Islamic Financial Instruments

IPIEF 3rd Week

Activities in the IFS Funding Activities

Collect fund from fund surplus parties (saver, investor)

Financing Activities Distributing fund to the fund minus parties

(entrepreneur, lender) Consists of two:

Equity Financing Debt Financing

Exchange goods for money Exchange money for goods Exchange money for money

Service Activities

Islamic financial instruments

Depository (wadiah) Profit-sharing agreement (mudharabah) Equity participation (musyarakah) Trade with mark up or cost-plus sale (murabahah

and BBA) Leasing (ijarah) Sales contracts (salam, istishna) Money lending (sharf) Al Qardhul Hasan

Al Wadiah Depository IFI is deemed as a keeper and trustee of funds or other

asset. A person deposits funds or other assets in the IFI The IFI guarantees refund of the entire amount of the

deposit when the depositor demands it The IFI only keeps the asset and has no permission to

utilize the asset idle capacity of the asset IFI is benefited from cash incurred from safety keeping

services Customers are benefited because their assets are safe Consists of:

Al Wadiah Al Wadiah yad Dhomanah

Al Wadiah yad Dhomanah Modified depository, to avoid idle capacity IFIs can utilize the asset as Islam

encourages productive activities by transfer the assets especially funds to the fund minus parties through financing activities

The depositor, at the IFI's discretion, may be rewarded with Hibah (bonus/gift) as a form of appreciation for the use of funds by the bank

Al Murabahah The sale of goods at a price, which includes

a profit margin agreed to by both parties Commonly used for short-term financing is

based on the traditional notion of purchase finance

The investor undertakes to supply specific goods or commodities

Incorporating a mutually agreed contract for resale to the client and a mutually negotiated margin

Around 75 percent of Islamic financial transactions are cost-plus sales

I

F

I

S

(1) Penerimaan Modal Istishna (2) Penyerahan Modal Istishna

(3) Menyerahkan barang pesanan(4) Menyerahkan barang pesanan

PembeliSubkontrak

I

F

I

s

(1) Memesan barang dan memberi uang muka

(2) Memesan barang sesuai pesanan nasabah dan memberi uang muka

(3) Menerima barang pesanan(4) Menyerahkan barang pesanan

PembeliSupplier

Bay’ Bitsaman Ajil (BBA)

A deferred-payment sale Sale of goods on a deferred payment

basis at a price, which includes a profit margin agreed to by both parties

Similar to Murabahah, except that the debtor makes the payment on installments basis.

Al Ijarah Lease, rent or wage Selling the benefit of use or service for a

fixed price or wage The IFI makes available to the customer the

use of service of assets/equipments such as hous, plant, office automation, motor vehicle for a fixed period and price

10 percent of Islamic financial transactions Consists of two types:

Ijarah (operating lease) Ijarah Muntahiya Bittamlik (financial lease)

The Advantages of Ijarah for the Lessee

Conserve the Lessee‘s capital since it allows up to 100% financing

Gives the Lessee the right to access the equipment on payment of the first installment

Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of flexible terms

Not considered Debt Financing so it does not appear on the Lessee' Balance Sheet as a Liability

Not included in the Debt Ratios used by bankers to determine financing limits so lessee

All payments towards Ijarah contracts are treated as operating expenses, thus it’s fully tax-deductible

Al Ijarah Muntahiya Bittamlik Leases where a portion of the installment

payment goes toward the final purchase Ended by transfer of ownership of the

assets to the lessee. Transfer of ownership methods:

As a gift (hibah), Sale before the contract period due Sale after the contract period Gradually sale (gradually transfer of ownership)

Al Mudharabah

One party acts as shohibul maal (investor, the fund owner) and another party acts as mudharib (entrepreneur/manager, lack of fund)

Identical to an investment fund in which managers handle a pool of funds

The agent-manager has relatively limited liability while having sufficient incentives to perform.

The capital is invested in broadly defined activities, and the terms of profit and risk sharing are customized for each investment

The maturity structure ranges from short to medium term and is more suitable for trade activities

Profit earned from the activities is shared to both parties with the predetermined nisbah (proportion)

Al Musyarakah Analogous to a classical joint venture Both entrepreneur and investor contribute

to the capital of the operation in varying degrees and agree to share the returns (as well as the risks) in proportions agreed to in advance.

Capital may include assets, technical and managerial expertise, working capital, etc)

Traditionally, it has been used for financing fixed assets and working capital of medium- and long-term duration.

Bay’salam An advance payment or in front payment A deferred-delivery sale Similar to a forward contract Delivery of the product is in the future in exchange for

payment on the spot market The quality of the commodity intended to be

purchased is fully specified leaving no ambiguity leading to dispute

The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals cause the exchange of good, silver, currencies and other ribawi commodity must be done simultaneously.

Bay’ al istishna’

Purchase by order or manufacture Made-to-order sale contract in which

payment can be made in advance of delivery.

The manufacturer designs and manufactures the item in accordance with the buyer's wishes.

I

F

I

s

(1) Penerimaan Modal Istishna (2) Penyerahan Modal Istishna

(3) Menyerahkan barang pesanan(4) Menyerahkan barang pesanan

PembeliSubkontrak

The Differences between Salam & Istishna’

Subyek Salam Istishna Aturan dan Keterangan

Aqad Muslam Fiih

Mashnu Specified commodity

Price Paid at the contract time

At the contract, installment method, in future

Mode of payment is the essential difference between salam and istishna’

Contract Profile

Bind from the beginning (thabi’i)

Mengikat secara ikutan (taha’i)

Salam mengikat semua sejak awal, istishna menjadi pengikat untuk melindungi produsen shg tidak ditinggalkan pembeli begitu saja

Sharf

Sale of money for money. This form of transaction is strictly

regulated under shariah in order to prevent the occurrence of riba

Al Qard Hasan/Al Qard

interest-free loan

Service Activities

Wakalah (agent, delegation of duty) Hiwalah (transfer of debt) Joalah (reward based contract) Kafalah (guarantor) Rahn (pawn shop)