Islamic Banking & Financial Investment Modes -Hamidur Rashid Jamil

Economy

Islamic banking, Islamic finance or Sharia-compliant finance is banking or financing activity that complies with Sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing).
The Bank’s Investment Policy has the unique feature of basing investments on a profit-loss sharing structure that complies with Islamic Shari’ah’s concepts and principles. The Bank’s Investment Policy places more of an emphasis on achieving social goals and objectives, such as creating employment opportunities, than on making a profit.
• Mudaraba
• Bai-Muajjal
• Bai Salam
• Bai Istisnaa
• Bai-As-Sarf
• Bai-Murabaha
• Musharaka
The term ‘Mudaraba’ derives from one of the definitions of the Arabic word’, which translates as ‘Travel’. Thus, the term ‘Mudaraba’ refers to ‘Travel’ for the purpose of conducting business.
Mudaraba is a profit-sharing partnership in which one party contributes finance and the other party contributes expertise and labor. The capital supplier is referred to as “Shahib al-maal,” whereas the provider of skill and labor is referred to as “Mudarib.”
Thus, Mudaraba may be defined as a partnership agreement in which the Shahib al-maal distributes capital to the Mudarib in exchange for the Mudarib investing it in a commercial venture through the use of his labor and endeavor. Both parties share profits in accordance with the agreed ratio, with losses, if any, being paid by the fund provider, i.e. Shahib al-maal, unless the loss is the result of a breach of trust, i.e. misconduct, negligence, or violation of the Mudarib’s stipulations. If any loss occurs as a result of the aforementioned factors, Mudarib becomes accountable for such loss.
It is permissible for the Client to place an order with the Bank for the purchase of specified items, specifying the goods and committing to purchase them from the Bank on Murabaha, i.e., cost + agreed upon profit.
It is legal to bind the Client to purchase from the Bank by requiring him to either fulfill the promise or indemnify the Bank for any damages incurred as a result of the pledge being broken without justification.
It is permissible to take cash/collateral security to ensure the promise’s fulfillment or to compensate against losses.
Mudarabah contracts may be restricted or unrestricted:
The rabb-ul-mal may identify a particular business for the mudarib in an al-mudarabah al-muqayyadah (limited mudarabah), in which case he shall invest the money exclusively in that business. For the account holder, a restricted mudarabah may permit the IIFS (institutions offering Islamic financial services) to invest their funds through mudarabah or agency contracts that impose particular restrictions on the location, manner, and purpose of investment. They would be held in “Investment Funds” rather than “Investment Accounts” by the bank customer.
In an al-mudarabah al-mutlaqah (unrestricted mudarabah), the rabb-ul-mal permits the mudarib to engage in any business he desires and so authorizes him to invest the money in whatever venture he considers fit. The account holder’s funds are invested without restriction pursuant to mudarabah or wakalah (agency) contracts, and the institution may pool the investors’ funds with their own and invest them in a pooled portfolio, with the funds being referred to as “Investment Accounts” rather than “Investment Funds.”
Bai-Muajjal may be defined as a contract between a Buyer and a Seller under which the Seller sells certain specific goods permissible under Islamic Shari‘ah and Law of the land) to the Buyer at an agreed fixed price payable at a fixed future date in lump sum  or  within a fixed period by fixed instalments. The seller may also sell the goods purchased by him as per order and specification of the Buyer.
It is permissible for the Client to offer an order to purchase by the Bank particular goods deciding its specification and committing himself to buy the same from the Bank on Bai-Muajjal i.e. deferred 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 to either satisfy the promise or to indemnify 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 indemnify the damages.
It is also permissible to document the debt resulting from Bai-Muajjal by a Guarantor, or a mortgage. or both like any other debt. Mortgage / Guarantee / Cash security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
Bai-Salam may be defined as a contract between a Buyer and a Seller under which the Seller sells in advance the certain commodity (ies)/product(s) permissible under Islamic Shari‘ah and the law of the land to the Buyer at an agreed price payable on execution of the said contract and the commodity (ies)/product(s) is/are delivered as per specification, size, quality, quantity at a future time in a particular place.
It is permissible to obtain collateral security from the seller client to secure the investment from any hazards viz. non-supply/partial supply of commodity (ies)/product(s), supply of low quality commodity (ies)/Product(s) etc.
It is also permissible to obtain Mortgage and/or Personal Guarantee from a third party as security before the signing of the Agreement or at the time of signing the Agreement.
Bai-Salam is a mode of investment allowed by Islamic Shari‘ah in which commodity (ies)/product(s) can be sold without having the said commodity (ies)/ product(s) either in existence or physical/constructive possession of the seller.
Istisna’a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific product(s) after having manufactured, permissible under Islamic Shariah and Law of the Country after having manufactured at an agreed price payable in advance or by instalments within a fixed period or on/within a fixed future date on the basis of the order placed by the buyer.
It facilitates the manufacturer sometimes to get the price of the goods in advance, which he may use as capital for producing the goods
It gives the buyer opportunity to pay the price in some future dates or by installments
It is a binding contract and no party is allowed to cancel the Istisna’a contract after the price is paid and received in full or in part or the manufacturer starts the work
Istisna’a is specially practiced in Manufacturing and Industrial sectors. However, it can be practiced in agricultural and constructions sectors also
Bai- as-Sarf is a contract of exchange of money for money. This contract is tightly regulated under Shari`ah because it can be easily manipulated for the purpose of producing an interest-bearing loan, which is prohibited in Islam.
Bai-as-Sarf means‘sale of price for price’ and each price is consideration of the other. It also means sale of monetary value for monetary value i.e. currency exchange.
This is also known as purchase/sale of Foreign Currency to earn Exchange income under the Bai-as-Sarf agreement.
Usually exchange of one currency into another currecy is dealt under Bai-as-Sarf mode.
The related foreign currency will be received by the bank as the client sold out the same to the bank at agreed upon exchange rate
Bai-Murabaha may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shariah and the Law of the land), to the buyer at a cost-plus agreed profit payable in cash or on any fixed future date in lump-sum or by installments. The profit marked-up may be fixed in lump-sum or in percentage of the cost price of the goods.
It is permissible for the Client to offer an order to purchase by the Bank particular goods deciding its specification and committing himself to buy the same from the Bank on Murabaha, i.e., cost plus agreed upon profit.
It is permissible to make the promise binding upon the Client to purchase from the Bank, that is, he is to either satisfy the promise or to indemnify 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 indemnify the damages.
It is also permissible to document the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both like any other debt.  Mortgage / Guarantee/ Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
It is permissible for the Bank to authorize any third party to buy and receive the goods on Bank’s behalf. The authorization must be in a separate contract.
Musharaka may be defined as a contract of partnership between two or more individuals or bodies in which all the partners contribute capital, participate in the management, share the profit in proportion to their capital or as per pre-agreed ratio and bear the loss, if any, in proportion to their capital/equity ratio.
In Islamic Fiqh literature, Shirkat, in its primitive sense, signifies the conjunction of two or more estates, in such a manner, that one of them is not distinguishable from the other. The term Shirkat, however, is extended to contracts, although there be no actual conjunction of estates, because a contract is the cause of such conjunction. In the language of the law, it signifies the union of two or more persons in one concern. It is the partnership between two or more persons or institutions.
It is preferable to provide a precise definition of “Islamic Modes of Finance” at the outset. In other terms, “modes” refers to systematic and specific rules, requirements, and actions that must be followed in order to complete a particular task. The word “modes” literally means “methods.” The task at hand in this situation is, however, the focus of each of the aforementioned modalities, i.e., any of the several kinds of investment operations (trade, leasing, real estate, manufacturing, agriculture, agriculture production etc., or, using Shariah expressions Murabaha, Mudaraba, Musharaka, Ijarah, Istisna, etc.). In one of its many definitions, “finance” refers to the provision of funds, capital, or credit by an individual (household), a company (private or public – financial or non-financial)
The writer of this article is studying at the Department of Arabic, University of Dhaka.