Nur ND ZamZam Bank Finacning Products

Financing
in
Interest Free Banking
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‫بسم الله الرحمن الرحيم‬
In the Name of Allah,
The Most Beneficent, The Most Merciful
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Major Financing Products of IFB
• Murabahah
• Ijarah
• Musharakah, Diminishing Musharaka
• Mudarabah
• Istisna
• Salam
• Import L/C (L/C Musharakah &
Murabahah)
• Export L/C(Pre-shipment & Post-
Shipment)
• Working Capital Financing
• Free loan (Qard al Hassen) 3
Murabahah
• It is a popular method used by an Islamic bank to

meet the short/long-term trade-financing needs of its
customers.
• It is often referred to as “cost-plus financing” or
“markup financing”.
• The bank agrees to fund the purchase of a specific
asset or goods from a supplier at the request of the
customer.
• The bank provides commodities on a ‘cost plus
profit’ price formula to customers who pay back their
debt in instalments.
• Upon acquiring the asset, the bank sells it to the
customer at a pre-determined markup.
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Murabaha-Applications
1. Home financing
2. Vehicle financing
3. Working capital financing
4. Project financing
5. Merchandise financing
6. Trade financing - LC based on Murabaha
7. Murabaha based Sukuk
8. Pre-shipment financing
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MURABAHA FINACING PRODUCTS
• Murabahah Revolving Facility limit
• Murabahah Merchandise Facility
• Murabahah Pre-shipment Export Financing Facility
• Murabahah Term Financing
• Motor Vehicle Murabahah Financing
• Construction Machinery Murabahah Financing
• Murabahah for Purchase of Building and Business
Establishments
• Murabahah Agricultural Term Financing
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Ijarah
 The term (Leasing)
Ijarah (Leasing) in Arabic
literally means to give something on rent.
Ijarah is the transfer of ownership of a
service for an agreed upon consideration.
 Ijara is comparable (but not identical)
to conventional leasing contract.
 Ijarah contract is an agreement
wherein a lessor (mu’ajjir) leases physical
asset or property to a lessee (musta’jir)
who receives the benefits associated with
ownership of the asset against payment
of predetermined rentals (ujrah).
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Ijarah (Leasing)
Ijarah is for a known time period called Ijara
period, most of the time the asset’s expected
life time.
The contract of Ijarah financing can be
utilized as a mode of financing to provide the
customers with short to medium-term
financing to lease such items which may
include: real estates, buildings, equipments,
machineries, computers, motor vehicles, and
other acceptable assets.
The owner of the asset (the bank) bears all
the risks associated with ownership.
A lease contract is made a binding contract
so that it may not be cancelled before the end
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Musharakah (Joint
Venture)
 It is a type of partnership financing in which
Profits
and losses are shared among the partners according
to a pre-determined formula.
 Profit sharing need not be based on the proportion

of shares owned, but Loss is limited to the
contributions of the shareholders.
 In other words, investors cannot be held liable for

more than the amount of capital they invest in the
partnership.
 The partners are entitled to participate in the

management and audit operations of the venture.
 In addition, the partners are allowed to charge a fee

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for any managerial efforts or other forms of labor they
Musharakah Cont’d
The bank may act as a passive partner while
the customer manages the venture.
 In practice, most banks closely monitor the

venture to ensure that it is well managed.
 A Musharakah partnership or joint venture is

often regarded as the purest form of Islamic
finance.
 Only selected banks offer it. Because many

banks consider it highly risky.
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Musharaka cont’d
• There are two main forms of Musharaka:

1. Permanent Musharaka
2. Diminishing Musharaka
Requires the participants to work in

partnership.
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Mudarabah (Silent
Partnership)
 Mudarabah can be used as a method of
investment finance where one party provides
capital or deposits or invests with another.
• Mudarabah means an arrangement in which
a bank participates with its money and
another customer(s) with his/her/its
expertise to the venture for sharing profit
from investment/trade in an agreed manner.
• It is a kind of partnership in which a bank
gives money (Rabbul-Maal) to another
(Mudarib) for investing in commercial
enterprises.
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• The profits generated are distributed on a predetermined
ratio while the loss is assumed by the investor in money
terms and management in service provided/effort terms.
Two scenarios can exist :
Bank as Rabbul Maal

• In case of a project financing initiative, an
entrepreneur requires financing for an investment
venture that he is skilled in.
Entrepreneur as Rabbul Maal
• The entrepreneur is the owner of capital or the
Rabbul Maal.
• In most instances, he is a depositor at an
Islamic Financial Institution, agreeing to
participate in the profits that will be made
upon investing the depositor’s/entrepreneur’s
funds. 13
stisna (Advance Payment)
 It is a contract of sale of specified items to
be manufactured or constructed, with an
obligation on the part of the manufacturer or
builder (contractor) to deliver them to the
customer upon completion.
It is a pure forward contract where the
obligations of both parties relate to the
future.
It is a contract of sale that can be used for
project financing, property development &
construction.
The unique feature of Istisna is that nothing
is exchanged on spot or at the time of 14
 It is an agreement wherein a
customer requiring a commodity with
clear specifications to be
manufactured or developed
approaches the bank for financing.
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Parallel Istisna
 The bank will enter into two mutually
independent contracts with the same product
specification.
 Two mutually independent Istisna contracts are
established.
 These contracts are
 1st Between the bank and the manufacturer for

production of the commodity requested by the
client and the
 2nd is sales contract to the client.
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BAI SALAM (Forward Sale)
 Salam literally means to advance or
forward.
 Bai’ Salam is a contract of sale which
involves a spot payment made in advance
for a deferred supply of goods.
 Salam can be understood as ‘future
delivery financing’.
 The goods must be in the possession of the

seller in order for a sale to be legitimate,
there are two exceptions : the Salam
transaction and the Istisna contract.
 The cornerstone of the forward sale or
Salam contract is the offer and acceptance.
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Parallel Salam
The buyer (bank) can enter into another separate
Salam contract with a third party to sell the goods
specified in the Salam contract. The two contracts
cannot be tied up and performance of one should not
be contingent on the other. Through the parallel salam,
a financing tool is recognised.
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Import Financing
 Musharakah and Mudarabah can be used more
easily for financing a single transaction. Apart
from fulfilling the day to-day needs of small
traders, these instruments can be employed for
financing imports and exports.
 If the letter of credit has been opened without

any margin, the form of Mudarabah can be
adopted,
and if the L/C is opened with some margin, the

form of Musharakah or a combination of both will
be relevant.
 After the imported goods are cleared from the port,
their sale proceeds may be shared by the Importer and
the Financier according to a pre-agreed ratio.
There are two types of bank charges on the letter of

credit provided to the importer: Service charges for
opening a letter of credit and Interest charged on
letters of credit, which are not opened on full margin.
 Collecting service charges for this purpose is

allowed but interest cannot be charged in any case.
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Export Financing
A bank plays two very important roles
in exports. It acts as a negotiating bank
and charges a fee for this purpose,
which is allowed in the Shariah.
 It provides an export financing facility
to the exporters and charges service
charge on this service.
These services are of two types:
1. Pre-shipment financing; and
2. Post-shipment financing
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Pre-shipment Financing
Pre-shipment financing needs can be fulfilled by
two methods:
1. Musharakah / Mudarabah
2. Murabahah
The bank and exporter can make an agreement

of Mudarabah provided that the exporter is not
investing; otherwise a Musharakah agreement
can be made.
The agreement in such case will be easy, as cost
and expected profit is known.
The exporter will manufacture or purchase
goods and the profit obtained by exporting
them will be distributed between them 22
Qard Hassan (Benevolent Loan)
 Under this scheme, a borrower in need of specific

amount of funds borrows the same from a lender as qard
al hassan with or without a clear stipulation regarding
the maturity date.
 The loan is repaid on maturity without an increment or
interest.
 When no maturity is stipulated, the loan is repaid
when asked by the lender, again without any increment.
 The lender is allowed to ask for an asset as collateral.
 The lender is allowed to charge the borrower actual
administrative expenses incurred in operation of the
mechanism.
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Thank you.
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Financing

• It is a popular method used by an Islamic bank to

 Profit sharing need not be based on the proportion

 In other words, investors cannot be held liable for

 The partners are entitled to participate in the

 In addition, the partners are allowed to charge a fee

 In practice, most banks closely monitor the

 A Musharakah partnership or joint venture is

 Only selected banks offer it. Because many

• There are two main forms of Musharaka:

Requires the participants to work in

Two scenarios can exist :

Bank as Rabbul Maal

 1st Between the bank and the manufacturer for

 The goods must be in the possession of the

 If the letter of credit has been opened without

and if the L/C is opened with some margin, the

There are two types of bank charges on the letter of

 Collecting service charges for this purpose is

The bank and exporter can make an agreement

 Under this scheme, a borrower in need of specific

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