Preface:

Foundation of Islamic banking is based on Shariah principles. The sources of

Shariah are the holy Quran Majid and authentic Sunnah of Prophet (SM).
Appropriate compliance of Shariah principles is mandatory for Islamic
banking to function. If we observe the Islamic banking practice worldwide,
four (4) motives primarily drive Islamic banking activities i.e. (i) pure belief
in Almighty Allah; (ii) huge market potential; and (iii) resilience and more
sustainability under stressed situation & iv) an effective yet complete
banking solution or arrangement. Islamic banking market is hence growing
fast and with remarkable coverage. Bangladesh considering one of the
largest Muslim countries, sees a significant footprint of Islamic banking since
the inception of banking industry evolved here. Islamic Banking has
experienced a considerable growth and expansion here in the context of
strong public demand and support for this arrangement. As a result, several
full-fledged Islamic Banks has been established, while a good number of
conventional banks have come forward to offer Islamic banking services
through opening of Islamic branches along with conventional ones. There is
also a trend of conversion of conventional banks into Islamic bank as per
recent trend.

Origin, Evolution and Expansion of Modern Islamic

Finance and Banking:
Islamic finance aims to provide economically viable financial intermediation
alternatives, framed within the boundaries set by Islamic/Shariah principles.
These activities involve the intermediation between the haves and have-nots
across all customer segments in a manner consistent with Shariah. It was a
system developed under the reign of the Muawiyad and the Abbasid
Caliphates from the year 661 to 850, and thereafter, it was spearheaded by
great Islamic empires such as those in Andalusia (Spain) until the year 1031,
in Granada until 1492, in the Malacca Sultanate until 1511, and in the
Ottoman Empire (Turkey) until 1918. It is a system which has existed for the
last 1,435 years but had lost its way due to changing political and legal
systems across the Islamic world in the last millennia. It has been a slow
lesson relearning what is available under the system over the last 50 years.
Malaysia, as one of the global centers of Islamic finance, has been at the
forefront of this modern day rediscovery and redevelopment of the industry.
Islamic finance or Islamic Banking is, in many ways, very similar to
conventional finance and banking (Ahmad, 2008). Islamic banking is based
on Islamic Shariah law that provide fundamentals about financing and
investing (El-Gamal, 2000). The Organization of Islamic Conference (OIC)
defined an Islamic bank as a financial institution whose statutes, rules and
procedures expressly state its commitment to the principles of Islamic
Shariah and to the banning of the receipt and payment of interest on any of
its operations (Hassan, 1999). Sometimes it is also called as Interest-Free-
Banking, and according to Khan and Bhatti (2008) interest-free Islamic
banking is derived from two axioms, mutual fairness in transactions and
reflection of actual reality. It is difficult to say with accuracy which was the
first such company or bank that pioneered this concept in practice. As found
in some literature (Chapra, 1996; Oitti, 2004) early experiments with Islamic
Banking took place in Malaysia in the mid 1940s, in Pakistan in the late
1950s and in Egypt in 1960s. Some analysts and experts in the field opined
(Mohamed, 2007) that Islamic banking and finance, in the modern context,
first emerged in 1963, when Mit-Ghamr Saving Bank began an experimental
project offering interest free banking in Egypt. According to Mastura (1988),
Mit Ghamr Bank helped set general guidelines and came up with new
terminologies that helped future Islamic banks and gave them the hope that
Islamic banking can be competitive and profitable. In the seventies, a
number of Islamic banks came into existence in the Middle East, e.g., the
Dubai Islamic Bank (1975), the Faisal Islamic Bank of Sudan (1977), the
Faisal Islamic Bank of Egypt (1977), and the Bahrain Islamic Bank (1979), to
mention a few (Siddiqi, 1988). Islamic banking made its debut in Malaysia in
1983 with the establishment of Bank Islam Malaysia Berhad (BIMB) which
represents a full-fledged Islamic commercial bank in Malaysia (Man, 1988).
Currently, Malaysia, Saudi Arabia, UAE and Bahrain with the largest
concentration of Islamic financial institutions are hosting a good number of
Islamic financial institutions dealing in diversified activities including
commercial banking, investment banking, offshore banking and funds
management (Ernst and Young, 2013). Of the other countries, notably, Sudan
and Iran also switched over to Islamic banking system at national level in
1984. The Islamic Banking System (now called Islamic Finance House),
established in Luxembourg in 1978, represents the first attempt at Islamic
banking in the Western world. In recent time, notable initiatives have been
undertaken in UK, Germany, and USA. There is no doubt that the stage of
development of Islamic banking remained different in different countries and
regions(Table-1).
Islamic Financial System:

Conceptual Aspects of Islamic Finance and Banking

and Review:
Islamic finance and banking transactions must be free from the use of “Riba”
(interest). Shariah (Islamic law) prohibits any increase in returns from
commercial transactions without sharing the risks or stake in the economic
activity. As a result, returns on investments must be based on real economic
activities and/or underlying assets, a performance on which the contractual
relationship between parties is structured. Transactions may also be based
on sale contracts where profits are legitimately earned from the sale of
underlying assets at a price which covers the asset’s original cost-plus profit.
In general, Islamic financial mechanisms aim to promote profit and loss
structures to ensure contracting parties share the risks of venture among
them. Apart from Riba, other elements prohibited in financial transactions
are excessive uncertainties in contractual performance (Gharar), and
gambling and/or chance-based outcomes in transactions (Maysir). In
addition, transactions involving activities deemed impermissible in Islam
such as alcohol brewery, gambling, and casino operations are prohibited.
Moreover, the financial contracts must be free from any sort of coercion,
corruption, and deception and the contracting parties must express their free
mutual consent in accepting a deal

Legal, Regulatory and Enabling Framework of

Islamic Finance and Banking:
Modern Islamic finance and banking is a relatively new sector of the global
financial system. The setting up of Islamic financial institutions in a large
number of different countries has led to a diverse legal and regulatory
landscape. In general, the countries that have shown commitment to
developing Islamic finance and banking can be categorized into three types:
(i) countries that claim to have fully Shariah-based legal systems, such as
Iran and Sudan; (ii) countries with partially Shariah-based legal systems,
such as Bahrain, Malaysia, Indonesia and the United Arab Emirates (UAE)
etc.; and (iii) countries with completely secular legal systems, such as
Singapore, the United Kingdom (UK) and the United States of America(USA)
etc. The prevailing legal and regulatory system of a country determines the
structure and type, as well as the means of implementation, of its legal and
regulatory framework for Islamic finance and banking. Two distinct
approaches have been observed: (i) setting up a comprehensive, separate
legal and regulatory framework for Islamic finance that is parallel to and
compatible with the existing laws and regulations for conventional banking
and finance; and (ii) retaining the existing conventional financial framework
and taking incremental steps to accommodate the specificities of Islamic
finance, which leads to a gradual extension and differentiation of the legal
and regulatory system over time (NikThani & Othman, 2008). This process
can also factor in the experiences of other jurisdictions. Most jurisdictions
have adopted the second approach: they have retained the existing
conventional legal and regulatory framework and made necessary
adjustments for the integration of Shariah principles in the financial practices
mentioned in Table-1

The adoption of a gradualist approach, however, poses some challenges to

the Islamic finance industry, as a number of the existing legal and regulatory
provisions are not in line with Shariah principles, while Islamic financial
institutions are bound to follow the Shariah. A research by the World Bank
(2004) observed factors specific to Islamic finance that may become hurdles
in developing a legal and regulatory framework for Islamic finance. To
achieve the objective, efforts should be made to broaden and deepen the
understanding of Islamic specificities by providing supporting services to the
legislature and the judiciary in a cost-efficient and timely manner. It is of the
utmost importance that legislators and judges come to well-informed
decisions because of the possibly of a far-reaching impact of a single
decision on the rest of the Islamic finance industry. Furthermore, it is
important to set up a legal harmonization committee or a working group to
scrutinize a country’s legal and regulatory framework and propose solutions
for identified legal conflicts between the Islamic and secular systems
Table-1
Principles of Deposit:
Shariah principles for receiving deposits Islamic banks receive deposits under
two principles:

 Al-Wadeeah principle.
 Mudaraba principle.

Al-Wadeeah:

Fund which is deposited with Banks by the depositors with clear permission
to utilize / invest the same is called Al-Wadeeah. Islamic banks receive
deposits in Current Accounts on the basis of this Al-Wadeeah Principle.
Islamic banks obtain permission from the AlWadeeah depositors to utilise the
Funds at its own responsibility and the depositors would not share any profit
or loss earned/incurred out of using of this funds by the bank. The banks
have to pay back the deposits received on the principle of Al-Wadeeah on
demand of the holders. The depositors have to pay goverment taxes and
other charges, if any.

Mudaraba:

Mudaraba is a partnership of labour and capital, where one partner provides

full capital and the other one manages the business. The capital provider is
called Sahib-Al-Maal and the user of the capital is called Mudarib. As per
Shariah principles, the Mudarib will conduct the business independently
following Shariah principles. The Sahib-Al-Maal may provide advices, if he
deems fit but he can not impose any decision over the Mudarib. Profit, if any,
is divisible between the Sahib-Al-Maal and the Mudarib at a predetermined
ratio, while loss, if any, is borne by the Sahib-Al-Maal. Mudarib can not avail
of any salary or remuneration against his labour as a manager or conductor
of the enterprise/business. The deposits, received by Islamic banks under
this principle are called Mudaraba Deposits. Here, the depositors are called
Sahib-Al-Maal and the bank is called Mudarib. The Mudaraba deposits
include:

 Mudaraba Savings Deposits (MSD)

 Mudaraba Short Notice Deposits (MSND)
 Mudaraba Term Deposits (MTD).

Different Islamic banks have developed various deposit schemes on the

basis of this Mudaraba principle such as monthly deposit-based Hajj Scheme,
Monthly/One time depositbased Term Deposit Scheme, Monthly Mudaraba
Profit Deposit Scheme, Monthly Mudaraba Marriage Savings Scheme,
Mudaraba Savings Bond etc.

Investment Principles & Investment Products

Islamic banks do not directly deal in money. They run business with money.
The funds of Islamic banks are mainly invested in the following modes:

1) Mudaraba;

2) Musharaka;

3) Bai-Murabaha (Murabaha to the purchase orders);

4) Bai-Muajjal;

5) Salam and parallel Salam;

6) Istisna and parallel Istisna;

7) Ijara;

8) Ijarah Muntahia Bittamleek (Hire Purchase);

9) Hire Purchase Musharaka Mutanaqisa (HPMM);

10) Direct Investment;

11) Investment Auctioning etc.

12) Quard

13) Quard Hassan etc.

1. Mudaraba:

Mudaraba is a shared venture between labour and capital. Here Bank

provides with entire capital and the investment client conducts the business.
The Bank, provider of capital, is called Sahib-Al-Maal and the client is called
Mudarib. The profit is to be distributed between the Bank and the
investment client at a predetermined ratio while the bank has to bear the
entire loss, if any.
2. Musharaka:

Musharaka means partnership business. Every partner has to provide more

or less equity funds in this partnership business. Both the Bank and the
investment client reserve the right to share in the management of the
business. But the Bank may opt to permit the investment client to operate
the whole business. In practice, the investment client normally conducts the
business. The profit is divided between the bank and the investment client
at a predetermined ratio. Loss, if any, is to be borne by the bank and the
investment client according to capital ratio.

3. Bai-Murabaha:

Contractual buying and selling at a mark-up profit is called Murabaha. In this

case, the client requests the Bank to purchase certain goods for him. The
Bank purchases the goods as per specification and requirement of the client.
The client receives the goods on payment of the price which includes mark-
up profit as per contract. Under this mode of investment the purchase/ cost
price and profit are to be disclosed separately.

4. Bai-Muajjal:

Meaning: "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. It is a
contract between a buyer and a seller under which the seller sells certain
specific goods (permissible under Shariah and 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 installments. The seller may also sell
the goods purchased by him as per order and specification of the buyer.

In Bank's perspective, Bai-Muajjal is treated as a contract between the Bank

and the Client under which the bank sells to the Client certain specified
goods, purchased as per order and specification of the Client at an agreed
price payable within a fixed future date in lump sum or by fixed installments.

5. Salam and Parallel Salam:

Salam means advance purchase. It is a mode of business under which the
buyer pays the price of the goods in advance on the condition that the
goods would be supplied / delivered at a particular future time. The seller
supplies the goods within the fixed time. Parallel Salam: Parallel Salam is a
Salam contract whereby the seller depends, for executing his obligation, on
receiving what is due to him - in his capacity as purchaser from a sale in a
previous Salam contract, without making the execution of the second Salam
contract dependent on the execution of the first one.

The following conditions are essential in the contracts of Murabaha, Bai-

Muajjal and Salam. The respective contracts must include the following
aspects regarding the goods:

* Number/Quantity

* Quality * Sample

* Price and amount of profit

* Date of supply/time limit

* Place of supply

* Who will bear the cost of supply?

* Timeframe for payment in case of Bai-Murabaha and Bai-Muajjal.

6. Istisna and parallel Istisna:

A contract executed between a buyer and a seller under which the seller
pledges to manufacture and supply certain goods according to specification
of the buyer is called Istisna. An Istisna agreement is executed when a
manufacturer or a factory owner accepts a proposal placed to him by a
person or an Institution to produce/manufacture certain goods for the latter
at a certain negotiated price. Here, the person giving the order is called
Mustasni, the receiver of the order is called Sani and the goods
manufactured as per order is called Masnu. An order placed for
manufacturing or producing those goods which under prevailing customs
and practice are produced or manufactured will be treated as Istisna
contract.

Conditions & characteristics of Istisna are enumerated below:

 The agreement concerned must contain the details, such as, the type,
class, quantity and features of the goods to be produced, so that no
misunderstanding is created later on.
 The price has to be settled; payment time/schedule and modes thereof
is to be predetermined.
 When, where and on whose cost the goods to be supplied has to be
clearly mentioned.
 If agreed by both parties, payment may be made in advance to the
seller in part or in full or may be deferred to be paid in due course/
agreed time.
  Generally timeframe is not mandatory for supplying the goods under
Istisna agreement. It may be executed without determining timeframe.
But in case of bank, timeframe for supplying goods must be determined
to avoid any dispute in future.
 Condition for imposing stipulated compensation/penalty may be
included in the Istisna agreement against the party who breaches the
terms of the agreement causing the other party to suffer. But no
compensation/penalty would be imposed on any party if it happens for
any valid reason or unavoidable circumstances.
 As per opinion of the contemporary jurists, the compensation in case of
Istisna may be treated as legal income.

Parallel Istisna:

If it is not stipulated in the contract that the seller himself would

produce/provide the goods or services, then the seller can enter into another
contract with third party for getting the goods or services produced/
provided by the third party. Such a contract is called Parallel Istisna. This
may be treated as a sub-contract. The main features of this contract are:-

 The original Istisna contract remains valid even if the Parallel Istisna
contract fails and the seller will be legally liable to produce/ provide the
goods or services mentioned in the Istisna contract.
 Istisna and Parallel Istisna contracts are treated as two separate
contracts.
 The seller under the Istisna contract will remain liable for failure of the
sub-contract.

7. Ijara :

The mode under which any asset owned by the bank, by creation,
acquirement / or building-up is rented out is called Ijara or leasing. In this
mode, the leasee pays the Bank rents at a determined rate for using the
assets/properties and returns the same to the Bank at the expiry of the
agreement. The Bank retains absolute ownership of the assets/properties in
such a case. However, at the end of the leased period, the asset may be sold
to the client at an agreed price.
8. Ijarah Muntahia Bittamleak (Hire-Purchase):

Under this mode, the bank purchases vehicles, machineries and

instruments, building, apartment etc. and allowed clients to use those on
payment of fixed rents in installments with the ultimate objective to sell the
asset to the client at the end of the rental period . The client acquires the
ownership/ title of the assets/ properties subject to full payment/ adjustment
of all the installments.

9. Hire-purchase Musharaka Mutanaqasa (HPMM):

Hire-purchase Musharaka Mutanaqasa means purchasing and acquiring

ownership by one party by sharing in equity and paying rents for the rest of
the equity held by the Bank/or other party. Under this mode, the Bank and
the client on contract basis jointly purchase vehicles, machineries, building,
apartment etc. The client uses the portion of the assets owned by the bank
on rental basis and acquires the ownership of the same assets by way of
paying banks portion of the equity on the assets in installments together
with its rents as agreed upon.

The features of this mode are elaborated below:

a) The client applies to the Bank expressing his/her wishes to purchase the
assets/properties and the bank accords its approval after proper evaluation/
scrutiny.

b) The client deposits his/her share of equity with the bank after obtaining
approval and the bank pays total price of the assets/properties together with
its equity.

c) Before purchase of the assets/properties an agreement is executed

stipulating the actual prices, monthly rents, price of the bank's portion of the
assets/properties, payment schedule and installment amount and the nature
of the security etc.

d) The bank shall rent out its own portion of the assets/properties to the
client as per terms & conditions of the agreement.

e) The client (Hirer) pays off in installments bank's portion of equity on the
assets together with its fixed rent as per the terms and conditions of the
agreement.

f) With the payment of installments by the client, the ownership of the bank
in the assets/properties gradually diminishes, while that of the client
increases.

g) The amount of the rent receivable by the bank, reduces gradually

proportionate to the increase in the ownership of the client on the
assets/properties.

h) The client acquires full ownership of the goods/assets after payment of

the entire dues of the bank.

i) The client may acquire the full ownership of the assets/properties before
expiry of the deal by paying off the entire dues to the bank.

j) The rent remains payable in proportion to Bank's ownership, if the client

fails to pay the due installment(s).

k) The bank can take of the assets / properties under its control, if the client
fails to pay the installment(s) as per the terms and conditions of the
agreement.

l) The ownership of the assets/properties remains with the bank until the
entire equity provided by the bank together with the fixed rent is fully paid
off. On full payment/ adjustment of Bank's dues, it transfers the ownership
to the client.

m) The amount which the bank receives as rent is its income. The rent
should not treat as a part of the equity in any way.

10. Direct Investment:

Under this mode, the bank can under its full proprietorship conduct business
by directly investing in the industries, trading, transports etc. In these cases,
the profit/loss fully goes to the bank.

11. Investment Auctioning:

Selling by auction of those assets/goods acquired by the bank through direct
investment is called Investment auctioning. Generally, the bank establishes
industrial units by direct investment, makes the same operationally
profitable and then sells out on auction. This mode of investment is very
helpful for industrialization of the country.

12. Quard:

It is a mode to provide financial assistance/ loan with the stipulation to return

the principal amount in the future without any increase thereon.

13. Quard Hassan:

This is a benevolent loan that obliges a borrower to repay the lender the
principal amount borrowed on maturity. The borrower, however, has the
discretion to reward the lender for his loan by paying any amount over and
above the amount of the principal provided there will be no reference
(explicit or implicit) in this regard. If a bank provides its client any loan, it can
receive actual expenditure relating to the loan as service charge only once. It
can not charge annually at a percentage rate. If a loan is provided against
the money deposited by a client in the bank, it has the right not to pay any
profit against the amount of money given as loan. But profit should be paid
on the rest of the amount deposited as per previous agreement.

Investment System for import/export business as per Islamic

Shariah

Import Business:

The import business is broadly divided into the following three categories:-

i) Import of Commercial goods.

ii) Import of raw materials for production purpose.
iii) Import of capital / machineries.

The importers avail of investment facilities against all kinds of imports. But in
case of imports under category (i) and (ii), investments are made under the
Shariah approved Bai-Murabaha and Bai-Muajjal modes and in case of import
under category (iii), investment is made under the Shariah compliant mode
of Hire Purchase under Shirkatul Melk (HPSM). Investment facilities are also
provided for import business through Bai-Salam, Musharaka and Mudaraba
modes. Besides, the Islamic banks will fully abide by the national and
international norms and guidelines relating to export/import business.

1.0 Import under the Bai-Murabaha system

1.1 Definition of the Bai-Murabaha: Bai-Murabaha is a contract between
a buyer and a seller under which the seller sells certain specific goods
permissible under Islamic Shariah and law of the land to the buyer at a price
determined by charging agreed profit, margin or mark-up over the cost price.
In this case, the buyer either makes cash payment to receive the goods or is
allowed to make payment by instalments or on a fixed future date. The profit
mark-up may be fixed in lump sum or in percentage over the cost price of
the goods.

1.2 Some important features of the Bai-Murabaha mode of

investment

a) The client (buyer) requests the bank to purchase particular goods and
promises to purchase the same from the bank at a price fixed by charging
profit over the cost price.

b) Under the Bai-Murabaha mode of investment there is no scope to

increase the price once it is fixed.

c) After buying the goods, the Bank has to bear all the risk until goods are
actually delivered to the client.

Import of goods under Bai-Murabaha mode of investment

In the import business, the importer provides an irrevocable letter of

authority to the Bank to import specific goods on behalf of him (the client)
from the foreign seller and promises to buy the same from the Bank. In this
case, the Bank is designated as a consignee in the Bill of lading and later on
the Bank hands over the same to the importer through endorsement i.e. the
ownership of the goods is transferred to the importer. As per uniform
customs and practices, the seller lodges his claim or places claim for dues to
the buyer's Bank through the bill of exchange and the buyer’s bank
discharges the claim on behalf of the buyer. The above import system is fully
approved/ supported by the Islamic Shariah.

1.3 Investment in imports by Islamic Banks

In the import business, Bai-Murabaha investment is accomplished through a

single deal at the time of opening L/C, Bills and Shipment. For example:

a) Murabaha Import L/C

b) Murabaha Import Bills

c) Murabaha Post Import.

1.4 Murabaha Post Import (MPI)

The importers apply for investment facility against imported goods after
shipment for payment of the invoice values of the goods to the
seller/supplier including custom duty, VAT and other expenses. In such a
case, Islamic banks allow a Bai-Murabaha investment facility under single
deal concept. It is so called as the Letter of Credit. Bills and the handling of
Post-shipment are settled under one agreement while opening the letter of
credit for importing the goods.

1.5 Accounting procedure for purchase price, profit and sale price

a) Price payable to the supplier

b) Other expenses related with purchase

i) Conveyance - TA/DA

ii) Commission payable to the agents.

iii)The expenditures in connection with supplier’s payment.

iv)Transportation cost up to the Bank’s godown.

v)Transit Insurance and other expenses.

vi)Godown rent and salary of officials etc. incurred before sale of goods.

Additional expenses

1. Duty

2. VAT

3. License fee

4. Commission for C&F agent etc.

c) Cost price or total value = a + b

d) Estimated profit/Mark-up profit (profit percentage on purchase/cost

price)

e) Sale price = c + d

f) The net Investment amount is determined after deduction of the down

payment (if any) from figure at "e" above
2.0. Import under the Bai-Muajjal mode of investment

2.1. The term Bai-Muajjal means "deferred payment sale" or "Sale

on Credit"

Under this mode of investment a contract is made between the buyer and
seller for buying and selling of goods approved by Islamic Shariah and law of
the land on the stipulation to pay the agreed price at a specific future date or
by fixed installments.

2.2 Some important features of the Bai-Muajjal mode of investment

Most of the features of Bai-Murabaha and Bai-Muajjal are alike excepting the
following:

a) Bai-Muajjal sale is executed completely on deferred payment system

b) The sale price is determined adding the profit with cost price. It is not
necessary to disclose the cost price and the profit mark-up separately to
the client. But in BaiMurabaha, the cost price and the profit mark-up
ratios are to be disclosed separately to the client.
c) The accounting procedure for imported goods under both the Bai-Muajjal
and BaiMurabaha mode are alike. But so far as contract is concerned
they are different. BaiMurabaha contract and Bai-Muajjal contract are
executed for imports under BaiMurabaha and Bai-Muajjal modes
respectively.

3.0. Import under diminishing proprietorship method (Hire Purchase

under Shirkatul Melk-HPSM)

Capital machineries and other re-usable goods are imported under this
mode. It combines three modes: rent (Ijara), partnership (Shirkat) and buying
and selling. a) The Bank and the client invest their capital jointly through a
contract called partnership (Shirkat) and buying and selling.

a) The Bank and the client invest their capital jointly through a contract
called partnership (Shirkat).

b) The bank leases its portion at a certain rent.

c) The Bank sells its portion to the client on receipt of the price under this
system
4.0 Import under Musharaka mode of investment:

4.1. Definition of Musharaka:

Musharaka is a Shariah compliant mode of investment wherein the bank and

the client jointly provide the capital. Here no prefixed profit is earmarked like
in Bai-Murabaha or Bai-Muajjal. Profit, if any, is distributed as per agreement
between the client and the bank while the loss, if any, is shared according to
capital ratio.

4.2. Some general features of Musharaka mode of investment:

a) The Musharaka agreement shall clearly laid down the amount of capital
investment to be provided by the bank and the client and the profit/ loss
sharing ratio as agreed between them. b) The actual profit of the business is
to be distributed between the bank and the client as per the agreed ratio.
But loss, if any, is to be borne by them as per ratio of the capital.

c) The client shall properly maintain ledger, register, books of accounts etc.
and have to show those to any authorized person of the bank on demand.

d) For the success of client's business the bank shall have the right to give
any decision and supervise the business activities.

4.3. Before establishing Letter of Credit, the bank shall receive an

application from the client in prescribed form which shall include
the following aspects:

a) The price of goods to be imported, C&F price as per quotation/indent.

b) Wholesale/retail price of every unit/ton/bag/carton.

c) Import cost including estimated import expenditures.

d) Expected sale price of imported goods.

e) Per unit/ton/bag/cartoon expected sale price of the imported goods.

f) Particulars of any other expenditure in addition to the import cost.

g) Estimated net profit.

h) Capital and profit /loss sharing ratios.

4.4. The Bank shall, thereafter, receive the equity portion of the client and
after completion of documentation shall make payment against the import
liability and all expenses related to it as per the Musharaka agreement. If
there is profit, bank shall receive its share of profit as per agreement and in
case of loss, shall bear the same according to capital ratio.

4.5. Fixation of liability in case of loss:

If loss is incurred after performing all duties and responsibilities as per

agreement, then the loss would be borne by the bank and the client
according to capital ratio. But if the loss is incurred due to carelessness,
negligence or breach of any condition by the client, then the client would be
liable to bear the loss.

5. Import under Mudaraba mode of investment:

5.1. Definition of Mudaraba: Under the Mudaraba mode of investment, the

client or businessman or capital user does not invest any capital. In this case,
the bank alone invests all the required capital and the entrepreneur (the
client) directly manages and looks after the business.

5.2. Under this mode, the bank bears all the expenditures related to imports.
In this case, the Bank supervises the use of capital, system of business
operation and income of the business etc. The client maintains all the
registers, documents and accounts concerning buying & selling of the goods.

5.3. In this case, profit, if any, is distributed between the bank and the client
as per the agreed ratio and loss is fully borne by the Bank.

Investment in exports:

To accomplish export process/ order as per the terms and conditions of the
letter of credit (L/C) and the agreement executed between the seller and
buyer, an exporter needs financial and other banking facilities on urgent
basis. So, it is one of the important functions of a bank to provide investment
and banking facilities to the exporter at different stages of export business.

An exporter needs financial facilities at two stages of export process. such

as:

a) At pre-shipment stage, and

b) At post-shipment stage.

Hence, financial facilities to export sector may be classified as:

a) Pre-shipment Finance.

b) Post-shipment Finance.
Financial assistance/ facilities complying Shariah principles are provided at
both the stages of export process.

Investment at Pre-Shipment stage as per Islamic Shariah:

An exporter needs various financial facilities till shipment of goods. Finance is

needed for procurement of raw materials and to meet transportation and
other related cost upto shipment.

Pre-shipment facilities are generally provided for the following purposes:

i) To procure raw-materials.
ii) To process the exportable goods.
iii) For transportation and packaging.
iv) For payment of insurance premium.
v) For payment of water, electricity and gas bills etc.
vi) For payment of wages and salary/bonus to employees.
vii) For payment of freight of the ship.

Shariah compliant modes for Pre-shipment Finance:

1. Back to Back Letter of Credit (Back to Back L/C)

Bank extends Back to Back letter of credit (L/C) facility to exporters to

procure/import raw-materials for producing/manufacturing exportable goods
at pre-shipment stage under the mode of Bai-Muajjal. Initially, no financial
facility from the Bank is required when the back to back L/C is opened. But if
the exporter fails to pay the L/C value at maturity or on due date, the bank
provides financial facilities to the client under BaiMuajjal mode.

2. Bai-Murabaha TR (Trust Receipt) :

To procure/purchase raw-materials for executing export order the bank

provides investment facilities to the client under the mode of Murabaha TR.
In this case, the bank obtains Trust Receipt signed by the client and
handover the imported goods to the exporter.

3. Bai-Salam :

3.1 Under the Bai-Salam mode of investment, payment is made in advance

to purchase the goods and the supplier makes promise to deliver the goods
at a future date.
3.2 Investment under Bai-Salam mode is made to meet other expenses of
the exporter excepting the manufacturing cost of exportable goods. The
Bank purchases a portion of the exportable goods under the Bai-Salam
mode and makes advance payment for the same on the condition that
arrangements will be made by the exporter to export the goods purchased
by the bank along with other goods of the exporter.

3.3 Fixing purchase price of the goods and recovery of bank's

investment: The purchase price is determined by deducting estimated
profit of Bank's purchased portion of the exportable goods. The bank
recovers its dues after realization of export proceeds.

3. Musharaka:

Pre-shipment investment may be made under Musharaka mode of

investment if there is any pre-determined investment arrangement.

4. Post-Shipment Investment :

Bank provides post-shipment investment facilities through Negotiation (FBN)

and purchase of export bills. It normally negotiates or purchases the export
documents if the documents/bills prepared by the exporter are found in
order/correct in all respect. The bank adjusts the liabilities against FBN/FBP
after receiving the export proceeds and earns exchange income from this.
This mode of investment is in compliance with the Islamic Shariah

Other functions:

a) Remittance or Money Transfer: Islamic banks can transfer money

through D.D, T.T, T.C etc. and collect the bills (cheque, Draft, Payment
order etc.) and realize commission or service charges within the norms of
Shariah.

b) Miscellaneous Banking Services: Islamic banks can render

miscellaneous banking services like locker services, receipt and payment
of clients' bills, issuance of Guarantee and working as agents of clients
against commission or service charges. Collection of service charges or
commissions for rendering those services are permissible under Shariah.
References:

1. GUIDELINES FOR CONDUCTING ISLAMIC BANKING

2. Alamgir, M., Hossain, M.M. and Faisal, N.A. (2015) “Issues and
Challenges for Islamic Finance and Banking in Bangladesh in the
Perspective of Global Development”, Research Monograph 24, pp. 1-
76, BIBM, Dhaka

3. Alamgir, M., Hossain, M.M., Rahman, T., Ahmed, T., Sharif, M.A., and
Safiullah, A.Q.M. (2020). “Islamic Banking Operations in Bangladesh –
2019”, Banking Review Series 2020, Paper No. 5, pp. 187-227, BIBM,
Dha