You may wish view the Founder's personal letter to the Middle Eastern Banking Industry
here.
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Table of Contents
Concept, Mission and Overview of Shari'ah Policies:
1. Concept: the concept of the Shari'ah Advisor and Audit process
is to insure any charges, fees questionable practices or
procedures within a financial institution that might be
considered abusive to customers or communities, (i.e. excessive
interest rates or fees or foreclosure procedures), shall, upon
determination of a Shari'ah Advisor, go to a fund that benefits
the community through charitable agencies, youth and family
service agencies and educational agencies.
Typically a Shari'ah policy is developed to meet Islamic
principles, focusing on Islamic law. BTUBank's goal in adopting the
Shari'ah policies of charity and community, is to expand the reach of these
principles beyond Islamic nations, to 'Western', 'Asian', 'African' and
'Latin American' nations, regardless of the presence of a majority of Islamic
foundations within a given region.
To encourage this trend, regardless of whether a predominant Islamic
culture exists within a community, BTUBank's policy is to appoint a Shari'ah
Advisor to each 'branch' so chartered within a region, to insure that
the policies and procedures therein conform to the principles described
within this document and furthermore, that distribution of any funds
drawn from the account managed by the Shari'ah Advisor for these charitable
and educational purposes, shall go to charities that have a track record
of delivering measurable results within the communities served and finally,
that these funds shall be available to serve populations equitably,
without regards to race, creed, age, color, religion or sex, based on a
'grant review and approval' process, managed by the Shari'ah Advisor, Board
Members of each Branch, customers and community and civic leaders with
a history of working with these charitable agencies.
In this way, regardless of the presence of Islamic law in places, such
as a Latin American or Asian or Western country, the concepts and principles
of the Shari'ah Policies and Advisor, and charitable nature of community
development shall prevail, preventing abusive practices and in good faith,
encouraging each BTUBank to work towards fostering community development.
To avoid this type of crisis in the future, BTUBank, a bank focused on energy
infrastructure development, sought a relationship with a developer who focused
on both community development and profits and had a team with a track record of serving
both the energy and utility sectors, and the educational and charity sectors.
The result was an alliance between BTUBank and Gold Pact Power, which as worked
with agencies such as Kids Computer Kamp (Free PCs for Kids), public schools,
youth and family agencies, senior agencies, senior programs, juvenile probation
departments, rehabilitation programs and other youth and family services.
As BTUBank began exploring a relationship with financial institutions both in
the Middle East and in Asia, Europe, North America, Latin America and Africa,
while we developed our Shari'Ah policies based on adoption of Saudi, Pakistan, Afghanistan
and Bahrain definitions, it became grossly apparent that Islamic law is often not the prevalent law of the land
and therefore, many central banks might not accept or be familiar with
policies based on Islamic law, but would be likely to accept
policies based on Shari'ah principles, audits and distribution of
funds under the terms of this document.
Therefore, BTUBank, through its Charters, does not promote any given
race, creed, color or religious sect, but does seek to actively embrace
and promote the Banking procedures under the Shari'ah principles and binding
policies, as described and defined herein.
Furthermore, rather than simply suggesting compliance to the
Shari'ah Principles, BTUBank actively, if not enthusiastically,
invites outside Auditors with traditional, well-rounded
knowledge Islamic law, to review policies and procedures, audits
by Shari'ah Advisors and the distribution of funds to related charities and
agencies described herein.
Every BTUBank Institution (BI) designated as a "Shari'ah Compliant Institution" in its Charter,
shall be required to appoint a Shari'ah Advisor, the appointment of whom shall be made keeping
in view the following instructions:
i) Appointment of Shari'ah Advisor, together with its terms and
conditions shall be approved by the Board of Directors in case
of domestic BIs and in case of foreign banks having BTUBank
Branches (BBs), Shari'ah advisor shall be appointed by
the management.
ii) Terms of Reference of the Shari'ah Advisor should be approved
by the Board/management.
iii) Shari'ah Advisor should meet the "Fit and Proper Criteria
for Shari'ah Advisors", such as having a history of both working
the banking and financial sectors and directly with charities,
family agencies and educational institutions.
iv) Appointment of Shari'ah Advisor shall thereafter, be
confirmed by written approval from Central Banking Regulators of
each nation where a specific BTUBank branch or office is
chartered to operate and for which information about Shari'ah
Advisor should be submitted, along with approval of their
appointment by a qualified Islamic Banking Advisor from the Home
Office of the BTUBank chain, as to the Fit and Proper
Criteria for Shari'ah Advisors.
v) Shari'ah Advisor should not be a director or shareholder of
the BI concerned or receive any salary from the BI concerned,
except as a per-diem reimbursement of expenses for travel, food
and lodging in performance of their duties required herein.
The Shari'ah Advisor may be a member of the Board of Directors of
related charities, youth and family agencies or educational
institutions in their nation or region and shall be selected by
the Board without discrimination based on race, creed, age,
color, religion or sex. Elderly individuals with a history of
both banking and industrial experience, along with charitable
and educational experience and experience in travel and global
affairs shall generally be encouraged to apply.
vi) The fatawa and rulings of the Shari'ah Advisor in all
financial matters shall be binding on the BI. In the event of a
dispute between the BI and the SA, within 30 days, the matter
shall be brought before an Independent 11 member Counsel formed
and brought to meeting at the expense of the BI, said Counsel to
be chosen from charitable, youth and family and educational
institutions, without regards to race, creed, age, color,
religion or sex, who reside within that community or region and
who shall be unrelated to the BI. Thereafter, upon any decision
by a 51 percent majority of the Independent Counsel in favor of
the SA's findings, the BI shall honor and the SA shall then
enforce the Counsel decision. The Sa may also advise/issue
guidelines on any matter referred to him by BoD/management.
vii) If the appointment of Shari'ah Advisor has not been approved
by the Board of Directors of the bank before the issuance of
these instructions, the same should be ratified within three
months from the date a branch has been chartered within a nation
or region.
B. Duties and Responsibilities of Shari'ah Advisor:
1. Shari'ah Advisor (SA) shall ensure that all products and
services and related policies and agreements of BIs are in
compliance with Shari'ah rules and principles, primarily to
prevent usury or abuse of customers, to insure any violations of
principles focus such benefits received back to charities, youth
and family agencies and educational institutions, to generally
resolve issues of conflict or questionable acts in favor
charities, youth and family agencies and educational
institutions and community development, especially occupational
programs, to assist each BTUBank branch with developing policies
and lists of charities that encourage community development,
education and distribution of benefits along charitable and
educational principles, without discrimination to race, creed,
age, color, religion or sex of the children or families that may
benefit from such charities and educational funding.
After a trial period of no more than 90 days, any new products
and services that may charge fees to customers or may affect
community or charitable development within a community, the
financial and community impact of the related policies and
agreements shall be reviewed and duly vetted by the SA. The SA,
in coordination with management, shall also conduct/arrange
Shari'ah training programs for the BI’s staff. SA shall prepare a
report on BTUBank's annual financial statement in respect of
its Shari'ah compliance the stated goals herein.
2. Upon written request, Shari'ah Advisor shall have access to
all records, documents and information from all sources
including professional advisors and BI employees. The management
shall be responsible to provide all information relating to the
BI’s compliance with Shari'ah.
SA shall review operations of the BI and may be asked to review
Conditions, Operations, Quality Assurance and Utilization Review
(QAUR) reports of associated charities, on a periodical basis in
coordination with officials responsible for compliance to ensure
that all the products and services being offered by the BI and
related charities conform to decisions, injunctions and
principles of Shari'ah. When a conflict or question arises, it
shall be deemed "Resolved" when the benefits associated with a
given line item detail have been provided to a charitable
agency, youth and family service or educational institution as
described herein.
1 BTUBank Institution means BTUBank commercial banks,
BTUBank subsidiaries and BTUBank banking branches of
conventional banks licensed and chartered in various nations and
regions, compliant by the Shari'ah Advisor, the same shall be
credited to Charity Account or Accounts, opened for this
purpose.
C. Report of Shari'ah Advisor:
Based on periodical reviews, the SA shall prepare a report,
which shall be published in the BI's annual report. The SA shall
report that:
i) EXAMINATION: an audit listing documents, policies and
procedures examined, along with related QAUR reports and related
classes of transaction, the relevant documentation and
procedures adopted by BI.
ii) GOOD FAITH PRACTICES: an audit reviewing the BI's procedures
that work within good faith principles to comply with Shari'ah
concepts in contracts, transactions, accounts and dealings and
also with specific fatawa and rulings issued by the Shari'ah
Advisor from time to time;
iii) FUNDING, PROFITS, FEES AND CHARGES: an audit reviewing the
allocation of funds, weightages, profit sharing ratios, profits
and charging of losses (if any) to verify accounts conform to
the basis vetted by Shari'ah Advisor in accordance with Shari'ah
rules and principles;
iv) VIOLATION RESOLUTION: an audit of distribution of funds
within the principles described herein, to charities, youth and
family agencies and educational institutions, any earnings that
have been realized from sources or by means considered
inappropriate by Shari'ah rules and principles, listing the
charity account(s) credited.
iv) QAUR REPORTS AND OVERSIGHT OF AGENCIES: a preliminary audit
(QAUR Reports) of charitable and youth and family and
educational agencies drawing benefits from the distribution of
funds within the principles described herein, along with
cross-section surveys of the benefactors (i.e. children, single
parents, seniors) who receive care or services from such drawing
agencies.
D. Conflict Resolution in Shari'ah Rulings:
1. In case any difference of opinion arises between Shari'ah
Advisor of the BI and the BTUBank's Inspection staff or other
departments regarding Shari'ah practices, BTUBank may refer the
case to the 11 Member Counsel described above and the decision
of Counsel Majority shall be final.
2. In case management of any BI has a difference of opinion on
any ruling of their Shari'ah Advisor on the basis of Shari'ah
principles, the management shall produce the ruling and
arguments of Shari'ah Advisor with their views based on
Shari'ah principles. The decision of the Counsel shall be final.
3. Shari'ah Advisor of any BI, with the concurrence of
management, may also refer issues relating to Shari'ah compliance
to the Counsel for consideration. In that
case, the matter will be sent to the Counsel with his arguments based
on Shari'ah. The Counsel shall provide guidance in such
matters within 30 days.
E. Permissible Modes of Financing and Investment:
1. BTUBank may offer following Shari'ah-compliant modes of
financing and products based on these policies:
A) Participatory Modes:
i) Mudaraba
ii) Musharaka
iii) Diminishing Musharaka
iv) Equity Participation in the form of shares in a corporate entity.
B) Trading Modes:
i) Ijara or Ijara wa Iqtina
ii) Murabaha
iii) Musawama
iv) Istijrar
ix) Salam/ Parallel Salam
x) Istinsa/Parallel Istisna
xi) Tawarruq may also be used in exceptional cases requiring specific prior approval of SA.
C) Debt Based Modes:
i) Qard
D) Others:
i) Wakala
ii) Assignment of Debt
iii) Jua’la
2. The above list of modes, however, does not preclude the
possibility of developing new products by the BIs with prior
approval of their Shari'ah Advisor. Further, in addition to above
mentioned modes, BIs may also engage in other businesses
provided they are Shari'ah compliant or have a standard
company-wide policy of donating at least 20 percent of their net
profits back to charitable, youth and family or educational
institutions.
3. It shall be ensured that any of the above
mentioned permissible modes, which may not require security,
will be subject to the usual limits for unsecured financing as
mentioned in the various Regional Regulations.
4. Any security obtained by BIs for participatory modes of
financing shall not be applied or utilized to cover losses
except those in case of bankruptcy, negligence, fraud or
misconduct by the customers.
5. It would be prohibited for BIs to engage in or finance
trading of Haram goods and services. BIs shall be encouraged to
provide finance to those charitable and educational agencies
providing rehabilitation and services to those women affected by
such trades and practices.
F. Essentials of Modes of Financing:
All BIs are required to follow essentials of modes of financing
provided in Appendix hereof in the course of their operations as
minimum requirements for Shari'ah compliance in respect of
products developed on the basis of such modes. Furthermore,
these essentials should be considered minimum requirements for
Shari'ah compliance and BIs may include additional conditions and
controls in their procedures for the sake of more effective
Shari'ah Compliance and prudence.
G. Use of Charity Fund:
1. Every BI will create a Charity fund in which income of the
BIs from non-Shari'ah compliant sources or penalties and late
payment charges received from clients in default or overdue
cases etc. will be credited. The existing Prudential Regulations
for Corporate/Commercial Banking will not be applicable to the
Charity Fund created under these instructions related to Shari'ah
Compliance. The amount in this fund will be utilized for
charitable, youth and family and educational purposes in
accordance with the policy vetted by Shari'ah Advisor and
approved by the Board of Directors, in case of locally
incorporated BIs or management in case of foreign banks having
a relationship with BTUBank. A copy of this policy shall be submitted to the Regional
Regulatory Agencies with the application for Charter a BI Branch
in a given region. Any modification in this policy shall also be
communicated to Regulatory Agencies within thirty days of the
change.
2. The BIs shall maintain proper accounts and records regarding
all transactions relating to Charity Fund(s) and disclose in
their quarterly audited financial statements a Statement of
Sources and Uses of Charity Fund.
H. Introduction of New Products and Services:
The BIs shall prepare a full set of documents including
agreements, process flows, checklists and manuals pertaining to
the deposit, investment and financing products being offered by
them, duly vetted by the Shari'ah Advisor. After a trial period
of no more than 90 days, and subsequent review of results and
the fiscal impact on the customers and community affected by the
Shari'ah Advisors, if the policy or procedure continues to be
offered, a report of\ the effects and a certificate from the
Shari'ah Advisor will be submitted to any associated Regulatory
Agencies, with structure and salient features of the product
before offering it to customers on a permanent basis.
In the event the SA determines the policy or procedure of such a
test pilot program is not Shari'ah Compliant, any profits or
revenue from the test shall, within 30 days, be transferred
to the charity account and subsequently distributed in accordance
with the intent of this document.
I. Schedule of Service Charges:
The BIs shall be required to provide original copy of the
printed schedule of charges to the Regulatory Agencies on a minimum
of a quarterly basis or sooner, as may be required by regional law.
BIs shall ensure meticulous compliance of the following instructions while submitting schedule of charges to Regulatory Agencies:
i) BTUBank Branches of Conventional banks shall have a separate set of Schedule of Charges for their business.
ii) The set of Schedule of Charges submitted by the BIs shall be signed by the bank's Shari'ah Advisor as an endorsement of Shari'ah compliance.
iii) If BIs want to fix different rate of charges for various categories of clients (e.g. according to volume of business etc.), then such categories should be clearly defined by the BI.
I. Shari'ah Compliance:
In order to strengthen the Shari'ah compliance mechanism within
BIs and to ensure that all relevant banking regulations are
followed in good faith, BIs are required to introduce Shari'ah
compliance oversight mechanism, specifically at least one Branch
Officer trained by the SA and BTUBank, in the requirements under
these policies, as a part of their control structure. Close
coordination of the Compliance Officer with Shari'ah Advisor of
the BI shall encourage and streamline the process with necessary
audits, review of impacts and policy adjustments by the Shari'ah
Advisor. The Shari'ah Compliance framework may include the
following:
A) A system of compliance having special emphasis on Shari'ah
aspects with relevant provisions of existing laws, rules,
regulations, policies and procedures related to BTUBank need to
be embedded in the BI's processes in such a manner that
monitoring and reviewing of issues related to Shari'ah compliance
forms part of internal control structure.
B) Monitoring and reviewing for Shari'ah Compliance should cover
all activities, products and locations of the BI.
C) The basic purpose of this responsibility is to ascertain
whether the transactions, processes and products undertaken by
the BI are Shari'ah compliant and all related conditions are
being met, as approved by Shari'ah Advisor.
D) All necessary documents should be provided to Shari'ah compliance officials in performance of their functions.
E) Irregularities, if any, related to Shari'ah Compliance shall be rectified with the approval of Shari'ah Advisor.
II. Internal Shari'ah Audit:
BTUBank shall introduce a system of internal Shari'ah audit, so
as to ensure that the goals and objectives of Shari'ah compliance
meet the following guidelines:
A) Internal Shari'ah Audit of BI may form part of the regular
internal audit or as a separate unit depending upon size of
operations of the BI.
The primary objective of the Internal Shari'ah Audit is to ensure
that the management of the BI is discharging its
responsibilities in compliance with Shari'ah rules and principles
as prescribed by the BTUBank policy, the regional Regulatory
Agency, the Shari'ah Audit staff of the Home Office and the
Shari'ah Advisor of the BI. The purpose of the Internal Shari'ah
Audit is to ensure that the system of internal control for
Shari'ah Compliance is conceptually sound and effective in
implementation, so as to ensure that the goals and objectives
for Shari'ah compliance are achieved.
B) The Internal Shari'ah Audit shall be carried out in conformity
with Shari'ah rules and principles, guidelines and instructions
issued by BTUBank and Regional Regulatory Agency and Shari'ah
advisor of the BI. The internal Shari'ah auditor shall have
direct and regular communications with all levels of management
and Shari'ah Advisor. No scope limitation and restriction of
access to documents, reports etc. shall be placed on the
Internal Shari'ah auditor.
C) The report of Internal Shari'ah Audit shall contain
observations and assessment of systems and controls in place for
Shari'ah compliance. The Internal Shari'ah Audit report shall also
include recommendations for potential improvements and
corrective actions to be taken. Any disputes/difference of
opinion between management and Internal Shari'ah auditors on
matters relating to Shari'ah interpretation shall be referred to
the Shari'ah Advisor of the BI for decision.
D) The report of the Internal Shari'ah Audit shall be placed
before the Audit Committee of the BI for consideration and
appropriate remedial action as may be deemed necessary.
III. Investment in Shares:
1. BI branches, in the course of their business, may invest
their surplus funds in shares of such companies whose primary
business is not prohibited under Shari'ah. For investment in
shares of such companies, a screening process for the selection
of shares shall be followed. In this process, companies with
acceptable primary business activities related to energy, food
production, housing and infrastructure development, community,
charity, youth and family and educational development or
supporting companies who provide materials or services for these
activities, should be identified, which should be further
evaluated according to several ratio filters as advised by the
Shari'ah Advisor of the BI in order to eliminate companies with
unacceptable levels of non-Shari'ah compliant activities, debts
or revenue.
2. If the BI invests in the shares which meet above mentioned
criteria for investment, and in the event a portion of
non-Shari'ah compliant income exists in the investee company
accounts, then income of BI shall need to be purified and BI's
share of non-Shari'ah compliant income shall be deposited to the
charity account for distribution.
3. BIs shall follow the regulatory limits prescribed by regional
regulatory agencies in terms of their aggregate exposure in
shares both in ready/cash and futures market, as amended from
time to time.
IV. Policy for Profit Distribution with BTUBank depositors:
1. BIs shall have a policy statement in place, vetted by the
Shari'ah Advisor, regarding the policies and procedures to
safeguard the interest of the Profit and Loss Sharing based
deposit holders (BTUBank depositors). The following areas may be
covered under this policy:
A) Identification and determination of pools of Assets and
related income and the basis of such determination together with
method for allocation of profits/losses between the depositors
and the BI (as a Mudarib or as an investment manager), whether
or not BI participates in the investment with its own funds.
B) Policy for charging provisions against non-performing assets
in compliance with Regulators and Profit Equalization Reserves
out of income generated from BTUBank funds and to whom these
provisions and reserves revert to, in case of write-back,
write-offs, write-downs or recovery.
C) Policy on the priority for investment of own funds and those
of depositors.
D) Basis for allocating expenses to equity holders and various
classes of depositors for determination and appropriation of
profit.
E) Profit Sharing Ratio and Weightages for distribution of profit among various categories of deposits and periodicity for changing the same.
2. BIs shall submit these policy statements to SA and Regional
Regulatory Agencies and the Home Office within 30 days of
issuance of these guidelines. Any modification in such policies
shall be communicated to SA within one month of the change.
3. The applicable Profit Sharing Ratios and Weightages for each
type of deposits should be displayed in the branches and on the
BTUBank web site(s) accessible by affected BTUBank shareholders,
along with filings for information of the general public.
V) Financial Reporting and General Disclosure:
1. BI shall follow financial reporting standards for Shari'ah
Compliant modes of financing based on Islamic Principles (see
appendix) issued by the Securities and Exchange Commission of
the Regional Regulatory Agencies.
2. In the annual report, BIs are encouraged to disclose detailed
working of profit distributed to depositors, break up of their
financing by Shari'ah Compliant modes of finance and remuneration
of Shari'ah advisor. In addition, BTUBank should also disclose
balance sheet and income statement of their banking operations
in the annual report. Nothing contained in these instructions
and guidelines shall or be deemed to permit an BI to engage in
any business, transaction or trading which is contrary to
Shari'ah principles.
Appendix 1. Murabaha (Agreed profit margin sale with cash or
deferred payment of price)
i) Murabaha means a sale of goods by a person to another under
an arrangement whereby the seller is obliged to disclose to the
buyer the cost of goods sold either on cash basis or deferred
payment basis and a margin of profit included in the sale price
of goods agreed to be sold.
ii) Goods to be traded should be real, but not necessarily
tangible goods. Credit documents cannot be the subject of
Murabaha.
iii) Being a sale transaction, it is essential that the
commodities which are the subject of sale in a Murabaha
transaction, must be existing, owned by the seller and in his
physical or constructive possession. Therefore, it is necessary
that the seller must have assumed the risks of ownership before
selling the commodities to the buyer/customer.
iv) Murabaha, like any other sale, requires an offer and
acceptance which will include certainty of price, place of
delivery, and date on which the price, if deferred, will be
paid.
v) In a Murabaha transaction, the appointment of an agent, if
any, the purchase of goods by or for and on behalf of the bank
and the ultimate sale of such goods to the customer shall all be
transactions independent of each other and shall be so
separately documented. An agreement to sell, however, may embody
all the aforesaid events and transactions and can be entered
into at the time of inception of relationship. The agent would
first purchase the commodity on behalf of his principal i.e.
financier and take its possession as such. Thereafter, the
client would purchase the commodity from the financier, through
an offer and acceptance. According to Sharia it is sufficient in
respect of the condition of "possession" that the supplier from
whom the bank has purchased the item, gives possession to the
bank or its agent in such a manner that subject matter of the
sale comes under the risk of the bank. In other words, the
commodity will remain in the risk of the financer during the
period of purchase of the commodity by the agent and its
ultimate sale to the client (agent/buyer) and its possession by
him.
vi) The invoice issued by the supplier will be in the name of
the financier as the commodity would be purchased by an agent on
behalf of such financier. It is preferable that the payment for
such commodities should be made by the financier directly to the
supplier.
vii) Once the sale transaction has been concluded, the selling
price determined cannot be changed, except by mutual agreement of both buyer and seller.
viii) It can be stipulated while entering into the agreement
that in case of late payment or default by the client, he shall
be liable to pay penalty calculated at percent per day or per
annum that will go to the charity fund constituted by the bank.
The amount of penalty cannot be taken to be a source of further
return to the bank (the seller of the goods) but shall be used
for charitable purposes including the projects intended to
ameliorate economic conditions of the sections of the society
possessing little or nothing i.e. needy people/peoples without
means.
ix) The banks can also approach the Counsel (above) or competent
courts for award of solatium, which shall be determined by the
Counsel or Courts at their discretion, on the basis of direct
and indirect costs incurred, other than opportunity cost. Also,
security or collateral can be sold by the bank (seller) without
intervention of the court.
x) The buyer may be required to furnish security in the form of
pledge, hypothecation, lien, mortgage or any other form of
encumbrance on asset. However, the lender or the
charge-holder shall not derive any financial benefit from such
pledge or security, except on determination by a Court of fraud
on the part of the buyer.
xi) A Murabaha contract cannot be rolled over because the goods
once sold by the bank become property of the client and, hence,
cannot be resold to the same (or another) financial institution
for the purpose of obtaining further credit. The bank can,
however, extend the repayment date provided that such extension
is not conditional upon an increase in the selling price of
goods, originally agreed.
xii) Buy-back arrangement is prohibited. Therefore, commodities
already owned by the client cannot become the subject of a
Murabaha transaction between him and any financier. All Murabaha
transactions must be based on the purchase of goods from third
party(ies) by the bank for sale to the client.
xiii) The promissory note or bill of exchange or any evidence of
indebtedness cannot be assigned or transferred on a price
different from its face value.
2. Musawamah Musawamah is a general kind of sale in which price
of the commodity to be traded is stipulated between seller and
the buyer without any reference to the price paid or cost
incurred by the former. Thus it is different from Murabaha in
respect of pricing formula. Unlike Murabaha, seller in Musawamah
is not obliged to reveal his cost. All other conditions relevant
to Murabaha are valid for Musawamah as well. Musawamah can be an
ideal mode where the seller is not in a position to ascertain
precisely the costs of commodities that he is offering to
sell.
3. Ijarah (Leasing):
i) In Ijara/leasing, the corpus of leased commodity remains in
the ownership of the lessor and only its usufruct is transferred
to the lessee. Any thing which cannot be used without consuming
the same cannot be leased out like money, edibles, fuel, etc.
Only such assets which are owned by the lessor can be leased out
except that a sub-lease is effected by the lessee with the
express permission of the lessor.
ii) Until such time that assets to be leased are delivered to
the lessee, lease rentals do not become due and payable.
iii) Unless agreed by the lessee at the time the lease is made,
during the entire term of the lease, the lessor must retain
title to the assets. Furthermore, the lessor must bear all risks
and rewards pertaining to ownership, except for that equipment
owned by the lessee and brought to the leased property. However,
if any damage or loss is caused to the leased assets due to the
fault or negligence of the lessee, the consequences thereof
shall be borne by the lessee in accordance with the term and
conditions of the lease or in total, if no such terms exist. The
consequences arising from non-customary use of the asset without
mutual agreement will also be borne by the lessee. The lessee is
also responsible for all risks and consequences in relation to
third party liability, arising from or incidental to operation
or use of the leased assets.
iv) The insurance of the leased asset should include the name of
lessor and the cost of such insurance borne by him, unless
lessee agrees to accept this cost. The Islamic Takaful may
replace the existing insurance system in the future.
v) A lease can be terminated before expiration of the term of
the lease, but only by mutual consent of both parties.
vi) Either party can make a unilateral promise to buy/sell the
assets upon expiry of the term of lease, or earlier at a price
and at such terms and conditions as are agreed, provided that
the lease agreement shall not be conditional upon such sale.
Alternatively, the lessor may make a promise to gift the asset
to the lessee upon termination of the lease, provided the lessee
has fulfilled all his obligations. However, there shall not be
any stipulation in the lease agreement purporting to transfer of
ownership of the leased assets at a future date.
vii) The amount of rental must be agreed in advance in an
unambiguous manner either for the full term of the lease or for
a specific period in absolute terms or based on a percentage of
revenue (royalty) the lessee may acquire as a result of
operations, such royalty paid to the lessor upon receipt by the
lessee.
viii) Assignment of only the lease rentals is not permissible
except at par value.
ix) Contract of lease will be considered terminated if the
leased asset ceases to give the service for which it was rented.
However, if the leased asset is damaged during the period of the
contract, but is capable of being repaired, the contract will
remain valid.
x) A penalty can be agreed within the lease agreement, for delay in payment of rental by the lessee. In that case, lessee shall be liable to pay penalty calculated at the agreed rate in percent per day/annum. However, that penalty shall be used for the purposes of charity. The banks can also approach competent courts for award of damages, at discretion of the courts, which shall be determined on the basis of direct and indirect costs incurred, other than opportunity cost. Also, security or collateral can be sold by the bank (purchaser) without intervention of the court.
4. Salam (Advance payment--Deferred Delivery Sale):
i) Salam (advance payment against deferred delivery of goods)
means a kind of sale whereby the seller undertakes to supply
specific goods to a buyer at a future date in consideration of a
price fully paid in advance at the time the contract of sale is
made.
ii) The buyer shall pay the price in full to the seller at the
time of effecting the sale. Otherwise, it will be tantamount to
a sale of debt against debt, which is expressly prohibited in
Shari'ah.
iii) The specifications, quality and quantity of the commodity
must be determined to avoid any ambiguity which could become a
cause of dispute.
iv) Date and place of delivery must be agreed upon, but can be
changed with mutual consent of the parties.
v) Salam can be effected in respect of "Dhawatul-Amthal" which
represent such commodities the units of which are homogenous in
characteristics and which are traded by counting, measuring or
weighing according to usage and customs of trade. Therefore,
other things such as precious stones, cattle heads etc. cannot
be sold through the contract of Salam without mutual consent,
because every stone or individual animal is normally different
from the others.
vi) It is necessary that the commodity which is the subject of
Salam contract is normally expected to be available at the time
of delivery.
vii) Salam cannot be effected in respect of things which must be
delivered on spot. Examples are exchange of gold with silver or
wheat with barley where it is necessary according to Shari'ah
that the delivery of both be simultaneous.
viii) Salam cannot be tied to the produce of a particular farm,
field or tree.
ix) In a Salam transaction, the buyer cannot contractually bind
the seller to buy-back the commodity that will be delivered by
the seller to the buyer. However, after the delivery is
effected, the buyer and the seller can enter into a transaction
of sale, independently, with their free will.
x) In Salam transactions the buyer shall not, before taking
possession (actual or constructive) of the goods sell or
transfer ownership in the goods to any person.
xi) The bank (buyer in Salam) can enter into a Parallel Salam
contract without any condition or linkage with the original
Salam contract. In one of them, the bank will be the buyer and
in the second the seller. Each one of the two contracts shall be
independent of the other. They cannot be tied up in a manner
that the rights and obligations of original contract are
dependant on the rights and obligations of the parallel
contract. Further, Parallel Salam is allowed with a third party
only.
xii) In order to ensure that the seller shall deliver the
commodity on the agreed date, the bank can ask him to furnish a
security.
xiii) In case of multiple commodities, the quantity and period
of delivery for each of them should be separately fixed.
xiv) A penalty can be agreed upon in the Salam contract for
delay in delivery of the concerned commodity by the client i.e.
seller of the commodity. In that case, the client shall be
liable to pay penalty calculated at the agreed rate in percent
per day/annum. However, that penalty shall be used for the
purposes of charity. The banks can also approach competent
courts for award of damages, at discretion of the courts, which
shall be determined on the basis of direct and indirect costs
incurred, other than opportunity cost. Also, security or
collateral can be sold by the bank (purchaser) without
intervention of the court.
5. Musharaka:
i) Musharaka means relationship established under a contract by
the mutual consent of the parities for sharing of profits and
losses arising from a joint enterprise or venture.
ii) Investments come from all partners/shareholders hereinafter
referred to as partners.
iii) Profits shall be distributed in the proportion mutually
agreed in the contract.
iv) If one or more partners choose to become non-working or
silent partners, the ratio of their profit cannot exceed the
ratio which their capital investment bears to the total capital
investment in Musharaka.
v) If Mudarib in a Shirkah arrangement also contributes his own
capital to the business, he will be entitled to share the profit
in proportion to his own capital in addition to his share as
Mudarib according to the agreed proportion.
vi) It is not allowed to fix a lump sum amount for any of the
partners, or any rate of profit tied up with his capital. A
management fee however, can be paid to the partner managing the
Musharaka provided the agreement for the payment of such fee is
independent of the Musharaka agreement.
vii) Losses are shared by all partners in proportion to their
capital.
viii) All assets of Musharaka are jointly owned in proportion to
the capital or value of financial instruments or services
contributed of each partner.
ix) All partners must contribute their capital and instruments
in terms of money or species at an agreed valuation.
6. Mudaraba:
i) Mudaraba means an arrangement in which a person participates
with his money and another with his efforts and shall include
banks, unit trusts, mutual funds or any other institutions or
persons by whatever name called.
ii) A Mudarib who runs the business can be a natural person, a
group of persons, or a legal entity and a corporate body.
iii) Rabbulmal shall provide his investment in money or species,
other than receivables, at a mutually agreed valuation which
shall be placed under the absolute disposal of the Mudarib.
iv) The conduct of business of Mudaraba shall be carried out
exclusively by the Mudarib within the framework of mandate given
in the Mudaraba agreement.
v) The profit shall be divided in strict proportion agreed at
the time of contract and no party shall be entitled to a
predetermined amount of return or remuneration.
vi) Financial losses of the Mudaraba shall be borne solely by
the Rabbulmal, unless it is proved that the Mudarib has been
guilty of fraud, negligence or willful misconduct or has acted
in contravention of the mandate.
vii) The liability of Rabbulmal is limited to his investment
unless otherwise specified in the Mudaraba contract.
viii) Mudaraba may be of various types which may be multi
purpose or specific purpose, perpetual or for a fixed period,
restricted or unrestricted and close or open-ended in accordance
with the conditions respective to each of them.
ix) The Mudarib can invest his funds in the business of the
Mudaraba with the permission of Rabbulmal. The condition is that
in such situation, the Rabbulmal shall not be entitled to a
proportion of profit in excess of the ratio that his investment
bears to the total investment of the enterprise. The loss, if
any, shall be shared in proportion to the capital of the
parties.
7. Istisna:
i) Istisna‘a is an exceptional mode of sale, at an agreed price,
whereby the buyer places an order to manufacture, assemble or
construct, or cause so to do anything to be delivered at a
future date.
ii) The commodity must be known and specified to the extent of
removing any ambiguity regarding its specifications including
kind, type, quality and quantity.
iii) Price of the goods to be manufactured must be fixed in
absolute and unambiguous terms. The agreed price may be paid in
lump sum or in installments in the matter mutually agreed by the
parties.
iv) Providing of material required for manufacture of commodity
is not the responsibility of the buyer.
v) Unless otherwise mutually agreed, any party may cancel the
contract unilaterally if the seller has not incurred any direct
or indirect cost in relation thereto.
vi) If goods manufactured conform to the specifications agreed
between the parties, the orderer (purchaser) cannot decline to
accept them except if there is an obvious defect in such goods.
However, the agreement can stipulate that if the delivery is not
made within the mutually agreed time period, then the buyer can
refuse to accept the goods.
vii) The bank (buyer in Istisna) can enter into a Parallel
Istisna contract without any condition or linkage with the
original Istisna contract. In one of them, the bank will be the
buyer and in the second the seller. Each of the two contracts
shall be independent of the other. They cannot be tied up in a
manner that the rights and obligations of one contract are
dependant on the rights and obligations of the parallel
contract. Further, Parallel Istisna is allowed with a third
party only.
viii) In Istisna transactions the buyer shall not, before taking
possession (actual or constructive) of the goods sell or
transfer ownership in the goods to any other person.
ix) If the seller fails to deliver the goods within the
stipulated period, the price of the commodity can be reduced by
a specified amount per day as per the agreement.
x) The agreement can provide for payment for penalty calculated
at the agreed rate in percent per day/annum that shall be used
for the purposes of charity. The banks can also approach
competent courts for award of solatium, at discretion of the
courts, which shall be determined on the basis of direct and
indirect costs incurred, other than opportunity cost. Also,
security or collateral can be sold by the bank (purchaser)
without intervention of the court.
xi) In case of default by the client, the banks can also
approach competent courts for award of damages, at discretion of
the courts, which shall be determined on the basis of direct and
indirect costs incurred, other than opportunity cost.
8. Diminishing Musharaka (Newly Approved Essential by the SBP
Shari'ah Board) Diminishing Musharaka (DM) is a form of
co-ownership in which two or more persons share the ownership of
a tangible asset in an agreed proportion and one of the
co-owners undertakes to buy in periodic installments the
proportionate share of the other co-owner until the title to
such tangible asset is completely transferred to the purchasing
co-owner.
i) Diminishing Musharaka can be created only in tangible assets.
Diminishing Musharaka shall be limited to the specified Asset(s)
and not to the whole enterprise or business.
ii) A DM arrangement would consist of following three steps, i.e.
a. Creation of joint ownership between the co-owners.
b. Renting out by one co-owner the undivided share in the asset owned to the other co-owner; and
c. Selling in periodic installments by one co-owner his share to the other co-owner(s).
iii) All other terms and conditions as are essential to
co-ownership, Ijarah and sale shall be fulfilled in respect of
different stages in the process of DM arrangement.
iv) Proportionate share of each co-owner must be known and
defined in terms of investment.
v) Expenses incidental to ownership shall be borne jointly by
the co-owners in the proportion of their co-ownership.
vi) Loss, if any, shall be borne by the co-owners in the
proportion of their respective investments.
vii) Risk and Reward shall be shared by the co-owners in
proportion to their investment. Any other ratio, even if
mutually agreed, shall be void.
viii) The amount of periodic payment would go on decreasing with
purchase of ownership units by the purchasing co-owner.
ix) Each periodic payment shall constitute a separate transaction of Sale.
x) Agreements and Sequence:
(i) Separate agreements/contracts shall be entered into at different times in such manner and in such sequence so that each agreement/contract is independent of the other in order to ensure that each agreement is a separate transaction.
(ii) The sequencing of the agreements in a DM shall be as follows:
a. There shall be an Agreement of co-ownership between the parties.
b. There shall be an agreement of Lease between the co owners to lease out one's share in such property to another for an agreed rental in consideration of the use of the former's share by the latter.
c. An undertaking by one of the co-owners to the effect to purchase the units of other co owner at a mutually agreed price until the entire ownership of the asset is transferred to the purchasing co-owner. Additionally, an undertaking shall be given by the other owner to the effect that he will sell the units owned by him to the first co-owner in the event the latter desires to purchase the units earlier than the agreed schedule on such price as may be mutually agreed.
d. The sale of units by one co-owner to the other co-owner as aforesaid shall be documented in such a manner as the parties may mutually agree.
xi) (i) In case a co owner fails to honor his undertaking, as aforesaid with regard to the periodic payment and purchase or sale of units as the case may be, the asset shall be sold in the open market and the co-owner aggrieved by such failure shall be entitled to recover:
a. Actual loss defined as the difference between the market price and price mentioned in the undertaking, if any, not being the opportunity cost.
b. Any gain on sale of property, shall be shared by the co-owners in proportion of their respective investment at the time of such sale. (ii) In addition to the above, the co-owner shall be entitled to recover outstanding rental in respect of the period for which the other co-owner has actually used or possessed the asset which shall be payable to such co-owner.
DEFINITIONS:
9. Istijrar: Istijrar is a contract between a client and a supplier, whereby the supplier agrees to supply a particular product from time to time (each time there is no offer or acceptance or bargain), on the basis of an agreed mode of payment. The sale price or its basis should be determined in advance. All other conditions relevant to Murabaha are valid for Istijrar as well.
10. Qard: Qard is a contract of loan between two parties in which borrower is required to pay back only the amount borrowed. Any excess over the principle amount cannot be demanded and Qard is repayable on demand.
11. Wakala: Wakala is a contract of agency in which one person appoints someone else to perform a certain task on his behalf on agreed terms and conditions, usually against a certain fee. Only such acts can be delegated which the principle is permitted to perform himself and the act permits delegation.
12. Assignment of Debt: It is the transfer of the liability for a debt from the debtor to the liable person named in the contract. In other words, in this transaction the transfer of debt takes place from the transferor (Muheel) to the payer (Muha Alaihi). The transfer of debt differs from transfer of right as in transfer of debt a debtor is replaced by another debtor whereas in a transfer of right a creditor is replaced by another creditor.
13. Jua’la: Jua’la is a contract in which one party (the Ja’il) undertakes to give a specific reward (the Jua’l) to anyone who may be able to realize a specific or uncertain required result (the Aa’mil). This mode may be used for recovery of financing, brokerage services, etc.
14. Tawarruq (Reverse Murabaha): Tawarruq is an arrangement in which one party sells commodities to the other party on deferred payment at cost plus profit. The other party then sells the commodities to a third party on spot basis and gets instant cash.
The principle source of Shari'ah is the Qur'an itself; the very
core of the Shari'ah are the arkan ad-din, or the "five pillars
of relgion," which prescribe all the rituals incumbent on a
believer. There are, however, a plethora of social and ethical
matters not covered in the Quranic revelations. For these, the
Shari'ah bases its principles on the Sunnah of Muhammad. The
Sunnah are the collected histories of the actions and words that
Muhammad spoke outside of revelation; for the Shari'ah, the
sayings of the prophet Muhammad (hadith) are the most vitally
important aspect of the Sunnah. Still, the Qur'an and the Sunnah
leave several social and ethical matters untouched; for these,
the Shari'ah turns to the consensus (ijma') of the most
religious and scholarly members of the community and to argument
through analogy (qiyas), that is, by using established truths of
the sacred law to come up with rules or judgements for matters
not covered in the sacred law. These are the four principles of
Shari'ah :the Qur'an , the Sunnah, consensus, and argument
through analogy.
Like other sacred laws, the Shari'ah consists of commandments
and prohibitions covering almost every aspect of life, from
marriage to criminality to the economic life of the community.
In the sacred law of Islam, all human actions are divided into
five types: obligatory actions, recommended actions, indifferent
actions, repulsive actions, and forbidden actions. Punishments
are incurred for neglecting obligatory actions or for performing
forbidden actions; the three middle categories allow for a great
deal of interpretive latitude in prosecution and punishment.
Unlike other legal traditions, however, the Shari'ah is not only
concerned with the here and now, its primary focus is on
salvation, on the life after this life. The Shari'ah are not
simply rules for living; they are rules for gaining salvation by
performing proper actions in this life.
The sacred law was codified in the eighth and ninth
centuries—many decades after the death of Muhammad—in order to
produce legal texts for legislation and jurisprudence in the
growing Islamic bureaucracies. The Shari'ah is actually divided
into four separate traditions named after the schools of
jurisprudence (madhabs) that arose in the codification of the
Shari'ah. These four different schools vary in details but not
really in larger matters or organization. These four madhabs
have since the tenth century divided Islamic society according
to which version of the Shari'ah a region chooses to follow. The
four madhabs and the regions currently dominated by each one
are:
Maliki: named after its founder, Malik ibn Anas (died 795); this
sacred law currently dominates in North Africa.
Shafi'i: named after its founder, ash-Shafi'i (died 820); this
is the sacred law prevalent in Egypt.
Hanafi: founded by Abu Hanifah (died 767); the Shari'ah of
Turkey and Pakistan (and the Ottoman and Mughal empires).
Hanbali: named after its founder, Ahmad ibn Hanbal (died 855);
the Shari'ah of some areas in eastern Asia.
While every Islamic society follows one of these four versions
of the Shari'ah, it is recognized that human affairs are
manifold and constantly changing. In order to address the
relationship between sacred law and the changing world of human
life, a special group of people came to be regarded as experts
in the Qur'an and in sacred law: the 'ulama, or "religious
scholars." To be sure, the 'ulama formed in the decades
following the death of Muhammad; in the Abassid dynasty of the
eight and ninth centuries, however, these religious scholars
became government functionaries whose specific task was to
interpret the Shari'ah. Until the twentieth century, the 'ulama
was a vital part of all Islamic government. Since all Islamic
society is to be founded on the the sacred law, the 'ulama had
special functions in legislation, adjudication, and interpreting
the law.
Shahadah: the confession of faith. The confession of faith is
the fundamental expression of Islamic faith and the core of all
Islamic law; it is very simple: "There is no God but God and
Muhammad is the messenger of God" (la illaha illa 'lah
Muhammadun rasul 'llah). The shahadah is the first thing spoken
to a newborn and the last thing whispered into the ears of the
dead.
Salat: prayer. Islam enjoins upon the believer five prayers
every day. These ritual prayers must be performed in the
direction of Mecca and involve first standing, inclining,
prostrating oneself, and sitting. The prayers are read from the
Qur'an and must be chanted from memory in Arabiyya, or the
classical Arabic of the Qur'an. It is not allowed to either
have a book in one's hand or to chant the Quranic prayers in
another language. Personal prayers, called du'a in Arabic, can
be made in one's own language after the ritual prayer.
Sawm Ramadan: the fast of the month of Ramadan. During the month
of Ramadan, all believers must refrain from food, drink, and
sexual relationships from dawn until dusk. The month of Ramadan
occurs at different times of the year (the Muslim calendar is a
lunar rather than a solar calendar), so the severity of the fast
varies. The fast is intended to purify the believer as a
renunciation of the world.
Zakat: alms-giving. The Qur'an does not vilify the accumulation
of wealth as the Christian gospels do; in fact, Islam manifestly
understands the material world as created for the enjoyment of
humanity. However, one's duties to God involve distributing
one's wealth to the less fortunate. This is instituted in
Islamic law, the Shari'ah, which constrains everyone to give the
equivalent of 2 1/2 percent of their wealth to the poor in the
form of taxes (if one's wealth is in money). Islamic society, it
is not unfair to assert, was the first welfare state in
existence! Just as the fast of Ramadan purifies the believer
through renouncing the world, the zakat purifies the believer by
encouraging a charitable disposition and a lack of attachment to
worldly belongings.
Hajj: the pilgrimage to Mecca. Every believer must once in their
life make a pilgrimage to the Ka'bah, the sacred shrine of Islam
in Mecca. By recreating many of the events of the life of
Abraham and Ishmael who are, in Islamic tradition, the founders
of the Ka'bah, one injects oneself into the core of Islamic
history and re-evaluates one's life and one's society in the
perspective of that history.
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