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IMPORTANCE OF ISLAMIC SYSTEM IN MANAGING A BUSINESS
ISLAMIC BUSINESS MANAGEMENT
Islamic banking/finance is gaining more popularity in these few years, where we can see more
international people are starting to trust this method of banking/finance
US and UK are starting to incorporate Islamic laws/methods in their banking/finance system
Some western universities are also starting to offer courses in Islamic banking/finance/business
management
IMPORTANCE OF ISLAMIC SYSTEM IN MANAGING A BUSINESS
ISLAMIC BUSINESS MANAGEMENT
Islam has set clear procedures to follow
Financial crisis 2008/2009 made a way for Islamic finance to develop
Due to oil bloom, Muslim countries are becoming the most affluent consumers
Level of foreign investment in Muslim countries is increasing
BASIC ISLAMIC RULES IN CONDUCTING BUSINESSES
ISLAMIC BUSINESS MANAGEMENT
HALAL/ permissible/ can be done
WAJIB/ Duty (Must be done)
MANDOOB/ Likeable (Not compulsory, but it is nice, if you can do it)
MAKHRUH/ Not preferable (If you do it, it is not sinful, but it is better, if you
don’t do it)
BASIC ISLAMIC RULES IN CONDUCTING BUSINESSES
ISLAMIC BUSINESS MANAGEMENT
MUSHTABEH/ Doubted
If you are not sure about some business decisions that you want to make, think very carefully about it
and if you have still have doubt, then don’t do it
BASIC ISLAMIC RULES IN CONDUCTING BUSINESSES
ISLAMIC BUSINESS MANAGEMENT
HARAM/ Not allowed in Islam
Something that is forbidden in Islamic rules
ISLAMIC MARKETING MIX
ISLAMIC BUSINESS MANAGEMENT
5Ps Marketing Mix
Islamic marketing principles combine a value-maximization concept with the principle of justice
for wider welfare of the society
Which means that these principles are aiming to increase the living standards of people through
commercial pursuits It is forbidden to exploit customers in any way
This is because, such actions are considered to be alienating the concepts of brotherhood/equality
ISLAMIC MARKETING MIX
ISLAMIC BUSINESS MANAGEMENT
5Ps Marketing Mix (PRODUCT)
Should be lawful
Must be deliverable
Need of identification of extra cost-added
Production process has to be guided by the criteria of the value and impact of product upon the whole
society
ISLAMIC MARKETING MIX
ISLAMIC BUSINESS MANAGEMENT
5Ps Marketing Mix (PRICE)
Not allowed in giving high retail price
Not allowed to charge a price without altering the quality/quantity of product
Unethical lapses in pricing are considered to be sinful
ISLAMIC MARKETING MIX
ISLAMIC BUSINESS MANAGEMENT
5Ps Marketing Mix (PROMOTION)
It is unethical for salesmen to over-praise his products and attribute to them qualities which they
don’t possess Avoid false/misleading advertising
Avoid misleading sales tactics Avoid sales promotions that use deception
Do not use sexual, emotional appeal in advertisingDo not use suggestive language and behaviour, do
not use women in advertising
ISLAMIC MARKETING MIX
ISLAMIC BUSINESS MANAGEMENT
5Ps Marketing Mix (PLACE)
Not manipulating the availability of product for the purpose of exploitation
Not using coercion in marketing
Not exerting undue influence
ISLAMIC MARKETING MIX
ISLAMIC BUSINESS MANAGEMENT
5Ps Marketing Mix (PEOPLE)
Emphasizes the importance of free and independent judgment on the part of the customer
A customer’s right to acquire products/services’ information is his right and is indicative of the status
given to him by Islam
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
Description
The whole practice of Islamic finance is based on models that do not involve interest (RIBA)
As a general rule, they involve the carrying out of investment and/or the purchase of goods, services
and assets
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
MAJOR MODES OF FINANCING USED BY ISLAMIC BANKS
First method is depending on profit and loss sharing and includes Mudarabah and Mushakarah
Second method is involving the sales of goods and services on credit and leads to indebtness
(Mudarabah, Ijarah, Salam and Istisna)
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
MUDARABAH (PASSIVE PARTNERSHIP)
Contact between two parties
The investment comes from first partner- Rabb-ul-mal
Management and work is an exclusive responsibility of Mudarib
Profit is distributed between two parties
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
MUDARABAH (PASSIVE PARTNERSHIP)
Financial loss is incurred by capital owner
Investment manager cannot guarantee any profit generation
AL-MUDARABAH AL MUQAYYADAH (restricted mudarabah)
AL-MUDARABAH AL-MUTLAQAH (unrestricted mudarabah)
ISLAMIC BUSINESS MANAGEMENT
In case of loss, all loss will be borne by rabb-ul-mal and mudarib would not able to get anything
Capital must be in the form of cash
Percentage of profit sharing must be agreed upon akad
Contract can be cancelled anytime
Business transactions must be halal
MUDARABAH
RULES
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
MUSHARAKAH (ACTIVE PARTNERSHIP)
Quite similar to musharakah
Differences are according to: participation in management, capital provision, profit and loss
sharing
ISLAMIC BUSINESS MANAGEMENT
Concept of Wakalah
Percentage of profit sharing should be agreed upon during akad
Capital must be in the form of cash
Deal can be cancelled
Losses should be divided equally
Business transactions must be halal
MUSHARAKAH
RULES
ISLAMIC BUSINESS MANAGEMENT
DIFFERENCE BETWEEN MUDARABAH AND MUSHARAKAH
MUDARABAH MUSHARAKAH
Investment is the sole responsibility of rabb-ul-mal
Investment comes from all partners
Members have no right in the management as it is carried
out only by the mudarib
All partners can manage their business and can work for it
The loss is suffered by rabb-ul-mal
All partners share the loss
All goods purchased by mudarib are solely owned by rabb-ul-mal and mudarib can
earn his share in the profit only in case he sells the
goods profitability
All assets become jointly owned by all of them
according to the proportion of their investment
A kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred and
sells it to another person by adding some profit
Murabahah is not a loan given on interest
PROFIT RATE + ACTUAL COST = PRICE (to customers)
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
MURABAHAH (SALES CONTRACT AT A PROFIT MARK UP)
ISLAMIC BUSINESS MANAGEMENT
Sellers have to mention the actual cost of the products that they want to sell
Subject of sale must exist at the time of sale Subject matter should be in the ownership of seller at
the time of sale Sales must be instant and absolute
Certainty of price is necessary Agreement can be cancelled
MURABAHAH
RULES
Rental of assets and properties The one who gives the permission to rent the
product is MU’AJIR The lesse (tenant, occupant, renter)- MUSTA’JIR
Rent is called UJRAH Products that are being rented- MA’JUR
Ijarah is not a mode of financing in its origin It is a normal business activity like sale
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
IJARAH (LEASE/ RENTING) Pajakan atau sewa pajak
ISLAMIC BUSINESS MANAGEMENT
Subject of lease must have a valuable use It is necessary for a valid contract of lease that the
corpus (physical product) of the leased property remains in the ownership of the seller
Costs of properties’ cleanliness and safety should be incurred by lessee
Period of lease must be determined in clear terms The lessor cannot increase the rent unilaterally
IJARAH
RULES
ISLAMIC BUSINESS MANAGEMENT
VALUABLE (can be used by society)
PRODUCTS CAN BE USED BY MUSTA’JIR (renter)
PRODUCTS THAT ARE LAWFUL (halal)
PRODUCTS CAN BE USED (and not damaged)
IJARAH
CHARACTERISTICS OF PRODUCTS THAT CAN BE LEASED
ISLAMIC BUSINESS MANAGEMENT
IJARAH
Difference between Ijarah and Interest
IJARAH INTEREST (RIBA)
•Suppose you have a $100,000 in cash
•You purchase a home and pay cash for the home
•You rent the home to a tenant for $500 per month
• At the end of the year, you have collected $500 X 12 or
$6000 in rent• That $6,000 in rent is a 6%
return for your $100,000 investment
• Starting with the same $100,000 cash
• You give someone the money• They proceed to purchase the same home with those funds• They pay you the same $500
per month, or 6% a year for use of the money
• This is basically rent on money
Based on the system of ‘Tabarru’
Objective of takaful is to pay a defined loss from a defined fund
Can be used to cover- properties, vehicles, goods, valuables, health, accidents and life
Principal- co-operation in protecting people against unexpected disaster and accidents
ISLAMIC BANKING
ISLAMIC BUSINESS MANAGEMENT
TAKAFUL (Insurance)
ISLAMIC BUSINESS MANAGEMENT
Must be performed with utmost sincerity
Schemes should be clearly defined and explained
Deal between Takaful companies and participants is called as
al-Mudarabah
Takaful companies- Mudarib, Takaful participants- Sahib-ul-mal
Members would be acknowledged about their rights
TAKAFUL
RULES
ISLAMIC BUSINESS MANAGEMENT
Aimed to be protection scheme for certain goods like Fire Takaful, Motor Takaful, Accident Takaful, etc
Done through the collection of money (contributed by Takaful participants)
This collection of money will be used to pay compensation
It can also be used to invest
TAKAFUL
GENERAL TAKAFUL
ISLAMIC BUSINESS MANAGEMENT
Amount of contributed money will be used to help any participants who are dealing with deaths,
accidents
Remaining money can be used for investment
Participants of family takaful have the right to gain the profit from the investment
TAKAFUL
FAMILY/ LIFE TAKAFUL
ISLAMIC BUSINESS MANAGEMENT
Contributions must be invested purely in Shariah-compliant assets
Sukuk market offers access to an asset class which shares some properties with conventional bonds and
others with equity stock
Investors the receive a regular income based on a target rate of return
But, income is not guaranteed
SYARIAH-COMPLIANT ASSETS
ISLAMIC BUSINESS MANAGEMENT
Provides the same facilities as conventional insurance companies but within a structure that
remains Shariah-compliant and specifically tailored to the particulars of Takaful market
Allows Takaful funds to share risk among multiple Takaful pools
Fund receives contributions from each participating Takaful fund and distributes back surplus arising from
investment
When fund goes into deficit then operator is required to make an interest-free loan to the fund to
eliminate this shortfall
RETAKAFUL
ISLAMIC BUSINESS MANAGEMENT
SALAM
Sale whereby seller undertakes to supply some specific goods to buyer at a future date in exchange of
an advanced price fully paid at a spot
Beneficial to seller as he receives the price in advance and it is beneficial to buyer as well (as price
in Salam is lower than price in spot sales)
ISLAMIC BUSINESS MANAGEMENT
RULES OF SALAM
Buyers pays the price in full to the seller at the time of effecting the sale
Can be affected in those commodities only the quality and quantity of which can be specified exactly
Cannot be affected on a particular commodity or on a product of a particular field/farm (delivery becomes
uncertain)
Quality and quantity of commodity are fully specified
ISLAMIC BUSINESS MANAGEMENT
ISTISNA’A
A contract of exchange with deferred delivery (specified to made-to-order items)
Manufacturer must obtain his own raw materials
Delivery date need not to be fixed in advance
Full advance payment is not required
Contract can be cancelled
ISLAMIC BUSINESS MANAGEMENT
RULES OF ISTISNA’A
Nature and quality of item must be specified
Manufacturer must make a commitment to produce the item as described
Payment can be made in one lump sum or in instalments and at any time up to after the time of
delivery
Manufacturer is responsible for the sourcing of inputs to the production process
ISLAMIC BUSINESS MANAGEMENT
MUSWAMA (negotiated –price sale)
Selling of commodity at an agreed upon price irrespective of the original purchase price
Seller is not required to disclose to buyer what the cost price was
Both seller and buyer try to transact at the best price possible
Usually occurs when it is difficult to determine what the cost of a particular good/service was
ISLAMIC BUSINESS MANAGEMENT
RULES OF MUSWAMA
Assets must be in existence and in the seller’s possession at the time of sale
Sales must be immediate
Assets must be of value and usable