What is diffrence between Istisna and Ijarah?

Under Istisna,  the manufacturer either uses his own material or he arrange for the material himself whereas under Ijara the material  is provided by the customer and the manufacturer uses only his labour and skill meaning that his services will be hired for specific fee paid to him. Further, under Istisna the purchaser has the right to reject the goods after inspection if  these are not according to the specifications agreed at the time of contract whereas under Ijara this right of ispection does not exist.

What is Bai Muajjal?

Bai Muajjal is the Arabic equivalent of "Sale on differed payment basis". The deferred payment becomes a debt payable by the buyer in lump sum or in installments  as may be agreed between the two parties. In Bai Muajjal, all those items can be sold on deferred payment basis which come under the definition of tangible goods where quality does not make a difference but the intrinsic vale does. Those assets do not come under definition of capital where quality can be compensated for by the price and Shariah scholars have an "ijmah" (Consensus) that demanding a high price in deferred payment in such a case is permissible.
The following are the condition of valid Bai Muajjal:

1. The price to be paid must be agreed and fixed at the time of deal. It may include any amount of profit agreed between the parties.
2. Complete/ total possession of the object in question must be given to the buyer, while the defrred price is to be treated as a debt due from him.
3. Once the price is fixed, it cannot be decreased in case of earlier payment nor can it be increased in case of default.
4. If the commodity is sold on installment, the seller may put a condition on the buyer that if he fails to pay any installment on its due date, the remaining installments will become due immediately.

What is Musawamah?

Musawamah is a general and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, seller in Musawamah is not obliged to reveal this cost. Both the Parties negotiate on the price. Alla other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be used where the seller is not in a position to ascertain precisely the costs of commodities that he is offering to sell.

What is Murabaha used for in Islamic Banks?

Murabaha is typically used for to facilitate the short term financing requirements of the customer. The following are the uses of Murabaha:

1: Purchase of raw material, goods and merchandise of all kinds and description.
2: Purchase of equipments.
3: Import of goods and merchandise.
4: Export financing (pre-shipment)
5: Other financing of working capital nature

Presently, the majority of financing extended by Islamic banks is based upon Murabaha.

Islamic banking meant only Muslims?

The teachings of Islam are not confined to Muslims, rather these equally address the non-Muslims due to their universal nature. The basis of Islamic banks is laid down on ethical values and socially responsible system. The values like justice, mutual help, fee consent and honesty on the part of the parties to the contract, avoiding fraud, misrepresentation and misstatement of facts and negation of injustice or exploitation form the basic principles of Islamic banking. Therefore, the principles of Islamic banking lead the economic system to achieve the common good and economic prosperity. On this premise, Islamic banking a viable option for everyone irrespective of their religion.

Eid Mubarak

Assalam-o-Alaikum!

Eid Mubarak to All Muslims.

Coffee

The first record of coffee's discovery is from Yemen when an Arab named Khalid noticed that his animals became livelier eating a certain berry. He boiled the berries to create al-qahwa. This brew was later consumed by Muslims to stay awake through nights for prayers.

Sheikh 'Abd-al-Kadir, the Persian Sufi based in Baghdad, wrote the earliest known manuscript on the history of coffee in 1588. Coffee soon spread to rest of the Muslim world by travelers, pilgrims and traders reaching Makkah and Turkey in the late 15th century, from where it made its way to Venice in 1645.

Coffee was first introduced in England by a Turkish merchant named Pasqua Rosee in 1650 and its consumption was largely on the traditional Muslim preparation of the drink. By 1700, there were about 500 coffeehouse in London and nearly 3,000 in the whole of England. The Arabic 'al-qahva' became the Turkish 'kahve' the the Italian 'caffe' and then English 'coffee'.

Cheque

 

Cheque: In history, Muslims were known to be traders, traveling the world, dealing with people of all races and faiths and trading money from one city to an another. The historic evolution of the modern cheque comes from the Arabic sakk, a written vow by Muslim businessmen to honour payment for merchandise upon delivery.
Origination in the eastern Mediterrance as a convenient form of payment between local merchants in order to avoid the dangers and difficulties in  carrying coins, the sakk became the foundation of the modern cheque-based payment system seen today. In the 9th century, during the rule of Harun-al Rashid, a Muslim businessman could cash a sakk in China drawn on his bank in Baghdad under a highly developed "banking system".

By promoting the concept of the bills of exchange, sakk, or cheque, Muslims made the financing of commerce and international trade possible. This system became more versatile in 16th century Europe through the development of negotiability, eventually leading to the development of global cheque payment system.

Toothbrush

Miswak, the first toothbrush in history, was known before Islam, but added a religious aspect to using it. The use of Miswak was popularized by Prophet Muhammad (S.A.W) who recommended Muslims to clean their teeth using a Miswak daily. It is a teeth cleaning twing made from the Salvadora persica a tree (lnown as arak in Arabic) and is reputed to have been use for more than 7000 years. The Muslim practice of using a twing of Miswak to scrub one's teeth before each prayer is amongst the credible source which aided in inventing toothbrush.

Miswak not only has the chemicals for oral treatment that can help prevent tooth decay and hum diseases but the twing also acts as a brush that helps remove plaque and fights teeth coloring. This traditional alternative to modern toothbrush not only purifies the mouth, inhibits bad breath and increases salivation but also helps to protect teeth from gum. In 1987, World Health Organization encouraged the use of Miswak for oral hygiene because of tradition, availability and low cost.

Financing in Islamic Banks.

Question: If the Islamic banks do not lend money on interest then what modes of financing can be used for the following:

 

Trade and industrial finance 

 Financing the budget deficit 

 Acquiring foreign loans

As a matter of principle, all the financial transactions between the parties are lawful in the eyes of Islamic Shariah. Islamic Shariah provides several interest-free modes of finance that can be used to satisfy various business needs of the customer. These modes can be clubbed into two main categories.

The 1^st may include modes of advancing funds on a profit-and-loss-sharing basis. ( Mudarabah, Musharakah ).

The 2^nd may include the modes of finance in which are used for the purchase/hire of goods and services on a fixed return basis. (Murabaha, Istisna, Salam & Ijara). 

A)      Modes for financing trade and industry:

Muarabaha, Musawama, Ijara and Salam are particularly suitable for trade while istisna is especially suitable for manufacturing or construction industry. Murabaha can be used for the financing of all purchase of raw materials and inventory. For the procurement of fixed assets including plant and machinery, building etc. either Diminishing Musharakah or Ijara can be more feasible. 

B)      Modes for the financing a budget deficit:

It is noted that in an Islamic state, all the efforts should be made to avoid the budget deficit.

However, in case of unavoidable circumstances, the budget deficit may be kept to the possible minimum limit. Sometimes the budget deficit is seen as a result of either extravagant expenditure or inefficient effort to generate tax revenue due too political, economic reasons or otherwise. There is a need to win public confidence about these needs and to create transparency in government expenditure. This can serve better in keeping budget deficit to minimum level. In case of unavoidable deficit, government-owned enterprises can obtain finance by way of Mudarabah, Musharakah or Sukuk, just like private companies do. 

C)      An alternative to foreign loans:

Seeking Islamic solution to foreign borrowing, arrangements could be made to attract foreign as well as domestic funds.

Islamic Banking how is interest free?

Q: If banking were to be based on interest-free transactions how would it work in practice?

Islamic banks like other banks is an institution whose main business is to mobilize funds from savers and user these funds to finance the economic activities of businessmen. While a conventional bank uses the rate of interest for both obtaining funds from savers and lending these funds to businessmen. An Islamic bank performs these functions using various financial modes which are compatible with the Shariah. For mobilizing resources, it uses either the contract of Mudarabah or Wakalah with the funds owners. Under in first contract, the net income of the bank is shared between fund owners and fund providers according to a predetermined profit sharing formula. In the case of loss, the same is shared by fund providers in proportion to the capital contribution. As far as the nature of investment deposits are concerned, these could be either general investment deposit or specific investments’ accounts in which deposits are made for investment in particular projects. In addition, there are current accounts are in nature of an interest free loan to bank. The bank guarantees, the principle in case of current accounts but pays no profit on such accounts.

Under the Wakalah contract, clients give funds to the bank that serve as their investment manager. The bank charges a predetermined fee for its managerial services. The profit on to the fund after deducting such a fee. On the assets side, the bank uses a number of financial instruments none of which involves interest.

Takaful: The Islamic Insurance

Conventional Insurance:
                 In conventional term, Insurance is a way to provide security and compensation to what is valuable in the event of its loss, damage or destruction based on the principle of risk taking and specultion.
According to Shariah, there are two aspects of conventional insurance, namely:
1. Conceptual aspect
2. Practical aspect
So far as the concept of insurance is concerned, it is to cover the risk of loss, or fortunate many helping the unfortunate few. This concept is not only recognized, but also encourage and rewarded by islam.

"Help one another in righteousness and piety, but do not help one another in sin and transgression".(Al Quran).

The principles of muwalat, Maaqil, Kafalah(Guarantee) Dhaman( indemnity) and the establishment of islamic welfare state by the Holy Prophet (S.A.W) Waqf and Tabarru support this concept. The practical aspect of insurance, however is forbidden due to the following elements.

Qimar or Maysir (Gambling)
Riba( interest)

Since both are clearly prohibted in the Holy Quran and Ahadith.

Riba An Nasiyah

Riba An Nasiyah is defiened as excess, which results from predetermined
interest(Sood)which is a lender receives over and above the principal (Ras ul Maal) in any loan transaction. This is real and primary form of Riba. Since the verses of the Holy Quran has directly rendered this type of Riba as haram, it is also called "Riba Al Quran". Similarly, since only this type was considered as Riba in the dark ages, so it has earned the name of Riba Al Jahiliyyah as well.

The meaning of Riba has been clarified in the following verses of Holy Quran.

"" That is because they have said:" Sale is but like riba", while Allah has permitted sale, and prohibtted riba" (Surah Baqarah; 275).

Imam Abu Bakr Jassas Razi( Rehmatullah eleh) has outlined a comprehensive legal definition of Riba An.Nasiyah in the following words;

" That kind of loan where specific repayment period and an amount in excess of capital is predetermind."

The famous Sahabi Hazrat Fazala Bin Obaid( Razi Allah anho) has also defined Riba in similar words:

"Every loan that draws profit is one of the forms of Riba."

Riba.

Riba:
The word Riba means excess, increase or addition. According to Shariah terminology, it implies any excess compensation without due consideration.
(This definition of Riba is derieved from Holy Quran and is unanimously accepted by all Islamic scholars.

Classification
                   There are two types of Riba, idetified to date by the scholars namely "Riba An Nasiyah" and Riba Al Fadl".

Salam

In Salam, the seller undertakes to supply specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The payment is at spot but the supply of purchaesd goods is deffered.

Purpose of use:

1. This mode pof financing can be used by the modern banks and financial institutions especialy to finance.the agricultural sector.
2. To meet the needs and requirements of small formers who need financing theor financing to grow their crops and to feed their families until the time of harvest. When Allah's messenger declared Riba as haram, the farmers could not take usurious loans. Therefore, the Holy Prophet(S.A.W) allowed them to sell their agricultural products in advance.
3. To meet the need of traders for import and export business. Under Salam,  it is allowed to sell the goods in advance so that after receiving cash price,  they can easily undertake the aforesaid business. Salam is beneficial to the seller as he receives the price in advance and it is beneficial to the buyer also as normally the price is Salam is lower the price is spot sale.

The permissibility of Salam is an exception to the general rule that prohibts forward sale and therefore it is subject to strict conditions,  which are as follows.

Conditions for Salam:
                                        The conditions for Bai Salam are as follows.

1. It is necessory for the validity os Salam that the buyer paysthe price in full to the.seller at the time of affecting the sale.
In the absence of full payments, it will be tantamount to sale of debt against a desbt, which is expressly prohibted by the Holy Prophet (S.A.W). Moreover, the basic wisdom for allowing Salam is to fullfil the "instant need" of the seller. If the full price is not paid in advance, the basic purpose of Salam will mot achieved.
2. Only those goods can be sold through a Salam contract in which the quantity and quality can be exactly specified e.g precious stones can not be sold on the basis of Salam because each stone differ in quality and size, weight, their exact specification in not possible.
3. Salam cannot be effected on a partilar commodity or or for

To be continued..........

Islamic Banking

Islamic Banking and Finance- Global growth trends.
Islamic banking and finance growth has generated considerable interest in the financial world in recent years. The concept of Islamic banking has received encouraging response from different corners of the globe as one discovers its ideological dimensions and practical significance.

Given its ability to offer innovative financial solutions for basic financial needs in under-served markets espacially in the Muslim world and to meet complex financial requirements of the modern times, it is seen as a socially responsible and ethical banking model with considerable growth potential. In the Muslim world and increasingly in the West,  significant segments statements of the institutional and retail markets are choosing Islamic finance for their financing and investment needs. Islamic financial system also draws its strength from it being asset backed nature and directly linkage to the real economic transactions and avoidance of any element of interest and speculative activity.

Understanding the difference:

When we look at the difference between Islamic Financial Institutes and the interest based conventional institutions, we find out that the differences are on three levels:

1. Conceptual and Socio religious level.
2. Business model and governing framework.
3. Product Level Implementation.

Without a clear understanding of these differences, some people, even experts tend to make a common mistake of equating Islamic banks with other conventional banks with mere change of name.

Key difference.

1. In a conventional Bank the relationship between the bank and customer is that of creditor and debtor and any benefit available to either party falls under the ambit of interest since it is a gain on Debt/Loan. In Islamic Banking, the relationship between bank anf customer differ as per the modes of finace and thenature of the facility.
2. In Sale based transaction modes, Islamic Banks and the customer assume the role of seller and buyer respectively and any benefit available to either party is profit on Sale Trannsaction.
3. In rental based modes, the relationship between Islamic bank and customer is that Lessor and Lesssee respectively and any benefit available to bank is in the form of Rent.
4. In Participation based modes,  the relationship between Islamic bank and customer is that of partnership and the gain is raken by either party is profit on Musharakah.
In Service based mode, the relationship between Islamic bank and customer is of Mustajir (Service Provider) and Ajeer( To whom service is given) respectively and islamic bank gets remuneration in the form of fees(Ujrat).

Islamic Banking

Assalam o Alaikum!
 
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