a) Ijarah & Diminishing Musharakah

b) Bai Murabaha & CM

c) Salam and Istisna
d) Takaful
e) Sukuk & Implementing Islamic financial solutions.
f) Regulations of Islamic Finance
g) Islamic finance and financial inclusion
h) Annual Reports

Diminishing Musharakah
• Another form of Musharakah, developed in the near past, is the 'Diminishing Musharakah'.
According to this concept, a financier and his client participate either in the joint ownership of a
property or an equipment, or in a joint commercial enterprise. The share of the financier is
further divided into a number of units and it is understood that the client will purchase the units
of the share of the financier one by one periodically, thus increasing his own share until all the
units of the financier are purchased by the client so as to make him the sole owner of the
property, or the commercial enterprise, as the case may be. The Diminishing Musharakah based
on the above concept has taken different forms in different transactions. Some examples are
given below:
• 1. It has been used mostly in home financing. The client wants to purchase a house for which he
does not have adequate funds. He approaches the financier who agrees to participate with him
in purchasing the required house. For instance, 20% of the price is paid by the client and 80% of
the price by the financier. Thus, the financier owns 80% of the house while the client owns 20%.
After purchasing the property jointly, the client uses the house for his residential purposes and
pays rent to the financier for using his share in the property. At the same time, the share of
financier is further divided into eight equal units, each unit representing 10% ownership of the
house. The client promises to the financier that he will purchase one unit after every three
months. Accordingly, after the first term of three months, the client purchases one unit of the
share of the financier by paying 1/10th of the price of the house. This reduces the share of the
financier from 80% to 70%. Hence, the rent payable to the financier is also reduced to that
extent. At the end of the second term, he purchases another unit thereby increasing his share in
the property to 40% and reducing the share of the financier to 60% and consequently reducing
the rent to that proportion as well. This process goes on in the same fashion until after the end
of two years, the client purchases the entire share of the financier reducing the share of the
financier to 'zero' and increasing his own share to 100%. This arrangement allows the financier
to claim rent according to his proportion of ownership in the property and at the same time
allows him periodical return of a part of his principal through purchases of the units of his share.
 • 2. 'A' wants to purchase a taxi to use it for offering transport services to passengers and to earn
income through fares recovered from them, but he is short of funds. 'B' agrees to participate in
the purchase of the taxi, therefore, both of them purchase a taxi jointly. For instance, 80% of the
price is paid by 'B' and 20% is paid by 'A'. After the taxi is purchased, it is employed to provide
transport to the passengers whereby the net income of Rs. 1,000/- is earned on daily basis. Since
'B' has 80% share in the taxi, it is agreed that 80% of the fare will be given to him and the rest of
20% will be retained by 'A' who has a 20% share in the taxi. It means that Rs. 800/- is earned by
'B' and Rs. 200/- by 'A' on daily basis. At the same time the share of 'B' is further divided into
eight units. After three months 'A' purchases one unit from the share of 'B'. Consequently, the
share of 'B' is reduced to 70% and share of 'A' is increased to 30% meaning thereby that as from
that 136 Meezan Bank’s Guide to Islamic Banking date 'A' will be entitled to Rs. 300/- from the
daily income of the taxi and 'B' will earn Rs. 700/-. This process will go on until after the expiry of
two years, the whole taxi will be owned by 'A' and 'B' will take back his original investment along
with the income distributed to him in the above mentioned way.

Murabaha and CM
• Murabaha is a particular kind of sale where the seller expressly mentions the cost of the sold
commodity and sells it to the buyer by adding some profit thereon.
• Shariah Justification : The Prophet (peace be upon him) has cursed the receiver and the payer of
interest, the one who records it and the two witnesses to the transaction and said: 'They are all
alike [in guilt].'" (Muslim). This hadith emphasizes the prohibition of riba (interest) in Islamic
finance, and as such, Murabaha is considered a permissible alternative to conventional interest-
based financing.
• The Bai' Murabaha in banks involves the purchase of a commodity by a bank on behalf of a client
and its resale to the latter on cost plus-profit basis. Under this arrangement, the bank discloses
its cost and profit margin to the client.
• A simple Murabaha is one where there is cash payment i.e. payment is made at the time of sale.
“Murabaha Mua'jjal” is one on deferred payment basis i.e. payment is made after few days of
sale.

Conventional Murabaha

1. Qard based contract A sale transaction

2. Compensation in the form of interest, since Compensation in the form of price of goods
any benefit over loan is interest
3. Bank does not assume the ownership and The ownership and risk of the asset are borne
risk of the assets by the bank
4. Charges penalty in case of late payment No penalty can be charged in case of late
payment
 • The subject of sale must exist at the time of the sale. Thus, anything that does not exist at the
time of sale cannot be sold and its non-existence makes the contract void
• The subject of sale must exist at the time of the sale. Thus, anything that does not exist at the
time of sale cannot be sold and its non-existence makes the contract void.
• The subject of sale must be in physical or constructive possession of the seller when he sells it to
another person. Constructive possession means a situation where the possessor has not taken
physical delivery of the commodity, yet it has come into his ownership and all rights and
liabilities of the commodity are passed on to him, including the risk of its destruction.
• The certainty of price is a necessary condition for the validity of the sale. If the price is uncertain,
the sale is void.

Step by step Murabaha Financing:

1. The client and the institution sign an overall agreement whereby the institution promises to sell
the commodity and the client promises to buy it from time to time at an agreed rate of profit
added to the cost. This agreement may specify the limit up-to which the facility may be availed.
2. An agency agreement is signed by both the parties in which the institution appoints the client as
his agent for purchasing the commodity on its behalf.
3. An agency agreement is signed by both the parties in which the institution appoints the client as
his agent for purchasing the commodity on its behalf.
4. The client informs the institution that it has purchased the commodity and simultaneously
makes an offer to purchase it from the institution.
5. The institution accepts the offer and the sale is concluded whereby ownership as well as risk is
transferred to the client.
• Murabaha transaction cannot be rolled over for a further period once the old contract ends. It
should be understood that Murabaha is not a loan rather the sale of a commodity, which is
deferred to a specific date
• Sometimes the debtors want to pay earlier than maturity to get discounts. Majority of Muslim
scholars including the major schools of thought consider this to be un-Islamic. However, if the
Islamic bank or financial institution gives somebody a rebate on its own, without stipulating it in
the contract of Murabaha, it is not objectionable especially if the client is needy.

Risk Management of Murabaha Financing:

1) Product Specific Risk In Murabaha Financing, an Islamic Bank should assume the risk of
destruction or loss of the assets prior to its sale to the Customer. Mitigant are: i) Takaful
coverage for the Murabaha assets. ii) Another tool for managing this risk is to minimize the time
of ownership by selling the asset to the customer immediately after acquiring the assets.
2) Credit Risk It is the risk pertaining to the default or delay of customer in paying its obligations.
Mitigant i) Any Shariah Compliant security can be taken to cover the risk of non-payment or
delay in payment. ii) Robust evaluation of customer’s business performance and Industry
outlook. iii) Matching the Murabaha financing with the cash cycle of the customer. For example,
if a customer sells its goods in the market for a credit of 90 days, then tenure for Murabaha
financing must be kept around 90 days.
3) Shariah Non-Compliance Risk This is the risk of Non-compliance of basic Shariah requirements
for a Murabaha transaction, which results in the reduction of the income of the bank as non-
 compliant income may lead to loss of bank’s income as banks cannot accept or recognize income
from a non shariah compliant transactions. Mitigant i) Proper Training of Bank employees and
the customer. ii) Implementing strong control measures in the bank through policy making. iii)
Implementing a system of Shariah Audit and Compliance. iv) Development of easy to understand
process flow for each Murabaha financing.
• In commodity Murabaha, the corporate gives unilateral promise to Islamic banks to purchase
asset. Islamic banks make payments and purchase asset on market price from seller. The asset
then is delivered on spot to Islamic Bank. The corporate purchases the asset from Islamic bank
on deferred payment and resell the asset on spot to another party. The another party
(purchaser) gives spot payment to corporate and in this way the corporate has now working
capital (cash).
• Purchaser needs to be different than seller.
• AAOIFI has clear guidelines that corporate cannot appoint Islamic bank as an agent to sell the
asset to purchaser.
• Commodities or assets needs to be properly identified and should be Shariah Compliant.

Bai' Muajjal :
• Bai' Muajjal is the Arabic acronym for "sale on deferred payment basis". The deferred payment
becomes a loan payable by the buyer in a lump sum or installment (as agreed between the two
parties). In Bai' Muajjal, all those items can be sold on deferred payment basis which come
under the definition of capital where quality does not make a difference but the intrinsic value
does.
• The price to be paid must be agreed and fixed at the time of the deal. It may include any amount
of profit without any qualms about riba.
• Complete/total possession of the subject in question must be given to the buyer, while the
deferred price is to be treated 156 Meezan Bank’s Guide to Islamic Banking as debt against the
buyer.
• Once the price is fixed, it cannot be decreased in case of early payment, nor can it be increased
in case of default.
• In order to secure the payment of price, the seller may ask the buyer to furnish a security either
in the form of mortgage or in the form of a tangible item.
• If the commodity is sold in installments, the seller may put a condition on the buyer that if he
fails to pay any installment on its due date, the remaining installments will become due
immediately.

Salam:
 • In Salam, the seller undertakes to supply specific goods to the buyer at a future date in exchange
of an advanced price fully paid at spot. The payment is at spot but the supply of purchased
goods is deferred.
• Shariah Justification : When Allah's messenger declared Riba as haram, the farmers could not
take usurious loans. Therefore, the Holy Prophet allowed them to sell their agricultural products
in advance.

The permissibility of Salam is an exception to the general rule that prohibits forward sale and
therefore it is subject to strict conditions, which are as follows:

Conditions for Salam:

1) It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the
time of affecting the sale. In the absence of full payment, it will be tantamount to sale of a
debt against a debt, which is expressly prohibited by the Holy Prophet . Moreover, the basic
wisdom for allowing Salam is to fulfill the "instant need" of the seller. If the full price is not
paid in advance, the basic purpose of Salam will not be achieved.
2) Only those goods can be sold through a Salam contract in which the quantity and quality can
be exactly specified e.g. precious stones cannot be sold on the basis of Salam because each
stone differs in quality, size, weight and their exact specification is not possible.
3) Salam cannot be effected on a particular commodity or for a product of a particular field or
farm e.g. Supply of wheat of a particular field or the fruit of a particular tree since there is a
possibility that the crop may get destroyed before delivery and given such possibility, the
delivery remains uncertain.
4) It is necessary that the quantity of the commodity is agreed upon in absolute terms. It
should be measured or weighed in its usual measure only, meaning what is normally
weighed cannot be quantified and vice versa.
5) The exact date and place of delivery must be specified in the contract.
6) Salam cannot be affected in respect of items, which must be delivered at spot like gold
purchased in exchange of silver.
7) The commodity for Salam contract should be available in the market at the time of delivery.
8) The time of delivery should be at least fifteen (15) days to one month from the date of
agreement. Price in Salam is generally lower than the price in spot sale. The Salam period
should be long enough to affect the prices. But Hanafi Fiqh did not specify any minimum
period for the validity of Salam. It is all right to have an earlier date of delivery if the seller
consents to it.

There are two ways of using Salam for the purpose of financing:

1) After purchasing a commodity by way of Salam, the financial institution can sell it through a
parallel contract of Salam for the same date of delivery. The period of Salam in the second
parallel contract is shorter and the price is higher than the first contract. The difference between
the two prices shall be the profit earned by the institution. The shorter the period of Salam, the
higher the price and the greater the profit. In this way, institutions can manage their short term
financing portfolios.
2) The institution can obtain a promise to purchase from a third party. This promise should be
unilateral from the expected buyer. The buyer does not have to pay the price in advance. When
the institution receives the commodity, it can sell it at a pre-determined price to a third party
according to the terms of the promise.
• In an arrangement of parallel Salam, there must be two different and independent contracts; i)
one, where the bank is a buyer and ii) the other in which it is a seller. The two contracts cannot
be tied up and performance of one should not be contingent on the other. For example, if 'A' has
purchased from 'B' 1,000 bags of wheat by way of Salam to be delivered on 31 December, 'A' can
contract a parallel Salam with 'C' to deliver to him 1,000 bags of wheat on 31 December. But
while contracting Parallel Salam with 'C', the delivery of wheat to 'C' cannot be conditioned with
taking from 'B'. Therefore, even if 'B' does not deliver wheat on 31 December, 'A' is duty bound
to deliver 1,000 bags of wheat to 'C'.

ISTISNA:
• Istisna' is a sale transaction where a commodity is transacted before it comes into existence. It is
an order to a manufacturer to manufacture a specific commodity for the purchaser. The
manufacturer uses his own material to manufacture the required goods. In Istisna', price must
be fixed with the consent of all parties involved. All other necessary specifications of the
commodity must also be fully settled.
• Shariah Justification: The Holy Prophet (P.B.U.H) order his ring and podium to be build on
Istisna.
• After giving prior notice, either party can cancel the contract before the manufacturing party has
begun its work. Once the work starts, the contract cannot be cancelled unilaterally.
Istisna Salam
The subject mater must by an item which The subject mater must by an item which
needs to be manufactured needs to be manufactured
The price does not necessarily need to be The price has to be paid in full in advance
paid in full in advance. It is not necessary to
pay the full price even at delivery either. It
can be deferred to any time according to the
agreement of the parties. The payment may
also be made in installments
The time of delivery does not have to be The time of delivery is an essential part of the
fixed. contract
The contract can be cancelled before the The contract cannot be cancelled unilaterally.
manufacturer starts the work

Istisna Ijarah tul Ashkhaas

 The manufacturer uses his own material or The material is provided by the customer and
obtains it to make the ordered goods. the manufacturer uses only his labor and skill,
i.e. his services are hired for a specified fee.
The purchaser has a right to reject the goods Right of rejection of goods after inspection does
after inspection as Shariah permits somebody not exist.
who purchases a thing not seen by him, to
cancel the sale after seeing it. The right of
rejection only exists if the goods do not
conform to the specifications agreed upon
between the parties at the time of contract.

• Istisna' can also be used for financing working capital requirements of a manufacturer. The bank
will order the manufacturer to manufacture certain specified goods and pays the Istisna price to
the customer. Upon manufacturing the goods, the customer will deliver the goods to the bank.
After taking possession of the goods, buyer will sell the goods in the market at the same price
and for this purpose, the bank may sale the goods directly or may appoint same agent (including
the customer) to sell their goods in the market.
• The modern BOT (Built, Operate and Transfer) agreements may be formalized through an Istisna'
agreement as well. So, if the government wants to build a highway, it may enter into an Istisna'
contract with the builder. The price of Istisna' maybe the right of the builder to operate the
highway and collect Toll Taxes for a specific period.

Ijarah:
• "Ijarah" is a term of Islamic fiqh. Lexically, it means “to give something on rent”. “Ijarah” is used
for two different situations.
i) In the first place, it means “to employ the services of a person on wages given to him as a
consideration for his hired services. (Ijarah-tul-Ashkas)”. The employer is called “Mustajir”
while the employee is called “Ajir”, while the wages paid to the Ajir are called their “Ujrah.
ii) The second type of Ijarah relates to the usufructs of assets and not to the services of human
beings. 'Ijarah' in this sense means “to transfer the usufruct of a particular property to
another person in exchange for a rent claimed from him.” In this case, the term 'Ijarah' is
analogous to the English term 'leasing'.

Shariah Justification:

The Prophet (peace be upon him) leased a piece of land to a Jew in return for a certain amount of dates"
(Sahih al-Bukhari). This hadith demonstrates the Prophet's practice of using the Ijarah contract in
financial transactions.

• The basic rules of Ijarah are as follows:

i) Transferring of usufruct not ownership. The owner transfers its usufruct to another person
for an agreed period, at an agreed consideration.
ii) Subject matter of lease. The subject matter of lease should be valuable, identified and
quantified.
 iii) All consumable things cannot be leased out. For example, money, wheat etc can’t be leased
out due to its nature.
iv) All liabilities of ownership is borne by lessor
v) Period of lease. It should be clearly mentioned.
vi) Lease for specific purpose. The lessee cannot use the leased asset for any purpose other
than the one specified in the lease agreement
vii) Lessee as Ameen. The lessee is liable to compensate the lessor for every damage to the
leased asset caused by his misuse or negligence.
viii) Lease of jointly owned property. A joint owner of a property can lease his proportionate
share only to his co-sharer and not to any other person

Conventional Leasing Ijarah

The asset to be leased is not owned by the The asset to be leased is owned by the bank.
bank.
The bank is not responsible for any loss to the The bank bears all the risk of loss of asset if
asset. such loss is not caused by the negligence of
the customer.
Rent is charged and demanded prior to No rent can be charged and demanded prior
delivery of the asset. to the delivery of the asset
The conventional lease agreements give Since Ijarah is a binding agreement therefore,
unilateral right to bank to terminate the Lease neither party can terminate it without mutual
Agreement without any reason. consent unless if there is a breach of contract
by either party.
Penalty on late payment is charged. Penalty on late payment cannot be charged.

• Unlike the contract of sale, the agreement of Ijarah can be effected for a future date
• It should be clearly understood that when the lessee himself has been entrusted with the
purchase of the asset intended to be leased, there are two separate relations between the
institution and the client, which come into operation one after the other. In the first instance,
the client is an agent of the institution to purchase the asset on latter's behalf.
• The second stage begins from the date when the client takes delivery from the supplier. At this
stage, the relation of lessor and lessee comes to play its role.
• Some Islamic banks use the rate of interest (LIBOR or KIBOR) as a benchmark to determine the
rental amounts.
• It is suggested by some contemporary scholars that the relation between rent and the rate of
interest is subjected to a limit or ceiling. For example, it may be provided in the base contract
that the rental amount after a given period, will be changed according to the change in the rate
of interest, but it will in no case be higher than 15% or lower than 5% of the previous monthly
rent. It will mean that if the increase in the rate of interest is more than 15%, the rent will be
increased only up to 15%. Conversely, if the decrease in the rate of interest is more than 5%, the
rent will not be decreased to more than 5%
• The lessee cannot force lessor to sell it to him at a nominal price, nor can such a condition be
imposed on the lessor in the lease agreement. But after the lease period expires, and the lessor
wants to give the asset to the lessee as a gift or to sell it to him, he can do so by his free will OR
 the lessor may enter into a unilateral promise to sell the leased asset to the lessee at the end of
the lease period. This promise will be binding on the lessor only.
• Bai Inah which is sale and buy back of the asset by same party is not in practice and is not
allowed in Fiqh Hanafi
• Tawarruq means “to buy on credit and sell at spot value.” This transaction is now a days being
used by many Islamic banks for liquidity management and as a mode of financing especially for
personal financing and credit cards. The preferred view in all the four schools of Islamic fiqh is
that Tawarruq is permissible. However, lending (without interest) is more advisable.
• Organized Tawarruq is not allowed in Islam.

Takaful:
• Takaful is an Arabic word that means "Guaranteeing each other". It is an Islamic system of
Insurance based on the principle of “Ta'awun (cooperation)” and “Tabarru (gift, give away,
donation)”, where the group voluntarily shares the risk collectively.
• The equity holders of Takaful Company establish the Waqf to compensate the beneficiaries or
participant of Takaful scheme. Every policyholder would pay his subscription as donation to the
Waqf. Any member or participant suffering a catastrophe or disaster would receive a certain sum
of money or financial aid from the Waqf.
• The Takaful Company can charge a fixed fee or commission from the capital of Waqf for
rendering the services of management and administration of this Waqf.
• In Pakistan, the Wakala waqf model for Takaful is use. There are six full fledged takaful
companies. EFU, LIFESTATE and Jubilee have takaful windows.
• General takaful are short term such as car, motor, fire and marine. Family takaful are long term
and family takaful are investment linked policies.
• Shariah Justification: The Holy Prophet (P.B.U.H) encourages to leave something for family if the
bread earner dies.
• Takaful is non-commotative contract.
• The Tabarru is divided into two parts: 1) Participant Investment Asset 2) Participant Takaful Fund
• All the claims are paid from PTF while PIA is used for investment purposes.
• Takaful company sometimes waqf their funds which is known as cede money and cannot take
back in any circumstances.
• Kafala is the guarantee and according to the AAIOFI, charging for providing guarantee is not
allowed. The guarantor is liable to pay to creditor if debtor fails to pay.

Sukuk:
• History of Sukuk : The roots of Sukuk is found from the 1st Century Hijri. Imam Malik in his books
“Muwatta” discussed about the Sukuk. In 7th century Hijri, Umayyad use Sukuk al Badl to pay
soldiers and public servants.
• There are two categories of Sukuk: 1) Asset based Sukuk such as Mudaraba, Musharaka and
Ijarah Sukuk 2) Debt based Sukuk such as Murabaha, Salam and Istisna
• For asset based sukuk, assets need to exist for whole time of sukuk period
• Company cannot raise funds directly in Sukuk. They have to raise funds through structure in the
form of company which is SPV.
• Sukuk means certificate of undivided ownership in an asset and according to section 17 of
AAOIFI it is the instrument of asset which needs to be equal in value, undivided share and
ownership. The ownership is divided into three categories 1) Tangible assets 2) Usufruct of
assets and 3) services
• Bank Islami issues Certificate of Investment (COI) which is same as Sukuk
• Govt Sukuk are more liked by investor due to less risk of default and timely payment. SECP is the
approving authority of Sukuk.
• If sukuk are backed by tangible assets, then price can be change as tangible assets are volatile
and these type of Sukuk have secondary markets.
• There is no secondary market for debt based sukuk such as Murabaha.
• Pakistan does not have Murabaha sukuk instead we use Ijarah Sukuk.
• The basic feature of Ijarah sukuks is that they represent leased assets, i.e. without relating the
sukuk holders to any common organization, company or institution. For instance, an aircraft
leased to an airline can be represented in sukuks and owned by a thousand different
sukukholders, each of them, individually and independently, presenting his sukuk(s) certificates
to the airline company and collecting the periodic rent without having any relation with other
sukukholders. In other words, the Ijarah sukuk holders are not the owners of a share in a
company that owns the leased airline, rather they are simply a sharing owner who only owns
one thousandth or more of the aircraft itself.
• The expected net return on some forms of Ijarah sukuks may not be completely fixed and
determined in advance, since there might be some maintenance and insurance expenses that
are not perfectly determined in advance. Consequently, in such cases, the amount of rent given
in the contractual relationship represented by the sukuk represents a maximum return subject
to deduction of this kind of maintenance and insurance expenditure.
• Ijarah sukuks are completely negotiable and can be traded in the secondary markets. Subject to
market conditions, these sukuks will offer a high degree of liquidity and therefore, possess both
the characteristics and necessary conditions for functioning as successful securities.
• Sukuk asset should be qualified, quantified, of value (cannot use barren land) and revenue
generating.
• Main advantage of SPV is that 1) No taxation issue as they are generally set up in tax free zones.
2) If company goes bankrupt, then bankruptcy will not effect transaction because financing has
been raised through SPV so bankruptcy of company will not effect SPV.
• Green sukuks are now commonly use in Islamic world.
 • Bai Tauliah is the sale based contract in which sale is made on cost and does not have profit in it.
For example, certain companies sell their products to employees on cost to provide benefits to
employees.
• Agency or Wakala contract is the contract in which activity is carried out on behalf of the
principal.
• Wakala contract can free and it can be paid. It can be permanent and temporary too.
• Shariah Justification is that Holy Prophet (P.B.U.H) purchased sheep on behalf of someone else.
• Wakala contract is supporting contract and used in Murabaha, Takaful, Salam and Istisna.
• Agent is not liable for any loss and all the risk is to be borne by Principal unless loss is due to
negligence of agent.
• In Bai bin Tami Ajjal contract, the payment by customer to bank will always be deferred

Islamic Finance and Financial Inclusion:

Microfinance Banking Non-banking institutions provide Islamic
microfinance
Regulated by SBP Regulated by SECP
11 conventional full fledged microfinance Akhuwat is the NBFI and is promoting
banks and 0 Islamic MFBS microfinance by giving out loan (Qard-e-
Hasna)
MCB Islamic bank is only full fledged bank Islamic microfinance institutions often have a
which provide microfinance services too strong focus on social responsibility, and aim
to promote social and economic development
in their communities. This may include
providing financial literacy training,
promoting sustainable business practices, and
supporting disadvantaged groups such as
women and rural communities.
U Microfinance Bank and NRSP Microfinance NBFI cannot take deposits
bank ltd are only two conventional MFBS
which have Islamic microfinance windows
Islamic microfinance institutions place a
strong emphasis on transparency and
accountability, both for the lender and the
borrower. This includes clear disclosure of
terms and conditions, regular reporting of
financial performance, and mechanisms for
dispute resolution

• Shariah Justification: “To help someone in need has greater rewards in this world and hereafter”
“To give loan (qard-e-hasna) has more rewards than giving charity”
• Modaraba sector companies fall under the purview of SECP. It is totally different from ordinary
Mudaraba
 • Modaraba companies don’t take deposits, but they give finance and it is mandatory for them to
have Shariah Advisor
• They offer COI, which can be purchased by high profile individuals and companies. Mostly,
Pension Funds purchase these COI.
• First Habib Modaraba - This is one of the largest Modaraba companies in Pakistan, with a diverse
portfolio of investments across various sectors such as energy, construction, and agriculture.
• Al Meezan Modaraba - This Modaraba company focuses on investments in the healthcare,
education, and agriculture sectors, and is one of the fastest-growing Modaraba companies in
Pakistan.
• The profits earned by a Modaraba company are shared between the investors and the
management company in a predetermined ratio. This ratio is determined at the time of
investment and remains fixed throughout the investment period. The profit-sharing model
ensures that the interests of investors and the management company are aligned.
• Modaraba companies are managed by professional management teams that have expertise in
investment management and compliance with Islamic principles. This ensures that the
investment is managed in a responsible and sustainable manner.
• Derivatives are not allowed in Islam as it contains gharar.
• Derivatives are not backed by the assets, so it is another reason which is not allowed in Islam
and is Haram.

Regulations of Islamic Finance:

• Liability side of bank: 1) Certificate of Investment (COI) 2) Current account 3) Saving account
• Asset side of bank : 1) Salam 2) Istisna 3) Mudaraba 4) Musharaka 5) Ijarah 6) Murabaha
• The State bank of Pakistan is working for sustainable environment. It has issue Sustainable
Development Goal(SDG) and it has 17 points
• Environment and Social Governance (ESG) s a framework for measuring the sustainability and
ethical impact of an investment in a company or business.
• Promoting green projects and blue environment (Aquatic Life)
• Green banking guideline issued by SBP
• The Shariah governance framework issued by SBP as well as by SECP.
• There are ten points in Shariah governance framework issued by SBP.
• Board of Directors (BOD) shall be ultimately responsible for Islamic Bank operation with Shariah
principles.
• BOD appoint Shariah Board (SB) to help them with Shariah principles.
• BOD needs to be aware of Shariah because of fiduciary relationship.
• BOD shall meet Shariah Board at least on half yearly basis. One meeting should be physical and
other can be virtual.
• Executive management (EM) shall be responsible for implementation of Shariah framework and
fatwas too.
• EM and BOD should have sound knowledge of Shariah to guide their juniors and eventually
customers about how the Islamic Banks operate,
• EM needs to show zero tolerance on Shariah non-compliance by employees and can take actions
against employees in the form of performance appraisal or even termination of employee
contracts in some cases.
• Islamic Banking Institution (IBI) shall have SB comprising of at least three Shariah scholars.
• There should be one Resident Shariah Board Member (RSBM) in every IBI and shall be appointed
on full time basis. RSBM cannot work anywhere else except teaching in educational institutes.
• RSBM cannot give fatwas alone.
• It is not mandatory for financial institution to appoint RSBM as head of Shariah Board.
• Every IBI should have product development department.
• Every IBI should have internal audit department which will report to Head Of Internal Audit who
will report directly to BOD.
• Conflict between IBI and SBP inspection team is to be resolved by Islamic Banking Department
and in some extreme cases by Shariah Advisory Committee.
• Shariah Board report is part of the annual report and contains section about charity as well.
• Charity should be given in case of penalty on late payments and on Non-shariah compliance
income which is recorded by bank as their income. These Non-shariah compliance income are
usually found out or traced in the audit of the Bank.
• Takaful and Modaraba Companies should have Shariah Advisor.