subject: Investment modes in Islamic Banking [print this page] Investment modes in Islamic Banking Investment modes in Islamic Banking
Investment: Investment is the action of Deploying Funds with the intention and expectation that they will earn a positive return for the owner. Funds may be invested in either real assets or financial assets. When resources are spent to purchase fixed and real assets. For example, the establishment of a factory or the purchase of raw materials and machinery for production purposes. On the other hand, the purchase of a legal right to receive income in the form of capital gains or dividends would be indicative of financial investment. Specific example of financial investment are, deposits of money in a bank account, the purchase of Mudaraba bonds. There are different modes of investment under the Islamic Shari'ah which can be classified into three categories: 1. Trading or Bai(Kbv-ePv) mode (Bai-Muazzal, Bai-Murabaha, Bai-Salam, Istisna'a) 2. Partnership or Share(Askx`vix) mode (Mudaraba, Musharaka) 3. Leasing/Izara(fvov) mode (Hire purchase, Izara-Bil-Baia, Leasing) Bai Murabaha mode of investment: The term "Bai-Murabaha" have been derive from Arabic words Bai' and Ribhun'. The word Bai' means purchase and sale and the word ribhun' means an agreed upon profit. Bai-Murabaha' means sale on agreed upon profit. Bai-Murabaha may be define as a contract between a Buyer and Seller Under which the seller sells certain specific goods permissible under Islamic shariah and the Law of land to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in limp sum or by installments. Important Features of Bai-Murabaha:
To offer an order by the client to the bank.
To make the promise binding upon the client to prophase from the bank and also to indemnity the damages caused by breaking the promise.
To take security in the form of cash/kind/collaterals.
To document the debts resulting from Bai-Murabaha.
Stock and availability of goods is a basic conditi9on.
Bank must bear the risk until delivery of goods to the client.
Bank may sell it at a higher price.
Price once fixed cannot be changed.
Bai-Muajjal mode of investment: the term Bai' and the Muajjal' have been derive from Arabic words Bai' and Ajalu'. The word Bai' means purchase and sale and the word Ajalu' means a fixed time or fixed period. Bai-muajjal' means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on credit. Bai Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain goods permissible under Islamic Sharia and the Law of the country to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installment. The seller may also sell goods purchase by himas per order and specification of the buyer. Important Features of Bai-Muajjal:
It is permissible for the client to offer an order to purchase by the Bank particula goods deciding its specification and committing himself to buy the same from the bank on Bai-muajjal i.e. deffered payment sale at fixed price.
It is permissible to make the promise binding upon the client to purchase from the Bank, that is, he is either satisfy the promise or to identify the damages caused by breaking the promise without excuse.
It is permissible to take cash/collateral security to Guarantee the implementation of the promise or to identify the damages.
It is also permissible to document the debt resulting from Bai-Muajjal bu a Guarantor, or a mortgage.
Stocks and availability of goods is a basic condition for signing a Bai-Muajjal Agreement. Therefore, the Bank must purchase the goods as per specification of the Client of goods to acquire ownership of the same before signing the Bai-Muajjal Agreement with the client.
After purchase of goods the Bank bust bear the risk of goods until those are actually delivered to the Client.
The Bank must deliver the specified goods to the Client on specific date and at specific place of delivery as per Contract.
The Bank may sell the goods at a higher price than the purchase price to earn profit.
The price once fixed as per agreement and deferred cannot be further increased.
The Bank may sell the goods at one agreed price which will include both the cost price and the profit. Unlike Bai-Murabaha, the Bank may not disclose the cost price and the profit mark-up separately to the Client.
