Islamic Economics & Finance

(Class Assignment 1)

Name: ____________________________________________ Student ID: _______________________ Total Marks:

15

Problem Question 1: Given the investment ratio of two partners in a Musharakah, identify the correct profit and loss
sharing. Briefly explain your answer.

Option b (Profit distribution as agreed, whereas loss as per the capital contribution (pro rata basis)

Problem Question 2: A Pakistani Islamic Bank invested into a grocery store for a one-month period, applying a
Musharakah contract. The investment contribution of the bank and the grocery store partner with the net profit are given
in the following Table.

Pakistani Islamic Bank Investment Contribution (PKR)

Bank Grocery Store Owner (Partner) Total
Investment 735,000 690,000 1,425,000
Percentage 52 48 100
Net Profit 179,000 271,000 450,000

It was agreed that the profit distribution for the management of the project should be 37% for the bank and 63% for the
grocery store owner. The 37% was to be distributed as being 30% of the partner’s percentage in the management with the
bank contributing 7% of the management.

It was also agreed that the 63% should be divided as being 30% of the partner’s percentage of the profit and 33% as being
the bank’s percentage of the profit.

 Calculate the following:

 The total amount received by each party (bank and grocery store) as the management share.
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 The total amount received by each party as the shared profit.
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 The grocery store’s monthly rate of return.
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 The grocery store’s annual rate of return.

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 The bank’s monthly rate of return.

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 The bank’s annual rate of return.
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Problem Question 2: Mahira is the Rab Al Maal and Anfal is the Mudarib for an accounting consultancy firm
in Karachi. The table below shows various investment splits between the Rab al Maal and the Mudarib, as well
as the possible Shariah-compliant profit and loss sharing. Identify the correct one. Briefly explain your answer.

Option a (Profit distribution as agreed, whereas the entire financial loss is borne by the rab al maal)
Problem Question 3: Fatma wants to start a daycare business and she has decided to get Mudarabah financing
of (Omani rial) OMR500,000 from Oman Islamic Bank. The annual sales revenue expected from the business is
OMR120,000 and the expected operational expenses are OMR50,000. Fatma’s salary of OMR18,000 per
annum is also deducted to arrive at the net profit. Each year half of the net profit is used to repay the capital of
the bank. The remaining half is distributed as per the pre-agreed percentage of profit sharing between the bank
and Fatma, that is 70:30.
 Calculate, how much the bank will be paid as capital repayment and as a profit percentage?
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 How much Fatma will get from the business as salary and profit?
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Problem Question 5: Adam approaches the Islamic Bank of Arlington in the USA to finance the purchase of an industrial
washer-dryer for his laundry business at USD10,000. The bank agrees to purchase the machine from the manufacturer and
then sell it to Adam for USD12,000, which is to be paid by Adam in equal instalments over the next 3 years.

a) What type of Islamic financing is being offered by the bank to Adam?

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b) How much is the monthly instalment?

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Problem Question 6: In pre-Islamic times, traders used their own capital to pre-finance the production of generic
goods (fungibles), in particular seasonal goods such as agricultural produce. The purchase of future production
(harvest) from the farmers by making advance payment (usually less than the expected spot price) was a
common practice. Prophet Muhammad (PBUH) accepted this type of contract (called “Salam”), but he specified
certain conditions to make a Salam contract a valid (since it is a general Islamic ruling that state that trade
commodity cannot be sold before its existence). The contract has to be in writing and all essential features have
to be fixed, such as the kind of goods, their quality and quantity, the terms of delivery (on a fixed date or within
a range of dates) and the price to be paid when the contract is concluded. This is to avoid excessive
uncertainties (known as gharar) which could lead to disputes.
Based on the above description, a Salam contract was signed between the ABC Islamic bank and farmers for the
production of Basmati rice being cultivated in the preceding years. The quantity was fixed at 110 maunds per
acre from a specified piece of land located near the city (Sukkur). The produce was to be delivered at the end
start of November. The place of delivery was specified to be one of the warehouses of the company located in
Sukkur, Sindh. Farmers were paid in full at the price of PKR1200 per maund at the time of the contract making
it the total sale price of (rice) al musalam fihi PKR660,000. This made the farmers really happy as they got the
price of 110 maunds of paddy in advance. But at the same time, the farmers had to work hard to get the quantity
and quality of paddy mentioned in the contract which would make the farming efficient.
Further, the bank also entered into a parallel Salam deal with rice exporter at a price of PKR1350 per maund
and appointed Khaleel corp. as its agent. With these calculations, the company paid a price of PKR1200 per
maund at the beginning of the season. This was a win-win situation for the farmers as they got the price at the
beginning of the season and for a higher quantity than they historically produced. Additionally, they had the
incentive to work well on the fields to produce more than the specified amount and increase their revenues.
 From the above case identify any three discrepancies in the Salam based contract.
1. Quantity defined is not as per Shariah rulings i.e. 110 maunds/acre is creating uncertainty (gharar).
2. In the parallel Salam contract total price is not given making the contract invalid (as per Salam contract).
3. The commodity in trade specified in the contract is required to be delivered from a specific piece of land
which is again violating the Shariah rulings of Salam contract.
Course Instructor
Dr. Abid Mahmood