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Prof khaliq murabaha n salam

  1. 1. Islamic Modes for Agricultural FinancingPRODUCTS – Murabahah and Salam Margalla Hotel, November 28, 2011Al – Huda Training Programme Muhammad Khaleequzzaman Head Islamic banking Department Int’l Islamic University Islamabad
  2. 2. Islamic Modes – Agricultural Financing Agricultural production Cycle - Crops STAGE ACTIVITY Entering Contract of cultivation inAcquisition of land/ case of rented land, decision about crop Choice of crop in view of market demand Clearing, Leveling, Plowing, Seed bed preparation,Preparation of land Installation of Irrigation/drainage system Crop production Sowing/transplantation, Irrigation, Fertilization, operations Weeding, Pesticide application Cutting/ picking, Harvesting threshing Post harvest & Cleaning, Grading, Processing, Packing, Marketing Storage, Transportation, Sale of produce
  3. 3. Islamic Modes – Agricultural FinancingAreas of Financing (including crop production) – Working Capital (Short term): • Crop production [Purchase of inputs i.e. seeds, fertilizers, pesticides, etc.] {Murabahah} • Poultry Farming [purchase of feed/raw material, birds/chicks, vaccination/medication, utensils, etc.] {Murabahah} • Dairy Farming [purchase and production of feed/fodder, milk container, vaccination/medication, utensils, etc.] {Murabahah} • Fish Farming [purchase of fuel, ration, processing {Murabahah} equipment, purchase of handling and storage boxes, etc.] • Liquidity Requirement [repair & maintenance of machinery & equipment, labor/water/utility charges, etc.) {Salam}
  4. 4. Islamic Modes – Agricultural FinancingAreas of Financing (including crop production) – Term Financing (medium and long term: • Farm Mechanization [Purchase of tractor and farm machinery for tillage, sowing/planting, pesticide application, harvesting/threshing, etc.] {Murabahah/ Ijarah} • Transport [purchase of trailers, reefer vans, milk cooling/ chiller tanks/carriers, motorcycles/pickups, of feed/raw material, birds/chicks, vaccination/medication, utensils, etc.] {Ijarah/Diminishing Musharakah} • Live stock [purchase/replacement of animals for milk & meet production, refrigerated storage, animal sheds, water supply system, generator, fencing slaughter house etc.] {Murabahah/DM/Istisna} • Irrigation System [t/wells, sprinkler/drip/solar pumps, water course lining, etc.] {Ijarah/Murabahah/DM/ salam} • Forest development and enhancement [nursery raising, tree plantation, etc.] {DM}
  5. 5. Islamic Modes – Agricultural FinancingAreas of Financing (including crop production) – Term Financing (medium and long term: • Poultry Farming [construction of breeding & hatchery farms, utensils, feed mills, transport & distribution vehicles, slaughtering & processing, etc.] {Murabahah/ DM} • Fish Farming/catching [construction of fish ponds & hatcheries, purchase/replacement of fishing boats, engines, and related facilities & equipments, construction of cold storage, etc.] {Murabahah/DM} • Dairy Farming [milk processing, plants, etc.] {Murabahah/DM/Ijarah} • Miscellaneous [green houses, godowns, dairy/livestock farms, seed/milk/fruits/vegetables processing equipment]
  6. 6. Islamic Modes – Agricultural Financing BLANK SLIDE
  7. 7. Training Workshop – Islamic Microfinance ISLAMIC MODES/ INSTRUMENTS:– Sale Contracts: • Murabaha/Murabahah to the Purchase Orderer • Salam/Parallel Salam • Istisna’/Parallel istisna– Participatory Modes: • Mudarabah/Resource Mobilization • Musharakah/Diminishing Musharakah– Rent based Modes: • Operating ijarah • Ijarah wa iqtina’
  8. 8. Theory & Practice of MurabahahPreliminary: Rules applicable for Islamic Sale1. Subject (good to be sold) must exist at the time of sale2. Subject must be in ownership of seller – Physical or constructive possession [exception in Salam and Istisna’]3. Subject must be property of value4. Subject should be halal5. Subject must be known and identified6. Sale must be instant and absolute7. Sale must be unconditional8. Delivery of sold item must be certain9. Price of subject must be certain Risks and responsibilities attached with the subject must transfer from seller to the purchaser as a result of sale
  9. 9. Training Workshop – Islamic MicrofinancePreliminary:• Murabahah; historical perspective• Murabahah and Musawamah• Spot and Deferred Murabahah• Deferred Murabahah and Bai Muajjal• Banking Murabahah
  10. 10. Theory & Practice of MurabahahMurabahah – Concept and Historical perspectiveMurabahah defined:• Selling a commodity as per the purchasing price with a defined and agreed profit (Ribh means profit).• Profit may be a percentage of the selling price or a lump sum.• The transaction may be concluded with or without any promise in which case it shall be called as ordinary Murabahah or banking Murabahah or Murabahah to the purchase orderer.Shariah Legitimacy of Murabahah:• Qura’an: Surah Ale Imran – “It is no crime for you to seek the bounty of your Lord” [verse 198] Surah Al-Baqarah – “Allah has permitted trade” [Verse 275]• Sunnah: The Prophet (PBUH) purchased a she camel from Abu Bakr (RAA) for use as transportation from Medinah...
  11. 11. Theory & Practice of MurabahahProcess Flow: Promise Stage – Negotiation/Approval of overall limit – MOU/Master Murabahah Facility Agreement – Requisition + Undertaking + Security Deposit (Hamish jiddiyah) 2 Bank MOU/Master MFA Client Approval of Limit 1 Requisition, Undertaking, Sec. Dep. 3
  12. 12. Theory & Practice of MurabahahAgency Stage – Third party appointed as agent [Optional] – – Clint can be appointed agent [case of dire need] – Payment to the Supplier – Direct Draft of Payment 2A Agent 3 (Client) Receipt of Payment Agent Bank Bank Client (3rd Party) Receipt of Payment Agency Agreement 2 1 Supplier Payment 3 2
  13. 13. Theory & Practice of MurabahahAcquisition/Possession Stage – Constructive Possession • Payment to supplier • Discount of supplier/benefit to client • Title of goods • Transfer of risk and responsibilites Risks and Responsibilities Agent (Client) Agent Bank Supplier Title Goods (3rd party)
  14. 14. Theory & Practice of MurabahahExecution of Murabahah / second Sale – Receipt / Possession report – Offer of client to purchase – Acceptance of offer by the bank – Return of security deposit – Collateral obtained – Delivery of goods / Transfer of Risk & responsibility – Ownership changes – Payment of earnest money (Urboun) [Optional]Payment of Murabahah Price – Client pays Murabaha price as per agreed schedule – Collateral released – Murabahah terminates
  15. 15. Theory & Practice of MurabahahExecution of Murabahah Urboun/Securities 4 Offer to Purchase 2 Bank Client Acceptance of Offer 3 Receipt , Possession Report 1 Sec. Deposit/Hamish jiddiyah 3 DP Note Payment of Murabahah Price Murabahah Price 1 Bank Client Murabahah Terminates 2
  16. 16. Theory & Practice of MurabahahPurchase of poultry feed stock• Murabahah transaction: Rs. 100,000• Murabahah Facility: 90 Days• Payment: Lump sum• Rate of Profit: Six months KIBOR+2%• Freight: 5% of cost of goods• Securities: Pledge of feed stock, post dated cheques
  17. 17. Theory & Practice of Murabahah Pricing of Murabahah [Example]:Particulars Amount (Rs.)Cost of goods Rs. 100,000Rate of Profit Kibor + 2%Six monthly KIBOR 10% p.a.Freight/Insurance 5% of costTotal cost 100000 x 5% 100000 + 5000 =105000Profit 10%+2% = 12% p.a. 105000 x 12% x 90/365 = 3107Murabahah Price 105000+3107= 108107
  18. 18. Theory & Practice of MurabahahIssues in Murabahah:• Oral promise/unilateral – bilateral promise with option• Supplier’s price in the name of customer/without any name/bank’s discretion (offer to negotiate)• Prior contractual relationship (customer and supplier)• Vendor being third party [buy back (inah)]• Commitment or credit facility fee• Documentation charges• Syndication charges• Feasibility study fee• Performance guarantee from customer in case the vendor is of its choice
  19. 19. Theory & Practice of MurabahahIssues in Murabahah:• Hamish Jiddiyah/trust/return/investment• Arboun/ treatment/timing• Sequence of transactions• Timing of promissory note• Rollover in murabahah• Timing of executing murabahah• Default by the client• LIBOR/KIBOR being reference price• Rebate on early payment
  20. 20. Islamic Modes – Agricultural Financing BLANK SLIDE
  21. 21. Islamic Modes/Instruments - Sale Contracts:Salam: Defined A salam transaction is the purchase of a commodity for deferred delivery in exchange for immediate payment. It is a type of sale in which the price, known as the salam capital, is paid at the time of contracting while the delivery of the item to be sold known as subject matter of salam (al Muslam fihi) is deferred. Salam is also known as Salaf (lit: borrowing)
  22. 22. Islamic Modes/Instruments - Sale Contracts:Salam: Shariah Legitimacy Allh says “O ye who believe when you deal with each other, in transactions involving future obligations in a fixed period time, reduce them to writing” [Al Baqara Verse 282] Ibn Abbas reported, the Prophet (PBUH) came to Medina on Hijrat and found that people were selling dates for deferred delivery (salam) over a period of one or two years. The Prophet (PBUH) said: “whoever pays for dates on a deferred delivery basis (salam) should do so on the basis of specified scale and weight” [Bukhari and Muslim]
  23. 23. Islamic Modes/Instruments - Sale Contracts:W
  24. 24. Islamic Modes/Instruments - Sale Contracts:Salam: It is an exception to the possession (a rule of sale) A purchase contract with deferred delivery of goods in exchange of advance price fully paid on spot (opposite to Murabahah financing) Benefits both the seller and purchaser –  Seller (client) receives the price in advance  Purchaser (Bank) contracts the price which is lower than the market price at the time of delivery
  25. 25. Islamic Modes/Instruments - Sale Contracts:Conditions of Salam:• Salam is a binding contract• Full price at spot, otherwise selling debt for debt (exception – upto 3 days)• Salam capital (price) in principle be in cash, however, it can also be fungible commodities (wheat etc.), or usufruct [Imam Malik]• Debt not recognized as salam capital• Sale in case of commodities satisfying condition of fungibility (Dhawatul Amthal), quantity be specified exactly• Standardized production of companies can also be treated as salam commodity• Product of a particular field or farm cannot be sold under Salam
  26. 26. Islamic Modes/Instruments - Sale Contracts:Conditions of Salam:• Certain date and place of delivery• The commodity should remain in the market throughout the period of contract [Different opinions]• Time period for delivery should be sufficient to allow use of salam capital conveniently and effect prices, preferably be at least 15-30 days [Different opinions]• Subject matter of salam can be exchanged with other goods only after the date of delivery as long as this replacement is not the part of contract. But market value of exchanged goods should not be more than the market value of salam goods
  27. 27. Islamic Modes/Instruments - Sale Contracts:Conditions of Salam:• If the buyer refuses to take delivery of goods (when these meet the specification criteria) he should be compelled to take delivery• If seller fails to deliver due to insolvency he should be granted an extension in time of delivery• Salam contract can be cancelled with the consent of both parties, and only the original price paid is returned• A security/guarantee or personal surety can be obtained as safeguard against risk of default
  28. 28. Payment of Salam Price 1-1-2007 SalamBank Client Transaction Agent Delivery of Goods 30-6-2007 Third Party
  29. 29. Islamic Modes/Instruments - Sale Contracts: Salam: Procedural Alternatives: •The banks face limitations in receivingcommodities and selling them in the market •Banks can overcome the limitation byestablishing a subsidiary to undertake this task •Banks can adopt Parallel Salam or Third party sales to avoid this situation •Banks can appoint the client its agent to sell the commodity. The agency agreement should beseparate from the salam agreement •If agent has been able to sell the commodity at a price more than the one stipulated in agencyagreement, he is entitled to get the difference
  30. 30. 1 Salam Sale Contract 1 June 06 2 Salam Price Payment 1 June 06 Delivery ofClient 5 Purch Commodity Ban MFI 20 Dec 06 Parallel Salam 3 2 Salam Contract 2nd Salam Contract Delivery of Third Commodity 2nd S 20 Dec 2006 6 15 Ju
  31. 31. 1 Salam Sale Contract 1 June 06 2 Salam Price Payment 1 June 06 Delivery ofClient 4 Purchaser Commodity Bank 20 Dec 06 Promise to Purchase Pays 20 Dec 06 15 June 06Third Party 6 3 Promise 5 Delivery of Third Party Commodity Promise and 20 Dec 2006 Payment
  32. 32. Islamic Modes/Instruments - Sale Contracts: Rules of Parallel Salam and Third party promise •Both the contracts viz. salam and parallel salam must be independent of each other, otherwise it becomes two sales in one contract •Parallel salam is allowed only with third parties. Therefore the original seller cannot be entered into the parallel salam •If one party breaches its obligation, the bank has no right to refuse delivery of goods in parallelcontract •The third party giving unilateral promise should not pay the price as this is not allowed in Shariah
  33. 33. Islamic Modes/Instruments - Sale Contracts: Difference Between Salam and MurabahaSalam MurabahahDelivery of good is deferred, Good is delivered at spot,price is paid at spot payment of price is deferredPrice has to be paid in full Price can be paid on spot or differed, lump sum or in installmentsSalam is not executed in the Murabaha can be executed incommodity of particular particular commodity.specifications or thecommodity from particularorigin
  34. 34. Islamic Modes – Agricultural Financing THANKS