Understanding Islamic Finance - Doha Academy of Tertiary Studies

332 Understanding Islamic Financeprofit-sharing ratio in the Mudarabah arrangement in favour of the pool. The bank may alsoinvest in the pool as a depositor.All accounts should be linked to respective pools containing more than 50 % Ijarah or otherfixed assets to allow premature withdrawal. However, if the Hanafi view is adopted, earlywithdrawal will be allowed even if the nonliquid assets are more than 10 % of its total worth.Savers/investors offer funds to Islamic mutual funds or banks on a Mudarabah basis, whomix those funds with their own funds and offer them to users who seek Sharī´ah-compatiblefinancing. Hence, Islamic financial institutions play the role of intermediary along with thatof partner, as reflected in taking the funds, considering customer requests, following uprepayments, distributing realized profits and many other functions.The system of profit allocation between the banks’ equity and investment account holdersis important, because it deals with fundamental and ethical aspects relating to the concept offairness in the Islamic alternative that Islamic banks offer as opposed to interest-based banks.It requires disclosure of information regarding the business and the profit-sharing formulas.The principles of fairness and trust emphasize the importance of the individuals’ confidencein the Islamic banks’ ability to achieve their investment goals. Disclosure should be madeabout significant accounting policies, weightages assigned on the basis of the tenor and thesize of accounts, expenses to be charged and the basis applied by the Islamic bank in theallocation of profits between owners’ equity and unrestricted investment account holders.12.7.2 Use of Shirkah on the Assets SideThe best alternative to interest for financing by banks is considered to be a Shirkah arrangementthat could be in the form of Mudarabah, Musharakah or investments through Shirkahbasedcertificates or Sukuk. Mudarabah can be best used for financing of import trade on asingle transaction or consignment basis in the case of a firm order and L/C without margin,where the whole investment has to be made by the bank. Its use is also possible for runningbusinesses, project financing and for the purpose of securitization.Musharakah can be applied in trade finance without complexities, since the chances offraud, negligence and other problems are relatively lower in international trade than in otherMusharakah-based projects. A bank may enter into a Musharakah arrangement with a clientwho intends to import; the bank may also appoint him as agent for acquisition and disposalof the goods after the same are imported; an L/C could be opened in the bank’s or theclient’s name. The net profit out of this limited purpose Musharakah will be shared betweenthe bank and the client in an agreed ratio. The above procedure can also be adopted inrespect of bills drawn under inland L/Cs. Detailed procedures for import financing underMusharakah are given in Chapter 14.In the case of export finance under L/C, the goods will be acquired and made ready forshipment on a Musharakah basis. The client will prepare the export documents strictly inaccordance with the terms of the L/C and undertake to indemnify the bank for any loss incase of his failure to honour his commitment. Export proceeds will be distributed accordingto the agreed ratio. If there is no L/C involved, the merchandise will be made ready for exportunder joint ownership of the bank and the client. However, details of all such transactionswill have to be worked out in consultation with the commercial bankers who are actuallyinvolved in the business.The following could be the procedure for export financing on the basis of Shirkah: theexporter receives an order from abroad to export a specific commodity/goods at a knownprice. He estimates its expected profit. If he needs financing for manufacturing/procurement