied concern), take the possession of the goods as pledge in the godown of the Bank or godown of the client under Bank’s control duly insured and sale these to the client on partly or wholly in cash after fixing price with profit & other expenditures. The essential elements of Murabaha investment are as follows:
1. There must be three parties (a) Bank, (b) Client, (c) Seller of commodities. 2. Commodity should be Halal, not perishable and easily marketable
3. Bank never handover/deliver cash money to the client. Payment to be made to the Seller of goods / Supplier through PO/DD.
4. Bank will purchase goods as per order of the investment client or as per contract, take possession of the goods as pledge in the Godown of the Bank or in the godown of the client under Bank’s control and sale these to the client on wholly or partly, at a time or separately after determining the profit amount of the Bank and other charges alongwith the price of the goods in cash (Cost + other charges + profit).
5. Client must take delivery of the goods duly signed & sealed after writing ‘Goods received in good condition’ on the cash memo or on their letter head pad or on a white paper. (as the case may be)
6. The quotation and sale receipt of the goods should be in the name of the bank.
7. Purchased goods should be taken in the possession of the Bank for atleast a moment.
8. Insurance cover note on the stocks of the godown to be obtained in the name of the Bank as 1st party and the client as 2nd party.
9. After purchase, bank could not sale the goods to others.
10. Investment client must take delivery of the goods within six months of purchase after depositing cash into the Bank. ۞ Margin of the goods to be obtained/retained from the party.
11.Collateral security may be obtaine
12.If the goods not take delivery by the investment client within six months, then the bank could sale the goods to others. In this process, if any loss incurred by bank – it should be beared by the client.
13.Insurance premium of the godown, salaries of Godown staff, Godown charge, transportation cost of goods to be beared by the client.
14.Expenditure for creation of mortgage of collateral security to be beared by the client.
15. Charge documents duly signed & stamped at the cost of the client to be obtained from the party.
16. The mode is called sale on cash payment.
- Bai-Muajjal:
- Bai-Muajjal is a combination of two Arabic words. Bai means purchase & sale, while Ajl means a fixed time or fixed period. Bai-Muajjal is a type of investment through which bank purchases goods from market as per order/contract and sale on credit to the investment client duly fixing the sale price adding profit & other expenditures with the purchase amount repayable within a fixed period in lump sum or at a time or by installments.
The salient features of this nature of investment are as follows:
1. There must be three parties: Bank, client and the seller of the goods.
2. Bank under no circumstances will handover cash money to the investment client. Payment for the price of the goods to be made to the seller through PO/DD.
3. Bank will purchase goods as per specification order of the client in the name of the Bank. After taking delivery for at least a moment, the goods will be delivered to the client determining the sale price which includes purchase price, profit and other expenses.
4. The respective contracts must include number/quantity, Quality, Sample, Price and amount of profit, Date of supply/time limit, Place of supply, Timeframe for payment, Who will be bear the cost of supply regarding the goods.
5. Purchase price, other expenses and profit amount are not necessarily to be informed the client.
6. Client must receive the goods duly signed & sealed on the sale receipt of the goods or on their letter head pad or on a white paper as ‘goods received in good condition’. (as the case may be)
7. Stocks of the business house/place should be insured in the name of the Bank as first party and the client as second party and insurance premium to be beared by the client.
8. Bank could not ask the client to repay the price of the goods before schedule date. The client will repay after the sale of the goods or at a fixed date of repayment whichever is earlier.
9. No extra amount as profit could not add, if time of repayment extend. But compensation for the validity expired period to be realized from the party and amount so realized to be credited to compensation account. ô
10 To secure the investment, bank may ask the client for collateral security.
11. Bank could not use the collateral security.
12. Income earned, if any, from the collateral security to be paid to the investment client.
13. Normally Bank could not sale the goods to others except the client.
14. The client must take delivery of the goods.
15. If the client refuse to take delivery of the goods in writting, he/they must indemnify the Bank for any loss due to sale of the goods to others.
16 The mode is called sale on deferred payment.
17. Expenditure for creation of mortgage of collateral security to be beared by the client.
18. Charge documents duly signed & stamped to be obtained from the party at the cost of the party.
19. Bank may allow rebate on the selling price to the client for early payment provided there will be no conditions in the contract.
20 Stock report to be obtained from the client at the end of each month and it should be preserved properly duly verified the stock.
Investment , credit in Islamic shariah, Bai-Muajjal again some other types:
Bai-Muajjal (General/Financial obligation): Investment allowed to individual/firms against financial obligation i.e. lien on MTDR or Scheme Deposit Receipts up to 90% of the face value of the MTDR or Scheme deposit receipt @ 3% above the rate of MTDR or Scheme Deposit. Details about this type of investment has been mentioned in ‘’Questions & Answers on Investment Banking’. This may not be a continuous investment. Formalities to be observed as per Bai-Muajjal investment.
Bai-Muajjal (Work order): Investment allowed against assignment of work order for execution of contractual work falls under this head. This investment is generally allowed for a definite period and specific purpose. It is not a continuous investment. Formalities to be observed as per Bai-Muajjal investment. Details about this type of investment has been mentioned in ‘’Questions & Answers on Investment Banking’.
Bai Muajjal (Export): Investment allowed for purchasing Foreign currency for payment against L/Cs (Back to Back) where the exports do not materialize before the date of import payment. This is also an investment for temporary period, which is known as Export finance and falls under the category ‘Commercial lending’.
Investment , credit in Islamic shariah: Bai-Salam:
Bai-Salam is a combination of two Arabic words Bai and Salam. Bai refers to purchase & sale while Salam means to advance. Payment of Bai-Salam transaction is made in advance. This is a system of investment where price of the goods (agricultural products) is determined by the buyer and seller, paid earlier at the time of contract and took delivery of the goods as per specification, size, quality, quantity at a future time in a particular place. In other words, forward sale of goods. Essential elements of Bai Salam are:
1. There should be a written agreement between the buyer & seller which includes price and amount of profit, quality, quantity, date, place of delivery/supply, sample, transportation cost, time of delivery etc.
2. The price of the goods to be made payment at the time of agreement, failing which the contract will be invalid.
3. The price of the goods may be in cash or kind.
4. The buyer must take of the goods on due date as per contract.
5. The goods should be agricultural products/fungible goods.
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.
Istisna: The word Istisna is derived from Arabic language which means Industry. Istisna is an investment procedure by which price of the construction/assembling/packaging or manufactured commodity may be paid in advance fully or partly and goods will be delivered later on. There should be a written contract about the product, price, payment mode, delivery time with date, quantity, quality etc. Here the goods may be fungible or non-fungible.
A contract executed between a buyer and a seller under which the seller pledges to manufacture and supply certain goods according to the 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.
Investment or credit in Islamic shariah. 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 an Istisna contract.
Ijara mode:
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 lessee 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.
