Muhammad Ayub Understanding Islamic Finance phần 5 ppsx

190 Understanding Islamic Finance • Specific investment accounts can be managed as per savers’ instructions on a Mudarabah or Wakalah basis. Banks can float equity funds on the principle of Mudarabah against a share in the actualprofits.However,there mayalsobe an agencyrelationship, wherein the bankwould be managing depositors’ funds against pre-agreed fees and passing on the profit/loss to the depositors. • Banks may establish closed/open-ended mutual funds. • Inter-bank financing will also become part of the equity of the bank, using appropriate weightage and DPB to calculate profit. Box 8.1: Deposit Management in Islamic Banks on Mudarabah Basis Most of the Islamic banks are following a profit-sharing mechanism called the Mudarabah + Musharakah model or simply the Mudarabah model. Step by step, the process flow of the Mudarabah model is as follows: The bank will create an investment pool having categories based on different tenors of deposits. We assume that the bank launches the following deposit tenors: three months, six months and one year. Each depositor of the bank will deposit its funds in a specific category of the investment pool that will be assigned a spe- cific weightage. Weightage can only be amended at the beginning of the account- ing period. Assume that the following investment is made by the depositors in pool A. Category Amount in $ Weightage Three months 3000 0.60 Six months 4000 0.70 One year 3000 1.00 All members of the pool will have a Musharakah relationship with each other, i.e. they are partners in the pool with the above mentioned weightages. The bank may also invest in the pool as a depositor. Now the pool, in its collective capacity, enters into a Mudarabah contract. Under the agreement, pool A would act as Rabbul-m ¯ al and the bank would be Mudarib. The bank would undertake business with funds from the pool and the profit earned would be shared between the parties in an agreed ratio. Assume that the profit sharing ratio is 50:50. The bank deploys $10 000 of the pool for a period of one month and earns a profit of $1000 at the end of the month. This profit would be shared as follows: bank (500) and the pool (500). The Mudarabah contract would be completed at this stage. Profit-sharing Among the Pool Members $500 earned by the pool would be distributed as per the weightage assigned at the beginning of the month. The relationship within the pool would be governed by the rules of Musharakah. Overview of Financial Institutions and Products 191 Deposit ($) Weightage Weighted average Profit Rate (A) (B) (C = A ∗ B) (D 1 )(E 2 ) 3000 0.6 1800 119 3.96 % 4000 0.7 2800 184 4.60 % 3000 1 3000 197 6.56 % 10 000 7600 500 1 C ∗ 500/7600 2 D ∗ 100/A Sharing of Loss Among the Depositors As per the rules of Musharakah, loss to the pool, if any, would be distributed among the pool members (Rabbul-m ¯ al) according to their investment ratio. For example, if a loss to pool A of $500 occurs, it will be distributed in the following manner: Three months 3000 150 Six months 4000 200 One year 3000 150 Total loss 500 8.5.3 Instruments on the Assets Side Islamic banking financing practice as of now reveals that the doors are open for utilizing all legitimate modes including those based on Shirkah, trade or lease, whether to finance trade, industry or a budget deficit through domestic or foreign sources. In order to prop- erly manage the risk, the banks should manage diversified portfolios and select the proper modes/instruments. The volume of investment deposits determines banks’ investment strate- gies – if depositors are risk-averse, banks should also be risk-averse – investing in less risky modes. Musharakah/Mudarabah can be used for short-, medium- and long-term project financing, import financing, preshipment export financing, working capital financing and financing all single transactions. Banks use Diminishing Musharakah for purchase of fixed assets like houses, transport, machinery, etc. Murabaha can be used for the purchase and sale of automobiles, consumer durables and trade financing, acquisition and holding of stock and inventory, spares and replacements, raw material and semi-finished goods. Buy-back and rollover in Murabaha are not allowed. Musawamah can be used for the financing of huge single transactions. Salam has a vast potential in financing the productive activities in crucial sectors, par- ticularly agriculture, agro-based industries and the rural economy as a whole for financing agriculturists/farmers, commodity operations of public and private sectors and other pur- chases of homogeneous goods. Banks’ subsidiaries as trading and leasing companies can also provide finance on the basis of Murabaha and leasing. They can deal with priority areas not only on the basis of Murabaha, Salam and operating lease, but also on the basis of partnership. Ijarah, or leasing, is best suited for financing of automobiles and machinery. There could also be a combination of more than one mode like Istisna‘a plus Murabaha, Salam plus Murabaha or Salam plus Istisna‘a for financing of trade and industry. Finance for the purchase and construction of houses can be based on Diminishing Musharakah or Murabaha. Working capital finance can 192 Understanding Islamic Finance be provided on the basis of Salam, Istisna‘a and Murabaha. Financing of big projects can be made through syndicate Mudarabahs using the modes of Istisna‘a or Murabaha. Appropriate modes of financing, as recommended by experts on Islamic finance, for particular areas and transactions are as given below. 8 Modes for Financing Trade, Agriculture and Industry Murabaha, instalment sale, leasing and Salam are particularly suitable for trade, while Istisna‘a is especially suitable for industry. More specifically, in trade and industry, financing is needed for the purchase of raw materials, inventory (goods in trade) and fixed assets as well as some working capital, for the payment of salaries and other recurrent expenses. Murabaha can be used for financing of all purchases of raw materials and inventory. For procurement of fixed assets, including plant and machinery, buildings, etc., either instalments sale or leasing can be used. Funds for recurrent expenses can be obtained by the advance sale of final products of the company using Salam or Istisna‘a. Household, Personal Finance, Consumer Banking Personal finance for consumer durables can be provided through Murabaha, leasing and in special cases by way of return-free loans out of the current accounts or the banks’ own funds (depositors’ money in PLS accounts is a trust in the hands of banks and should not be used for charitable and social purposes without their explicit approval). Wakalah and Murabaha can be used for cash financing through charge and credit cards. The alternatives for auto finance are Ijarah Muntahia-bi-Tamleek and Murabaha. Housing finance is possible through Murabaha, Diminishing Musharakah and rent-sharing. Treasury Operations – Liquidity and Fund Management Liquidity management means ensuring that the bank has sufficient liquid funds available for a smooth running of its operations and to meet short-term financial obligations as and when due. It has to invest surplus funds, match maturity of assets and liabilities, accommodate decreases in deposits/liabilities and increases in assets in an efficient and economic manner. Fund management refers to securing and managing funds for the development of business. Islamic banks may sell and purchase Shar ¯ ı´ah-compliant money and capital market instru- ments like stocks and Sukuk. Direct placement or acquisition of funds (in the inter-bank funds market) on the basis of Mudarabah and Musharakah is also possible. The deficit bank agrees to give a share of its profits according to a Mudarabah ratio that can either be negotiated according to the market conditions or recommended by the central bank, for the duration of the contract. In the case of Mudarabah, the following process can be adopted: 1. A Mudarabah relationship will be created. 2. Funds received will be allocated to pools. 3. Weightages will be assigned periodically, based on different tiers/categories. 4. Profit earned will be allocated according to weightages assigned at the beginning of the period. 8 Detailed processes for these modes of financing different areas/sectors are given in Chapter 14. Overview of Financial Institutions and Products 193 5. The bank will charge a pre-agreed Mudarib fee as a percentage of the realized profit; the bank can pay additional profit from its own share. 6. The investor will bear a loss unless it arises from misconduct or negligence of the Mudarib. Islamic banks may also agree to an arrangement with the central bank serving as a lender of last resort. One option is financing on a Mudarabah basis; the central bank may agree to provide liquidity for, say, a three day grace period with ceilings, followed by a Mudarabah with profit-sharing ratio heavily favouring the central bank to discourage the Islamic bank from resorting to the central bank’s funds for longer periods. Another option is the sale and purchase of Shar ¯ ı´ah-compliant certificates/Sukuk. Sukuk are important for liquidity management. In Sukuk, an investor gets returns on the basis of ownership rather than interest. Ijarah Sukuk are more common instruments in this regard and are issued against assets for rental. To generate liquidity, Sukuk can be sold/purchased in the secondary market. If the regulatory structure allows, Islamic banks can sell the Sukuk to the central bank to generate liquidity. Sukuk can be structured on an amortizing or bullet maturity basis. Foreign Exchange Operations Exchange of currencies and monetary units has to be subjected to the rules of Bai‘ al Sarf, i.e. it must be simultaneous. Accordingly, spot purchase and sale of one currency against another currency is allowed; forward purchase and sale is not allowed. However, IFIs can enter into a promise to purchase and sell agreement. On this principle, foreign currency forward cover is allowed with certain conditions, as discussed in Chapter 14. In order to ensure that the transaction actually goes through, parties may stipulate any earnest money. Negotiation of export documents is partially allowed. Government/Public Sector Financing Government and public sector enterprises can obtain finance by way of Mudarabah or Musharakah certificates, which can be issued to purchase equipment or utility-generating assets in order to lease them to public sector corporations. Ijarah and Istisna‘a are best suited for infrastructure projects in the public sector. Recently, Ijarah Sukuk have emerged as the most crucial instruments for financing of the public sector. Through syndication arrangements, Islamic banks can supply goods/assets of enormous value to government entities or corporations on a Murabaha basis by setting up joint Murabaha funds. In such cases, ownership of Murabaha funds can also be securitized to offer equity-based investment opportunities to the investors and the banks themselves. Returns on these funds would be distributed among Sukuk/certificate holders on a pro rata basis. Alternatives to Foreign Loans For the inflow of foreign resources, the instruments of portfolio investment through stock markets, flotation of various categories of Sukuk and direct investment by foreigners can be used. 194 Understanding Islamic Finance Public as well as private enterprises can issue Musharakah and Ijarah Sukuk to finance projects, especially development projects. Sukuk can be denominated in foreign as well as domestic currencies and carry a predetermined proportion of the profit earned by their respective projects. The Sukuk issued can be restricted to a particular project or earmarked to a group of projects. Various funds can be established to finance the economic activities of public and private enterprises on equity, partnership, leasing, Salam and mixed asset pool bases. Funds can be established to finance a specific sector, for example, agriculture, industry or infrastructure; a particular industry, for example textiles, household durables, etc.; or general types of projects. Box 8.2: Islamic Banking Products and Services Nature of Product/Service Modes and Basis I. Deposits – fund mobilization Current deposits Am ¯ anah – Qard to bank; no return payable Savings deposits Mudarabah General investment term deposits Mudarabah Special investment deposits Mudarabah, closed-and open-ended mutual funds, Wakalatul Istism ¯ ar Individual portfolios Mudarabah, Wakalatul Istism ¯ ar Liquidity generation Tawarruq – reverse Murabaha, sale to any 3rd party II. Trade finance, corporate finance Project finance Musharakah, Mudarabah-based TFCs, syndication through Mudarabah, Murabaha, Istisna‘a, Ijarah/Ujrah Working capital finance Murabaha, Salam, Musharakah in single transactions Export finance – preshipment Salam/Istisna‘a plus Murabaha and Wakalah, Murabaha, Musharakah Import finance Murabaha, Musharakah Cash finance Salam, Istisna‘a, Tawarruq (sale to 3rd party) Export finance – post shipment (bill discounting) Qardal Hasan in local currency (spot rate) and promise to sell foreign exchange in future market – exchange rate differential bank’s income; Murabaha if funds needed for next consignment Letter of credit Commission, Ujrah along with Murabaha, etc. Letter of guarantee Kafalah, service charge III. Agriculture, forestry and fisheries Production finance for input and pesticides Murabaha, Salam Overview of Financial Institutions and Products 195 Tubewells, tractors, trailers, farm machinery and transport (including fishing boats) Ijarah Munahia-bi-Tamleek, Salam, Murabaha Plough cattle, milk cattle and other livestock; dairy and poultry Murabaha, Salam Storage and other farm construction (sheds for animals, fencing, etc.) Diminishing Musharakah or rent-sharing Land development Operating Ijarah, Salam Orchards, nurseries, forestry Salam, Musaqat IV. Treasury Money market – inter-bank Mudarabah with or without allocation of assets Liquidity management Sale/purchase of permissible securities, Parallel Salam, Tawarruq Fund management Mudarabah, Wakalatul Istism ¯ ar, trading in permissible stocks and Sukuk Trading in Sukuk, stocks Depending upon the nature of instruments Forex operations Unilateral promise to buy/sell foreign exchange simultaneously at pre-agreed rate V. Personal advances (including consumer durables and housing) Consumer durables Murabaha/instalments sale Automobiles Ijarah Munahia-bi-Tamleek, Murabaha Housing finance Diminishing Musharakah, Murabaha Providing cash for personal needs Salam if possible, Tawarruq 8.6 THE ISSUE OF MODE PREFERENCE According to the majority of scholars, the main instrument by which the interest-based system has to be replaced is profit/loss sharing, encompassing Musharakah, Mudarabah and their variants. The idea of replacing interest by profit sharing in the depositor–bank and bank–business relationships, first mooted during the 1940s to 1960s, gained considerable acceptance in the 1980s and 1990s. However, there are slight differences in approach and priorities. While S.M. Hasanuz Zaman is not in favour of using Mudarabah 9 (on the assets side) for non-trade operations 10 , a vast majority of scholars have recommended its extensive use. Nejatullah Siddiqi has discussed thoroughly the extended scope of Mudarabah. 11 To him, it does not involve traits like Riba, Qim ¯ ar, fraud, coercion, exploitation of needs, hazard and uncertainty that could make it unlawful. He hints that although in practice the role of profit-sharing and partnership is very small at present, they continue to dominate the 9 Alternatively, he recommends the use of Musharakah. As the combination of Mudarabah and Musharakah is also accepted by Shar ¯ ı´ah scholars, the bank could use profit/loss sharing as a technique encompassing both modes, subject to the fulfilment of relevant conditions. 10 Hasanuz Zaman, 1990 (1410 AH), pp. 69–88. 11 Siddiqi, 1991, pp. 21–34. 196 Understanding Islamic Finance theory of Islamic banking. They are regarded as the norm towards which practice should, and will, eventually gravitate. Like him, a large group of Islamic economists insist that Islamic banking and finance will have to rely on profit-sharing contracts if the objectives of socio-economic justice, efficiency and stability of the economic system are to be achieved. Similarly, according to Umer Chapra, the most important and unanimously agreed upon form of financing provided by Islamic banks would be on the basis of Mudarabah, Shirkah or acquisition of shares of joint stock companies. Chapra has given its rationale in the following words: “The general principle, which is beyond dispute as being the criterion for determining the permis- sibility or otherwise of any method of financing, is that the financier cannot avert the taking of at least some risk if he wishes to derive an income. To put this in the form of an adage, one could state with respect to all financing operations: no risk, no gain”. 12 On the other hand, as pointed out by Abdul Halim Ismail, the approach of Islamic banks’ practitioners is different from the general approach adopted by Islamic economists. He considers that the contracts of exchange, both for instant and deferred prices, are more relevant to Islamic financial institutions and equally legitimate as per Qur’ ¯ anic injunctions. Giving more importance to PLS modes according to the popular theory of Islamic finance has been formulated incorrectly. He has divided the writers on Islamic finance into the categories of “Islamic economists” and “Islamic bankers”. While the economists group is in favour of replacing interest with a PLS system as a main policy tool, bankers have tended to give equal importance to debt-based modes involving both trade and leasing. Islamic bankers are remarkably uniform in their application of exchange contracts, including both trade and leasing. He blames Islamic economists for not deriving their theory of PLS preference from the Holy Qur’ ¯ an and considers the contracts of exchange on a par with the contracts of profit-sharing. He argues that the current practice of Islamic finance, in contrast to the general perception of Islamic finance theory, is largely based on trade/exchange-based transactions. However, the point is that Islamic economists have not prohibited debt-creating modes; the issue is of preference only and that, too, on account of the possible impact of risk-based versus risk-free capital in an economy. As exchange-based modes also involve risk-sharing, Islamic economists have allowed them subject to the fulfilment of relevant conditions. Their stress on profit-sharing modes is for their better socio-economic impact and to avoid any back doors to interest. Analysing the issue from another angle, the replacement of the interest-based system by an alternative profit-sharing system raises a number of fundamental theoretical, practical and policy questions. The questions being discussed in the emerging literature include, among others, the following: • What is the theoretical framework underlying Islamic banking and finance? • Will the Islamic system be more or less stable than the traditional interest-based system? • What will be the effect of the adoption of an interest-free Islamic system on important macroeconomic variables like saving and investment? • Will monetary policy have a role to play in such a system? 12 Chapra, 1985. Overview of Financial Institutions and Products 197 As regards the first two questions above, Mohsin S. Khan takes the view that the replace- ment of interest by some type of profit-sharing arrangement makes the Islamic system an equity-based system, as opposed to a traditional debt-based system. Using the concept of equity participation, he has developed a theoretical model to examine the working of the Islamic banking system. He has shown that the Islamic system may well turn out to be better suited than the interest-based banking system to adjust to shocks that can lead to banking crises. In an equity-based system, shocks to the assets position of banks are immediately absorbed by changes in the nominal values of shares (deposits) held by the public in banks. Therefore, the real value of assets and liabilities would be equal at all points in time. In the conventional banking system, since the nominal value of deposits is guaranteed, such shocks can cause a divergence between real assets and real liabilities, and it is not clear how this disequilibrium can be corrected and how long the process of adjustment would take. 13 On the basis of this analysis, Mohsin Khan has had an important insight that from an economic standpoint, the principal difference between the Islamic and traditional banking systems is not that one allows interest payments and the other does not. The more relevant distinction is that the Islamic system treats deposits as shares and accordingly does not guarantee their nominal value, whereas in the traditional system, such deposits are guaranteed either by the banks or by the government. As regards the impact of adoption of the Islamic system (the third question above), Waqar Masood concludes that in a full Islamic system, the costs of monitoring would be insignificant and the equity participation arrangement would be superior to the interest- based system. Honesty and faithfulness to the terms of one’s contract are an indispensable ingredient of Islamic behaviour. The driving force of a truly Islamic society is the existence of a strong ideological consensus that the success of the society and its members depends on how closely the rules of the Shar ¯ ı´ah are followed. 14 Nadeem ul Haque and Mirakhor are of the view that the adoption of a profit-sharing arrangement between the lender and investor may raise monitoring costs that could have an adverse effect on the supply of credit, and thus on investment. They are of the view that individual contracts can be designed to take into account the moral hazard problem. Avoiding an adverse effect on investment would require implementation of a legal and institutional framework that facilitates contracting. The Islamic law of contracts provides for such a framework, but it has not yet been fully adopted in countries where an Islamic banking system is being established. In the absence of this framework, monitoring costs could be prohibitive and investment could consequently be discouraged. On the other hand, if legal measures are present to safeguard the terms of contracts, the level of investment may increase. 15 Shahrukh Rafi Khan, while discussing the implications of introducing a PLS system, has concluded that: 16 1. Expectation-based profit-sharing ratios can serve as a pricing mechanism to bring the loanable funds market into equilibrium. 2. The elimination of risk-free assets with positive returns will leave lenders worse off. 13 Khan and Mirakhor, 1987, pp. 15–36. 14 Khan and Mirakhor, 1987, pp. 75–105. 15 Khan and Mirakhor, 1987, pp. 125–161. 16 Khan and Mirakhor, 1987, pp. 107–124. 198 Understanding Islamic Finance 3. Profit-sharing ratios are relatively inefficient instruments of monetary policy. 4. The introduction of interest-free banking does not necessarily lead to a situation where all profitable projects will be financed irrespective of their rate of return. However, Mohsin Khan and Mirakhor do not feel convinced by these conclusions because they are conditional on the model and the specific assumptions under which the results are obtained. The traditional welfare comparisons made by Rafi Khan are incorrect because the welfare function itself will change with Islamization of the economy. Regarding the impact on savings, Nadeem ul Haque and Abbas Mirakhor have concluded that the rate of return also increases as risk increases, and then savings may, in fact, rise. The structural changes accompanying the implementation of an Islamic financial system may produce favourable effects on the rate of return on financial assets. As such, there is no a priori reason for believing that savings in an Islamic system will necessarily be lower than in an interest-based system. The above discussion implies that all Islamic modes have potential for development. The institution of Mudarabah serves as a basis of business to be conducted by combining funds and the expertise of different groups of people. Shirkah-based (PLS) modes that provide the much-needed risk-based funds can be used for short-, medium- and long-term project financing, import financing, preshipment export financing, working capital financing and financing of all single transactions. Mudarabah Sukuk can be issued to mobilize funds and strengthen trading and industrial activities. SPVs can manage such assets as trusts/funds for conducting business for their benefit as well as the Sukuk holders. This could generate higher rates of return for the investors relative to the return realizable on any interest-based investment. As visualized by Homoud, if the profit rate in Mudarabah-based businesses is as low as 10 % and the annual turnover is 3, the realized profits may reach 30 % per annum. “These profits may be distributed at an equal sharing ratio or at the rate 1/3 to 2/3 between Mudarabah certificate holders and the management of the institution. The idea has the potential to alleviate the hardships of low income people in many countries.” 17 In the case of big projects, the IFIs may form a consortium to issue certificates to the public for subscription. Similarly, they can carry out work on infrastructure and socio-economic projects in coordination and partnership with the engineering firms. The non-PLS techniques not only complement the PLS modes but also provide flexibility of choice to meet the needs of different sectors and economic agents in society. Murabaha with less risk has several advantages vis-à-vis other techniques and can be helpful in employment generation and alleviation of poverty. Leasing can be very much conducive to the formation of fixed assets and medium- and long-term investments. Salam has a vast potential in financing the productive activities in crucial sectors, partic- ularly agriculture, agro-based industries and the rural economy as a whole. It provides an incentive to enhance production and leads to the creation of a stable commodities market with stability in prices. To realize this potential, IFIs could organize a forward commodity trade market on the basis of Salam. This would provide not only a nonspeculative forward market for resource mobilization and investment but would also be a powerful vehicle for rural finance. 17 Homoud, 1998. Overview of Financial Institutions and Products 199 8.7 ISLAMIC INVESTMENT BANKING Islamic investment banking can be easily understood in the light of conventional investment banking. An Islamic investment bank provides exactly the same products and services as a con- ventional bank does. The distinguishing factor, however, is that their products and services are tailored in a Shar ¯ ı´ah-compliant manner while meeting the clients’ requirements.Islamicinvest- ment banks manage portfolios for institutions, corporate clients and high net worth individuals, as well as pooled investment vehicles such as unit trusts and mutual funds. Asset management companies managing conventional funds are now gearing up for Islamic funds. The following are the opportunities for Islamic asset management: • open and closed-end mutual funds; • equity benchmarks; • leasing companies involved in asset-backed financing. Islamic investment banks provide venture capital financing to small, medium and big companies in a number of sectors. They avoid involvement in prohibited and unlawful activities and offer services to all projects except those manufacturing or dealing with forbidden products and services, such as alcohol, pork, entertainment, interest-based financial services and the like. Their services relate to venture capital and corporate finance, including syndication finance, project finance and transactions in the capital markets. Asset management or management of funds includes equity funds, real estate funds as well as alternative investments in Ijarah and other Sukuk. They engage in treasury operations for managing the asset–liability mismatch created by different tenors of investment opportunities and different return profiles. Islamic corporate finance activities of investment institutions are similar to conventional corporate finance except that the products and services offered are Shar ¯ ı´ah-compliant. These services include: • equity issues such as IPOs, offers for sale, rights issues; • private placements; • strategic reviews; • financial restructurings; • acquisitions, divestments, mergers; • joint ventures, alliance searches and studies. Islamic investment banks also undertake syndicate financing, which is usually a large financing facility granted to a key industrial or trading organization and lead-managed by a bank of strong base. Since the amount involved is large, a number of financial institutions par- ticipate in the financing. An Islamic syndication facility can be provided through Murabaha, Mudarabah, Musharakah, Ijarah or leasing (detailed processes are given in relevant chapters of the book). 8.8 ISLAMIC FINANCIAL MARKETS AND INSTRUMENTS Islamic financial markets, like their conventional counterparts, comprise money and capital markets, but the instruments and the procedures of functioning are different. An Islamic [...]... be added and expenses which represent the services that the seller could have 13 14 15 16 Udovitch, 1970, p 220 Al-Jaziri, 1973, p 56 4; AAOIFI, 2004–5a, p 128 Al-Marghinani, 1 957 , p 282; Shaybani, 1 953 , pp 155 , 156 Al-Jaziri, 1973, pp 56 4, 56 5; Saleh, 1986, p 96 218 5 6 7 8 9 17 18 19 20 21 22 Understanding Islamic Finance provided himself but did not provide, such as packing charges, sales commission,... After basing the sale price on the original cost of the goods to the seller, the 4 5 6 7 8 9 10 11 12 Al-Marghinani, 1 957 , p 282 Ibn Qudama, 1 958 , 4, p 179; Al Jaziri, 1973, pp 55 9 56 4 Malik, 19 85, pp 424, 4 25 Al Jaziri, 1973, p 55 9 Al-Hilli, 1389 AH, p 40 Al-Kasani, 1993, 5, p 223, cf Hassan, 1993, p 95 Al-Marghinani, 1 957 , p 282 Ibn Qudama, 1367 AH, p 187 Al-Kulayni, 1278 AH, p 197 Murabaha and Musawamah... financier for a deferred price.42 39 40 41 42 AAOIFI, 2004–5a, p 113 AAOIFI, 2004–5a, Standard on Murabaha, clause 2 /5/ 1, p 116 AAOIFI, 2004–5a, Standard on Murabaha, pp 113, 114, 116, 128; clauses 2/2/1 to 2/2 /5 and 2 /5 Usmani, 2000a, p 106; for principal’s ownership during agency, see Zuhayli, 2003, p 674 224 9.8.1 Understanding Islamic Finance MPO – A Bunch of Contracts Modern Murabaha also involves... deduction from the price according to Imam Abu Hanifa and his disciple Muhammad, because the commodity against which he has to practise his right of option does not exist Ibn Rushd, 1 950 , 2, p 217 See Saleh, 1986, p 96 AAOIFI, 2004–5a, clause 4 /5, p 120; See also Saleh, 1986, p 96 Al-Marghinani, 1 957 , p 2 85 Ibn Rushd, 1 950 , 2, p 218; cf Ray, 19 95, p 44 Ibn Qudama, 1369 AH, 13, p 78 Murabaha and Musawamah 219... include the opportunity cost”. 45 43 44 45 AAOIFI, 2004–5a, Standard on Murabaha, p 130 This is the view of Imam Abu Hanifa, Imam Shafi‘e, Imam Ahmad and of some Maliki jurists, cf Usmani, 2000a, pp 121, 122 Usmani, 2000a, pp 1 25, 126; Resolution Nos 2 and 3, 5th session of the Islamic Fiqh Academy Murabaha and Musawamah 2 25 This aspect has been discussed in detail in Chapter 5, with the conclusion that... Tradability • Islamic money market instruments can either be tradable or nontradable in the secondary market; • instruments representing ownership in business, real physical assets and usufructs are negotiable at market prices; • instruments representing ownership of debt are not tradable in the secondary market, as sale of debt is not permissible in Islamic law; 25 Khan, 19 95 208 Understanding Islamic Finance. .. be financed on a Murabaha–Mu’ajjal basis 26 Majallah al Ahkam refers to Bai‘ al Mujjal as Bai‘ bil Nasiah or bi al T’ajil wa al Taqsit (Al-Atasi, 1403 AH, Articles 2 45 251 ) 27 Al-Marghinani, 1 957 , p 242 24 25 220 Understanding Islamic Finance right of the seller It is, therefore, within his discretion to postpone it for the convenience and ease of the purchaser The fact is that he is empowered even... recommends that the customer should not be appointed to act as agent for purchase of items for Murabaha except in situations of dire need (clause 3/1/3, p 117) 35 AAOIFI, 2004–5a, p 129 36 AAOIFI, 2004–5a, p 120 222 Understanding Islamic Finance defect in the goods and nonpayment by the client at the due date(s) According to the AAOIFI Standard, a promissory note or other guarantee can be obtained... chapter AAOIFI, 2004–5a, pp 3 05 307 206 Understanding Islamic Finance sometimes a special procedure is adopted, according to which the deficit bank agrees to give a share of its general profits according to a Mudarabah ratio that is negotiated according to the market conditions Central banks can also advise profit-sharing ratios for the duration of the fund placements In Malaysia, the Islamic Inter-bank... http://www.ruf.rice.edu/∼ elgamal The Economist, London, 15th March, 2003 212 Understanding Islamic Finance The markets that can function in the Islamic financial framework include both money and capital markets, equity markets, limited forex markets, forward markets and investment Sukuk markets, representing a variety of instruments for fund and investment management by Islamic financial institutions Providing Shar¯´ah-compliant . Mirakhor, 1987, pp. 15 36. 14 Khan and Mirakhor, 1987, pp. 75 1 05. 15 Khan and Mirakhor, 1987, pp. 1 25 161. 16 Khan and Mirakhor, 1987, pp. 107–124. 198 Understanding Islamic Finance 3. Profit-sharing. pool A of $50 0 occurs, it will be distributed in the following manner: Three months 3000 150 Six months 4000 200 One year 3000 150 Total loss 50 0 8 .5. 3 Instruments on the Assets Side Islamic banking. tradable in the secondary market, as sale of debt is not permissible in Islamic law; 25 Khan, 19 95. 208 Understanding Islamic Finance Box 8.3: (Continued) • instruments representing a combination