#2 Types of Islamic Finance – ACCA / CPA / SFM -By Saheb Academy #Finance

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CashNews.co of islamic Finance this topic of financial management that we have started. Now in the previous CashNews.co in the first CashNews.co of islamic

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance we have discussed a brief concept about it and we have also seen that this system entirely relies upon the islamic law or in arabic it is also called Sharia fine okay and then

we also discuss about a bit history over there you can see that in the previous CashNews.co not that important but the most important thing is the principles of islamic none;">Finance yeah this is very important see here principles of islamic Finance in islam interest is completely forbidden yeah you can’t use money to

make money paying or charging interest from people is completely forbidden in islam all right so if any transaction involves interest then that’s not allowed in islamic financial institutions right and then investing in businesses involved in prohibited activities yes islamic financial

institutions you know they can’t be involved in any businesses which deals in prohibited activities prohibited activities such as you know gambling, prostitution, pornography and then what do you say alcohol the businesses which deal in alcohol, pork yeah all these are prohibited activities

in islam music industry yeah all these things fine so if any businesses are involved in these activities they can’t get Credit or anything from islamic financial institution they can’t get in contract with islamic banks fine and then speculation is also not allowed okay

you can’t deal in what you say Futures market or option market right and then uncertainty and risk if any contract where you know the terms of the contract are not clear yeah not clearly mentioned and they depend on some future event then that’s also not allowed all

right because there is too much risk it is equal to gambling yeah both of these things are like gambling only so that’s a prohibited activity in islam so you can’t deal in those type of transactions and those type of contracts you know such as complex derivative instruments and short

selling are completely prohibited fine and the main principle one more principle is the risk should be shared yeah the risk of any contract between the lender and the borrower must be shared fine that’s the main principle of islamic

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance fine and then the last is wealth must be generated from legitimate trade and asset-based investment either it should be asset-based or asset-backed all right for every every transaction there must be an

underlying asset yeah you can’t just use money to make money that’s just interest all right you can’t do that so that’s the last principle of islamic none;">Finance fine so i hope you have recalled whatever we did in the first CashNews.co yeah if you want to go deeper then please go in the first CashNews.co and watch it again all right okay then i’ll put the link in the description below now coming back to this CashNews.co in

this CashNews.co what we’re going to do is in this CashNews.co we are going to see different forms of contracts of islamic Finance yeah different types of products or

the services that are offered by islamic banks fine so what are the allowed ways to do you know banking that’s what we are going to see over here now as you can see the principles of islamic text-decoration: none;">Finance there are so many restrictions so tell us what is allowed yeah this is it right these are the five major contracts that are allowed in islam fine so now let’s discuss this one by one madaraba musharraka sukuk yeah let’s discuss this one by

one okay now here we have the first contract of islamic Finance see here Mudaraba Mudaraba is same like partnership okay partnership or joint venture here what will happen is

here there will be two person involved okay maximum two person only yeah it can’t be more than two so one party will bring the Capital yeah one party will bring the money and the other party will bring the skill yeah it’s a partnership transaction where one party

supplies the money hundred percent of Capital and the other provides management expertise yeah other party will bring the skill now this party who brings the Capital will be called as money supplier of

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Financer in english but in arabic it is called as he is called as rab-al-maal okay rab-al-maal and then the party which brings the skill the management expertise the labor provider who will do all the work yeah this

person the working partner will be called as Mudarib okay so now this person who is the money supplier the Financer he will only contribute Capital he will

not participate in management okay he’ll be the sleeping partner working partner sleeping partner is that clear right so now here what will happen this business either this business will make Profit if it makes Profit then it will be distributed in the

pre-decided ratio okay the ratio the Profit sharing ratio will be decided in beforehand itself okay but if in case god forbid there is a loss then entirely the loss will be borne by the text-decoration: none;">Financer okay the who the rab-al-maal the money supplier the person who has brought in the Capital entire loss will be borne by the the Capital provider okay why is it like that see here because it is considered that you know

this person has done his 100 person yeah he has participated and he has worked really hard and still he couldn’t earn Profit he couldn’t make Profit in this business then it is believed that it is argued that you know he has done 100% of his work so he

can’t be penalized yeah he can’t be because he doesn’t have the money that’s why he has only brought his skill yeah yeah he doesn’t have money and or anything so that’s why he can’t bear the loss only the

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance provider will bear the loss it’s argued like that in islam okay is that clear so this is what mudaraba is only two people one will bring the Capital other will bring the skill yeah if there

is a Profit it will it will be divided in the it will be distributed in the pre-decided ratio yeah and if there is a loss the loss will entirely be borne by the Capital provider and there is an exception over here if this person is involved in some fraud or

anything yeah if the loss is because of his negligence or his he is guilty then the loss will be borne by this person okay in case mistake is there by this person clear otherwise normally the entire loss will be borne by the Capital provider this is what Mudaraba contract is simple

partnership all right now let’s see another one now you can pause the CashNews.co and take this note if you like yeah otherwise just continue on now here we have the second form of contract see here Musharaka now Musharaka is also same like mudaraba only but there are big differences so see

here it’s a joint enterprise or partnership structure yeah same like Mudaraba only where at least two parties or more yeah that’s the main thing here the parties can be more also in mudaraba we saw there will be only two parties right one rab-al-maal the

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance provider and one the labor provider Mudarib but here it’s not like that here the parties can be more yeah multiple parties can be there yeah so see here multiple parties

can be there they will bring their Capital as well as skills bring Capital and skills and everyone are working partners yeah or they want they can be sleeping partners but everyone can be what they can be working partner they can participate in the management of

the business all right and these person the partners they are called as musharrek in this contract okay musharik everyone are musharik musharik musharik musharik fine everyone can participate in management now the main difference here is if there is a Profit then the

Profit will be distributed in the pre-decided ratio all right whatever they decide in the beginning itself but then if there is a loss then the loss has to be strictly it has to be distributed in the Capital ratio okay whatever Capital they brought

in that ratio only the loss will be shared among them build among them all right so this is what Musharaka is okay the main difference is the loss difference in the mudaruba in the mudrabah we saw the loss is entirely borne by the bold; color: #1a73e8; text-decoration: none;">Finance provider yeah but here the Finance is provided by everyone so what will happen here is that the loss will

be distributed in the Capital ratio of the mushariks the partners clear and one more difference was that everyone are working partner over here everyone can participate in management but here only the the skill provider the manager he’s the manager right he’s only

participating here in mudaraba in mudaraba I mean yeah. In Musharaka here everyone can participate in the management of the business clear so this is what Musharaka is simple very simple now let’s move on to the third contract you understood right Musharaka nothing it’s simple and then

we have sukuk now what are sukuk? sukuk are the islamic Bonds you know the Bonds that are structured in such a way as to generate returns to investors without infringing islamic law that prohibits interest now normally conventionally what happens yeah normal

Bonds how are they ? when the company issues bond the conventional Bonds then they pay interest on them to the bond holders right if you have purchased the Bonds that means you are receiving interest from them yeah you as an investor if you have

purchased any Bonds then you will be receiving interest from the company which has issued the Bonds isn’t it yes that’s what conventionally normally happens but here in islam interest is completely forbidden interest is not allowed so if interest is not

allowed then how can Bonds work that’s what you have to think about all right so here the Bonds are structured in such a way to generate returns to investors without infringing islamic law that prohibits interest interest can’t be there in these

Bonds in this these Bonds interest are not there but investors are getting returns how does that work let’s understand this see here sukuk aims at Profit sharing by offering the investor ownership in business and Assets now

let’s take an example and understand this see here let’s say i have a company right and let’s say this company issued Bonds yes it is should so cook so car issued fine so now let’s say you subscribe you purchase those to cook now you will be paying money

right so i’m getting dollars i’m getting money so now what i’m going to do as a company first i will appoint and manager sukuk manager right so that sukuk manager will be you know in managing everything related to these Bonds fine so now what the company will do

is company will purchase an asset normally why do you raise Debt Finance mostly to purchase asset right so what you’re going to do is you are going to

purchase an asset the company is going to purchase an asset right so now what the company will do is company will give you ownership in those Assets because which money is this this money is of bond holders you are a bondholder right why you are a bondholder because you have

subscribed to the Bonds the sukuk right so you will get ownership of the asset which has been purchased from your money yeah the Cash Flow which the company will get from you yeah after issuing the Bonds from that they will purchase the asset and

the ownership of that asset will be given to you to the bondholders fine so when you become owner of something yeah when you become owner of something then you are entitled to the benefits and risk coming out of that asset right so whatever Income that will be generated from that

asset you will get a part of that so that’s how you will receive Income from these Bonds okay you will not get interest okay interest is completely forbidden in islam you know that yeah but here in sukuk there is a Profit sharing objective by

offering the investor ownership in asset right when you get the ownership you are entitled to the benefits as well as the risk of that asset so whatever money has been generated because of that asset yeah a part of that will be sent to you yeah it will be given to you it will be distributed to you

right participation in Profit that’s how you will participate in the Profit of that asset yeah because you own it right you as a sukuk holder fine so this is how sukuk works so unlike conventional Bonds sukuk are linked to an underlying

tangible asset yeah an asset will be there you remember the what the last principle of islamic Finance wealth must be generated from legitimate trade and asset based

investment okay this is what it is yeah there is an underlying asset over here you are not just getting you know interest no you are not getting interest over here you are getting Profit you are getting Income over here from the asset based investment okay is that

clear easy right so this is what sukuk is all right simple okay and then the fourth type of contract we have is ajara ijara is similar to a lease contract okay so when we think about leases what comes to our mind we think about the principal amount plus interest yes that’s how leases works

isn’t it the lessee will make payment to the lesser for using the asset and that payment will include what principal amount plus interest but now here in islam interest is completely forbidden so how these contracts are going to work yeah how is it going to work so see here that’s what

we have to understand an ijara transaction is the islamic equivalent of a lease contract where one party lessor allows another party lessee to use their asset against the payment of a rental fee now here since interest is forbidden so a predetermined rental fee will be agreed upon between the

parties the lesser and lessee and that rental fee will be paid which doesn’t include interest it is a predetermined fee okay it’s not like compounding interest and all all right yes so now let’s understand that in very much detail see here let’s say you need a car and you

don’t have money to purchase it outright okay immediately you don’t have money to purchase it so what are you going to do is you are going to approach islamic bank okay and you will get an agreement with them of a ijara yeah you will get an ijara contract now what is this ijara contract

what will happen is see here as i said you need a car so bank will purchase the car and make the payment in whole in one go right so they will make the whole payment to the vendor and bank will instruct the vendor this honda showroom this manager to deliver it to you okay so the car will be

delivered to you okay you will have the position of the car yeah and you will have to make an initial deposit to the bank okay initial some money you have to pay to the bank for the guarantee or something yeah but the ownership of that car will remain with the bank all right the ownership will

remain with the bank so whatever benefits and risk are there of that asset of that car will remain with the bank itself so if there is any major maintenance cost yeah there’s any maintenance then the bank will have to build the maintenance cost and everything yeah but if there’s a minor

maintenance or something then you will have to build it yourself but now how you are going to pay to the bank you are going to pay in form of rentals okay the rentals will be agreed in the beginning itself okay predetermined rentals fine so you will pay the rentals and at the end of the lease

period yeah you will also decide the least period also with the bank at the beginning itself so at the end of the lease period what will happen is at the end of the lease period the bank will give you option do you want to buy the asset yeah buy the car just by making some extra additional payment

yeah a new agreement will be made or do you want to return the car back to the bank yeah that’s the option will be given to the to the lessee yeah to you fine so this is what a ajara contract is all right it’s a simple contract you understood this initial deposit you will make bank will

purchase the car for you and make the payment to the this honda guy yeah this manager then this manager will deliver the car to you he will give the position to you but the ownership will remain with the bank and bank will you know bank will be responsible for any maintenance cost and everything

because the risk and reward are with the bank because they have the ownership right so yes and you will be paying regular in rentals to the bank and at the end you will be given the option either to buy or return the asset back clear this is what a lease contract is simple lease contract yeah if

you want you can pause the CashNews.co and take this down right okay so now let’s move on now here we have the last the final contract of islamic Finance that

you’re going to see in this CashNews.co Murabaha the fifth contract so far we have covered four contracts mudaraba musharaka sukuk and ijara so now what is this Murabaha see Murabaha is nothing but just a Credit sale okay Credit sale contract that’s all

Murabaha is. See the meaning over here a Murabaha transaction is a deferred payment sale or an installment Credit sale and is mostly used for the purchase of goods for immediate delivery on deferred payment basis now you already know what is installment Credit sale

if the goods are of hundred dollars you will pay 20 20 20 in installments but now what is deferred payment basis? deferred payment means what you are postponing the payment at a later date okay you will pay at a later date that’s what deferred payment basis is simple but now let’s

understand how this muraba will work see for example let’s say you need to buy an asset or some goods and you don’t have money to buy it outright immediately you don’t have enough money you have some money so now what are you going to do is you have to get into a contract contract

with the bank islamic bank obviously right so now what the bank will do is bank will purchase the asset or the goods for you and the bank will sell it to you at a Profit margin for example if the bank purchased that asset for 100 right so what the bank will do bank will add 20 more

Profit 100 plus 20 a markup and sell it to you for 120 and in the beginning only they will be it will be decided yeah the markup and everything will be different decided at the beginning itself it is not like the bank will hide any terms of contract from you okay they will disclose

everything so it will not be injustice to you right and then what you have to do is after getting the asset you have to pay in form of installments okay whatever you agreed upon yeah in installments or on deferred payment basis you can also promise them to pay at a later date yeah that can also

happen yes simple yeah this is what Murabaha is yeah you want to ask it you approach to the bank bank will purchase it for you and sell it to you with a Profit margin cost plus Profit you have to pay in form of installments or deferred payment basis clear

that’s what muraba is simple is that easy so now what i’m gonna do is i’m gonna add timestamps in the CashNews.co if you want to revise or go back to any of these contracts then just go to the description and see the timestamps and go back and watch these okay fine okay then see

in the next CashNews.co right that’s it for today