Modes of Financing

1. Morabaha :This is a mode of sale and purchase of commodities. The agreement is made between the Bank and a Customer, whereby Bank purchases a commodity and sells the same to Customer on a deferred payment basis. The essential features of  the  Morabaha are :-                               

                                i.            Existence of a tangible commodity/asset of which physical possession can be taken before use or consumption.

                                 ii.            Such commodity or asset has to be acquired from third party (commodity/asset already in the possession of the Customer, cannot form basis of the agreement).

                                iii.            Bank sells the commodity/asset to the Customer

1a. Local Purchase Morabaha (LPO):

1b. Morabaha Imports (PAD):

Bank and Client sign a Morabaha Agreement.

In terms of the Morabaha Agreement, the Bank appoints the Client as its Agent through an Agency Agreement to import commodities from time to time.

Client submits an application to establish letter of credit and the Bank opens it.

Upon negotiation, the Bank creates an advance in the name of the Client, value payment of funds to the beneficiary.

Upon receipt of documents and arrival of goods, the Bank and the Client enter into a Morabaha through a declaration submitted by the client. Such Morabaha can be spot, where client pays immediately to retire documents or on a deferred payment basis, if the client wishes to pay later.

In case of deferred payment, the Client signs a promissory note for the purchase price agreed and the Bank releases the documents.

1b. Morabaha Imports (PAD):

Bank and Client sign a Morabaha Agreement.

In terms of the Morabaha Agreement, the Bank appoints the Client as its Agent through an Agency Agreement to import commodities from time to time.

Client submits an application to establish letter of credit and the Bank opens it.

Upon negotiation, the Bank creates an advance in the name of the Client, value payment of funds to the beneficiary.

Upon receipt of documents and arrival of goods, the Bank and the Client enter into a Morabaha through a declaration submitted by the client. Such Morabaha can be spot, where client pays immediately to retire documents or on a deferred payment basis, if the client wishes to pay later.

In case of deferred payment, the Client signs a promissory note for the purchase price agreed and the Bank releases the documents.

2. Ijarah (Leasing):

3. Musharakah:Under Islamic jurisprudence, Musharakah means a joint enterprise formed for conducting some business in which all partners contribute financially and share the profit as per pre agreed upon ratios, while the loss is shared according to the ratios of financial contribution of each partner. The Musharakah is an ideal alternate to replace interest based lending with far reaching effects on both production and distribution of capital.

Profit sharing ratios in a Musharakah depend entirely on the estimated profit the business is able to generate.

The Musharakah is a relationship established, by the parties, by mutual contract and therefore all necessary ingredients of a valid contract must be present.

The risk of loss inherent in this mode of financing, ensures that the Bank fully satisfy itself as to the profitability and feasibility of the business venture as well as to the integrity of its Musharakah partners.

4. Modaraba:This is a kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "Rabb-ul-maal" while the management and work is an exclusive responsibility of the other, who is called "Modarib" and the profits generated are shared in a predetermined ratio.

There are two types of Modaraba namely:

This is called Al Modaraba Al Moqayyadah (restricted Modaraba).

Al Modaraba Al Mutlaqah: If Rabb-ul-maal gives full freedom to Modarib to undertake whatever business he deems fit, this is called Al Modaraba Al Mutlaqah (unrestricted Modaraba). However, Modarib cannot, without the consent of Rabb-ul-maal, lend money to anyone. Modarib is authorized to do anything which is normally done in the course of business. If they want to have an extraordinary work which is beyond the normal routine of the traders, it cannot be done without express permission from the Rabb-ul-maal. Modarib is also not authorized to (a) keep another Modarib or a partner (b) mix his own investment in that particular Modaraba without the consent of Rabb-ul-maal.