Understanding Islamic Finance - Doha Academy of Tertiary Studies

The Philosophy and Features of Islamic Finance 77“Hind bint-e Utbah came to Umar and asked for a loan of 4000 (dinars) from the publicexchequer so that she could trade with it and became liable to pay back the same. Aftergetting the amount, she went to the area of banu kalb and engaged in trading; but shesuffered loss. Umar (Gbpwh) said the loan could not be waived as it was from the publicexchequer.” 34. Salam involves providing funds against the forward purchase of precisely defined goodswith prepayments.5. Ijarah involves leasing an asset and receiving rentals; so long as the asset is on lease, thelessor owns the asset and the risk and reward of its ownership.6. Istisna‘a involves engaging a person that could also be a financing agent to manufactureor construct and supply an item at some future date for an explicit sum on periodicpayment. The agent contracts with a manufacturer to produce the commodity and thecustomers make payments to cover the production price and the profit margin.We can distribute the above modes into a number of categories, as given in Table 4.1,which also shows the salient features of the various modes in terms of liquidity, rate ofreturn (known or unknown) and the nature of collateral or guarantee. The rate of return forthe banks is known in credit sales like Murabaha, Musawamah and in Ijarah. However, therisk profile of trade and Ijarah is different and in the case of the latter, the bank will haveto bear the asset risk and the ownership related expenses. The net return in Ijarah would,therefore, be quasi fixed.Table 4.1Features of various Islamic financing toolsType of contract Liquidity Guarantee Rate of returnDebt-creating modesQard al Hasan — Collateral NilCredit sales Non-liquid Collateral KnownSalam Non-liquid Collateral Unknown/knownIstisna‘a Non-liquid Collateral Unknown/knownSemi-debt modesIjarah Liquid Collateral KnownSharing modesMusharakah Liquid Penalty for misconduct UnknownRestricted Mudarabah Liquid Penalty for misconduct UnknownGeneral Mudarabah Liquid Penalty for misconduct UnknownThe return is basically unknown in Salam and Istisna‘a, as the bank cannot ascertain inadvance the price at which it will sell the asset when delivered under these contracts. But itcould be known to the bank to some extent, with the possibility of any change in income, ifit enters into a parallel contract or a promise with any party for disposal of the asset at anystipulated price. If the promisor is unable to purchase the asset for any reason, the bank’sincome will certainly be affected. In the case of sharing modes, the return rate is not knownin advance.3 Federal Shariat Court (FSC) Judgement, PLJ, 1992, FSC, 153 (cf Tabari, Ibne Jarir, Tarikh al Umam, 5, pp. 29, 30). Also inUniversity of the Punjab, 1973, 10, p. 775.