 Partnerships :
Is one of the formulae by virtue of which the bank participates with an
entrepreneur in a certain project in which each party has a fixed share
in the capital. Such a project may be a commercial project based on purchasing
and marketing a certain commodity, such as cars, printing machines or foodstuffs.
This operation is conducted through a certain deal in which the total cost
is agreed upon by the two parties. The bank makes with the entrepreneur
a partnership contract for purchasing and marketing such a commodity. Each
party shall participate with a known equity in the capital such that the
profit of such a deal shall be distributed after marketing according to
each party's share in the capital but only after deducting the management
share initially agreed upon for the party carrying out the management from
the total net profits. As for the loss, it is to be distributed according
to each party's equity share in the capital and nothing else. The project
may be in any of the sectors of production whether it be the industrial,
the agricultural or service sector. Each party participates with an equity
share in the capital of the project and both set up a joint stock company
in accordance with the laws and regulations governing joint stock companies.
The basic legal rule in partnership contracts is [sharing in profits and
losses] which means that since the two partners share in the profits of
the company, then each party must also assume its share of the losses (if
any) without bringing it to bear on one party only.
Mudaraba:
Mudaraba in Shari'ah is derived from working in order to earn a living.
A Mudaraba contract in Shari'ah is a contract between two parties one of
them owns the capital but does not have the expertise to operate and invest
it, such a party is called the "owner of capital" the second
party is the one having the expertise to operate funds in the market but
doesn't have the capital and is called "the working party". The
owner of capital agrees with the working party to give him an amount of
money to be invested such that the profit is distributed among them with
known predetermined percentages that are not based on the capital but on
the amount of the realized profit itself. As for the loss (if any), it
is to be borne by the owner of capital alone and the working party suffers
the loss of his effort and his time without any compensation. However,
if the working party is proved to have been negligent in his work in a
way that caused the loss or the loss of the capital or part of it, then
the working party shall assume the total loss. This type of contracts relies
on the honesty and earnest on the part of the working party, which is of
course a good trait that business men should all have. Mudaraba is an operation
of great benefit to economic activity since there are a lot of people who
have the efficiency and the ability to operate funds but do not have the
money to do so, therefore, the Mudaraba contracts open the door of opportunity
to many talented enterprenuers and increases the volume of trade. The Mudaraba
contract may play an effective role in raising funds for financing infrastructure
projects and mega production projects of high cost to be carried out by
the state or the private companies without resorting to taking loans from
the local or international money markets. This could be done if the cost
of financing is submitted in the form of deeds that allow its holders to
share in the profits of these projects and can trade them in the stock
exchanges.
Sale:
Buying commodities and selling them to clients is one of the forms of
transaction contracts that the Islamic banks implement on the basis of
credit sale, which means paying the price of the purchased commodity on
installments paid on terms agreed upon between the bank and the client.
The most important types of these contracts of sale is the Murabaha sale
where the purchase contract specifies the actual cost of the commodity
to which the bank adds a sum agreed upon with the purchaser - such an additional
sum is considered the profit of the bank from the deal. This means that
the bank states the actual cost and the margin of profit that is added
to the value of the commodity to specify the total selling price to the
purchaser. The value of the commodity and the profit are determined by
the bank and the client before making the contract of sale. If the two
parties reach an agreement and the client demands the bank to buy the commodity,
the two parties shall make a pledge of sale. When the bank actually buys
the commodity, upon the client's instructions, it shall notify the client
that the commodity is available at the bank in order to take possession
of it. Upon delivery, a final contract of sale is made by virtue of which
ownership of the sold commodity is transferred to the client. Consequently,
the client becomes committed to paying the sale price to the bank according
to the terms and conditions agreed upon in the contract and during the
specified term. The Murabaha sale gives the purchasing client a privilege
that is not given in other ways of sale such as bargaining. This privilege
is that of the bank, while purchasing the agreed upon commodity, may obtain
a reduction from the original provider of the goods that reduces the cost
price from the one specified in the contract, the client has the right
to that reduced sum and the cost price specified in the contract shall
be reduced by virtue of that reduction obtained by the bank. The Murabaha
sale also gives the client the right to return the commodity and cancel
the contract of sale if it is proven that the bank has specified a price
higher than the one at which it has actually purchased the commodity. The
Murabaha sale should be conducted on the basis of honesty and transparency
not fraud that is why it is called the fiduciary sale.
Ijarah (Lease):
The lease contract is one of the famous contracts in Islamic Jurisprudence
and is based on selling the utilities of things keeping the assets in possession
of the seller. By virtue of the Lease contract, the owner sells a utility
or a service provided by the asset, while he retains the ownership of that
asset, for a certain term in return for a fee paid by the lessee agreed
upon by the two parties. When the term expires, the asset returns to the
owner who after that has the right to sell that asset to any party whether
it is the lessee or to another and also has the right to lease to any other
party. In addition, there is a lease contract that ends in transference
of ownership. The real benefit from the lease contract is that the capital
assets which the clients need such as loaders, cranes, equipment or expensive
machines may be of a very high cost that the businessmen cannot afford.
In which case the bank can, purchase such assets and lease them to the
entrepreneurs for a certain term specified in the contracts. In this way,
the lessee obtains the service provided by that asset for a certain term
at a certain price affordable to him. This type of dealing is of great
value to lessees since it does not impact their cash liquidity that could
be directed to operations without resorting to loans for buying such high-cost
assets. Moreover, the cost of leasing is added to the profit and loss balance
of the entrepreneur and as such is not taxable. In addition, the leasing
of the assets enables the lessee to update the required assets according
to the latest technological developments, in the field of equipment and
machines. Furthermore, the maintenance cost is usually assumed by the lessor
in order to keep it in shape for the lessee.
The Salam Contract:
Common contracts of sale stipulate the immediate delivery of commodities
to the buyer who, according to the contractual terms of agreement, either
pays the price upon delivery or in installments over a predetermined time
schedule. This type of contract is in strict compliance with the Islamic
Shari'ah which ordains that an individual cannot sell what he does not
possess. This principle of Shari'ah aims at guaranteeing the seriousness
of the deal, the ability of the purchaser to inspect the commodity prior
to the conclusion of the contract and leaving no space for any form of
deception or fraudulence. Nevertheless, owing to the occasional need for
financing the production process before the products become available,
the Prophet (PBUM) has allowed the institution of the Salam contract, otherwise,
also known as the loan contract which is governed by very precise conditions.
Hence, the Salam contract involves the sale of goods that do not exist
at the date of concluding the deal, and therefore, can not be inspected
by the purchaser, however, the commodities are expected to be available
at a certain time in the future e.g. sale of dates, grain or rice for which
the time of harvest is anticipated some time in the future. The precise
and strict conditions that govern such a contract are the specification
of the kind of commodity, the type, the amount, the weight, the characteristics,
the time and place of delivery. Within the framework of a Salam contract,
the seller receives on the date of contract a payment that allows him to
finance the production process, whilst the purchaser obtains a guarantee
of possession of the commodity in due time and according to the specifications
mutually agreed upon. In this way, both parties benefit and achieve their
goals without any injustice to either side.
Manufacturing contract
(Istissnaa) :
Is a contract made with a manufacturer for buying commodities that will
be manufactured such as windows, doors, ships, planes etc. Such a contract
is the basis of many contracts of sale nowadays. The agreed upon commodity
is delivered on the future date specified in the contract along with the
payment of the full price or part of the price and the rest to be paid
upon delivery.
Cultivation and Irrigation:
Cultivation contract is made when a person gives an agricultural land
owned by him to another one to cultivate it whereby the produce is to be
distributed as agreed upon between them. An Irrigation contract is made
when a person takes care of another person's land that is cultivated with
palms or fruits for example, in return for an agreed upon share of the
harvest.
Services
lease :
Ijarah aims at leasing a utility in return of compensation, and the lessee
has the right to sell this usufruct to others, subject to the consent of the
original owner and against an equal or more or less the amount paid to him.
Hence, the lease of a utility means selling a certain service involving utility
against an amount paid by the purchaser for its full price from the onset or in
instalments according to the terms agreed upon. The lessee may also re-sell this
service to a third party for a higher amount or different terms within the
framework of the initiated agreement.
The Islamic Bank buys the usufruct of many services offered by lessors such as :
Trips of travel and tourism agencies, educational programes in schools and
universities and medical treatment in hospitals in return of specified cash
amount. Then, the bank re-sells this right to its clients by virture of leasing
contracts at a suitable profit margin.
This instrument helps in covering the expenses of education, travel, religious
tourism, medical treatment, surgeries, maintenance and cleaning service and
participation in the sporting clubs in amanner meeting individual needs.
Al-Tawaroq
Sale :
In this type of sale, the purchaser of a commodity in instalments, may
re-sell it in cash amounts less than the purchase amount. This instrument is
important for many people who occassionaly face emergency cases and need money
to cover costs of marriage, housing, medical treatment, … etc.
The
Infrastructure Organisations and Associations for the Islamic Banking Industry :
The organizers and concerned parties of the Islamic banking industry have
successfully established a large group of infrastructure organisations and
associations that help incubating and supporting the Islamic banking activity
and its instruments. This infrastructure has developed channels of understanding
and cooperation with other conventional banks, the monetary authorities, and
international organisations supervising the financial and banking affairs
worldwide.
The following is a list of these organisations and associations :
General Council for Islamic banks and Financial
Institutions (www.islamicfi.com).
Accounting & Auditing Organisation for
Islamic Financial Institutions (www.aaoifi.com).
Islamic Financial Services Board – Malaysia. (www.ifsb.org).
Islamic Development Bank. Jeddah (www.isdb.org.sa).
Liquidity Management Centre. (www.imcbahrain.com).
International Islamic Trade Finance Corporation.
International Islamic Financial Market. (www.iifm.net).
Islamic International Rating Agency. (www.iirating.com).
Islamic Corporation for the insurance of
Investment & Export Credit. (www.iciec.com).
[1] General Council for Islamic Banks and
Financial Institutions (www.islamicfi.com) :
This council has been established as an international independent nonprofit
organisation on May 2001. The main objectives of the council are :
Defining Islamic financial services and disseminating the
knowledge of their concepts, rules and features as well as developing and
enhancing the Islamic financial industry.
Enhancing cooperation amongst members of the council and
similar institutions.
Making available all information and data pertaining to
Islamic banks and financial institutions and other related Islamic Organisations
.
Taking care of the interests of its members, facing
obstacles and challenges, enhancing cooperation amongst institutions and also
with other supervisory entities.
Whithin this framwork, and in its efforts to realize its objectives, the council
performs the following functions :
Issuing bulletins, books, periodicals, banking
jurisprudent encyclopedias, and other studies and researches.
Organising conferences, Seminars, Lectures, meetings and
work shops.
Cooperation with entities concerned with issuing laws for
Islamic banks and financial institutions and other related organisations, and
also encouraging the issuance of governmental and non-governmental financial
instruments.
Establishing a data base to introduce the council’s
message and that of the Islamic economy and finance in an active manner using
the available technological tools.
Participation in preparing the training programs to raise
the professional expertise of the Islamic banking human resources.
[2] Accounting & Auditing Organisation for Islamic Financial Institutions –
Bahrain (www.aaoifi.com) :
Given the duality that exists in banking practices in each country at different
levels namely, national, regional and international Islamic banks and financial
institutions need the support of the accounting and auditing standards that are
compatible with the principles and rulings of Islamic Shari’ah.
This professinal role is assumed by the Accounting & Auditing Organisation for
Islamic Financial Institutions, which provides one of the major cornerstones for
the sound progress and development of Islamic Financial pracies.
The Organisation is an Islamic international independent and non profit entity
focusing on establishing the standards of accounting, auditing and good
governance as well as the ethics of banking activity in accordance with the
rulings of Islamic Shari’ah.
The Organisation was established by the incorporation agreement signed by a
number of Islamic financial institutions on February 1990, and is located in :
Manama – Bahrain.
In its efforts to realize its objectives, the Organisation provides training,
organises seminars, undertaking researches and issues publications as follows :
Issuing an integrated group of accounting and auditing
standards.
Good governance rules for Islamic financial institutions.
Rules and legitimate requirements for the Islamic
investment and finance.
Purpose of capital adequacy ratio for Islamic banks and
method of calculation.
All these previous efforts have led to introducing many Islamic instruments for
investment and financing, some of which were never addressed by traditional
banking school of thought.
[3] Islamic Financial Services Board – Malaysia (www.ifsb.org) :
The IFSB was established on November 2002 as an independent board supervising
the Islamic financial services industry worldwide. The Board is supported by the
central banks and monetary authorities of some countries as well as some
organisations and international institutions supervising and controlling the
international banking industry.
The Board is comprised of (65)members; (19) of them represent international
supervisory bodies such as : The world bank, the International Monetary Fund and
the International bank for settlements.
The main function of the Board is to supervise, organise and set the rules of
the Islamic Financial Services Industry as indicated here-after :
Establishing the origination of the principles and
foundations governing the Islamic financial services industry and harmonizing
them with the applied international standards guaranteeing their compliance with
Islamic Sharia.
Cooperation with international institutions responsible
for setting the standards and principles governing financial and menetary
stability.
Supporting practices of Islamic financial services in risk
management through researches, training and technical know how.
Encouraging cooperation among member states to develop the
Islamic financial services industry and support research work in Islamic
banking.
Establishing a data base for Islamic banks and financial
institutions coverning their products and services.
[4] Islamic Development Bank – Jeddah (www.isdb.org.sa) :
The Islamic Development Bank is an international financial institution
incorporated in accordance with the resolutions of the Islamic Countries Finance
Ministers’ conference – held in Jeddah on 1393H. (corresponding to December
1973). The Bank was officially inaugurated in Shawal 1395 H. (October 1975).
The Bank aims at supporting economic development and social progress of the
member states as well as other Islamic communities in non-member states subject
to the rulings of Islamic Sharia.
The Bank performs many functions; most important of which are :
Participation in capital of projects, providing financing
to institutions and productive projects in the member states, besides offering
financial help to these states through other channels for the purpose of
socio-economic development.
Establishing and managing specific purpose Funds,
receiving deposits and mobilizing financial resources in different legitimate
methods.
Enhancing foreign trade development of the member states,
together with the commercial exchange amongst them especially for productive
commodities and providing technical assistance for them.
Encouraging member states to practice financial, economic
and banking activities according to the rulings of Islamic Shari’ah.
The head office of the Bank is located in Jeddah – Saudi
Arabia, and has (55) member states and three regional offices in each of
Malaysia, Morrocco and Kazakhistan.
[5] Liquidity Management Centre (www.imcbahrian.com) :
Liquidity is one of the major challenges facing Islamic banks; as these banks
cannot borrow required funds from conventional markets against interest, besides
the in-availability of developed financial markets that operate according to
Islamic banking rules.
Based on this; a group of Islamic banks and financial institutions including
Islamic Development Bank, Dubai Islamic Bank, Kuwait Finance House and Islamic
Bank of Bahrain have established a liquidity Management Centre in Bahrain in
2002 to perform a number of major functions such as :
Facilitating the establishment of an interbank market to
help Islamic Banks, and financial institutions to tackle the financial gaps
between assets and liabilities.
Providing short-term liquidity and other Islamic financial
instruments that can be circulated (i.e. skouk) to help islamic banks use the
available surplus liquidity.
Providing legitimately accepted short-term investment opportunities at
competitive prices which are more rewarding than those of Murabaha operations on
going in the market.
Enabling Islamic financial institutions to easily
liquidate their financial papers to improve the state of their protfolios.
Creating a secondary market for the circulation of islamic
financial instruments.
[6] International Islamic Trade Finance Corporation :
The council of Governors of the Islamic Development Bank approved the
establishment of this corporation as an independent entity to finance and
develop trade among member states through providing trade finance facilities and
activities.
The agreement of incorporation was signed on 30/5/2006, and the first meeting of
the general assembly was held in Jeddah on 9/9/2006. The following are the main
features of the corporation :
It is an independent entity within the Islamic Development
Bank’ and has a complete legal personality.
The founding members are those participating in the
exports finance program, in addition to the institutions participating in the
Islamic Banks portfolio.
Subscribed capital of the corporation at foundation
amounted to USD (432,510,000).
The Corporation’s head office is in Jeddah – Saudi
Arabia, and its first branch is located in Dubai. More branches shall be
established according to need.
Authorized capital of the corporation is USD (3) billion,
and capital offered for subscription amounted to USD (500) million, with a
majority equity guaranteed to the Islamic Development Bank at all times.
[7] International Islamic Fianncial Market (www.iifm.net) :
The (IIFM) was established on April 2002 in Bahrain as a result of the
coordination between the financial and supervisory entities namely; Bahrain
Monetary Authority, Islamic Development Bank, Central Bank of Sudan, Central
Bank of Indonesia, Ministry of Finance – Tanzania and Foreign Investments
Authority – Malaysia.
The establishment of this market aims at realizing the following :
Tackling the absence of Islamic financial investment
instruments and the liquidity problem of the Islamic Banks.
Introducing new financial investment instruments to help
in creating a secondary market capable of attracting the investments of the
islamic countries as an alternative to conventional markets and also the
investors who would rather deal through these instuments according to Islamic
Shari’ah.
The management of this market is formed of two
committees; namely :
The legitimate committee comprising scholars of
jurisprudence and economics to assure the compatibility of investment
instruments with Islamic Shari’ah.
The Researches and Development Committee.
[8] Islamic International Rating Agency (www.iirating.com) :
This agency was established during the year 2004 in
Bahrain. It is the first agency specialised in classifying Islamic Banks and
financial institutions.
Capital of the agency is USD (10) million, with a majority
shareholding alloted to the Islamic Development Bank amounting to (42%), and the
remainder is distributed as follows : 11% to each of the Islamic Bank of
Bahrain, Kuwait Finance House, Islamic Bank of Abu Dhabi and Takafol Company of
Malaysia, 5% to Al-Baraka Group, 5.3% to J.C. rating – Pakistan and 2% to
Capital Intelligence – Cyprus.
The main objective of the Agency is to assist Islamic
Banks in developing their Business and having their papers accepted by
international markets.It will equally provide greater transparency of the
activities of Islamic financial institutions in a manner that would help
ascertain the volum of risks facing them. The role of the agency is expected to
increase with the application of Basel II standards as of the beginning of 2007.
[9] Islamic Corporation for The Insurance of Investment and Export Credit (www.iciec.com)
:
This corporation is one of the corporations established by the Islamic
Development Bank within the development role it plays within the Islamic
countries and communities.
The corporation aims at :
Enhancing & broadening commercial activity and
ancouraging the flow of investments among countries.
Providing services to exporters and investors subject to
Islamic Shari’ah.
Insurance and Re-insurance of exports to cover commercial
and country risks subject to Islamic Shari’ah.
Banks in general and Islamic Banks in particular shall
benefit greatly from these services, especially the banking policy which
provides direct insurance against the risks of non-payment. They can also
benefit from the export opportunities in the high risk classified countries as
is the case with some African Countries. |
