Islamic Financing

In: Business and Management

Submitted By ireez99
Words 570
Pages 3
TITTLE: Home Financing through the Musharakah Mutanaqisah Contracts: Some Practical Issues by Ahamed Kameel Mydin Meera and Dzuljastri Abdul Razak.

As an introduction, authors made a comparison between Al-Bay’ Bithaman Ajil (BBA) and Musharakah Mutanaqisah Partnership (MMP) where they contended that MMP is better than BBA due to few reasons. BBA was claimed to has higher financing balance compared to conventional loan and on the other side as for bankers, liquidity management problem may arise because of BBA fixed financing mode that caused by cost of funds that based on floating rate whereas income are from fixed rate. Therefore, the authors did not favour BBA compared to MMP.

MMP is said to be based on a diminishing partnership concept. It has 3 stages; firstly, it is called musharakah where customer and bank join ownership together to own the asset being financed. Secondly, the bank leases its share in the asset ownership to the customer which this is called as ijarah. Thirdly, this is known as bay where customer gradually buys the bank’s 80% shares at an agreed portion periodically until the customer can fully own the asset. In the other words we can say that customer will pay periodic rental amount according to the agreed percentage which keeps changing. Share ratio owned by customer will increase as periodic redemption until finally the asset will be fully owned by him. There are main benefits derived from MMP, some of them are MMP is established as shari’ah compliant internationally unlike BBA, house under MMP is valued upon market price as well as rental that determined by market rental values, rental rate for asset under MMP can be revised periodically to reflect current market value and MMP is more flexible financing structure compared to BBA.

Generally, Islamic economics scholars in opinion that it is allowable to use…...

Similar Documents

Islamic Banking

...BRAC University Journal, Vol. III, No. 1, 2006, pp. 35-52 COMPARATIVE ANALYSIS OF LOAN RECOVERY AMONG NATIONALIZED, PRIVATE AND ISLAMIC COMMERCIAL BANKS OF BANGLADESH Ezaz Ahmed Department of Management and Business BRAC University, Dhaka, Bangladesh and Ziaur Rahman IITM, Dhaka, Bangladesh and Rubina I. Ahmed Department of Business Administration East West University, Dhaka, Bangladesh ABSTRACT Bangladesh has a unique Banking system with multiple types of Banking with Nationalized Commercial Banks (NCBs), Private Commercial Banks (PCBs), Foreign Commercial Banks (FCBs), Islamic Commercial Banks (ICBs), Specialized Development Banks and the Cooperative Banks. Currently the magnitude of loan default is quite enormous in the Banking sector. However, the general perception and belief regarding the Islamic Banking is better recovery rate of loans and advances. This paper attempts to discuss the issues that govern the banking practices in Bangladesh and it also paints a picture of the lending practices followed by NCBs, PCBs and ICBs in Bangladesh. From the analysis presented in this case, it comes to light that ICBs lending practices with Islamic banking instruments mirrors the lending practices of conventional banks having synonymous counterpart products. The paper also unfolds some strategically weak links in the development of the banking sector, which has obstructed the overall economic development of the country. In this diversified Banking system, an attempt...

Words: 10535 - Pages: 43

Islamic Banking

...this research is to find out if Islamic Banking is a better alternative to the Western, Conventional Banking. The information provided will reveal various Islamic Banking principles that would have prevented previous major economic crises and if applied globally today could prevent a major economic collapse. Islamic Banking is banking system based on Shari'a (Islamic) Law on which it developed its unique characteristics that will be discussed in this paper. Shari'a Law does not allow the use of Interest (Riba), trading in financial risk, and investing in businesses that are considered unlawful according to the Quraan and Islamic scholars. Shari'a law in Islamic Banking is meant to promote economic and development through the means of disciplined investing, fair risk sharing, and profit or loss sharing (Warde, 2000). The literature that will be examined in this paper will show that Islamic Banking is a good alternative to the current global banking system, however, it will be near impossible to revamp the existing banking system and replace it with Islamic Banking because it goes against many of the core principles of conventional banking that the global economy is built on which has been around for decades. Brief History The main goal of Islamic banks was to promote social and economical welfare in society through guiding investors and offering financial assistance to businesses by engaging in profit sharing transactions (Warde, 2000). Islamic banks were thought of as......

Words: 2022 - Pages: 9


... conventional banks and Islamic banks. In simple words Islamic banks operate in interest free system. Prohibition of interest is ordained in Islam in all forms and intent. This Prohibition is strict, absolute and unambiguous. The Holy Qur'an in verse 278 of Surah Al-Baqarah states: "O ye who believe! Fear Allah and give up what remains of your demand for Riba, if ye are indeed believers." Verse 2: 279 says: "If you do it not, take notice of war from Allah and His Messenger. But if ye turn back, ye shall have your capital sums. Deal not unjustly and you shall not be dealt with unjustly." It therefore, follows that interest is prohibited as it leads to injustices and Islam is against all forms of injustices and exploitations and pleads an economic system, which aims at securing extensive socio-economic justice. The Islamic law of prohibition of Riba, which includes interest, was originally not based on economic theory but on Divine Authority, which considers the charging of interest as an act of injustice (Dr. Siddiqui). Islamic banks appeared on the world scene as active players two decades ago. But many of the principles on which Islamic banking is based have been commonly acceptable all over the world for centuries rather than decades, as it is evident that Islamic finance was practiced predominantly in the Muslim world throughout the middle Ages, promoting trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became......

Words: 21336 - Pages: 86

Islamic Banking

...Islamic Banking Malek Alraddadi 02-24-2014 FIN-610 Introduction This study debates upon the history of Islamic banking. What are the ethical issues involved in the implementation of Islamic banking. Since the birth of Islam what type of steps are taken and by whom these measurements were taken. Besides this this paper also declares the response and customers point of view regarding Islamic banking with the help of different studies. History of Islamic banking The term Islamic banking got regular in the 1960's, however the systems and thoughts of the framework were suggested and operated since the beginning of Islam. Numerous studies and explores have indicated that Islamic money components were utilized within the Muslim world all around the Middle Ages; in leading exchange and business exercises. Charging investment on credits was not regular in those days. The first run through investment bearing credits were generally utilized within the Muslim world, particularly in the Middle East, was throughout the Ottoman Empire's governed in the fifteenth century. Mehmet Ebusuud Efendi, the senior Islamic minister of the Ottoman Empire, issued a fatwa (decision) permitting the charging of investment and thinking of it halal (allowable) as long as it was underneath 10%. Despite the fact that it was clear in The Holy Quran that investment was strictly disallowed, practically nobody could challenge the senior Islamic priest's decision since testing him might mean testing the...

Words: 1810 - Pages: 8

Islamic Financing : Leasing (Ijarah)

...Introduction Unlike conventional economics which focuses on profit maximization, the Islamic economic system aims at the “study of human falah achieved by organising the resources of earth on the basis of cooperation and participation (Akram Khan, p.55).” In other words, the Islamic economic system aims at attaining Allah s.w.t’s pleasure, while pursuing economic activities within the boundaries of the Islamic shariah. The Islamic shariah puts a heavy importance on the well being of the community and social justice. Thus, this also means the prohibition of interest. The prohibition of interest is one of the main factors that put Islamic economics in distance with the conventional economics. Because of this difference in nature, Islamic Financial Institutions (IFIs) have different types of contracts as practiced by conventional financial institutions. One of the types of contracts entered by IFIs is the Ijarah contract. Ijarah contracts are also known as Islamic leasing. Basically, this study is done in order to understand more the nature of leasing according to Islamic principles, and at the same time, the differences of ijarah with conventional leasing. In addition, this study also aims to identify the types of ijarah practiced by IFIs in Malaysia and also to see how Malaysian IFIs disclosed their ijarah financing in comparison to their counterparts in Bahrain IFIs. This is because as one ummah, it is important to have a standardized standard that is Shariah......

Words: 4835 - Pages: 20

Islamic Financing

...Islamic Financing for Large Infrastructure Projects Jasper Camacho International Financial Mgmt, Section 1 Fall 2005 Summary This paper examines the growing Islamic finance market and how it is becoming an important source of capital to fund infrastructure projects in the Muslim world. The paper starts by introducing basic tenants of Islamic finance and the problems as it relates to large capital projects. Innovations in Islamic project financing are then introduced along with the complexity that those have to innovations address. The paper concludes with a description of selected recent infrastructure development projects that use Islamic financing. Islamic Project Development Needs Increasing population throughout the Muslim world and the appetite for demand in investment for infrastructure in Muslim populated countries has led an increase need for capital that conforms to Islamic standards (see exhibit 1 for list of Organization of Islamic Countries).1 In many of these countries especially in the Middle East, Central Asia and South East Asia, oil and natural gas deposits push the need for companies to build extraction, transport and refining capacity. In developing countries such as the ones in Africa, Pakistan, and Afghanistan, there is an increasing need for electricity and water desalination stations. These projects are capital especially capital intensive in nature. Islamic Financing Basics Islamic financing is the method of financing that complies with the......

Words: 3761 - Pages: 16

Superbike Financing

...Abdul Ghani to conduct a study issue that related to finance sector. I choose “Bank Islam offers superbike financing “as for my individual assignment and presentation. Generally, I have to study and find out why Bank Islam choose to offer superbike financing and what is the reasons due to that. This main finding was that the assumption of increasing profit in sales is increased in this market segment by Bank Islam. Image 1: Example picture of superbike financing by Al-Rajhi Bank 1.0 INTRODUCTION Bank Islam, established in 1983, is Malaysia’s maiden Shariah-based institution. Since its inception, it has emerged as the symbol of Islamic banking in Malaysia and its vision to be “A Global Leader in Islamic Banking” illustrates the Bank’s status as the flag bearer of the country’s financial services industry (“the industry”). Bank Islam has been growing from strength to strength as evidenced by its financial performance and paid-up capital, which, in turn, was instrumental in making the growth of its assets. Throughout the year, Bank Islam has been embarking on a number of expansion programmes with its involvement in, among others, notable transaction in Sukuk and Corporate Mandates. Living up to its pioneering spirit, the Bank has continued to provide innovative and enhanced products and services which have resulted in a growing number of customers seeing Islamic banking as a true alternative to conventional banking. This growing list of clienteles in addition to truly...

Words: 2580 - Pages: 11

Islamic Banking

...BETWEEN ISLAMIC AND TRADITIONAL BANKS: PRE AND POST THE 2008 FINANCIAL CRISIS Mohamed Hashem Rashwan1 The British University in Egypt ABSTRACT This study tests the efficiency and profitability of banks that belongs to two different sectors: a) Islamic Banks (IBs) and b) Traditional Banks (TBs). The study concentrates on the pre and post 2008 financial crisis with an aim to test if there are any significant differences in performance between the two sectors. The study applies the MANOVA techniques to analyze the financial secondary data for only publicly traded banks in the same region. The findings of the study show that there is a significant difference between the two sectors in 2007 and 2009 and there are no significant differences in 2008, which indicates the effect of the crisis on both sectors. IBs outperform TBs in 2007 and TBs outperform IBs in 2009. This result indicates the spread of the crisis to the real economy where IBs usually operate. INTRODUCTION Forty years ago Islamic Finance was virtually an unknown system; interestingly it has expanded to become a distinctive and fast growing segment of the International Financials markets. With a growth rate that ranges from 15% to 20% (EL- Qoroshy 2005). Islamic Finance in general and Islamic banking in specific become main players in the financial world. According to the IMF survey (2010) the total capital managed under Islamic Finance systems was estimated to be $820 billion at the end of 2008. More than 200......

Words: 7407 - Pages: 30

Financing has earned for a period. Expense means the cost that a company has spent for a period. It could be wage, salary, and depreciation. If the revenues that company makes are bigger than the expenses, it would be net income. And if the revenues that company makes are lower than expenses, it would be net loss. Third thing is cash flow statement which gives information about where a company has received or spent cash. Cash flow is divided into three different parts which are operating activity, investing activity, and financing activity. Operating activity gives the cash flow from the main operations of a company. Investing activity gives the cash flow from purchasing and sale. Financing activity is an activity which changes the equity and borrowing structure of the entity. It is important that the interests and dividends might be considered as operating or financing cash flows. Shareholders’ equity involving the issuance of shares will be considered as financing activity. The fourth thing is statement of changes in equity which gives the detail of movement in equity of owner for a period. And, the movement of equity of owner is composed of several elements which are net profit or loss, share that is issued or reimbursed for a period, dividend payments and gain and loss in equity. And, last thing is thing called note to financial statements. The main purpose of the financial statements is to give the financial information about a company. In terms of that, it is really......

Words: 2682 - Pages: 11

Housing Mortgage in Malaysia; Islamic or Conventional Financing/Loan as a Prospective House Buyer

...DEPARTMENT OF ESTATE MANAGEMENT FACULTY OF THE BUILT ENVIRONMENT UNIVERSITY OF MALAYA PROPERTY FINANCE (BVEV3120) COURSEWORK SESSION 2012/2013 TITLE: HOUSING MORTGAGE IN MALAYSIA; ISLAMIC OR CONVENTIONAL FINANCING/LOAN AS A PROSPECTIVE HOUSE BUYER NAME: AUGUSTINE OBUM ONYEBUCHI MATRIC NUMBER BEE100709 LECTURER: Dr. SR ROSLI SAID NOVEMBER 2012 1 Table of Content Page cover Table of content 1.0 Introduction 1.1 Scope of Study 1.2 Islamic Finance 1.3 Conventional Finance 2.0 consideration 2.1Property Market 2.2 Warranty 2.3 Cost 2.4 Financing 3.0 Mortgage Product in the Market 3.1 Common Characteristics of Housing loan products 3.2 Margin of Financing 3.3 Loan Tenure 3.4 Features 3.6 Early Termination Penalty 3.7 Partial Payment 3.8 House Owner Insurance 3.9 Lock in Period 4.0 Islamic vs. Conventional 4.1 Calculating the Annual Payment 5.0 Root for decision making 6.0 Conclusion 7.0 References 1 2 3 4 4 5 5 6 6 7 10 13 14 15 15 15 15 15 16 16 17 17 21 23 23 2 1.0 Introduction Housing is a major aspect of human development. As noted by the World Bank (1992), housing investment typically accounts for 2% to 8% of GNP, and the flow of housing services for an additional 5% to 10% of GNP. Residential real estate represents around 30% of world wealth, greater than both bonds (27%) and equities (19%). Residential construction is a major employer often accounting for more than 5% of total employment. Housing is an important economic sector with linkages to the real......

Words: 6366 - Pages: 26


...Proposal: My subtopic is Islamic State of Iraq and Syria (ISIS) in figuring out the motives of their recent activities. “ISIS” has become a danger to all of Americans. Today the Islamic state of Iraq is proudly showing its hatred against American politicians. This is both interesting and important because our families, friends and loved ones are in danger at this time. This is a major issue for our Country. I plan to research through any search engine which I have access to. This war is well known in our country, it has been occurring for over the past 4 years. Almost every news station, website, social media, journals, online articles and magazines have pieces of information about ISIS terror group. There has been several events as well as presidential conferences pertaining to this issue. Shakira Scott Dr. Selitto Research Paper ISIS Terror Islamic State of Iraq and Syria is a blood thirsty group committed to terror. “ISIS” gained a significant presence. “ISIS” is under the leadership of Abu Bakr al-Baghdad. A relatively unknown and enigmatic figure. Abu Bakr al-Baghdad was born in 1971 in Samarra. He was not raised by a wealthy family but was well-mannered. Growing up, his childhood was mainly spent attending religious courses. Like the rest of his family, Al-Baghdadi’s was a devout Muslim, and faith played a big part in his early life. Al-Baghdadi studied the Koran at Samarra mosques and took courses in Islamic science and the Hadith—the traditions,......

Words: 1483 - Pages: 6

Islamic Banking

... However, with the passage of time, the activities covered by banking business have widened and now various other services are also offered by banks.  The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world. It is well said that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform financial intermediation by pooling savings and channelizing them growth engine revving. 2.2 ISLAMIC BANKING Islamic Banking is the banking activity which is consistent with the principles of sharia law and its practical application through the development of Islamic Economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees also known as riba for loans of money. Investing in business that provide goods or services considered contrary to Islamic principles is also prohibited. 2.3 ECONOMIC FUNCTIONS OF BANKS The economic functions of Banks include: 1. Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash. 2. Netting and settlement of payments – banks act as both......

Words: 2252 - Pages: 10

Islamic Banking

...Major Differences in Equity-financing and Debt-financing In Islamic Finance And Conventional Finance In equity financing, there are practically no major differences. The contract of al-Musharakah (Joint-Venture ProfitSharing) is, in essence, similar to the conventional concept of joint-stock company. Therefore - except for some minor to finance projects through equity participation, to float a company on the stock exchange, to organise a venture capital company, or to form an equity unit trust, would be generally the same under the Islamic equity-financing as under the conventional equity-financing. The contract of Al-Mudharabah (Trustee Profit-Sharing) - whereby one party (the owner of capital) provides fund for the other party (the entrepreneur) to invest or trade and generate profit and both share in the profit in pre-agreed proportions - while not widely practised is actually not totally unknown in the conventional financial system. A clear example is the occurrence of this type of contract sometimes in portfolio management business. However, major differences between the Islamic financial system and the conventional financial system prevail in debt financing. Debt financing in the conventional financial system is almost totally based on interest-based lending, while this contract is forbidden (that is, Haram) in the Islamic financial system. Conversely, the Islamic debt-financing instruments of Deferred Contracts of Exchange are not generally known in the......

Words: 273 - Pages: 2


...ISLAMIC FINANCE INDUSTRY: Over the last decade we have witnessed a rising influence of sharia-compliant products and a growing interest in the Islamic finance as a viable funding alternative. This development has simultaneously seen a growth in the market infrastructure and the interconnection between institutions that offer Islamic financial services and conventional banks. During the financial crises, the global growth in Islamic finance tended to continue and the whole sector demonstrated a marked resilience, or a remarkable resilience. Islamic finance is projected to continue to expand in response to economic growth in countries with large and relatively unbanked Muslim populations. One of the major Islamic finance located in Kuala Lumpur, Malaysia. Malaysia had been introducing the regulatory framework called Islamic Financial Services Act (IFSA) and Financial Services Act (FSA). The introduction of FSA 2013 and IFSA 2013 will place Malaysia’s financial sector, encompassing the banking system, the insurance/takaful sector, the financial market and payment systems and other financial intermediaries, on a platform for advancing forward as sound financial system. The main objectives of both regulatory frameworks are to promote financial stability, strengthen compliancy to Shari’ah and strengthen regulatory framework for Islamic financial institution. Sukuk have been introduced as one of Islamic finance elements. Sukuk is asset securitization based on Syari’ah principle......

Words: 333 - Pages: 2

Islamic Finance

...In the name of Allah, the Most- Merciful, the Very-Merciful Looking for New Steps in Islamic Finance jìÑíá=jìÜ~ãã~Ç=q~èá=rëã~åá Islamic banking industry has grown rapidly during the past three decades spreading its operations in many parts of the globe. Making its first debut in the small Savings Association of Mitghamr (Egypt) in 1963, its strength has now reached over 250 financial institutions operating in more than 40 countries with assets valuing USD 750 billions, and an annual growth rate of 15 per cent. Almost all the giant conventional banks are in queue to establish their Islamic units to capture the new emerging market. This rapid growth of Islamic financial industry is, no doubt, encouraging for those who wished to relieve themselves from the prohibition of interest on the one hand and to remain a part of the modern market economy on the other. Now that a substantial period of more than three decades has passed on the experience of Islamic Banks and Financial Institutions, it is imperative to review what they have achieved so far and what they have missed. It is, no doubt, a great achievement of these institutions that they relieved the Muslims from clear prohibition of riba, and came up with some alternatives that might be adopted in financial market without indulging in interest. In an atmosphere entirely dominated by interest-based transactions, it was really a formidable task. I do not agree with those who criticize them on the basis of utopian idealism,......

Words: 1576 - Pages: 7

Red Hat Certified Engineer (RHCE) - 2018 | Trails To Tsukiji S04E11 Cabbage XviD-AFG 27 minutes | Watchfree