ISLAMIC BANKING MODES &
TERMINOLOGY
Al-wadeah : Al-wadeah Current Account on the principles of Al-wadeah. The Bank commits to refund money deposited in these Accounts on the demand of customers. On the other hand the Bank takes permission from customers that the Bank may utilize their money. Customers may operate these Accounts as their desires. No profit is disbursed in these Accounts and depositors do not bear any loss.
Al-Wadeeah (BB) : Fund which is
deposited with Banks by the depositors with clear permission to utilize /invest
the same is called Al-Wadeeah. Islamic banks receive deposits in Current
Accounts on the basis of this Al-Wadeeah Principle. Islamic banks obtain
permission from the Al-Wadeeah depositors to utilise the Funds at its own
responsibility and the depositors would not share any profit or loss
earned/incurred out of using of this funds by the bank. The banks have to pay
back the deposits received on the principle of Al-Wadeeah on demand of the
holders. The depositors have to pay government taxes and other charges,
if any.
Bai‘ Muajjal : Literally it means a credit sale. Technically, a
financing technique adopted by Islamic banks that takes the form of Murabaha
Muajjal. It is a contract in which the seller earns a profit margin on his
purchase price and allows the buyer to pay the price of the commodity at a
future date in a lump sum or in installments. He has to expressly mention cost
of the commodity and the margin of profit is mutually agreed. The price fixed
for the commodity in such a transaction can be the same as the spot price or higher
or lower than the spot price.
Bai-Istijrar: The term "Bai-Istijrar" has been derived from
Arabic words بيع and جر (Bai and Zarra). The word بيع means to purchase and to
sell and the word جر means to hoist, to lift up, pick up, bring up.
"Istijrar" (استجرار ) means to purchase goods from time to time in
different quantities. In Islamic jurisprudence ‘Istijrar’ is an agreement where
a buyer purchases something under a single agreement in different instalments.
However, no offer and acceptance or bargain is required each time. The deal
will be considered as a single agreement where all terms and conditions are
finalized.
"Bai-Istijrar" is called such a buying and selling where a
person keeps on taking delivery of
required commodities part by part from time to time from a supplier and no
offer(Ijaab) & acceptance (Qobul) and bargaining between them is taken place each time of making and taking
delivery.
Bai-as-Sarf: Bai- as-Sarf is a
contract of exchange of money for money. This contract is tightly regulated
under Shari`ah because it can be easily manipulated for the purpose of
producing an interest-bearing loan, which is prohibited in Islam.
In pre-Islamic times gold was exchanged for gold, silver for silver and
gold for silver or vice versa. In Islamic law such exchange is regarded as sale
of price for price and each price is consideration of the other. It also means
sale of monetary value for monetary value i.e. currency exchange.
Ibn Rushd examines the three forms of sale that can arise in a market
where goods and money are in existence:
"When two commodities are exchanged, one may serve as a currency
and the other as a priced commodity, or both may be currencies. When a currency
is exchanged for a currency the sale is called 'sarf', and when a currency is
exchanged for a priced commodity, the transaction is sale property ('bay').
Similar is the sale of a priced commodity for another priced commodity
(barter)"
In respect of Bank, Bai-as-Sarf is a contract/agreement between the Bank
and the Client under which the Bank purchase the foreign currency against the
Foreign documentary bill in advance from the Client at specified/agreed
exchange rate.
“Bai-as-Sarf (FDB) ” is practiced for providing post shipment finance
facility against Foreign Currency export Bills and “Bai-as-Sarf (FCD) ” is done
for providing advance finance facility against Foreign Currency Cheque /Draft.
Hire Purchase under Shirkatul Meelk :Under this mode Bank may supply implements/ equipment/goods on rental basis. The ownership of the implements/equipment/goods will be with the Bank and the client jointly and the portion of the client will remain to the Bank as mortgage until the closure of the investment account, but the client will be authorized to possess the equipment for certain period. The client, after completion of the installments, will be the owner of the implements/ equipment/goods.
Hire Purchase under Shirkatul Melk is a Special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts:
Shirkat
Ijarah
Sale
These may be defined as follows:
Shirkatul Melk
Shirkat means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Melk contract.
Ijarh
The term Ijarah has been derived from the Arabic works (Air) and (Ujrat)
which means consideration, return, wages or rent. This is really the exchange
value or consideration, return, wages,
rent of service of an asset. Ijarah has
been defined as a contract between two parties, the Hire and Hirer where the
Hirer enjoys or reaps a specific service or benefit against a specified
consideration or rent from the asset owned by the Hire. It is a hire agreement
under which a certain asset is hired out by the Hire to a Hirer against fixed
rent or rentals for a specified period.
According to the majority of Fuqaha, there are three general and six detailed elements of Ijarah.
Subject matter of the contract : This includes the rent and the benefit.
The benefit / asset (Maajur) -
The benefit which is hired / rented out is called the benefit (maajur).
The Rent (Aj’r or Ujrat) - The
consideration either in monetary terms or in kinds fixing quantity of goods /
money to be paid against the benefit of
the asset or service of the asset is called the rent or ujrat or aj’r.
This is a sale contract between a buyer and a seller under which the
ownership of certain goods or asset is transferred by seller to the buyer
against agreed upon price paid / to be paid by the buyer.
Prophet (SAW) himself to the general rule provided the goods are defined
and the date of delivery is fixed. It is necessary that the quality of the
commodity intended to be purchased is fully specified leaving no ambiguity
leading to dispute. The objects of this sale are
goods and cannot be gold, silver or currencies because these are regarded as
monetary values exchange of which is covered under rules of Bai al Sarf , i.e.
mutual exchange is hand to hand without delay. Barring this, Bai-Salam covers
almost everything which is capable of being definitely described as to
quantity, quality and workmanship.
jarah : Letting on lease.Sale of a
definite usufruct of any asset in
exchange of definite
reward. It refers
to a contract
of land leased
at a fixed
rent payable in
cash and also
to a mode
of financing adopted
by Islamic banks.
It is an
arrangement under which
the Islamic banks
lease equipments, buildings or
other facilities to a client, against an agreed rental.
Investment : “Investment" means any
such modes of financing which Islamic Bank Company does in accordance with
principles of Shariah or as per the Shariah approved modes like Mudaraba,
Musharaka, Bai-Murabaha, Bai-Muajjal, Istisna, Lease, Hire-purchase under Shirkatul
Melk, etc.
Istisna’a : It is
a contractual agreement
for manufacturing goods
and commodities, allowing
cash payment in
advance and future
delivery or a future payment and future delivery. A manufacturer or builder agrees to produce
or build a well described good or building at a given price on a given date in
the future. Price can be paid in installments, step by step as agreed between
the parties. Istisna’a can be used for
providing the facility of financing the manufacture or construction of houses,
plants, projects, and building of bridges, roads and highways.
Gharar : It means
any element of
absolute or excessive
uncertainty in any
business or a
contract about the
subject of contract
or its price,
or mere speculative
risk. It leads
to undue loss
to a party
and unjustified enrichment of other, which is prohibited.
Heba : Heba is a term defined in the
Shariah law or Islamic law which means gift. Heba is affected through a deed
which needs to be registered with the proper authorities to ensure it's
effectiveness. Heba is usually done when one wants to gift their property to
someone else.
Ijab : Offer, in a contract.
Kobul: Kobul means the acceptance of
offer. Kobul is acceptance of offer or to agree with offer or to attract
anything.
Kafalah (Suretyship) : Literally, Kafalah means
responsibility, amenability or
suretyship, Legally in Kafalah
a third party
become surety for the payment of debt. It is a pledge given to a
creditor that
the debtor will
pay the debt,
fine etc. Suretyship in
Islamic law is
the creation of an additional
liability with regard to the claim, not to the debt or the assumption only of a
liability and not of the debt.
Kafalah:
A contract of guarantee or surety that provides assurance in terms of
performance and value when the object of the transaction is exposed to adverse
change due to varying outcomes.
Kafalah is the guarantee for a loan and all loans must be repaid in due
course according to Islamic law. The law allows the lenders to demand some sort
of security for the loan in the cases where the borrower fail to repay the
loan.
Kafil: Al-kafil is the one who joins
his liability to that of the principal (al-makful or al-makful anhu) in claims
regarding debts, personal injury or material assets.
Al-kafil is also spelled "al-kafeel".
Al-Kafil is an Arabic word for guarantor.
Maisir: An ancient Arabian game of
chance played with arrows without heads and feathering, for
stakes of slaughtered and quartered camels. It came to be identified with all
types of hazard and gambling.
Mudarabah: A form of partnership where
one party provides the funds while
the other provides
expertise and management.The latter is referred to as the Mudarib. Any profits
accrued are shared between the two parties
on a pre-agreed
basis, while loss
is borne by
the provider(s) of the
capital.
Mudaraba (BB):
Mudaraba is a partnership of labour and capital, where one partner
provides full capital and the other one manages the business. The capital
provider is called Sahib-Al-Maal and the user of the capital is called Mudarib.
As per Shariah principles, the Mudarib will conduct the business independently
following Shariah principles. The Sahib-Al-Maal may provide advices, if he
deems fit but he can not impose any decision over the Mudarib. Profit, if any,
is divisible between the Sahib-Al-Maal and the Mudarib at a predetermined
ratio, while loss, if
any, is borne by the Sahib-Al-Maal. Mudarib can not avail of any salary
or remuneration against his labour as a manager or conductor of the
enterprise/business. The deposits, received by Islamic banks under this principle
are called Mudaraba Deposits. Here, the depositors are called Sahib-Al-Maal and
the bank is called Mudarib. The Mudaraba deposits include:
i) Mudaraba Savings Deposits (MSD)
ii) Mudaraba Short Notice Deposits (MSND)
iii) Mudaraba Term Deposits (MTD).
Different Islamic banks have developed various deposit schemes on the
basis of this Mudaraba principle such as monthly deposit-based Hajj Scheme,
Monthly/One time depositbased Term Deposit Scheme, Monthly Mudaraba Profit
Deposit Scheme, Monthly Mudaraba Marriage Savings Scheme, Mudaraba Savings Bond
etc.
Murabaha : Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and the profit. This has been adopted by Islamic banks as a mode of financing. As a financing technique, it can involve a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost which is stipulated in advance.
Musharakah: Musharakah means a
relationship established
under a
contract by the
mutual consent of
the parties for
sharing of profits
and losses in the joint business.
It is an agreement under which the Islamic bank provides
funds which are
mixed with the
funds of the
business enterprise and
others. All providers
of capital are
entitled to participate
in management, but not necessarily required
to do so. The
profit is distributed
among the partners
in pre-agreed ratios,
while the loss
is borne by
every partner strictly in
proportion to respective capital contributions.
Qabul: Acceptance, in a contract; see also Ijab.
Qard (Loan of fungible objects): The literal meaning of Qard is ‘to
cut’. It is so called
because the property
is really cut
off when it is
given to the borrower. Legally, Qard
means to give anything having value in the
ownership of the
other by way
of virtue so
that the latter
could avail of the same
for his benefit
with the condition
that same or
similar amount of
that thing would
be paid back
on demand or
at the settled
time. It is that loan which
a person gives to
another as a
help, charity or
advance for a
certain time. The
repayment of loan is
obligatory. The Holy Prophet is
reported to have said “.....Every loan must be paid......”. But if a
debtor is in difficulty, the
creditor is expected
to extend time
or even to
voluntarily remit the whole or a
part of the principal. Qard is, in fact,
a particular kind of Salaf. Loans/Investments under Islamic law can be
classified into Salaf and Qard, the former
being loan for
fixed time and
the latter payable
on demand.
Quard Hassan:
This is a benevolent loan/Investment that obliges a borrower to repay
the lender the principal amount borrowed on maturity. The borrower, however,
has the discretion to reward the lender for his loan by paying any amount over
and above the amount of the principal provided there will be no reference
(explicit or implicit) in this regard. If a bank provides its client any loan,
it can receive actual expenditure relating to the loan as service charge only
once. It can not charge annually at a percentage rate.If a loan is provided
against the money deposited by a client in the bank, it has the right not to
pay any profit against the amount of money given as loan. But profit should be
paid on the rest of the amount deposited as per previous agreement.
Riba : An excess or increase.
Technically, it means an increase over principal in a loan transaction
or in exchange for a commodity accrued to the owner (lender)
without giving an
equivalent counter-value or
recompense (‘iwad) in return to
the other party; every increase which is without an ‘iwad or equal
counter-value.
Riba Al-Fadl :Riba
Al-Fadl (excess) is
the quality premium in exchange of low quality with
better quality goods e.g. dates for dates,
wheat for wheat,
etc. – an
excess in the
exchange of Ribawi
goods within a single
genus. The Concept
of Riba Al-Fadl refers
to sale transactions while Riba Al-Nasiah refers to
loan transactions.
Riba Al-Nasiah: Riba Al-Nasiah or riba of delay is due to exchange
not being immediate
with or without
excess in one
of the counter values. It is an increment on principal of a loan or
debt payable. It refers to the practice
of lending money
for any length
of time on the
understanding that the borrower would return to the lender at the end of the
period the amount
originally lent together
with an increase
on it, in
consideration of the
lender having granted
him time to
pay. Interest, in
all modern banking
transactions, falls under
purview of Riba Al-Nasiah.
As money in
present banking system
is exchanged for
money with excess
and delay, it falls, under the
definition of riba. A general accord
reached among scholar about its prohibition.
Salaf or Loan / Debt : The word
Salaf- literally means a loan which draws forth no profit for the creditor. In
wider sense, it includes loans for specified periods, i.e. short,
intermediate and long-term
loans. Salaf is another
name of Salam
as well wherein
price of the
commodity is paid
in advance while
the commodity or
the counter value
is supplied in
future; thus the contract
creates a liability
for the seller.
Amount given as
Salaf cannot be called back,
unlike Qard, before it is due. (see Qard)
Shariah : The term Shariah
refers to divine
guidance as given by the Holy Qur’an and the Sunnah of
the Prophet Muhammad (PBUH) and embodies all aspects of the Islamic faith,
including beliefs and practice.
Shirkah : A contract between two or more persons who launch a business
or financial enterprise to make profits.
In the conventional books of
Fiqh, the partnership
business has been
discussed under the
option of Shirkah that, broadly, may include both
Musharakah and Mudarabah.
Sunnah : Custom, habit or way of life.
Technically, it refers to the utterances of the Prophet Muhammad (PBUH)
other than the Holy Quran known as Hadith, or his personal acts, or sayings of
others, tacitly approved by the Prophet.
Salam and Parallel Salam: Salam means advance purchase. It is a mode of
business under which the buyer pays the price of the goods in advance on the
condition that the goods would be supplied / delivered at a particular future
time. The seller supplies the goods within the fixed time.
Parallel Salam:
Parallel Salam is a Salam contract whereby the seller depends, for
executing his obligation, on receiving what is due to him - in his capacity as
purchaser from a sale in a previous Salam contract, without making the
execution of the second Salam contract dependent on the execution of the first
one.
The following conditions are essential in the contracts of Murabaha,
Bai-Muajjal and Salam. The respective contracts must include the following
aspects regarding the goods:
* Number/Quantity
* Quality
* Sample
* Price and amount of profit
* Date of supply/time limit
* Place of supply
* Who will bear the cost of supply?
* Timeframe for payment in case of Bai-Murabaha and Bai-Muajjal.
Istisna and parallel Istisna: A contract executed between a buyer and a
seller under which the seller pledges to manufacture and supply certain goods
according to specification of the buyer is called Istisna. An Istisna agreement
is executed when a manufacturer or a factory owner accepts a proposal placed to
him by a person or an Institution to produce/manufacture certain goods for the
latter at a certain negotiated price.
Here, the person giving the order
is called Mustasni, the receiver of the order is called Sani and the goods
manufactured as per order is called Masnu. An order placed for manufacturing or
producing those goods which under prevailing customs and practice are produced
or manufactured will be treated as Istisna contract.
Parallel Istisna:
If it is not stipulated in the
contract that the seller himself would produce/provide the goods or services,
then the seller can enter into another contract with third party for getting
the goods or services produced/ provided by the third party. Such a contract is
called Parallel Istisna.
This may be treated as a sub-contract. The main features of this contract
are:
i) The original Istisna contract
remains valid even if the Parallel Istisna contract fails and the seller will
be legally liable to produce/ provide the goods or services mentioned in the
Istisna contract.
ii) Istisna and Parallel Istisna
contracts are treated as two separate contracts.
iii) The seller under the Istisna
contract will remain liable for failure of the sub-contract.
Waqf: Awqaf (also spelled awkaf, singular waqf/wakf) is an Arabic word
meaning assets that are donated, bequeathed, or purchased for being held in
perpetual trust for general or specific charitable causes that are socially
beneficial. In many ways, the concept of waqf is similar to the Western concept
of endowment.
Wakala: Wakalah refers to a contract where a party, as principal
(muwakkil) authorizes another party as his agent (wakil) to perform a
particular task on matters that may be delegated, with or without imposition of
a fee.
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