01: Home finance based on Musharaka Mutanaqisa:

Total cost of a house is Tk.1000000. The customer owns 20% share of the property and makes a down
payment of Tk.200000 and the Islamic bank owns the remaining 80% and pays Tk.800000 The customer
promises to buy the share of the Islamic bank in 60 monthly installments. Under a lease agreement, the
customer would be paying monthly rental for occupying the Islamic bank’s portion in property at 1% of the
value of Islamic bank’s outstanding share. Determine the monthly payment and prepare the repayment
table.

02: Home finance based on Murabaha:

The total cost of a house is Tk.1000000. The customer makes no down payment and requires 100%
financing. The bank agrees to finance 100% cost of the house. The bank purchases the house and sells it to
the customer on Murabaha (deferred sale) basis repayable in 5 years, i.e., 60 months @5% additional
benefit. What is the periodic payment? If the customer chooses to close the financing at the end of 4 years,
then what the customer will have to pay?

03: Home finance based on Ijara Muntahia Bittamleek:

Cost of an asset is Tk.1200000. The customer makes the down payment (Advance Rent) of Tk. 200000 and
the Islamic bank finances Tk.1000000. It is agreed between the customer and the Islamic bank that the
Islamic bank would lease the asset to the customer for a period of 5 years or 60 months against the monthly
rental, which includes the rent against usufruct and the payment towards the bank’s finance. The rent is
calculated on the Net Asset Value of the leased asset which includes the profit margin of 5% p.a. of the
Islamic bank. What is the periodic payment and what is the total payment when the Islamic bank would
transfer the ownership of the asset to the customer?

04: Vehicle finance based on mark-up sale (Murabaha):

Total cost of a car is Tk.5000000. The customer makes zero down-payment and requires 100% financing.
The bank agrees to finance 100% cost of the car @ 5% extra benefit rate. The bank purchases the car and
sells it to the customer on Murabaha (deferred sale) basis payable in 8 years, i.e., 32 quarters. Calculate the
total repayment and periodic payment.

Example # 05: Vehicle finance based on Ijara Muntahia Bittamleek:

Total cost of a vehicle is Tk.5000000. The customer makes the down payment of Tk.500000 as the lease
deposit and the Islamic bank finances the balance, which is Tk.4500000 @ 5.4%. It is agreed between the
customer and the Islamic bank that the bank would lease the asset to the customer for a period of 10 years,
by including the rent against usufruct and the payment towards the bank’s finance. Determine the half-
yearly payment and total amount of payment upto the point when Islamic bank would transfer the
ownership of the asset to the customer.

06: Islamic goods financing based on Murabaha:

Total cost of the goods is Tk.2000000. The customer makes zero down-payment and requires 100%
financing and the bank agrees to finance 100% cost of the goods which is Tk.2000000 @ 10%. Bank
purchases the goods and sells it to the customer on Murabaha (deferred sale) basis repayable in 3 years.
Find the followings:
i. Monthly Installment
ii. Payment if the customer chooses to close the financing at the end of 2 years
iii. If 50% rebate is granted, then the amount of payment from the customer.
07: Islamic goods financing-based markup-sale:
Total cost of the goods is Tk.3000000. The customer makes zero down-payment and requires 100%
financing and the bank agrees to finance 100% cost of the Goods which is Tk.3000000 @ 10% mark-up.
Bank purchases the Goods and sells it to the customer on Murabaha (deferred sale) basis repayable in 4
years. Determine the quarterly payment.

08: Credit card financing:

A customer wishes to apply for a Credit Card and requires Tk.100000 amount as a credit limit along with
24 months validity approaches the Islamic Bank. The Islamic bank assesses the customer credit credibility
for approval and sells the commodity to the customer at cost price plus profit @10% (“Total Murabaha
Amount”) for deferred payment for two years. After executing the commodity Murabah agreement, the
customer sells the purchased commodity to a third party and collects the sale proceeds which is equal to the
initial Cost price of the commodity. The sale proceeds which is Tk.100000 is credited to the customer’s
Mudarba account with the Islamic bank. The Customer is allowed, however to deposited in the above
account on the condition that the customer can withdraw and use the money only through a credit card
issued by the Bank and shall pay back certain amount, say at least 5% of the utilized amount, every month.
The total Murabaha profit which is Tk.10000 will be paid by the customer over the tenor on a monthly basis
which comes to Tk.417 (Tk.10000/24). While the cost price which is Tk.100000 will be paid at the end.
Along with the normal mudaraba profit in the mudaraba savings account the Islamic bank, at its own
discretion may give the customer some additional profit as a gift on monthly basis available in the
Mudarabah account. If the customer utilized Tk.50000, then what extra amount the customer is obliged to
pay?

09: Islamic savings account:

In a Savings Account total deposits from the client is Tk.200000 lac. The customer deposits the amount
with the Islamic bank on Mudaraba basis as a Rab-al-Maal and the Islamic bank acts as the Mudarib
managing the deposits. The depositor and Islamic Bank agreed to a profit-sharing ratio of 70:30. Profits are
shared as per the pre-agreed ratio; however, losses if any shall be borne by the depositor. As per the current
practice, funds raised from Mudaraba deposits/ savings accounts are invested in the bank’s assets and the
underlying profits generated from these assets are shared between the Bank and the depositors. The assets
are earmarked against the deposits and their performance is tracked and profits calculated accordingly. The
bank provides an indicative profit rate and profit-sharing ratio to the customers at the time of investment,
whilst the final profits paid out are based on the actual return generated from the underlying assets. The
Mudaraba deposits of Tk.200000 lac will be used for financing/investing in Shariah compliant products
which are booked in the bank’s balance sheet that may generate a net return of 10%. Determine the
customer’s net return from the Mudaraba deposits.

10: Mudarabah letter of credit:

Total cost of the goods to be imported is $200,000. The customer makes zero down payment (Hamish
Jiddiyyah)- and requires 100% financing and the bank agrees to finance @ 5% extra benefit rate. The Bank
purchases the goods and sells the same to the customer after taking the possession thereof on Murabaha
basis payable in 3 years. Calculate the monthly repayment amount.

11: Musharakah letter of credit:

Total cost of the goods to be imported is $1 Million. The importer contributes $200,000 to the Musharaka
Capital whereas the Islamic bank contributes 80% of the cost which and imports the goods from the
exporter paying the amount to the beneficiary bank. The Exporter forwards the Shipping documents to
Beneficiary bank, and the Beneficiary bank forwards the same to the Islamic bank. If the shipping
documents are found perfect the Islamic Bank releases the LC amount (in case of sight LC) to the
beneficiary bank. After getting the shipping documents endorsed by the Islamic bank the Customer seeks
the delivery of goods to sell them in the market. It is agreed between the customer and the bank that the Net
Profit realised from the sale of the imported goods shall be shared in the ratio 75:25 and the losses in
proportion to capital contribution. The customer sells the Musharaka goods on the profit margin of 10%.
Find out the profit share of the Islamic bank.

12: Supplier financing (Istisna):

The Total cost of the construction is $10 million. The Islamic bank makes 100% financing and the Istisna
Sale Price is $ 12.50 million which is paid by the customer in monthly installments over next 5 years
period. Determine the periodic payment and profit amount for the bank.

13: Supplier financing (Salam sale):

The Total market cost of the goods or commodities is $1.25 million. The Islamic Bank enters into Salam
Contract to purchase 100,000 Kgs of specified wheat at the unit price of $10 and sale price $12.50. The
total Sale Price of the Salam Goods is $ (100,000*10)=1,000,000. The Islamic bank makes 100% advance
payment towards Salam Sale Price of the goods whereby the customer has to deliver the goods semi-
annually within 5 years (10,000 Kgs in each 6 months). Determine the bank’s earnings in amount and %.

14: Commodity based Murabaha based working capital (Wakala):

Total cost of the goods is $150,000. The customer makes zero down-payment and requires 100% financing.
The bank agrees to finance 100% cost of the goods @ 5% benefit. The bank purchases the goods and sells it
to the customer on Murabaha (deferred sale) basis repayable in 2 years. The customer immediately sells the
commodity to a third party on spot at market price $150,000. The cash payment made by the third party
fulfills the working capital requirement of the customer. Determine monthly payment. If 50% rebate is
offered to the customer for making early settlement after 18 payments, calculate the total payment.

15: Commodity based Mudarabah based working capital

Total Working Capital requirement of the customer is $100,000. The Islamic bank agrees to finance 100%
of the capital requirement. As per Mudaraba, it is agreed that the customer would solely manage the
business and profits generated from the business will be shared as per the agreed ratio of 70:30. The term of
the business project is 1 year. The business (project) generates a profit of 10%. What amount to be paid to
the bank?

16: Ijarah syndication:

Total cost of the asset is $10.2 million where the customer makes the down payment of $200,000 as lease
deposit and the Islamic bank finances the balance through syndicate financing. The Investment of $10
million is pooled from the investors i-1, i-2 and i-3 which includes the investment of i-1 = $2,500,000/, i-
2=$2,500,000 and i-3=$5,000,000/- respectively. It is agreed between the customer and the Islamic bank
that the bank would lease the asset to the customer for a period of 5years against the fixed annual rental of
5% p.a. on the Bank’s Finance Determine proportional amount of profit for all banks.

17: Murabaha syndication:

Syndication is a financing facility granted by a group of financers (banks). In Murabaha syndication a
financial institution or the Islamic bank (lead arranger) pools the investment of the different financiers into
a huge pool. And the pool of money is invested on the basis of Murabaha. Total Investment pooled from the
3 investors is $10 million made up of investment amounts of I1 = $3,000,000/-, I2=$3,000,000 and I-
3=$4,000,000. Total cost of the Goods is $10 million. The customer makes zero down-payment and
requires 100% financing. Bank purchases the Goods and sells it to the customer on Murabaha (deferred
sale) basis repayable in 5 years @6%. Determine the quarterly payment and amount of profit for individual
financier.

18: Liquidity management based on commodity Murabaha:

The bank’s treasury requirement is $1,000,000 for six months. The Islamic Finance Institution (IFI)
purchases a commodity on the spot paying market price $1,000,000. The IFI sells the commodity to the
Islamic bank on Murabaha (deferred sale) basis repayable in 6 months with 3% additional rate. What is the
periodic payment?

19: Mr. A plans to purchase a house costing BDT 70 lac. He is in shortage of money. So, he proposes to an
Islamic financial institution for the required amount of investment for 15 years period. Based on past
experience, the institution makes investment in the house with provisional rate of profit of 7%. What would
be the required amount of repayment for Mr. A under i) half yearly repayment ii) monthly repayment And
iii) what would be the profit for the institution?

20: Commodity Mudaraba Term Deposit:

Mr. XYZ will invest BDT 10 million in ABC Islami Bank for a period of 3 months in Commodity
Mudaraba Term Deposit. Provisional profit for this account is LIBOR plus 25 basis point. If LIBOR is 35
basis point then what will be the proceed (investment plus profit) after three months?

21: Mudaraba Special Investment Account

Mr. X deposits BDT 200,000 in a special investment account conducted by ABC Islami Bank Limited. The
bank collects BDT 100 million from different investors with the assumption that 90% fund can be invested
and it adds BDT 15 million with the assumption that 100% can be invested. The estimated profit target is
BDT 10.5 million. The profit-sharing ratio agreed between the bank and the customer is 40: 60
respectively. Determine the amount of profit may be earned by Mr. X.

22: Bay Bithaman Ajil (BBA)

Mr. A plans to purchase a house costing BDT 70 lac. He is in shortage of money. So, he proposes to an
Islamic financial institution for the required amount of investment for 15 years period. Based on past
experience, the institution makes investment in the house with provisional rate of profit of 7%. What would
be the required amount of repayment for Mr. A under i) half yearly repayment ii) monthly repayment and
iii) what would be the profit for the institution?

23: Ijarah Financing

Mr. Nasir Hussain plans to buy a car but is in shortage of fund. Alternative option available to him is to
take lease from as Islamic financial institution. The value of the car is BDT 3,500,000, lease period is 5
years and provisional rental rate is 9%, where profit rate to be applied on simple basis or add-on basis. Find
out the monthly installment amount.

24: Sale based Ijarah

The marketing executive of ABC Company Limited requires a motor bike costing BDT 320,000. He selects
a supplier and finalizes the bike for buying by making 10% down payment. Now, he proposes to an Islamic
financial institution for funding the rest amount under sale-based lease contract. The institution agrees with
the marketing executive on term and conditions that BDT 65,000 profit to be added and investment amount
to be repaid in monthly installment over the next three years period. Calculate monthly installment amount?
25: Mudaraba Interbank Investment
Islamic Finance and Investment Company invests BDT 5,000,000 to XYZ Islami Bank Limited for 45 days
@ 6.25% provisional profit rate with 55 : 45 profit loss sharing ratio. Calculate the profit for the investor.

26: Commodity Mudaraba Interbank Investment

MNO Bank Limited has BDT 80 million surplus fund where ABC Bank Limited is in deficit of fund. These
two banks channel the fund for 25 days @ 7% profit margin (provisional). Calculate the amount of profit
for MNO Bank Limited.

27: Government Investment Issues

Government has issued BDT 100 million security in the market with 9% coupon rate for 3 months period.
Required yield for investors is 8%. Coupon payments are made monthly. What should be today’s issue
price or investment for investors?

Example # 28: Islamic Treasury Bill

Government has issued BDT 200 million Islamic Treasury Bills for 5 months period @ 6.5% discount.
Calculate the net proceeds for the Government.

29: Islamic Negotiable Certificates of Deposit

An Islamic Bank has issued BDT 20,000 par value certificates of deposits for 6 months with expected
dividend rate of 5.8% that are negotiable in the market. What will be the receipt for the investor?

GUIDELINES FOR CONDUCTING ISLAMIC BANKING Section I Introduction to Islamic Banking Islamic
Banking has experienced a phenomenal growth and expansion in Bangladesh in the backdrop of strong public
demand and support for the system along with its gradually increasing popularity across the world. As a result, a
number of full-fledged Islamic Banks has been established, while a good number of conventional banks have come
forward to offer services compliant with Islamic Shariah through opening of Islamic branches along with
conventional ones. There is also a trend of conversion of conventional banks into Islamic bank. It has, therefore,
become necessary to ensure that activities of the fast growing Islamic Banks are carried out properly and uniformly
according to the principles of Islamic Shariah. With this end in view, Bangladesh Bank constituted a Focus group
comprising representatives of the central Bank, a number of Islamic Banks and the Central Shariah Board for Islamic
Banks of Bangladesh to formulate an integrated guideline for conducting banking business of the Islamic
Bank/Islamic bank branches of conventional banks. Based on the recommendations of the Focus group this guideline
embodying different terminologies used in Islamic Banking operations, definitions of the terminologies, the
principles and modes of deposits and investments has been prepared. It also dwelt upon the issues of liquidity,
maintenance of books of accounts and preparation of financial statements and other related issues. This guideline has
been prepared mainly on the basis of Banking Companies Act 1991, Companies Act 1994 and Prudential Regulations
of Bangladesh Bank. However, this guideline should be treated as supplementary, not a substitute, to the existing
banking laws, rules and regulations. In case of any point not covered under this Guideline as also in case of any
contradiction, the instructions issued under the Banking Companies Act and Companies Act will prevail. 2
Definitions of Terms used in Islamic Banking Operations The following terms as used in this guideline, if not
repugnant to the subject or affairs, shall have the following meaning: a. "Shariah" means such rules and regulations as
have their origin in the holy Qur'an and Sunnah to govern all aspects of human life. b. "Islamic bank" means such a
banking company or an Islamic banking branch(es) of a banking company licensed by Bangladesh Bank, which
follows the Islamic Shariah in all its principles and modes of operations and avoids receiving and paying of interest at
all levels. c. "Islamic Banking Business" means such banking business, the goals, objectives and activities of which is
to conduct banking business/activities according to the principles of Islamic Shariah and no part of the business either
in form and substance has any elements not approved by Islamic Shariah. d. "Branch or Branch Office" means any
branch or Branch Office of Islamic Bank Company or office or Branch of such interest based conventional Banks
which run Islamic banking business. e "Depositor" means someone who holds with any Islamic Banking Company
any account namely Current account based on Al-Wadiah principles, Savings or long and short-term deposit accounts
under Mudaraba principles. f. "Investment" means any such modes of financing which Islamic Bank Company does
in accordance with principles of Shariah or as per the Shariah approved modes like Mudaraba, Musharaka, Bai-
Murabaha, Bai-Muajjal, Istisna, Lease, Hire-purchase under Shirkatul Melk, etc. g. "Client" means such a person or
institution who/which has any business relationship with Islamic Banking Company. h. "Compensation" means such
financial penalty as is imposed by a Islamic Banking Company over and above the amount of installment when a
client fails to repay Bank's investment on due dates as per the agreement executed by him. 3 Section II LICENSE A.
Criteria for setting up full-fledged Islamic Bank. The following will be the broad criteria for consideration of setting
up of the scheduled Islamic Commercial Bank: 1. The proposed bank company will be a public limited company and
a minimum of 50% share shall be offered to the public. 2. All the financial transactions of the banking company shall
be conducted based on the principles of Islamic Shariah. 3. The ways and means of resource mobilization, expansion
and nature of business transactions have to be stated in the application form. 4. The applicant(s) shall indicate
expertise and other facilities available with them for ensuring operation of their Islamic Banking business as per
Islamic Shariah. 5. The banking company, to commence business, shall raise a minimum paid-up capital of Tk.2.00
billion and shall at all times maintain the required capital adequacy ratio, as prescribed by the Bangladesh Bank. 6.
The minimum shareholding stake of each sponsor shall be Tk.2.5 million and the maximum shall be 10% of the
proposed bank's total share capital. This ceiling of 10% applies to an individual, company or family member, either
severally and jointly or both. Family includes spouse, father, mother, and son, daughter brother of the individual or
anyone dependent on that individual. 7. The Sponsors' share shall not be transferred before expiry of 3(three) years
from commencement of the business without permission from Bangladesh Bank. 8. The ceiling of 10% may be
relaxed in case of a bank set up as a joint venture with a foreign financial institution or banking company. 9.
Application shall stand disqualified if any of the sponsors and/or Directors, their spouses or firms:- a. has been
convicted by a court of Law for commission of any criminal offence inside or outside Bangladesh; b. has been
involved in any illegal activities, particularly illegal banking business, receipt of deposits, financial dealings and
other business; c. has failed to settle liability/meet obligation to banks and other financial institutions. They shall
furnish names of the banks/ financial institutions along with the names of the branches with which they have had
dealings. Bank reports are also required to be submitted; d. has failed to pay tax/duties. They shall indicate their Tax
identification numbers (TIN); e. is in the opinion of the sanctioning authority enjoys adverse reputation regarding
integrity and performance. 4 10. The Chief Executive (CE) would be a professional combined with at least 3 years
Islamic banking experience, and having complied with all the terms & conditions of the "Fit & proper Test" issued by
Bangladesh Bank and have no adverse information regarding his integrity and performance. The appointment of the
CE shall require prior approval of the Central Bank. 11. The applicant shall submit the following documents along
with the application: a) Feasibility report with organizational structure for formation of the bank company and
proposed name of the Chief Executive Officer. b) Short term & long-term business plan. c) Plans for Internal control
management, Risks management guidelines and details of the approval authority. d) Working system and procedure
for business activities/ operations. e) List of other Companies/Firms and their bankers in which sponsor director(s)
and their family as defined in The Bank Company Act, 1991 are interested as director(s), Chief Executive, Partner,
proprietor or major shareholders holding 5% or more shares. 12. The bank which may be permitted to be established
shall be subject to the prevalent banking and other laws, rules, regulations and directives issued by the Bangladesh
Bank from time to time. 13. The sponsors shall give an undertaking to the effect that the bank, if permitted, shall
comply with all instructions to be issued by Bangladesh Bank and the Govt. of the People's Republic of Bangladesh
from time to time. 14. All other terms and conditions as set by Bangladesh Bank for establishing a bank company
shall be applicable. B. Terms & conditions for the conventional Banks to obtain License for opening Islamic Banking
Branch(es). Conventional banks intending to open Islamic banking branch(es) shall fulfill the following conditions:
1. Eligibility criteria: The eligibility of a bank to open Islamic banking branch(es) shall be considered by the
Bangladesh Bank keeping in view, among others, the financial strength of the bank as evident from its capital
base(net capital free of actual and potential losses), adequacy of its capital structure, record of earning capabilities,
liquidity position, track record of bank's adherence to prudential regulations, credit discipline, quality of customer
services and the convenience and the needs of the population of the area to be served by the proposed branch. In
addition, (1) banks must have CAMEL rating of 1/2 in the last On-Site inspection of Bangladesh Bank and (2) there
should not be major adverse inspection findings against the bank. 2. Required working papers: The applying bank is
required to submit a proposal for opening Islamic branch(es) to the concerned department of Bangladesh Bank with
the following details:- a) Specify the number of branches to operate in line with Islamic Shariah and the names of the
proposed towns / districts. 5 b) A statement of services and products to be offered (regarding deposits, investments,
financing etc.) by the Islamic banking branch(es). c) Commitment to keep funds and accounts of Islamic banking
branches completely separate from those of the conventional ones. d) Methods of segregating the funds of the Islamic
branches from the funds of commercial branches of the bank. e) A Statement showing infrastructural and logistic
facilities including manpower and training. f) Accounting aspects, such as accounting policies to be followed, the
principles and mechanism of profit / loss sharing / distribution. g) Undertaking for preparing separate financial
statement for the Islamic branches. 3. Formation of an Islamic Banking Division: a) An Islamic Banking Division has
to be set-up in the Head Office of the local Bank(s) and in the Country Office (in Bangladesh) in case of foreign
Bank(s). b) An organizational structure of the division indicating qualifications and Islamic Banking experiences of
the top Executives is to be submitted to the concerned division of Bangladesh Bank. c) The responsibilities & duties
of the Islamic Banking Division of the concerned Banks would be as under: i. Framing of Islamic Banking rules and
regulations and ensuring their implementations. ii. Maintaining co-ordination with the Shariah Supervisory
Committee, if any, and the other divisions/offices of the Bank. iii. Ensuring investment of Funds received for Islamic
Banking business under modes approved by Islamic Shariah. iv. Arrangement is to be made to train up the manpower
deployed in the Islamic banking branch. v. Submission of required statements to the Central Bank is to be ensured. vi.
Ensuring of implementation of the guide-lines/rules and regulations concerning Islamic banking
framed/issued/instructed by the Central Bank. vii. Maintaining of SLR/CRR according to the instructions of the
Central Bank. viii. Complying of any other responsibility(ies), the Central Bank may assign from time to time. 6 d) A
senior Executive would be the chief of Islamic Banking Division who shall remain accountable to the CEO. This
Division is to be provided with sufficient manpower. 4. Control and segregation of Islamic Banking Fund: Separation
of Funds of Islamic banking branches and control and pursuance of appropriate procedures are to be ensured for
safeguarding the interest of the depositors. The following steps are to be taken to address the above issues: a) An
operational Manual for running Islamic banking business is to be prepared and got duly approved by the Board of
Directors of respective banks. In case of foreign bank(s), it is to be approved by their Head Office. b) A full set of
documents pertaining to deposits, investments & financing products of Islamic banking is to be prepared and
followed. c) Required documents, Forms, Books, and Deposit Receipts, cheque Books etc. of Islamic branch (es) are
to be designed in such a way as to make them distinct from those used in conventional banking branches. 5.
Maintenance of Accounts and Financial Statements: a) The Banks have to maintain separate accounting system for
their Islamic banking branches. For this purpose, separate ledger books, software etc. are to be maintained for
keeping records of deposits, investments, profit & loss A/Cs, etc. b) Separate trial Balance for daily transactions of
Islamic banking branch (es) is to be prepared and maintained. c) The bank has to prepare and submit quarterly, half
yearly and yearly Financial Statements to Bangladesh Bank relating to the Islamic bank branch (es). 6. All other
terms and conditions as set by Bangladesh Bank for opening of a bank branch shall be applicable. C. Conversion of a
Conventional Bank to an Islamic Bank: (A) The necessary measures for conversion 1. The bank will set up all
necessary procedures, create the required tools, explore alternatives to non-permissible financial practices, and train
and promote the personnel required for proper implementation of the procedures of conversion. 2. The appropriate
administrative arrangements must be in place, including changing the bank's operating license by Bangladesh Bank,
and amending the bank's memorandum and articles of association through the required procedures so that they
include objectives and operational measures that are appropriate to Islamic banking. The memorandum and articles of
association must be cleansed from anything that contradicts the nature of Islamic banking. 3. Restructuring the
organizational structure of the bank and its employment procedures, conditions and employee statutes to fit the
situation of conversion. 7 4. Written consent/no objection through an acceptable legal process should be obtained
from the existing depositors and clients for transforming their accounts into Islamic mode. 5. The transactions that are
concluded before the decision to convert must be ceased or disposed of immediately. 6. Reformatting or designing
standard contracts or specimens or exemplars of documents, forms, books, register etc. that comply with Shariah
rules and principles. 7. Preparing a special program for preparing personnel and impart them training to deal with the
application of Islamic banking practices. 8. Exerting all possible efforts to adapt the ways of dealing with Central
banks regarding deposits, liquidity needs or otherwise in a way that does not conflict with the rules of Shariah,
especially rules that govern riba transactions. 9. Any dealings with conventional banks must be limited to the
magnitude of the need to do so. 10. Revamping the transactions with conventional banks on the basis of riba-free
transactions and the application of instruments acceptable by Shariah. 11. Before commencement of business of the
converted Islamic bank, the books of accounts and statement of affairs of the conventional bank must be
reconstructed as per Shariah principles. (B) The effect of conversion on the interest-based receivables, impermissible
earnings, obligation and their Shariah alternatives 1. All traces of conventional transactions whereby the bank
originated any monetary assets and is liable to pay interest for them must be liquidated prior to date of conversion.
This is the rule whether such transaction involve individuals, banks or Central bank. 2. The bank must confine itself
to permissible operations for acquiring the necessary funds to operate or to meet its liabilities. 3. If the capital of the
bank has increased due to non-permissible transactions or the accumulation of reserves based on non-permissible
transactions, then its treatment must be in accordance with the treatment of non-permissible receivables or other non-
permissible assets in the possession of the bank. 4. All interest-based investment instruments must cease to be used
and must be replaced by permissible investment instruments prior to date of conversion. 5. All interest-based loans
that the bank has made prior to date of conversion must be terminated or converted to Shariah based transaction. 6.
All liabilities in the form of obligation to provide non-permissible service must be terminated by refunding the
consideration, even if it has to pay compensation for non-fulfillment of such obligations. (C) Starting from the
financial period in which the bank decides to convert, the following must be done 1. If a conventional bank is
acquired with the intention to convert it to an Islamic bank, the new owners are not obliged to dispose of interest and
impermissible 8 earnings that have been earned before such acquisition. 2.If a conventional bank is converted by its
existing shareholders into a bank, then the process of disposing of interest and impermissible earnings should be
considered as commencing at the beginning of the financial period in which the conversion starts to take effect.
However, for any impermissible earnings that have been distributed prior to conversion, it is necessary, on ethical
grounds, for the shareholders and depositors to whom these earnings have been distributed to dispose them of
personally. The bank is not bound to do so. 3. Revenues not yet received that are of doubtful permissibility are not
subject to compulsory disposal, whether they were earned before or during the financial period in which the bank
decides to convert. The same rule applies to revenues of doubtful permissibility that have been already received
because of a belief that they are permissible on the basis of (a) an interpretation of a person who is qualified to
perform ijtihad on issues that are subject to personal Juristic interpretation, (b) Juristic position of an authoritative
school of Shariah or (c) the opinion of some eminent and knowledgeable scholars. 4. If the bank has rights to
prohibited non-monetary assets, it may receive them with the intent to destroy them. If the bank is entitled to receive
consideration for supplying non-permissible assets or services, the bank may receive the consideration with the intent
to donate it to charity. The same rule applies to any income that has been acquired from non-permissible assets
during the period in which the bank decides to convert. All impermissible and doubtful earnings must be spent for
charity. 5. If the bank is converted and it has, among its tangible assets, impermissible commodities, the bank is
obliged to destroy them. If the bank has sold some of these commodities and is yet to receive the price thereof, the
price must be received and be spent for charity. 6. If the liabilities are in the form of payment of interest, the bank
should employ all lawful means to avoid paying such interest. This rule does not apply to the principal amounts of
debts or loans. The bank should not pay interest except on the basis of dire need. 7. If the liabilities are in the form of
obligations to provide non permissible services, then the bank is obliged to make every effort to terminate such
liabilities, by refunding the consideration, even if it has to pay compensation for non-fulfillment of such obligations.
(D) External conversion through acquisition of the bank by parties interested in converting it If the purchaser is
capable of negotiating a deal that could exclude all non-permissible receivables (i.e. interest and non-permissible
assets) from the acquisition deal in a way that will make the seller solely liable for non-permissible liabilities, then
the Shariah requires the purchaser to do so. However, if the acquisition cannot be concluded unless all assets of the
bank including the non-permissible assets and receivables are acquired, then there is no objection to the acquisition
on this basis on condition that the purchaser acts as quickly as possible to dispose of non-permissible liabilities even
if the purchaser has to suggest to the creditors of the bank an earlier repayment for a discount. 9 (E) The Zakah
Obligation When the conversion is initiated by outsiders who acquired the conventional bank for the purpose of
converting it, then they are not obliged to make zakah payment for the past financial periods because the zakah for
previous periods is the liability of the previous owners. The zakah liability will start to exist for the new owners from
the date of the decision to convert. However, if the decision to convert was made by the shareholders and the zakah
was not paid for the previous financial periods, the shareholders are obliged to pay zakah for these periods. They
must take into account that they are obliged to pay zakah even if the revenues and the money earned are
impermissible because the shareholders are obliged in the first place to dispose of all accrued interest and
impermissible earnings, so, the payment of zakah is part of the obligation to dispose of impermissible earnings and
interest. 10 Section III Responsibility for Shariah Compliance: It will be the responsibility of the board of directors of
the respective banks to ensure that the activities of the banks and their products are Shariah compliant. The Board of
the Islamic banks/ Subsidiary company/Conventional commercial banks having Islamic branches, therefore, be
constituted with directors having requisite knowledge and expertise in Islamic Jurisprudence. The Board may form an
independent Shariah Supervisory Committee with experienced and knowledgeable persons in Islamic Jurisprudence.
However, the Board shall be responsible for any lapses/irregularities on the part of the Shariah Supervisory
Committee. A fit and proper criteria for selection of members of the Shariah Supervisory Committee is enclosed in
Appendix-1. 11 Section IV Principles of Deposit Shariah principles for receiving deposits Islamic banks receive
deposits under two principles: i) Al-Wadeeah principle. ii) 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 fund 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 cannot 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: i) Mudaraba Savings Deposits (MSD) ii) Mudaraba Short Notice Deposits (MSND) iii)
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. 12 Section V 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. 13 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: a) The concerned Agreement 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. b) The price has to be settled;
payment time/schedule and modes thereof is to be predetermined. 14 c) When, where and on whose cost the goods to
be supplied has to be clearly mentioned. d) 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. e) 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. f) 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. g) 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: i) 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. ii) Istisna and Parallel Istisna contracts are treated as two
separate contracts. iii) 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 15 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. 16 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 cannot 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. 17 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 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. 18 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. 19
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. 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: 1. Bai-Muajjal sale is executed
completely on deferred payment system 2. 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. 3. 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. 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). 20 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. 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. 21 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: 22 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. 23 4.
Musharaka: Pre-shipment investment may be made under Musharaka mode of investment if there is any pre-
determined investment arrangement. 5. 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. 24 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 realise 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. 25 Section VI Maintenance of CRR/SLR All
Islamic Banking Companies shall maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per
rates prescribed by Bangladesh Bank from time to time. Every commercial Bank having Islamic bank branches shall
maintain SLR/CRR for its Islamic branches at the same rate as prescribed for the Islamic banks and shall, for the
purpose, maintain a separate Current Account for the Islamic branches with Bangladesh Bank. Addressing of
liquidity crisis and utilization of surplus fund of the Islamic Banks: In case of liquidity surplus and crisis the banks
can take recourse to the following: 1. The excess liquidity of the Islamic banks/ Islamic branches of conventional
Scheduled banks may be invested in the ‘Bangladesh Government Islamic Investment Bond’ (Islamic Bond
introduced by the Government). In the same way, Islamic banks/branches facing liquidity crisis can tide over the
crisis by availing of investment from Islamic Bond fund as per the prescribed rules. 2. In case Islamic banks/branches
have surplus/ enough investment in the Islamic Investment Bond and subsequently faces liquidity crisis then the bank
/ branch may overcome the crisis by availing of investment facilities from Islamic Bond Fund against lien of their
over purchased Islamic Bonds. To meet the crisis, REPO system may also be introduced for the Islamic Bonds. 3.
The Islamic banks/branches having no surplus investment in 'Bangladesh Govt. Islamic Investment Bond’ at the time
of their liquidity crisis, if arises, may availed funds from Bangladesh Bank at a provisional rate on profit on its
respective Mudaraba Short Notice Deposit Accounts which will be adjusted after finalization of Accounts and rate of
profit of the concerned Islamic banks/branches. But till funds generated from sell of Islamic Investment Bonds
remain available for investment such financial support may not be available from Bangladesh Bank. 26 4. The
Islamic banks/branches may open/ maintain Mudaraba SND accounts with each other and can meet liquidity crisis by
receiving deposits in the Mudaraba SND account at MSND rate from those having surplus liquidity. 5. To meet the
liquidity crisis, if any, of the Islamic branches of the conventional commercial bank fund may be collected from
sources which follow Islamic Shariah. 27 Section VII Preparation of Financial Statements: All the Islamic
banks/Islamic branches of the conventional commercial banks shall prepare financial statements and provide
information as per enclosed guideline (Appendix-II). 28 Section VIII Framework of Rate of Return: Under Mudaraba
principles, profit accrued from investment and financing are shared between the depositors and the bank based on
pre-agreed profit ratio. Losses, if any, will be borne by the depositor unless the loss is due to the negligence by the
bank in managing the depositors' funds. Given this unique relationship where the depositors would have a direct
financial interest over the bank's income, it is essential to ensure calculation of rate of return in a fair and equitable
manner. To this end, a standard framework for calculation of rate of return is enclosed in Appendix-III.

Sources of Funds and Distribution of Profit in Islamic Banks:

Deposit Mobilization Principles and Method of Profit Distribution against Deposits
Funding in Islamic Banks – Sources of Fund:
 Paid-up Capital – IBs are public limited companies incorporated under the companies act/relevant act of the
country and they are listed on the Stock Exchanges. Their capital has been subscribed by individual and
institutions, local and foreign.
 Deposits - Like conventional banks, the main function of IBs is to mobilize savings and provide financial support
to the entrepreneurs. Yet there are differences in techniques applied in the process of savings mobilization and
financing investment by the two banking systems.
 Islamic Inter-Bank Fund Market (IIFM) - According to rules, if any bank has excess fund, it will invest the
amount in the IIFM for short-period say, one day. Another Islamic bank requiring fund will borrow the money
from the IIFM for one day. The rate of profit in the Islamic bank call money market will be determined on the
basis of the profit the bank gives to its depositors on a three months' fixed deposit.
 Borrowing from Central Bank - To meet the temporary liquidity requirements Islamic banks are entitled to
borrow from central bank, as the lender of last resort. Such borrowing from central bank is treated as PLS deposit
with the Islamic banks. They can also borrow from central bank under Refinance Facilities.
 Islamic Financial Instrument - Mudaraba Subordinated/Perpetual Bond, Sukuk (Islamic Financial Certificates),
etc.
 Reserves - Islamic banks besides maintaining the statutory reserve are also allowed to build up ‘Investment Loss
Off-setting Reserve (ILOR)’ by appropriating ten percent of the bank’s annual investment profit.

Deposit Mobilization Principles

Islamic banks, elsewhere in the World, accept deposits in accordance with Islamic Shari’ah principles. Two Shari’ah
principles viz. (a) Al-Wadi’ah; and (b) Mudaraba are being used in the banking sector in Bangladesh for mobilizing
deposits. Generally, demand deposit is mobilized under Al-Wadi’ah principle. Savings, Term and specialized deposits are
mobilized under Mudaraba principle.
Al-Wadi’ah Principle - Meaning
The word 'Al-Wadi’ah' has been derived from the Arabic word 'Wada'yun' which means to keep/to deposit/to give
up/Amanah. Literally ‘Al-Wadi’ah’ means deposit. Legally, it is a contract between two parties whereby one party leaves
(deposits) his property for safe protection to another party. Therefore, through this contract one party empowers another
party to keep and protect his property.
Al-Wadi’ah Account
Al-Wadi’ah principle implies that the bank accepts deposits with the undertaking to refund the deposits on demand and also
with the authorization from the depositors to use their deposited money for the benefit of and at the risk of the bank.
Under Al-Wadi’ah principle:
1. The “depositor” is called “Muaddi”
2. The “bank” is called “Muadda Elaihee”
3. The deposited money is called “Muadda”
The Muaddi (Depositor) gives permission to the Muadda Elaihee (Bank) for using deposited money.
Major Features
 Al-Wadi’ah is a Shari’ah based contract/“Trust Agreement” between the depositors and bank
 This is a kind of deposits need prior permission of using deposited money
 Bank will provide the utmost safety of the deposited money and will ready to refund it to the depositors as per
their desire
 It makes the customer risk-free from the risk of handling cash.
 The depositor can deposit any amount in this account and the bank receives money from the clients for safe-
custody with the condition to return the money on demand.
 The depositor can withdraw any amount at any time through cheque or any other acceptable means retaining the
minimum balance in the account within the banking hour.
 The depositors are not entitled to any profit from the use of their deposits by the investors because they do not take
the risk of capital loss. It facilitates raising of cost-free deposits for the bank.
 Cheques, bills etc. may be collected in this account.
 Govt. excise and incidental charges for safe keeping of the depositors’ money or for services rendered to them can
be realized from the account as per rule.
 Maintenance of minimum balance and initial deposit are necessary.
Cost Free Deposit Products:

i) Al-Wadiah Current Account

ii) Sundry Deposit Account: Tax on Profit of Deposit, Margin on L/C, L/G, Vat on L/C Commission, Excess
Cash Received, etc
iii) Bill Payable Account: DD payable, TT Payable, PO Payable
Mudaraba Principle: Meaning
The word 'Mudaraba' has been derived from Arabic word 'Darb'/'Darbun' which means “Travel”. Literally, it means
movement to earn Rahmat (Munafa) of Allah (Al-Qur’an 73:20). Thus the word Mudaraba means travel for undertaking
business. Legally, Mudaraba is a form of partnership in profit whereby one party provides capital and the other party
provides skill and labour. The provider of capital is called ‘Sahib al-Mal’ or ‘Rabb-ul-Mal’ (the financier or owner of the
fund) and acts like a sleeping or dormant partner while the provider of skill and labour is called ‘Mudarib’
(entrepreneur/organizer) who provides the entrepreneurship and management for carrying on any venture, trade, industry or
service with the objectives of earning profits. In short, Mudaraba can be defined as a contract between two or more parties
whereby one party, the financer (Sahib al-Mal), entrusts funds to another party, the entrepreneur (Mudarib), to undertake a
business activity or venture.

Major Features of Mudaraba based Deposit Accounts

 Mudaraba is a Shari’ah based contract between the depositors (Shahib-al-Maal or Rabbul-Maal) and Bank
(Mudarib).
 Bank will enjoy full discretionary power to invest the deposited money in the Shari’ah permitted activities.
 The profit earned by using the deposited money to be distributed between the bank and depositors as per pre-
agreed ratio but the loss, if any, to be borne by the depositors
 Under this contract the bank will not in a position to give any guarantee of profit as well as repayment of principal
deposit to the depositors.
Mudaraba Deposit Products:
 Mudaraba Savings Deposit
 Mudaraba School Banking
 Mudaraba Money Spanning
 Mudaraba Special Notice Deposit
 Mudaraba Term Deposit: 1/2/3/6/12/24/36 Months & 100/175/400 days
 Mudaraba Hajj Scheme (1 year to 10 years )
 Mudaraba Monthly Deposit Scheme: 3 Years, 5 Years, 8 Years & 10 Years
 Mudaraba Millionaire Scheme: 12 Years, 15 Years, 20 Years & 25 Years
 Mudaraba Multiple Benefit Scheme: Double Benefit & Triple Benefit
  Mudaraba Monthly Income Scheme
 Mudaraba Cash Waqf Scheme
Profit Calculation and Distribution under Mudaraba Principle -Weightage Method
The following principles should be followed by the Islamic banks of all categories in distributing investment
income to the Mudaraba depositors:
1) Mudaraba depositors of the bank will share income derived from investment activities deploying
the Mudaraba funds. Income under this category will mean and include Profit, Dividend,
Capital Gain, Rent, Exchange Gain and any other income derived from the deployment of fund.
2) Mudaraba depositors will not share any income derived from miscellaneous banking service
where the use of fund is not involved, such as commission, exchange, service charges and other
fees realized by the bank in connection with sale and purchase of demand draft, telegraphic
transfers, mail transfers, issue/amendment/cancellation of LC, issue of TC, Letter of Guarantee,
clearance of imported consignment, QTDR, rent on locker, telephone/telex/fax/P&T/legal
charges, incidental charges recovered etc.
3) Mudaraba depositors will not share any income derived from investing bank’s equity and other
cost-free fund.
4) Profit Sharing Ratio (PSR) between the Mudaraba deposits and the bank (Mudarib) should he
declared before the starting of accounting year/at the time of Mudaraba contract/at the time of
opening account and to be duly disclosed to the Mudaraha depositors.
5) The share of gross investment income to Mudaraba deposits, will be distributed as under:

a) Thirty-five percent (35%) shall be retained by the bank as Management fee for
managing the investments.
b) Minimum Sixty-five percent (65%) will be distributed to Mudaraba depositors
applying the following weights:
S/N Deposit Types Weightage
1. Mudaraba Hajj Scheme: Up to 10 Years 1.10
2 Mudaraba Fixed Deposit:
a) 36 Months Term 1.00
b) 24 Months Term 0.98
c) 12 Months Term 0.96
d) 06 Months Term 0.92
e) 03 Months Term 0.88
3. Mudaraba Savings Deposits 0.75
Mudaraba Short Notice Deposits 0.55

6) Different Weightages, which may be changed by the management from time to time, are to be
assigned to various Mudaraba Depositors considering the following factor:
a) Period of Deposits: The longer period of deposit, the greater the risk they bear with regard to
fluctuation of the rates of profit and erosion of the value of deposit due to inflation. Some depositors
shall have to forgo profit if encashed with in fixed minimum period and also have to forgo some
profit in case of premature encashment through reduced weight age. Some depositors shall have to
forgo some profit in case of default of scheduled payment.
b) Banking Facilities: Some depositors do not enjoy any banking facility such as, operating accounts
by cheques, collection of cheques and other instrument, executing standing instructions through their
accounts and so on and so forth. On the other hand, the Mudaraba Savings Depositors have freedom
to get the above services through their accounts. Mudaraba short notice Depositors enjoy still greater
facilities in regard to making deposits in and withdrawal from their accounts.

c) Market Benchmark: The pattern of rate of return on various types of cost bearing deposits of the
traditional Bank in our Banking Sector have also an important bearing on allocation of
WEIGHTAGE at different rates.
Example:
Suppose, an Islamic bank has the following data:
1. Total Investment of the bank Tk.1,000/-
2. Total Mudaraba Deposits Tk. 800/-
3. Bank’s Equity & Cost Free Funds Tk. 200/-
4. Total Investment Income Tk.150/-
5. Profit Sharing Ratio = 65:35
Now, calculate the profit rates of Mudaraba deposits.

Solution:
Calculation Proportion of Mudaraba Deposits and Bank’s Equity including AWCD
(a) Proportion of Mudaraba Deposits = (Tk.800/Tk.1,000) 0.80
(b) Proportion of Bank Equity & AWCD = (Tk.200/Tk.1,000) 0.20
Total 1.00

Distributable Profit for the year ---

S/L Particulars Amount
1. Gross Investment Income 150.00
2. Less, Doubtful Income etc. (00)
3. Distributable Net Income 150.00
4. Share of Cost Free Funds & Bank’s Equity of Net Investment Income (Tk.150 × 0.20) 30.00
5. Share of Mudaraba Deposits of Net Investment Income (Tk.150 × 0.80) 120.00
6. Less, Management Fee (35% of Sl. No. 5) i.e (Tk.120 × 0.35) 42.00
7. Balance sixty-five percent (65%) of Sl. No. 5 to be distributed to Mudaraba Deposits 78.00
(Tk.120 × 0.65)

Allocation of Distributable Profit to Mudaraba Deposits & Rate of Profit (Percentage)

S/L Types of Deposit Yearly Weightage Weighted Distributable Rate of
Products Products Profit Profit (%)

(1) (2) (3) (4)= (2×3) (5) (6)

1. Mudaraba Hajj 100.00 1.10 110.00 12.44 12.44%
Scheme: Up to 10
Years
2. MTDs:
36 months 150.00 1.00 150.00 16.97 11.31%
24 months 50.00 0.98 49.00 5.54 11.08%
12 months 100.00 0.96 96.00 10.86 10.86%
06 months 150.00 0.92 138.00 15.61 10.40%
03 months 50.00 0.88 44.00 4.98 9.96%
3. MSDs 100.00 0.75 75.00 8.49 8.49%
4. Mudaraba NSD 50.00 0.55 27.50 3.11 6.22%
Total 750.00 - 689.50 78.00 -

Bank’s Share of Profit from Investment

Particulars Amount
1. Share of Investment income to Cost Free Funds & Bank’s Equity (20% of Tk.150) 30.00
2. Management Fee (35% of Tk.120) 42.00
Total 72.00