Islamic Standards
Islamic Standards
Islamic Standards
Islamic Standards
Main principles of Islamic financing:
1. Wealth must be generated from legitimate trade and asset-based investment (the use of
money for the purposes of making money is expressly forbidden).
- Charging interest contradicts the principle that risk must be shared and is also
contrary to the ideas of partnership and justice
2. Investments in businesses involved in alcohol, gambling, or anything else that the Shariah
considers unlawful or undesirable (haram).
1. MUDARBAH TRANSACTIONS
2. MUSHARIKA TRANSACITONS
3. MURABAHA TRANSACTIONS
4. IJARAH FINANCING
5. PROFIT AND LOSS DISTRIBUTION IN PLS SAVING DEPOSIT
1. MUDARBAH TRANSACTION:
Type of partnership
Mudarib Rab-ul-mal
2. MUSHARIKA TRANSACTION:
❶ ❷ ❸
3. MURABAHA TRANSACTION:
Form of trade credit for acquisition of asset that avoids payment of interest.
Parties
Bank Borrower
Ijarah is a contract whereby the owner of an asset, other than consumables, transfers its usufruct
to another person for an agreed period for an agreed consideration.
1. Lease agreements to explore for or use minerals, oil, natural gas and similar non-
regenerative resources;
2. Licensing agreements for such items as motion picture films, video recordings, plays,
manuscripts, patents and copyrights;
2. Only owned asset can be leased out (except sub-lease with the express permission of
the lessor).
3. The lessor must retain title to the asset and bear all risks and rewards pertaining to
ownership during the entire term of the lease. However, the lessee is responsible
for any damage or loss caused to the leased asset due to the fault or negligence of the
lessee or from non-customary use of the asset.
4. The insurance of the leased asset should be in the name of lessor and the cost of
such insurance borne by him.
5. A lease can be terminated before expiry of the term of the lease but only with the
mutual consent of the parties.
Treatment:
Lessor Lessee
Cash xxx
Cases:
Case 1 – Selling price is equal to fair value (recognize in Profit and Loss immediately)
Case 2 - Selling price is less than fair value (recognize in Profit and Loss immediately)
Case 3 - Selling price is greater than fair value (Excess over fair value should be amortized over
the lease term).
Illustration:
Asset 1,000
Gain 200
The future ijarah payments in the aggregate and for each of the following periods:
- later than one year and not later than five years
Mechanism:
How it works?
Important points:
1. Profits which have been allocated but have not yet been repaid or reinvested must be
recognised and disclosed as a liability by the IIFS.
A loss due to negligence or similar on the part of the IIFS is deducted from its share of
the profits of the jointly financed investment. Any such loss in excess of the IIFS's share
of profits is deducted from its equity share in the joint investment.
i. the bases applied to allocate profits between owners' equity and the
account holders
ii. the bases applied by the IIFS for charging expenses to unrestricted
account holders;
iii. the bases applied by the IIFS for charging provisions, such as provision
for non performing accounts, provisions on impairment etc.
b. The IIFS should disclose significant category of accounts and of the percentage
which the IIFS has agreed to invest in order to produce returns for them.
c. The following disclosures should be made either in the notes to the financial
statements or a separate statement:
iii. the percentage of profit charged by the IIFS as a mudarib during the financial
period;
iv. where the IIFS is unable to utilise all funds available for investment how the
investments made relates to the IIFS and investment account holders.