Modes Of Investment

Of Islamic Banks
Group members:
Joya Rani Nath -19306030
Amy Mostafa Sraboni -19306051
Jamuna Binta Islam -19306055
Md. Shoyeab Rahman Abir -19306126
Jayeta Barua -19306134 "Shariah Investment Explorers"
INTRODUCTION :
Islamic banking is a system of financial intermediation that avoids receipt and payment of transactions. Broadly speaking, this is a banking
system whose operation is based on Islamic principles of transactions of which profit and loss sharing is a major feature, ensuring justice and
equity in the economy.

SHARING MECHANISM: The main forms of sharing mechanism are

A. MUDARABAH:
B. MUSHARAKAH (SHIRKAT) :
C. MUZARA
D. MUSAQAT
A. MUDARABAH

Mudarabah is a form of partnership where the Sahib al-Maal provides capital and acts as a sleeping or dormant partner and Mudarib provides
the expertise with the purpose of earning "Halal" profit. The person who undertakes the business is called Mutating and the person who
provides capital for the business is called Sahib al-Maal.

Classification of Mudarabah: It can be broadly classified as Mudarabah al-Matlaq and Mudarabah al-Muqayyadah.

Mudarabah al-Matlaq: It means unrestricted or general Mudarabah. General Mudarabah is that Mudarabah in which Mudarabah contract
does not specify the time of business, place of business, line of trade industry or service, and the customers to be dealt with.

Mudarabah al-Muqayyadah : When the Mudarabah contract imposes restrictions on the Mudarabah business and the terms such as line of
trade, industry or services, period of business, place of business, customers to be dealt with, the Mudarabah is called restricted Mudarabah or
Mudarabah al-Muqayyadah.
Shariah Rules for Mudarabah :
Mudarabah Contract :
1. Both the Sahib al-Maal and Mudarib should have capacity to appoint agents and accept agency.
2. Mudarib contract is not binding one. Any one of the contracting parties may terminate it unilaterally except in two cases;
- If the Mudarib has already started the business
- When the contract specifies a duration for the business

Offer and Acceptance :

1. The wording of the offer should explicitly indicate the purpose of the contract.
2. Acceptance must be consistent with the offer.
3. The Mudarabah contract may be formal or informal and written or oral.

Capital :
In case of Mudarabah contract, Sahib al-Maal always provides capital for the business. In this respect, the following conditions should be
satisfied -
1. The capital should be provided in the form of local currency in circulation.
2. It is not permissible to use a debt owed by Mudarib or another party to Sahib al-Maal as capital in a Mudarabah contract.
3. Mudarib must have free access to and control over the capital.

Distribution of profit and loss:

The following conditions should be satisfied relating to profit and loss in a Mudarabah -
1. Profit should be for both parties according to agreed ratio
2. The ratio of profit distribution should be fixed when the contract is concluded.
3. No profit can be recognized unless the capital of the Mudarabah is maintained intact.
3. The Sahib al-Maal bears all loses incurred from the Mudarabah and the Mudarib will not bear any portion thereof unless it arises from his
breach of trust.
Termination of Mudarabah contract :
A Mudarabah contract can be terminated in the following manner -
1. Being a non-binding contract , it can be terminated by unilateral termination of the contract by one of the parties.
2. With mutual consent of both the parties
3. When the funds of Mudarabah have suffered loss
4. The death of Mudarib

B. MUSHARAKAH (SHIRKAT) :
All the partnership or sharing are called shirkat in Islamic Fight. The term Musharakah has been introduced recently and Islamic bank using it as
a mode of financing. Musharakah or Shirkat is a contract of partnership between two or more people in which all the partners contribute
capital, participate in the management, share the profit in proportion to their capital or as per a pre-agreed ratio and bear the loss, if any, in
proportion to their capital.
Shariah rules for Musharakah :

Capital :
1. The contribution of capital by the partners may be equal or unequal.
2. Capital can be contributed either in cash or in the form of assets/ properties / equipments.
3. The capital contributed by the partners constitutes an entity and comprises a single fund.

Management :
The normal principle of Musharakah is that every partner has the right to take part in the management and to work for it. However, if the
partners agree, the management may be carried out by one or more of them.

Distribution of profit :
1. Profit should be quantifiable
2. The ratio of sharing profit by each partner shall have to be determined on the basis of actual profit accrued to the business.
3. If it is agreed that each partner will get a certain percentage of profit on capital ratio, it is permissible
4. If all the partners are active are active, the share of profit can differ from the ratio of their capital.

Termination of Musharakah :
1. If the purpose of forming the Musharakah has been achieved, then it can be terminated.
2. Every partner has the right to terminate the Musharakah at any time after giving a notice to others as per terms of the contract.
Types of Musharakah :
There are 2 types, on the basis of Islamic mode of financing –

1. Permanent Musharakah :
This type of Musharakah is intended to continue upto the dissolution of the company, but one can sell his share of equity before dissolution. This is
also called continued Musharakah.

2. Diminishing Musharakah :
This is a special type of Musharakah where the share of capital or ownership of assets of the bank gradually diminishes and goes to the account of
the client with the payment of share value by the clients in addition to the share in profit as per agreement.
C. MUZARA’A:
It is a contract in which one person works in the land of another person in return for a pre- agreed share in the produce of the land.

Classification of Muzara'a : In respect of party to supply seeds and machinery, the Muzara'a contract may take two forms-

1) The landowner supplies the seeds and machinery and employs any person as his agent to work on the land in exchange for a pre-agreed share
of the produce of the land.
2) The seeds and machinery are supplied by the employee as a tenant who also cultivates the land in exchange for a pre-agreed share of the
produce of the land.

D. MUSAQAT :

Musaqat is a contract in which one person waters and nurtures an orchard or a tree of another person in return for a pre-agreed share of the
produce of the orchard or the tree.
MECHANISM IJARAH
Actually Ijarah is a kind of sale in which only services are bought and sold, while in other kinds of sale goods, assets, properties and moneys are
sold and bought .It embraces anything or property or living beings (human and animal) which are used to supply, on price, any sort of useful
services, such as, accommodation, transport, communication, entertainment, taking leisure and even sitting under a tree. It is a sale of any
advantage, regardless of whether the advantage is derived from a person, an animal or from the services of thing turned to advantage.

Classification of ijarah

primarily there are 2 types of ijarah

1. Ijarah al Dimmah: It includes hiring of any person to perform a specific job and hiring of an animal for specific use When a person employs
services of another person to perform a specified job for a fixed period of 5me on some fixed wages, salary or remuneration paid to him as
the price of his service, the Ijarah is called Ijarah al-Dimmah.
2. Ijarah al-Ain: Here the Ijarah means to transfer the services or usufructs of a particular non-fungible goods to another person in exchange
for an agreed upon price, which is called rent.
Elements Of Ijarah
1. The contract: This includes Ijab (offer) and Kabul (acceptance).
2. The contracting parties: An Ijarah contract must have two parties: the lessor/hiree(Ajir/Muajjir) and the lessee/hirer (Mustajir).
3. The object: It means the non-fungible goods/assets/properties/a person or an animal.
4. The subject matters of the contract: This includes the utility benefit/service extracted from the object, and the
wages/rent/remuneration paid in exchange for utility/benefit/service.
5. Period of contract. This means the duration of the contract. Sometimes a lease contract may be for a particular piece of work and the
mentioning of the period is not needed there.
Basic rules for validity of ijarah
i. Rules Regarding Contract-
contract is an agreement between two or more parties. It means to make an fer (jab) by either party and to accept (kabul) the same by the
other. So any verbal or oral agreement between parties is a contract.

i. Rules Regarding Contracting Parties-

In an Ijarah contract, the contracting parties are lessor and lessee (in case of non- fungible goods), or employee and employer (in case of human
beings) or hiree and hierer (in case of other living beings)

iii. Rules Regarding the Object

The object of Ijarah includes assets/properties/persons/animals the possession to derive or extract the intended utility.
a. object are transferred handed over to lessee. The object exists in spite of repeated use. It has flow of services, and therefore, can give service/utility more
than once or as and when it is used. its services or usufruct can be separated from the goods itself and can also be sold without selling the goods.
b. the object must have a value use.
c. The possession of the leased thing or living being should be handed over to the lessee so that he can use it.
d. The lessee cannot use the leased thing for any purpose other than the purpose specified in the lease agreement.
e. The leased asset remains with the lessee throughout the lease period. As a trust/al-Wadiah al-Damanah, he is not liable to compensate any loss or harm or
damage of the however, he would be liable for any harm occurred due to his fault.
Rules regarding Benefit :
a) Ijarah is a sale of benefit, utility, service or usufruct derived from the object. Therefore, it is necessary that the intended advantage or utility
should be separate as a product that may stem from the object.
b) The advantage should be identifiable, assessable and specifiable and must have value.
c) The use should be lawful.
d) the magnitude of use should be determined by the time or by work.

Rules regarding rental:

a) It is a condition that rent should be assessable, specified and fixed.
B) Rent is fixed bases on the unit of time.
C) In long term the rent might be fixed on bases on 3 ways. Firstly, with the condition that the rent shall be increased a specific proportion.
Secondly, contract can be renewed. Lastly, rent may be tied up with an influential bench mark.
d) The lessor can not increase the rent unilaterally.
Hire purchase under shirkatul Milk
Hire Purchase under Shirkatul Milk the bank and the client under Shirkah and Bai contracts, provide equity in equal or unequal proportion for
purchasing a real asset like land, building, machinery, and/or transport, procure install the asset with that money, and take joint ownership in
proportion to their equity contribution. Under Ijarah contract, the part of the asset owned by the bank is leased out to the client partner for a
fixed rent per unit of time for a specified period. Again under Bai contract, the bank transfers ownership of its share to Un the client in
exchange for an agreed upon payment of a fixed price. Payment to can either be made in installments during the currency of the lease or in
one pe lump sum at the termination of the agreement.

Transfer of the full ownership, may take though one of the following:

a) Gradual Transfer of Legal Title/Ownership-a separate sale contract is effected for sale and transfer of each part the ownership of the
asset by lessor to the lessee and the amount of rent increase with the decrease of lessor's ownership and simultaneous increase in e
lessee's ownership of the property.

b) Transfer of Legal Title by Gift-Upon expiration of the lease period and payment of all the rental installments, the title of the property may
be transferred. This may be done by a separate gift deed at the conclusion of the arrangement or the title may be transferred by
expiration for issuing a gift deed.

Conditions that make Hire-Purchase under Shirkatul Mik Valid

a) That the asset desired by the client is first purchased by the bank and the client jointly.
b) The ownership to the asset shall be as per equity cell participation of the bank and the client. Rent will accrue only after delivery of the
asset to the lessee in usable condition/good order.
c) That after purchase of the asset the risk of the asset is borne by the owners, the bank and the client lessee.
d) That the specifications of the asset, delivery date, time and place and bother terms of the contract are ensured.
Bai-Mechanism

Bai-Muajjal: Sale for which payment is made at a future fixed date or within a fixed period by installments.
Rules of Bai-Muajjal:
1. Permissible to make the promise binding upon the client to purchase from the bank.
2. Permissible to take collateral security
3. The specified goods may sell higher price than the purchase price.
4. Time and place of delivery must be specified.
5. The bank may sell goods at an agreed price.

Bai-Murabaha: sale for an agreed upon profit.

Types of Murabaha:
In respect of modes payment of price Murabaha maybe of two types:
1. Spot Murabaha
2. Deferred Murabaha

In respect of dealing parties Bai-Murabaha maybe of two types :

1. Ordinary Bai-Murabaha
2. Bai-Murabaha on order and promise

Bai-Musawamah: Sale for which commodities are bought and sold in lump sum price.
Bai-Mechanism

Bai-salam: Advance sale and purchase

Rules of Bai-salam:
1. Unit price and total price of the commodity must be fixed.
2. Time and place of delivery must be specified.
3. Not necessary to mention the cost of commodity and profit.
4. Not permissible on existing commodities.
5. Not permissible in land or real estate.

Bai-Istisna'a: An order sale, i.e., to get manufactured and sold on order.

Bai-Inah: Under the contract an asset is sold for a fixed price and then bought back at a higher price than the sale price.

Bai-al-Dayn: Sale of debt

Bai-Istijrar: A contract in which supplier agrees and delivers commodities on a regular basis at an agreed price

Jualah: A contract of buying and selling of services in exchange for commission.

PROJECT FINANCING CRITERIA
Criteria for selecting a project:

1) Technical criteria
2) Commercial criteria
3) Financial criteria
4) Managerial criteria
5) Security criteria
WORKING CAPITAL INVESTMENT OF ISLAMIC BANKING :
Working capital may be defined as the assets held for current use in a business, less the amount of short term liabilities. It maybe regarded
as the lifeblood of a business.

Why business need working capital?

A business enterprise has to maintain an adequate amount of working capital to ensure its liquidity so that the firm doesn’t face any
difficulty to meet its current obligations.

Some of them are given below:

1. It helps daily operation.
2. Investment in current assets.
3. Increasing sales.
4. payment of current obligations.
5. Taking advantage of cash discount.
6. Facing unforeseen adverse conditions.

Working capital financing mode for Islamic Bank :

1. Investment mode
2. Buy mode
3. Bills of exchange mode.
PROCEDURE OF ISSUING LC IN ISLAMIC BANKING
In Islamic banking, the procedure for issuing a Letter of Credit (LC) involves adhering to Sharia principles, which prohibit interest-based
transactions. Instead, LCs are structured as a type of trade-based financing. Here's a simplified overview of the process:

1) Customer Request: The customer (importer) initiates the LC request with the Islamic bank, detailing the terms of the trade transaction.

2) Bank Assessment: The bank reviews the customer's request, ensuring it complies with Sharia principles. The bank assesses the authenticity
of the trade transaction and the financial capabilities of the customer.

3) Application Submission: The customer submits a formal application for the LC, providing necessary documentation such as the purchase
agreement, proforma invoice, and other trade-related documents.

4) LC Issuance: If the bank approves the application, it issues the LC to the exporter's (seller's) bank, also known as the advising bank. The LC
outlines the terms and conditions of the trade, including the amount, shipment details, and any specific requirements.

5) Advising Bank's Role: The advising bank confirms the authenticity of the LC to the exporter and ensures that it aligns with Sharia principles.

6) Exporter's Compliance: The exporter ensures that the terms and conditions of the LC are met before initiating the shipment of goods.

7) Export Documents: The exporter provides the necessary documents, such as the bill of lading, commercial invoice, and other required
paperwork, to the advising bank.
PROCEDURE OF ISSUING LC IN ISLAMIC BANKING

8) Bank's Review: The advising bank reviews the documents and ensures they match the terms of the LC. If everything is in order, the advising
bank sends the documents to the importer's bank (issuing bank).

9) Importer's Obligation: Upon receiving the documents, the issuing bank notifies the importer. The importer pays the bank for the LC amount,
or the bank may offer deferred payment options as long as they comply with Sharia principles.

10) Goods Release: After receiving payment or an appropriate commitment, the issuing bank releases the documents to the importer. The
importer can then use these documents to claim the goods from the shipping carrier.

11) Repayment: The importer repays the bank according to the agreed-upon terms, which could include deferred payment periods that do not
involve interest.

It's important to note that the specific procedures can vary depending on the bank's policies and the nature of the trade transaction. The overall
goal is to facilitate trade while adhering to Islamic financial principles. Always consult with professionals in Islamic finance for accurate and up-to-
date information.
WELFARE SERVICES OF ISLAMIC BANK :
Islam upholds the concept that money, income, and property belong to Allah and this wealth oi to be used for the Welfare of the society.
Welfare services in Islam might include :

1. care for others

2. Zakat

Islamic banks take care of others through Qard-e-Hashnah(benevolent loan) financing transactions. It also mobilizes Zakat resources.

Some of the welfare activities include:

a. Income generating programs
b. Educational programs
c. Health and medicare programs
d. Humanitarian help programs
e. Relief and rehabilitation programs
NON-INVESTMENT SERVICES OF ISLAMIC BANK :
Non-investment services of Islamic banks are those that are not related with general investment activities of a bank. The income realized in
return for such services will certainly be interest free. There are various non-investment services offered by Islamic banks. Among them, most
popular services are –

1) Collection of Negotiable instruments : The bank takes in its possession negotiable instruments from its customer for safe keeping until
the date of their maturity.
2) Sale of Share: Islamic banks acts as a banker to issue of primary shares of public limited companies in exchange for a commission.
3) Transfer of Money :Islamic banks transfer money from one place to another place as per the order of its customers through MT, TT, DD
and PO.
4) Settlement of Transactions : Islamic banks pay Bill of exchange and Cheques of their customers to settle transactions with third parties.
5) Opening of L/C: Islamic banks issue Letter of Credit for domestic and international trade on a commission basis.
6) Issue of Solvency Certificate : lslamic banks issue solvency certificate to their customers if so requested.
7) Business advisory services : Islamic banks can provide business advisory services to its clients on marketing and other important business
information.
8) Transactions of Foreign Currency : Islamic banks buy and sell foreign currencies.
9) Publication Works : Islamic banks publish books, booklets, pamphlets to advertise the bank services.
10) Issue of Travelers Cheques : Islamic banks also issue Traveler Cheque, which are accepted by worldwide.
FOREIGN EXCHANGE OPERATION OF ISLAMIC BANKS
Islamic banks observing the forces of the demand and supply, which determines a FC price, purchase foreign currencies from other banks or
the Bangladesh Bank and sells the same to other parties for an agreed upon rate, which includes a profit between the two parties. The Islami
Bank Bangladesh Limited, as an Authorized Dealer (AD) has been dealing with the following FC accounts as per the Bangladesh Bank circular:

1) Non-resident Foreign Currency Deposit A/C- Bangladeshi nationals and persons of Bangladesh origin that live abroad maintain this
account.

2) Education FC A/C- In order to enable overseas Bangladeshi nationals to meet educational, expenses of their family, a scheme of special
foreign currency accounts known as Education FC account may be opened by them.

3) Convertible and Non- convertible Taka A/C.- the following can open convertible account. All diplomatic missions in Bangladesh, All
international non-profit organizations, i.e., UN organizations, Foreign civil companies engaged in Bangladesh, Foreign contractors,
consultants engaged for specific projects in Bangladesh

4) Private Non-resident Taka A/C- These are accounts belonging to individuals, firms or companies residing countries outside Bangladesh,
which are designated as non resident account.

5) Private Foreign Currency A/C- Foreign accounts opened in Bangladesh in the names of Bangladesh nationals or persons of Bangladesh
origin, who work or are self-employed abroad.
RURAL FINANCING UNDER ISLAMIC BANKING FRAMEWORK
Rural financing within Bangladesh's Islamic banking framework is guided by Shariah principles, prioritizing ethical practices like profit-sharing
and risk-sharing while avoiding interest-based transactions. to provide financial services to rural areas, supporting economic development and
social justice. The design involves accessible mechanisms such as rural branches and mobile banking

"Rural financing in Bangladesh's Islamic banking follows ethical Shariah principles, emphasizing profit-sharing and risk-sharing while avoiding
interest-based transactions. This approach aims to provide financial services to rural areas for economic development and social justice. This
is achieved through accessible mechanisms -like rural branches and mobile banking, to reach remote areas transparently, building on
successful field experiences that highlight special financial products and local economic understanding.

1) Ethical Finance: Islamic banks in Bangladesh, follow Shariah principles. They avoid interest-based transactions and focus on ethical
practices like profit-sharing and risk-sharing.

2) Empowering Communities: Rural financing is all about empowering rural communities. They selects beneficiaries based on need and
project viability, often forming groups for mutual support. They offer collateral-free financing to promote entrepreneurship and reduce
barriers.

3) Flexible Financing: Islamic banking offers versatile financing modes like Mudarabah and Musharakah, which can fund various activities,
from agriculture to small businesses. These modes ensure tailored financial solutions for rural needs.

4) Supporting Growth: Fair recovery processes and support for agriculture and cottage industries contribute to rural growth. This aligns with
Islamic values of ethical and accessible finance.

All in the pursuit of economic development and social justice.

REAL ESTATE FINANCING
Real Estate Financing in Islamic banking involves providing funds for real estate transactions while adhering to Shariah principles. It includes
various modes like Murabaha (deferred payment sale), Musharakah (shared ownership), and Istisna (contractual arrangement). The goal is
to offer Shariah-compliant solutions that align with ethical and legal principles for property acquisition and investment.

1) Real estate financing through Murabaha: The financier owns a property and sells it to the client at a profit on deferred payments. The
client pledges to buy the property after it's built to ensure a valid sale.

2) Real estate financing through Bai'muajjal: Ownership transfers twice, leading to double capital gains taxes. Al-Baraka Bank London's
solution is to directly register the property in the client's name, though this requires Shariah clarification.

3) Real estate financing through Musharakah: In the Iqtina form, the customer co-owns with the bank, paying rent and installments.
Payments contribute to ownership, reducing rent as ownership grows, eventually passing to the customer.

4) Real estate financing through Istisna: Generally prohibited, Istisna is allowed in exceptional cases. If the delivered commodity doesn't
meet terms, the buyer can reject it.

5) Real Estate Financing in Bangladesh: In the 1980s, Islamic banks, like Islami Bank Bangladesh Limited, began real estate financing using
the Hire Purchase under Shirkatul Melk mode, investing significantly in the sector.
BANK VISIT SUMMARY

We select Islami Bank Bangladesh limited (East Nasirabad, Sub Branch, 2 No Gate, Chittagong) as our respective Bank to visit in. We visited
the bank on Monday 14th August. The in-charge of the bank Mohammad Nasir Uddin (Senior Principal Officer) accepted our application and
expressed interest in discussing their Shariah based banking management with us.

Mohammad Nasir Uddin explains the basic functions of Islamic bank. Where he explained to us their Shariah-based banking activities and
shared various materials, which helped us to build the base of practical experience. He shared with us the Sharing Mechanism, Ijarah
Mechanism and Bai Mechanism in details. Which we have explained in details in our Presentation. We had an 1 hour 30 minutes of discussion.

They were confident in their works. Additionally, they welcome us to open accounts in their banks. Eventually, through the visitation in the
Islamic bank, our knowledge about Islamic banking has enriched. They also added that "some rumors had been spread against Islamic bank
from competitive perspective." Yet they had responded actively against these misrepresentation. Islamic bank is growing in numbers every
year, as it has introduced and offered shariah based policy to customers. The potential customers has responded positively in spite of there
are competition in market.

This banking system has been able to gain positive margin. And they are also trying to introduce new and flexible Shariah based policy to the
customer, in order to achieve customer trust and attract new customers.

At last, we see Islamic bank as a desired career choice. because it aligns with ethical values and offers opportunities to work in a financial
industry that follows Shariah principles, avoiding interest-based transactions and focusing on profit-sharing and risk-sharing.
Thank you!