AlHuda CIBE

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Outline of Presentation

• International Overview of Islamic Finance.
• Product Tree of Islamic Microfinance
• Partnership Based Modes in Islamic Microfinance
• Trade Based Modes in Islamic Microfinance
• Rental Based Modes in Islamic Microfinance
• MicroTakaful
• MicroTakaful Products for Islamic Microfinance
  Institutions.
• Presented by
• Prof. Dr. Khawaja Amjad Saeed
• Principal Hailey Collage of Banking Finance
• The University of Punjab.
• Director Research AlHuda Centre of Islamic
  Banking Economics

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• International Overview of Islamic Finance

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Islamic products and services offered by
Financial Institutions around the world

• .

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International Overview

• The size of Islamic Financial Industry has
  reached US 300 Bln. and its growing annually _at_
  15 per anum.
• 51 countries have Islamic Banking Institutions
• 27 Muslim countries including Bahrain, UAE, Saudi
  Arabia, Malaysia, Brunei and Pakistan
• 24 non-Muslim countries including USA, UK,
  Canada, Switzerland, South Africa and Australia

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International Overview

• Leading foreign Banks have opened Islamic Banking
  windows or subsidiaries such as
• Standard Chartered Bank
• Citibank
• HSBC
• ABN AMRO
• UBS

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International Overview

• In Feb 1999, Dow Jones introduced the Dow Jones
  Islamic Market Index (DJIM) of 600 companies
  world wide whose business complies with Islamic
  Shariah laws
• At present there are more than 105 Islamic Funds
  operational through out the world with a total
  fund base of over USD 3.50 billion

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International Overview

• Governments of Bahrain ,Malaysia and now Pakistan
  have issued Islamic Bonds (Sukuk) in order to
  facilitate Islamic Banks in managing their
  liquidity.
• Issuance of these bonds has also paved the way
  for Shariah compliant Government borrowings

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International Overview

• Institutions like Accounting and Auditing
  Organization for Islamic Financial Institutions
  (AAOIFI) and Islamic Finance Services Board
  (IFSB) have been formed.
• These institutions are playing a key role in
  setting up and standardizing Shariah , Financial
  and Accounting standards for Islamic Financial
  Institutions.
• Due to these collective efforts Islamic banking
  is now recognized by IMF, World Bank and Basel
  Committee.

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Takaful Operators

• The number of Takaful operators worldwide is now
  estimated at
• 108 Takaful companies
• 6 Retakaful companies
• In 35 Countries.
• Average growth rate higher than conventional
  insurance companies (around 25).
• NonMuslims increasingly opting for Takaful
  products for commercial benefits.

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Takaful Geographical Spread

• South East Asia 51
• Middle East 32
• Africa 12
• Europe, USA Others 5

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• Islamic Microfinance

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PRODUCT TREE
Islamic Modes of Microfinance
Trade Based Modes
Partnership Based Modes
Rental Based Modes

• Musharaka
• Mudaraba

• Murabaha
• Salam
• Istisna

• Ijarah
• Diminishing
• Musharaka

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• Partnership Based Modes

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MUSHARAKA

• Characteristics
• All parties share in the capital
• All parties share profits as well as losses
• Profits are distributed as per agreed ratio
• Loss is borne by the parties as per capital ratio
• Every partner is agent of other

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MUSHARAKA
May be in any agreed ratio
PROFIT Rs. 100
Rs. 40
Rs. 60
PARTNER A
PARTNER B
VENTURE
Rs.1000
Rs.1000
Rs. 50
Rs. 50
LOSS Rs.100
Must be according to capital ratio
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MUSHARAKA
May be in any agreed ratio
PROFIT Rs. 100
Rs. 50
Rs. 50
PARTNER A
PARTNER B
VENTURE
Rs.2000
Rs.3000
Rs. 40
Rs. 60
LOSS Rs.100
Must be according to capital ratio
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MUDARABA

• One partner (Rab al Mal) contributes capital and
  the other (Mudarib) contributes his skills or
  services to the venture
• Venture may for a fixed period or purpose
• Both share profit in pre-agreed ratio
• Loss is borne by Rab al Mal only, Mudarib loses
  his services

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MUDARABA
PROFIT
50
50
VENTURE
SERVICES
CAPITAL
RABBUL MAL
MUDARIB
ALL MONETORY LOSS
LOSS OF SERVICES
LOSS
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MUDARABA
PROFIT
40
60
VENTURE
SERVICES
CAPITAL
RABBUL MAL
MUDARIB
ALL MONETORY LOSS
LOSS OF SERVICES
LOSS
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• Trade Based Modes

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Basic Rules of Bai (Trade Base Mode )

• Existence of Product/Commodity
• Ownership of Product/Commodity
• Possession of Product/Commodity
• Unconditional basis
• Product have value/Price.

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Basic Rules of Bai (Trade Base Mode )

• Bai on Such product which is permissible in
  Islam.
• Product Must be Identify, clear with all
  demanding Qualities.
• Not based on any incident, struggle etc
• Price must be clearly identified.

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Bai

• There are many type of Bais but usually
  following are using in Islamic Microfinance.
• Murabahah
• Salam
• Istisna

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Murabahah

• Murabaha is a particular kind of sale where the
  seller discloses its cost and profit charged
  thereon.
• The price in this sale can be both on spot and
  deferred.

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Murabahah

• It is a contract wherein the institution, upon
  request by the customer, purchases a asset from
  the third party usually a supplier/vendor and
  resells the same to the customer either against
  immediate payment or on a deferred payment basis.

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Murabahah

• Basically, its not a mode of financing but a
  source to avoid interest Dealing
• Its not a type of loan, but a deal (Bai)
• Murabahah can be used as source of financing when
  client needs funds to purchase any
  product/Machinery etc.

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Murabahah

• Product Must be bought from third party for avoid
  buy back transaction
• Roll over is not Valid in Murabahah
• If actual cost can not be identified then
  Murabahah deal not possible.

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Salam

• Pay 100 amount in Advance.
• Product must be quantified, identified and
  Measured with quality.
• Date of delivery, Time, Place must be mentioned
  clearly in advance.
• Salam is not valid for a specific
  farm/land/garden.

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Istisna

• Not necessary to pay the 100 amount in advance
  Like Bai salam.
• Price must be decided on beginning of the
  contract.
• Qualities, features of that product must be
  clearly identified.

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• Rental Based Modes

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IJARAH (LEASING)

• Ijarah is to offer for a consideration the
  usufruct of a thing of value from which benefit
  can be derived without consumption, while
  retaining the ownership of the leased assets and
  assuming risks pertaining thereto.

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IJARAH (LEASING)

• - The leased commodity remains in the ownership
  of the lessor and only its usufruct is
  transferred to the lessee.
• - Any thing which cannot be used without
  consuming the same cannot be leased out like
  money, edibles, fuel, etc.
• - Only such assets which are owned by the lessor
  can be leased out except that a sub-lease is
  effected by the lessee with the express
  permission of the lessor.

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IJARAH (LEASING)

• - During the entire term of the lease, the lessor
  must retain title to the assets, and bear all
  risks and rewards pertaining to ownership.
• - If any damage or loss is caused to the leased
  assets due to the fault or negligence of the
  lessee, the consequences thereof shall be borne
  by the lessee.

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IJARAH (LEASING)

• - The lessee is also responsible for all risks
  and consequences in relation to third party
  liability, arising from or incidental to
  operation or use of the leased assets.
• - The insurance of the leased asset should be in
  the name of lessor and the cost of such insurance
  borne by him.
• - A lease can be terminated before expiry of the
  term of the lease but only with the mutual
  consent of the parties.

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IJARAH (LEASING)

• - Either party can make a unilateral promise to
  buy/sell the assets upon expiry of the term of
  lease.
• - Alternatively, the lessor may make a promise to
  gift the asset to the lessee upon termination of
  the lease.

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IJARAH (LEASING)

• - The amount of rental must be agreed in advance
• - Contract of lease will be considered terminated
  if the leased asset ceases to give the service
  for which it was rented. However, if the leased
  asset is damaged during the period of the
  contract but is capable of being repaired, the
  contract will remain valid.

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IJARAH (LEASING)

• - Late Payment Plenty
• - The banks can also approach competent courts
  for award of damages.
• - Also, security or collateral can be sold by the
  bank (purchaser) without intervention of the
  court.

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Ijarah

GENERAL MECHANICS

• The Bank leases the asset to the customer
• The customer makes periodic payments as per the
  contract
• The asset title transfers to the customer based
  on the method disclosed in the agreement

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• MicroTakaful

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Introduction

• Takaful is the Sharia Compliant brand name for
  the Islamic alternative to conventional
  insurance. Its based on the principle of Taawan
  or mutual assistance. It provides mutual
  protection and joint risk sharing in the event of
  a loss by one of its member

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Origins of Takaful

• In the event of death caused by someone from
  another tribe, the member of the offenders tribe
  would share the blood money (Khoon Baha) to
  provide for the family of the victim.

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Operating Model in Pakistan
Share Holder
S H A R E H O L D E R S F U N D (S.H.F.)
Mudaribs Share of PTFs Investment Income
Wakalah Fee
Management Expense of the Company
Profit/Loss
Takaful Operator
Investment by the Company
WAQF
Claims Reserves
Surplus (Balance)
Investment Income
Operational Cost of Takaful / ReTakaful
Participant
P A R T I C I P A N T S T A K A F U L F U N D
(P.T.F.)
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MicroTakaful Products for IMFs Institutions
Trade Based Modes
Partnership Based Modes
Rental Based Modes

• Musharaka
• Mudaraba

• Murabaha
• Musawama
• Salam
• Istisna

• Ijarah
• Diminishing
• Musharaka

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Thank You.