ISLAMIC MODES OF

FINANCING
CASE STUDIES
Rehan Waheed

MUDARABAH / INVESTMENT AGENCY / LOAN

• Mr. Ali received Rs. 4 million as inheritance. One of his friends Mr. Salman asked him to
give this money to him for business purpose. In the first month of business, Mr. Salman
earned Rs. 20,000
• Required
• Identify nature of business contract(s) and relationship
• Identify missing information
• Distribute profit
Rehan Waheed

MUDARABAH / INVESTMENT AGENCY / LOAN

SOLUTION:
• Nature of contract may be a Mudarabah or an Investment Agency or a Loan Contract
• Nature of contract is missing and hence relationship between Mr. Ali and Mr. Salman can
not be ascertained
• In case of Mudarabah, relationship would be of Partners i.e. Rabbul Mal and Mudarib
• In case of Investment Agency, relationship would be of Principal and Agent
• In case of Loan, relationship would be of Lender and Borrower

• Distribution of profit
• In case of Mudarabah, Profit Sharing Ratio (PSR) must have be agreed
• In case of Investment Agency, the Agency Fee must have been agreed
• In case of a Loan, case study is silent and hence we understand that there would be No Interest
Rehan Waheed

MUDARABAH

• Mr. Raza & Mr. Razi decided to form Mudarabah. Mr. Raza gave funds of Rs. 2 million to
Mr. Razi for investment in equities. The profit-sharing ratio (PSR) was agreed as 50:50.
After one month, Mr. Razi informed Mr. Raza that he has employed a staff for this
Mudaraba for Rs. 5,000. Mudarabah has earned a gross profit of Rs. 100,000 during the
first month.
• Required
• What would be the treatment of Rs. 5,000 paid to the employee?
• Distribute profit considering the provided information.
• Rabbul Mal share Rs. __________
• Mudarib share Rs. __________
Rehan Waheed

MUDARABAH
SOLUTION:
• Since the employee was appointed by the Mudarib at his own, his salary would be borne
by Mudarib himself
• Under the rules of Mudarabah, gross profit and/or gross loss is distributed between
Rabbul Mal and Mudarib
• Rabbul Mal share Rs. 50,000
• Mudarib share Rs. 50,000 (Gross)
• Mudarib share Rs. 45,000 (Net after deducting the salary of employee)
Rehan Waheed

DIMINISHING MUSHARAKAH

• Mr. Bablu decided to purchase a factory costing Rs. 12 million. He personally had Rs. 7
million and opted financing from Islamic bank for the remaining amount. Profit rate was
agreed @ 18% p.a. for 5 years tenure with annual rentals. The bank’s share will be divided
into units and Mr. Bablu undertakes to purchase one unit from the bank on annual basis
and hence at the end of 5 years Mr. Bablu will become the sole owner of the factory.
Assume Musharakah agreement date as January 1, 2018.
• Required
• Devise the process flow for the transaction
• Identify: Per Unit Cost, Per Unit Rent and the Date of first Unit Sale
• Prepare schedule for the entire tenure
Rehan Waheed

DIMINISHING MUSHARAKAH
SOLUTION:
Process Flow
1. Bank and Customer invest funds to purchase an Asset and enter into a Musharakah Agreement
and become joint owners in the Asset
1. The share of Bank and Customer is identified in percentage terms
2. Bank’s share will be divided into units

2. Bank and Customer enters into a Payment (Ijarah) Agreement, under which Bank rents its
share of Musharakah Asset to the Customer
1. Customer will pay monthly/quarterly/semi-annual Rent to the Bank for using Bank’s Musharakah Asset

3. The Customer signs an Undertaking to Purchase Bank’s Musharakah Units at agreed intervals
4. Bank will Sell Units to the Customer periodically through Unit Sale Receipt
Rehan Waheed

DIMINISHING MUSHARAKAH
SOLUTION:
1. Per Unit Cost: Rs. 1 million (Bank’s Musharakah Share / No. of Units)
2. Per Unit Rent: Rs. 180,000
3. Date of First Unit Sell: January 1, 2019

4. Schedule for the entire tenure

Years Rent Unit Price Monthly Payment Balance Unit Price Balance Units
0 5,000,000 5
1 900,000 1,000,000 1,900,000 4,000,000 4
2 720,000 1,000,000 1,720,000 3,000,000 3
3 540,000 1,000,000 1,540,000 2,000,000 2
4 360,000 1,000,000 1,360,000 1,000,000 1
5 180,000 1,000,000 1,180,000 0 -
Rehan Waheed

MUSHARAKAH (SHIRKAH TUL AQD)

• Mr. Sheikhu applied for Musharakah Financing facility of Rs. 20 million from Islamic bank. On
January 1, 2001 Musharakah agreement was executed with Mr. Sheikhu’s Capital Contribution
of Rs. 10 million. Mr. Kami, one the bank’s representative developed the following TORs:
• Mr. Sheikhu will be responsible for managing the business
• The profit-sharing ratio (PSR) would be 60% for the bank and 40% for Mr. Sheikhu
• Mr. Sheikhu will pay 10% p.a. fixed profit on bank’s share of Rs. 10 million
• It was mutually agreed that the loss will be borne by Mr. Sheikhu

• Required
• Identify & rectify issues
Rehan Waheed

MUSHARAKAH (SHIRKAH TUL AQD)

SOLUTION:
• Issues
• Bank’s share in profits cannot exceed its Capital Contribution Ratio
• Bank cannot demand any Fixed Profit from Mr. Sheikhu on its investment
• Bank must bear the Loss as per Investment Ratio
• Rectified TORs
• Mr. Sheikhu will be responsible for managing the business and the Bank would be a Sleeping
Partner
• The profit-sharing ratio (PSR) would be 50:50 between Mr. Sheikhu and the Bank
• Loss will be shared between Mr. Sheikhu and the Bank as per their Capital Contribution Ratio
Rehan Waheed

IJARAH

• Ms. Chulbul applied for car Ijarah facility for new Toyota Yaris (vehicle) from an Islamic bank
for 3 years. The vehicle is on booking and will be delivered after 2 months. The cost of vehicle
is Rs. 2,800,000 and Ms. Chulbul agreed to pay 20% as security deposit/ advance rent. Profit
Rate of 12% p.a. would be charged based on K + 5% (assuming K = 7% p.a.). Rentals will be
paid on monthly basis. The Islamic bank booked the vehicle on January 1, 2019 and delivery of
the vehicle was received on March 1, 2019.
• Required
• The first Ijarah Rent Date:
• The first Ijarah Rent Amount:
• Devise a Process Flow
Rehan Waheed

IJARAH (2,800,000*20/100) = 560,000 = 2240,000

SOLUTION: (2240,000*12%/12) = 22,400 * 3 = 67,200
The First Ijarah Rent Date: March 31, 2019 The First Ijarah Rent Amount: Rs. 253,867
• Agency: The Bank will appoint Ms. Chulbul as its agent to purchase the Vehicle on behalf of the Bank
• Undertaking to Lease: The Customer will promise to get the vehicle on lease once it is delivered
• Security Deposit: The Customer will pay the Security Deposit to the bank and request for disbursement
• The amount of Security Deposit will be treated as Amanah (Hamish Jiddiyah) before execution of Lease Agreement and
will be treated as Fixed Rental after the execution of Lease Agreement
• Booking of Vehicle: Bank will book the vehicle by issuing the pay order in the name of concerned showroom
• Delivery & Possession: Customer / Bank will obtain possession of the vehicle on behalf of the Bank
• Ijarah Agrement: Lease Agreement will be executed b/w the Bank and Customer and Rentals will be agreed
• Undertaking to Purchase: Customer will provide Undertaking to Purchase Vehcile in case of EOD
• Gift (Transfer of Ownership): Upon completion of Lease Period, Bank will gift the vehicle to the Customer

• 2240,000/36 = 67,222 * 3 = 186,667

• 67,222 + 22,400 = 89,622
Rehan Waheed

BAI SALAM

• Mr. Malik produces mangoes in his farm. Mr. Khadim asks him to supply 1000 kg mangoes
in November 2021. Both of them agreed to settle price at the time of delivery.
• Required
• Identify the nature of contract
• Identify issues
Rehan Waheed

BAI SALAM
SOLUTION:
• Nature of contract: Bai Salam
• Issues
• The date of delivery is not agreed
• The price of mangoes is also not ascertained
• 100% price was not paid in advance
• In the month November, Mangoes may not be available in the market and hence
involves excessive gharar (uncertainty)
Rehan Waheed

BAI ISTISNA

• On January 1, 2018 Mr. Khan contracts Mr. X for manufacturing few pair of shoes.
Detailed description of the pair of shoes were provided at the time of execution. Cost
was agreed at Rs. 10,000 per pair. Mr. Khan paid Rs. 50,000 as an advance and assured to
pay the remaining amount on the day of delivery.
• Required
• Identify the nature of contract
• Sale transaction date
• Identify issues
Rehan Waheed

BAI ISTISNA
SOLUTION:
• Identify the nature of contract: Bai Istisna
• Sale transaction date: January 1, 2018
• Issues
• Quantity was not agreed
• Delivery date was not agreed. Excessive uncertainty (gharar)