MEEEZAAAAN

7/31/2019 MEEEZAAAAN

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Bahria University of Management and Computer Sciences

Submitted to : Sir Khalid Hussain

Submitted by: Mariam Munir

M. Waleed Qasim

Ammar Ansari

M.Faran Khan

Obaid Ullah

BBA8 B

Final Project: Meezan Banks Islamic

Financing Modes & PracticesCourse: Islamic Financing Theory & Practice

Date of Submission: 10th August 2012


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TABLE OF CONTENTS

1 Introduction To Meezan Bank .............................................................................................................. 4

1.1 Deposit Accounts .......................................................................................................................... 4

1.2 Term certificates ........................................................................................................................... 4

1.3 Consumer finance ......................................................................................................................... 5

1.4 Services ......................................................................................................................................... 5

2 Meezan Bank Practices of Musharaka & Diminishing Musharaka: ..................................................... 6

2.1 UMI Model of Meezan Bank ........................................................................................................ 6

2.2 The Step-up Model ....................................................................................................................... 6

2.3 Legal Documents of Diminishing Musharaka .............................................................................. 6

2.4 Questions....................................................................................................................................... 6

2.5 Analysis....................................................................................................................................... 10

3 Meezan Bank practices in Murabaha .................................................................................................. 11

3.1 Questions..................................................................................................................................... 11

b. Rebates in Early Payment...................................................................................................... 13

c. Rises in Prices: ......................................................................................................................... 13

Rise in prises for the commodity in the market, in this case, bank or customer cannot increase

the payment except for which it is being set before. It is very rare in Meezan bank that the

condition imposed on the increase in prices cause increase in the payment given by thecustomer. In this way, new contract is made for the changes. ...................................................... 13

d. Delays in the Supply from Supplier ..................................................................................... 13

f. Purchase Evidence .................................................................................................................. 13

Customer comes to Meezan bank must purchase evidence and declaration in which customer

confirms as being an agent has purchased the goods after agency agreement. This evidence is

in the form of sale invoice and receipts. Sometimes customer also submit purchase summary............................................................................................................................................................. 13

3.2 Analysis....................................................................................................................................... 13

4 Meezan Bank Practices in Mudarabah Contract ................................................................................. 14

4.1 Questions..................................................................................................................................... 14

4.2 Analysis....................................................................................................................................... 15

5 Meezan Bank Practices in Ijarah Agreement ...................................................................................... 16


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5.1 Meezan Car-Ijarah ...................................................................................................................... 17

5.2 Questions..................................................................................................................................... 17

5.3 Comparison of Conventional lease and Ijarah ............................................................................ 19

5.4 Analysis....................................................................................................................................... 20

6 Conclusion .......................................................................................................................................... 21

7 Annexure ............................................................................................................................................. 22


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1 INTRODUCTION TO MEEZAN BANK

Meezan Bank Limited, a publicly listed company, is the first and largest Islamic Bank in

Pakistan and one of the fastest growing banks in the history of the banking sector of the Country.

Having the largest branch network and product range, Meezan Bank bears the critical responsibilityof leading the way forward in establishing a stable and dynamic Islamic banking system replete

with dynamic and cutting-edge products and services. Meezan Bank aims to fulfil its prime

objective of providing customers accessibility and convenience, within an atmosphere and culture

of dedicated service and recognition of their needs.

Meezan Bank has developed an extraordinary research and development capability by combining

investment bankers, commercial bankers, Shariah scholars and legal experts to develop innovative,

viable, and competitive value propositions that not only meet the requirements of todays complex

financial world, but do so with world-class service excellence which our customers demand; all

within the bounds of Shariah.

Meezan Bank provides a range of products and services for your Personal Banking . Meezan bank

have range of Deposit Accounts and Term Certificates to choose from, and provide Electronic

Banking services to access your funds anytime / anywhere globally. We provide a range of banking

services to ensure you receive the quality service you deserve.

1.1 Deposit Accounts

Meezan Bank offers the largest range of Riba-free Deposit Accounts for Personal Banking

Local Currency Accounts Foreign Currency Accounts

1.2 Term certificates

Meezan Bank provides a complete range of short term and long term deposit certificates with the

flexibility of monthly, quarterly, semi-annual and annual returns

Certificate of Islamic Investment- Offering a range of investment tenures from 3months to 5years

Meezan Amdan Certificate - A long-term investment with a monthly high expected return Monthly Mudarabah Certificate - A short-term investment certificate designed to provide

regular monthly returns

Dollar Mudarabah Certificate- An investment certificate to invest US Dollars and earn semi-annual or profit at maturity
http://www.meezanbank.com/coii.aspxhttp://www.meezanbank.com/coii.aspxhttp://www.meezanbank.com/amdanCertificate.aspxhttp://www.meezanbank.com/monthlyMudarbahCertificate.aspxhttp://www.meezanbank.com/DMC.aspxhttp://www.meezanbank.com/DMC.aspxhttp://www.meezanbank.com/DMC.aspxhttp://www.meezanbank.com/monthlyMudarbahCertificate.aspxhttp://www.meezanbank.com/monthlyMudarbahCertificate.aspxhttp://www.meezanbank.com/amdanCertificate.aspxhttp://www.meezanbank.com/coii.aspx


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1.3 Consumer finance

Meezan bank consumer financing, provides Shariah Compliant financing solutions for individuals

Car Ijarah- Car financing based on the principles of Ijarah Easy Home- A comprehensive, affordable, and totally hassle-free house financing facility Laptop Ease - Monthly installment as low as Rs.2,750/-1.4 Services

Meezan Bank is dedicated in its effort to provide a quality banking experience to our customers via

a range of unique Banking Services

Labbaik Travel Aasaan- A specialized service to assist you in making arrangementsfor Umrah & Hajj

Online Banking - Conduct banking transactions from any of Meezan bank's branchesnationwide

8 to 8 Banking- Giving our customers access to our branches from 8am to 8pm Ladies Banking- An exclusive banking area to provide a comfortable enviornment to female

customers

Home Remittance- Remittance services via a wide network of corresponding banks worldwide. Western Union Money Transfer- Convenient money remittance within minutes to Pakistan.
http://www.meezanbank.com/islamicCarFinancing.aspxhttp://www.meezanbank.com/islamicCarFinancing.aspxhttp://www.meezanbank.com/easyhome.aspxhttp://www.meezanbank.com/easyhome.aspxhttp://www.meezanbank.com/LaptopFinancing.aspxhttp://www.meezanbank.com/LaptopFinancing.aspxhttp://www.meezanbank.com/labbaiksaving.aspxhttp://www.meezanbank.com/labbaiksaving.aspxhttp://www.meezanbank.com/AjaxFunction.aspx?id=393&width=250http://www.meezanbank.com/AjaxFunction.aspx?id=149&width=250http://www.meezanbank.com/onlinebanking.aspxhttp://www.meezanbank.com/8to8Banking.aspxhttp://www.meezanbank.com/8to8Banking.aspxhttp://www.meezanbank.com/ladiesBanking.aspxhttp://www.meezanbank.com/ladiesBanking.aspxhttp://www.meezanbank.com/homeRemittance.aspxhttp://www.meezanbank.com/homeRemittance.aspxhttp://www.meezanbank.com/wunion.aspxhttp://www.meezanbank.com/wunion.aspxhttp://www.meezanbank.com/wunion.aspxhttp://www.meezanbank.com/homeRemittance.aspxhttp://www.meezanbank.com/ladiesBanking.aspxhttp://www.meezanbank.com/8to8Banking.aspxhttp://www.meezanbank.com/onlinebanking.aspxhttp://www.meezanbank.com/AjaxFunction.aspx?id=149&width=250http://www.meezanbank.com/AjaxFunction.aspx?id=393&width=250http://www.meezanbank.com/labbaiksaving.aspxhttp://www.meezanbank.com/LaptopFinancing.aspxhttp://www.meezanbank.com/easyhome.aspxhttp://www.meezanbank.com/islamicCarFinancing.aspxhttp://www.meezanbank.com/islamicCarFinancing.aspx


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2 MEEZAN BANK PRACTICES OF MUSHARAKA &

DIMINISHING MUSHARAKA:

2.1 UMI Model of Meezan Bank

Easy Home is structured under the concept of Diminishing Musharakah where Meezan Bank and

Customer enter into a Musharakah Agreement where both the parties provide their investments for

the purposes of purchase/construct/renovate the property. The Joint ownership is created in the

property between Bank & customer by Musharakah agreement.

In this Agreement, Banks share is divided into units and is given to the Client on rent and Client

promises to purchase Banks share (units) over the tenure of transaction. Client purchases the units

every month and will eventually become the owner of the property. Rental amount is adjusted

according to the banks share (units) remaining in the property. In UMI, the Musharakah unit price

remains constant throughout the financing period.

2.2 The Step-up Model

The Step-up Payment plan is introduced for customers who intend to avail maximum financing

facility with lower installments. The step up model is based on Shariah-compliant structure of

Diminishing Musharakah. In this model, the banks share is divided into Musharakah units and in

the initial half of the facility tenure, the customer purchases one Musharakah unit from the bank

every month and in the later half of the facility tenure, the customer purchases two Musharakah

units from the bank every month. Thus the monthly installment during initial years is

comparatively lower which is easily affordable. This model is a Shariah-compliant alternativeavailable to the customers who wish to avail maximum financing facility from the Bank.

2.3 Legal Documents of Diminishing Musharaka

Diminishing Musharakah Agreement Islamic Housing Finance Agreement. Monthly Payment Agreement. Undertaking to Purchase Musharakah Units. Undertaking to Sell Musharakah Units.2.4 Questions

1. Is Rental to Third party by the customer is allowed?

The involvement of the third party made by the customer to rent out the house further is a void for

contract between bank and customer. This is also against the Islamic laws. Without the consent of

the bank, customer cannot rent out the house further to the third party. If customer exercises this


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practice, the contract between bank and customer will terminate. On termination, the shares of

both parties are divided and disposed off.

2. Condition to buy the house is necessary?

The Diminishing Musharaka Agreement between Meezan Bank and customer does not based uponthe condition that customer will buy the house on the maturity of the transfer of the shares. Neither

bank nor client can impose this condition. Because this also against the shariah which has an effect

of two sales in one sale, where there are existence of two contracts in one contract.

3. Transfer of ownership at 1stinstallment?

When Meezan Bank and customer enter into a contract of Diminshing Musharaka in house

financing, at first installment paid by the customer, the ownership does not transfer to the

customer. Ownership is only transfer at the end of the maturity period.

The wisdom behind this is that; all the possessions (house, utilities etc) are under customer care,

they can utilize it as they want. This will decrease the customer cost of registration and other

expenses and also to avoid legal problems for the customer. Bank mortgage the house as security.

But according to the shariah, at 1st installment, customer becomes the owner of the house. Hence

ownership is transferred to the customer. But Meezan bank does not transfer ownership for the

care of their customer as they say.

4. What type of collateral is taken as security?

Meezan Bank charge collateral which they are practically dealing with. For example, in housefinancing, house shall be charged as collateral.

5. In case of customer being Default?

Due to the default customer, the equal amount of shares are disposed off to each party includes

Banks and customer. This is the only penalty charged to the customer.

6. What is the Effect of late payments by the customers?

According to shariah, late payment fee cannot be charged in bank profit and loss account. Meezan

Bank practices a tool in case of late payments that the clients have to pay a certain amount in

charity fund which is according to the Musharaka agreement. Meezan bank also deducts a certain

amount to cover the administrative cost relating to late payment, this is also subject to the Shariah

board approval of Meezan Bank.

7. What are the various rules of Musharaka followed by the Meezan Bank and customer?


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Fulfilling the preconditions of contract Contribution of equityo The partners( Meezan Bank and client) can contribute any amount of agreed upon capital with

respective ratios. And the ownership of equity would be according to the investmentratio/contribution.

o The asset (house) of Musharaka are the joint property of both partnerso The capital can be invested in form of cash only and not some other asset that have market

value of which would determine the share of capital for that partner(customer)

Profit and loss sharingo The profit sharing ratio set according to the mutual agreement of partners.o The basic for calculating profit is the earnings from business not the invested capital.o Fixation of lump sum amount as profit is not allowed to any partnero Any profit rate tied up with capital of partner is also not allowedo Partners cannot assure one another of any compensation in case of losso The ratio of loss sharing is strictly in accordance with the ratio of investment.8. What are Practical Problem faced by Meezan Bank in Musharakah and what techniques it

is using?

a. Risk of Loss:

Problem: It is argued that the arrangement of Musharakah is more likely to pass on losses of the

business to the financier bank or institution. This loss will be passed on to depositors also. The

depositors, being constantly exposed to the risk of loss, will not want to deposit their money in the

banks and financial institutions and thus their savings will either remain idle or will be used in

transactions outside of the banking channels, which will not contribute to the economic

development at national level.

Technique: Meezan bank cant restrict itself to a single Musharakah. There will always be a

diversified portfolio of Musharakah. If a bank has financed 100 of its clients on the basis of

Musharakah, it is hardly conceivable that all of these Musharakah or the majority of them will result

in a loss.

But on the other hand, the profitable Musharakah are expected to give more return than the

interest-based loans, because the actual profit is supposed to be distributed between the client and

the bank. Therefore, the Musharakah portfolio is not expected to suffer loss, and the possibility of

loss to the whole portfolio is merely a possibility which should not discourage the depositors.

b. Dishonesty by the clients:


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Problem: The dishonest clients may exploit the instrument of Musharakah by not paying any

return to the financiers. They can always show that the business did not earn any profit. Indeed,

they can claim that it has suffered a loss in which case not only the profit but also the principle

amount will be jeopardized.

Solution: First of all, a well designed system of auditing in Meezan Bank is implemented where theaccounts of all the clients are fully maintained and properly controlled. The profits may be

calculated to the basis of gross margins only. However if any misconduct, dishonesty or negligence

is established by a client, he will be subject to penalties, and may be deprived of availing any facility

from any bank.

c. Secrecy of the Business information disclosure:

Problem: By making the financier(Meezan Bank) a partner in the business of the client, clients

sometimes bound to disclose the secrets of the business to the financier, and through him to other

traders.

Solution: The client, while entering into the Musharakah, may put a condition that the financier will

not interfere with the management affairs, and he will not disclose any information about the

business to any person without prior permission of the client.

d. Clients Unwillingness to Share Profits due to high taxation liabilities:

Problem: Client think that the bank has no right to share in the actual profit, Because the Clients

are afraid to reveal their true profits to the Banks, for fear that the information is also passed on to

the tax authorities and Clients tax liability increases.

Solution: In Pakistan, rate of taxation are unjust. Meezan bank and their clients are struggling to

change the laws of taxation for the progress of their own respective business. The answer of this

question is merely depending upon the regulatory authorities.

9. What are the differences between conventional bank partnership and meezan

musharaka

a. Tenure:

o Conventional partnership is a long term contractual agreement.o Musharaka is a limited contractual agreement with similar rights and liabilities.

b. Contribution of each party:

o Conventional partnership; capital, financial property and good will can be contributed.o In Musharaka; capital, labor and financial value of asset depreciation contributed.

Contribution is in varying proportions and a partner may not contribute financial capital.

c. Addition and withdrawal of Capital:

o Conventional partnership; withdrawal and addition of capital is allowed during the life timeof contract.


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o In Musharaka, it is not allowed except by mutual consent. The contract will be changeaccordingly.

d. Profit Allocation:o Conventional partnership profit allocation is either fixed percentage of profit or according

to the partners contribution of capital and services or in proportion to capital balance

o In Musharaka profit allocation will be according to partners contribution of investment ofcapital with profit and loss shearing ratio agreed and cannot be altered during the life time

of contract.

e. Salary and commission Allocation:o In conventional net income of business is allocated periodically leaving the project in

operation. Partners may entitle commission or salary.

o In Musharaka profit and loss allocation is made when project finished. No partner is entitledto salary or commission.

10.What are the main differences between Diminishing Musharaka house financing and

Conventional house financing

a. Diminishing Musharaka house financing.

o The bank and the client cannot sell their undivided shares of the property. Meezan Bank donot recognize the right of the client to sell his share of the property.

o Bank has the right to charge penalty on late payments. Bank can sell the house if the client isnot able to buy unit shares of the bank according to schedule.

o After buying the full shares of the house, client becomes the sole owner of the house.b. Conventional house financing

o The bank has the right to auction the property, if the client defaults and in case of latepayments.

o The client has the right to get his mortgage released from the bank through paying off hisdebt.

2.5 Analysis

Meezan Bankss products ofMusharaka Agreement and Diminshing Musharaka(also other modes of

financing) are backed by the Shariah advisory council. In this way, violation of rule in any case

would result very badly. In this way, Meezan Musharaka and Diminishing Musharaka agreements

are following complete shariah rules. Hence there is no ambiguity. There is only one condition

which is not according to the Islamic way of doing business is that, Meezan bank dont allocate theownership of a house at 1st installment to the client. The justification they have provided is in favor

for the customer that customer will not be liable to encounter all the registration charges if they

dont allocate the ownership at 1st installment. Nevertheless, customer is being allotted with the

certification of house in 1stmonth and complete ownership in the end of the agreement.


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3 MEEZAN BANK PRACTICES IN MURABAHA

One of the most common mode of financing used by Islamic banks all over the world. Today in

Islamic banks world-over 66% of all investment transactions are through Murabaha.

Murabaha is the kind of sale in which the cost of the product has to be explicitly mentioned andconveyed by the seller to the buyer. Now the cost of the product does not only include the making of

the product but the profit margin also.

A simple sale is referred to as Musawamah in which the cost of the product does not have to be

mentioned by the seller.

Meezan bank as well established Islamic bank with over 275 branches has launched a Laptop

financing scheme with the name of Meezan Laptop ease

Under this scheme the bank will provide Laptop to its customers in an easy and hassle free method.

3.1 Questions

1. What are the features of meezan laptop ease program?

Easy Installment options for financing period for 3 to 24 months.

2 years warranty for HP & 1 year for Dell Products provided by vendor.

Free Carrying Case will be provided by vendor.

Dedicated Call Center for addressing after-sale issues and providing after sales support to the

customers at their door step

Absolutely Free Takaful Coverage. All laptops acquired through Meezan Laptop Ease will be

covered by Takaful (Islamic Insurance) before delivery to the customers Complete surety and peace of mind that purchased laptop is a genuine brand

Laptop model offerings will vary from time to time in consistence with the latest & upgraded

features and market demand.

Basically this is the scheme which works on Musawamah basis. Laptop Finance is based on the

concept of Musawamah which is a regular kind of sale in which price of the commodity to be

traded is bargained between seller and the buyer without any reference to the price paid or cost

incurred by the former. Thus, it is different from Muraba in respect of pricing formula. Unlike

Murabaha, seller in MUSAWAMAH IS NOT OBLIGED TO REVEAL HIS COST. Both the parties

negotiate on the price. On the other hand all conditions relevant to Murabaha are valid for

Musawamah as well.

Laptops of HP (Hewlett Packard) and Dell are being provided through this scheme by New

Horizon and Unique technologies respectively.

2. What are the conditions necessary for Murabaha ?

The subject of sale must exist at the time of the sale. Thus anything that may not exist at thetime of sale cannot be sold and its non-existence makes the contract void

The subject matter should be in the ownership of the seller at the time of sale. If he sellssomething that he has not acquired himself then the sale becomes void.


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If the buyer gets to know that the actual cost mentioned by the seller is wrong the contract canbecome void

Currency and monetary units can not be the subject matter of Murabaha The selling price should be settled and mentioned at the time of the contract Subject matter should be specified Right of option. If during a speecified time the buyer finds some fault with the product he can

return it

All sale and exchange conditions apply here. For e.g. there should be no gharar, riba, najash, etc.3. What is the The process flow of this scheme:

The subject matter is specified which is a laptop, the client goes to the bank witth the purpose

of buying the laptop on credit ( installment ) options of 3 to 24 months.. The bank provides the

laptop of Dell and HP by buying itself directly form the company New Horizon and Unique

technologies. Then the contract will be made between the bank and the client, after that down

payment will be made by the client according to the value of the laptop and then there will be

transfer of ownership. Future installments will then be made.

4. Is buy back allowed in meezan bank?

Meezan bank dont purchase commodity from the client himself on a buy back agreement which

is also not allowed in shariah. Because this buy-back agreement is similar to the interest based

transaction.

5. What are the Basic mistakes in Murabaha Financing:

Main mistake is to consider that, murabaha can be used for all type of transations and also

financing. But in reality, it is only used when commodity is purchased by the customer. If funds

required for some other purposes then it is not allowed.

It is important to study in detail the subject matter of Murabaha so that document is signed forobtaining funds for specific commodity.

In some cases, the commodity is somehow affected before acquired by the client from supplier.

It is crucial to follow the steps of the Murabaha.

Already purchased commodity is being given to the customer which is not allowed in Meezan

bank. But it happens in most of the conventional banks.

6. What are the issues involved in daily Murabaha transactions?

a. Default case:

Delay of the payment or the buyer being default from the due date, in this way, price cannot be

increased. But if buyer has signed the condition before the contract to pay certain amount to the

charitable purpose, he is bound to pay the amount. But this amount is not considering as

penalty and not account for the Bank income.


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b. Rebates in Early Payment

If the customer makes the payment before the due date and there is no commitment that he

would gain any discount in the price of Murabaha. Then it is permissible for bank to give any

rebate to the client.

c. Rises in Prices:

Rise in prises for the commodity in the market, in this case, bank or customer cannot increase

the payment except for which it is being set before. It is very rare in Meezan bank that the

condition imposed on the increase in prices cause increase in the payment given by the

customer. In this way, new contract is made for the changes.

d. Delays in the Supply from Supplier

Delay in Supply from the supplier in case where specific time was allowed leads to the

revocation of agency agreement. In such cases the customer will refund the cost of goods.

e. Rollover in Murabaha

Rollover murahabah is not implemented otherwise it is of emergency case. Which imply

payment of earlier murabaha price by executing new murabaha. It cannot be happen since each

murabaha transaction is for the purchase of a particular asset

f. Purchase EvidenceCustomer comes to Meezan bank must purchase evidence and declaration in which customer

confirms as being an agent has purchased the goods after agency agreement. This evidence is in

the form of sale invoice and receipts. Sometimes customer also submit purchase summary.

3.2 Analysis

The conditions that are not being followed in this type of financing scheme is that although it is

being done on Musawama basis all the conditions of Murabaha are being implemented except the

mentioning of the profit margin that the bank is charging and the actual cost of the laptop.


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4 MEEZAN BANK PRACTICES IN MUDARABAH CONTRACT

Mudarabah

This is a kind of partnership where one partner gives money to another for investing in a

commercial enterprise. The investment comes from the first partner who is called Rab-ul-Maalwhile the management and work is an exclusive responsibility of the other, who is called Mudarib

and the profits generated are shared in a predetermined ratio.

In Mudarabah, Rab-ul-maal provides the investment and Mudarib the management therefore the

Rab-ul-maal should hand over the agreed investment to Mudarib and leaves everything to Mudarib

with no interference from his side but he has the authority to:

a) Oversee the Mudaribs activities and

b) Work with Mudarib if the Mudarib consents.

The basic principle is that the capital in Mudarabah is valid just the way as it is in Shirkah which

according to Hanafi fiqh should be in liquid form but according to other scholars equipment, land

etc can also be included as capital. However all agree on the following:

Assets other than cash can be used as an intermediate step, meaning:

or

Original Investment Can be used for Mudarabah

However this is subject to the determination of exact amount of the assets before it is used for

Mudarabah. If the assets are not correctly evaluated, the Mudarabah is not valid.

4.1 Questions

1. What is the Mudarabah process followed by the Meezan Bank?

Mudarabah process starts from depositor who gives the capital to the Bank. Bank have two

positions in this case. Bank can either becomes Mudarib and manage the business or becomes

Equipment/ Land

Accounts Receivable

Cash


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Rab-ul-mal by providing the capital finance which was given by the depositor. Meezan bank

invest money in the project. From these projects, the profit incurred are shared between

depositors and the bank at the predetermined ratio.

2. How the Agreement of Mudarabah financing take place?

Memorandum of Association: It is based on the general framework or a memorandumdescribed the duration, particular sum of money in mudarabah contract which are later

implemented with Mudarabah transactions.

The memorandum of association also includes the consents of the parties whether use

restricted or unrestricted Mudarabah agreement. Memo also includes profit ratio and the

guarantee presented by the Mudarib to cover the situation in case of negligence.

3. What are the Requirements Relating to Capital?

Capital in Mudarabah is cash, other assets with valuation are not permissible in Meezan Bank.

Also debt own by the Mudarib cannot consider as the capital in contract. It is necessary that the

Mudarib have the free acces to the capital in which capital is completely belongs to him.

4. How Termination ofMudarabah in Meezan Bank take place?

The Mudarabah will stand terminated when the period specified in the contract expires. It can

also be terminated any time by either of the two parties by giving notice. In case Rab-ul-Maal

has terminated services of Mudarib, he will continue to act as Mudarib until he is informed of

the same and all his acts will form part ofMudarabah.

4.2 Analysis

After conducting an interview, there were a couple of things we found to be different than what we

studied theoretically in Islamic Theory and Finance. The first thing we identified was In Mudarabah

mode of finance at Meezan bank is that under no circumstances the Mudarib bears the loss unless

there is a question on due diligence. This statement raised a question because according to what we

were taught, profit and loss is calculated at the end of Mudarabah and if there is a loss, then

Mudarib has to contribute some of the profit according to predetermined agreed ratio.

Another observation we identified while conducting the Interview at Meezan bank was that the

capital injected by the Rub-ul-Maal can also be accounts receivable, which was contradictory to

what we were taught in the Islamic theory & Finance course. According to the theory taught to us

Accounts receivable in an uncertain asset which cannot be counted as capital in Mudarabah Finance

because there is a possibility of Accounts Receivable resulting in Bad Debt.

Other areas of Meezan Mubarabah mode of Finance was in line with the actual theory of Mudarabah

and we were quiet convinced that they actually implement the theory practically.


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5 MEEZAN BANK PRACTICES IN IJARAH AGREEMENT

Ijarah means to give something for rent. The term Ijarah is used for two different situations.

Leasing Of Real AssetsThe first type of Ijarah relates to the usage of assets and properties. It means to transfer the right to

use of a particular property to another person in exchange for a rent claimed to him. The Lessor is

called Mujir, the lessee is called Mustajir and the rent payable to the Lessor is called Ujrah.

ServicesThe second meaning of Ijarah is to employ the services of a person for wages paid to him as a

consideration for his hired services. The employer is called Mustajir while the employee is called

Ajir.

Practical Implementation Of Ijarah

1. The contract of Ijarah financing can be utilized by an Islamic bank to provide the customerswith short-term to medium-term financing to lease items. These items may include:

Equipment Machinery Motor vehicles Computers

2. The usage of the asset to be leased by the customer and to be financed by the bank must not beforbidden (haram).

3. In the process of extending Ijarah financing to the customer, the following factors are to beconsidered: Used industrial equipment market Second hand value Capital allowances

4. Repossession will be instituted by the lessor if the lessee defaults.5. All costs incurred in the repossession process shall be borne by the lessee.6. Under Ijarah the provision of guarantees is allowable. Examples of guarantees are as follows:

Personal or individual guarantee Corporate guarantee

7. The land and building or other property acceptable by the bank can be accepted as collateral fora financing facility under Ijarah. Land and buildings can be secured by way of a legal charge.

Rules Of Ijarah

Leasing is a contract whereby the owner of something transfers the right to use to another for

an agreed period at an agreed consideration.

The subject of the lease must have a valuable use.


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The leased property remains under the ownership of the seller and only its right to use istransferred to the lessee.

The period of the lease must be determined in clear terms. The lessee cannot use the leased asset for any purpose other than the purpose specified in the

lease agreement. If no such purpose is specified in the agreement, the lessee can use it for

whatever purpose it is used for in the normal course of the business.

The lessee is liable to compensate the lessor for any damage to the released asset caused by anymisuse or negligence on the part of the lessee.

The leased asset shall remain at the risk of the lessor throughout the lease period in the sensethat any harm or loss, caused by factors beyond the control of the lease, shall be borne by the

lessor.

A property jointly owned by two or more persons can be leased out and the rental should bedistributed between all the joint owners according to the proportion of their respective shares

in the property.

A joint owner of a property can lease his proportionate share to his co-share only and to anyother person.

The rental must be determined at the time of contract for the whole period of the lease. The lessor cannot increase the rent unilaterally and any agreement to this effect is void. The lessee period commences from the data on which the leased asset has been delivered to the

lessee, irrespective as to wether the lessee has started using it or not.

If the leased asset has totally lost the function for which it was leased and no repair is possible,the lease must terminate the day on which such loss has been caused. However, if the loss is

caused by the misuse or by negligence on the part of the lessee, he will be liable to compensate

the lessor depreciated value up to what it was before the damage took place.

Meezan Bank Limited

Meezan Bank Car Ijarah is a car rental agreement, under which the Bank purchases the car and

rents it out to the customer for a period of 3 to 5 years, agreed at the time of the contract. Upon

completion of the lease period the customer gets ownership of the car against his initial security

deposit.

5.1 Meezan Car-Ijarah

Meezan car ijra exist for last 8 years. It comprises of 8000 active contracts of ijra. Number of users

are very high, but compare to the magnitude of the amount is less then Musharaka and mudarabah.

The default rate is very low as 1.43% which shows the effectiveness of this program.

5.2 Questions

1. What are the Key features of car Ijarah?

Low monthly rental

Rental paid after delivery, not in advance


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Fastest processing and delivery

Tracker option available

Minimum security deposit as low as 10%

All new, used, local, imported and luxury vehicles can be financed

2. What are the Rights and Liabilities of owners and user?

Under Ijarah, all ownership related risks lie with the Bank while all usage related risks lie with

the user, thus making the Lessor the true owner of the asset and making the income generated

through the contract permissible (Halal) for the Bank.

3. Difference between the Continuation of lease rentals in case of total loss and theft of

vehicle from Islamic and conventional perspective?

Under the Meezan Bank Islamic system, rent is consideration for usage of the leased asset, and

if the asset has been stolen or destroyed, the concept of rental becomes void. As such, in the

above-mentioned eventualities, Meezan bank does not charge the lease rental. If the leased

vehicle is stolen or completely destroyed, the conventional leasing company continues chargingthe lease rent till the settlement of the Insurance claim.

4. The use of Takaful instead of Insurance?

Legally it is required for all leasing entities to insure the leased assets. As such, Meezan Bank

insures its leased assets. Meezan Bank insured its assets through Takaful only, which is the

Islamic product for insurance.

5. Permissibility for Penalty of Late Payment of Rent under Islamic Shariah and

conventional banking system?

Under Ijarah, the Lessee may be asked to undertake, that if he fails to pay rent on its due date,he will pay certain amount to a charity, which will be administered through the Islamic Bank.

For this purpose the bank maintains a charity fund where such amounts may be credited and

disbursed for charitable purpose. In most contemporary financial leases, an extra monetary

amount is charged, in their income, if the rent is not paid on time. This extra amount is the

considered as Riba and is Haram

6. What is the role of Meezan bank If customer wants to lease Used car financing?

In addition to leasing of new cars, Meezan Bank also provides the unique opportunity of leasing

second hand, both locally assembled and imported vehicles. This feature is specifically designed

as a highly economical option. The Used Car Ijarah facility is made available at a minimum-

security deposit as low as 20%. Financing of used cars are subject to the following Selection

Criteria.

The second hand car selected should not be more than twice registered.

The vehicle should not be older than 5 years.

The minimum security deposit for a vehicle up to 2 years of age is 20%, while minimum

security deposit for a vehicle over 2 years of age is 30%.


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At the time of maturity of Ijarah agreement, the vehicle should not be more than 8 years old.

This means that if a car is 5 years old, the Car Ijarah tenure is not more than 3 years and if its 4

years old, the tenure may be set for a maximum 4-year term.

Second hand vehicles selected should not be worth more than Rs. 1.5 million and less than Rs.

250,000. Meezan Bank will have the vehicle valued by an independent valuation company

accordingly.7. What is the Residual value Ijarah in car lease?

The value of an asset at the conclusion of the lease term or the price at which a fixed asset is

expected to be sold at the end of its useful life is commonly referred as Residual Value. The

average car buyer take some effort to determine the estimated value of their new car in the

future it would be best to know how much your car is worth in the future.

Based on the above definition, Meezan Bank Car Ijarah is introducing Residual Value Financing,

enabling customer to afford luxury with economy, where the customer can enjoy the benefits of

eased rental. A high residual value would result in a lower monthly lease.

5.3 Comparison of Conventional lease and Ijarah

Conventional lease Ijarah

1. Consideration The consideration for conventional

lease is interest.

Consideration is the rentals

accumulated by the lease of the asset.

2.Ownership Remains with the lessor Remains with the lessor

3.Risk bearer Risk lies with the lessee Risk lies with both lessor and lessee

4.Starting time for

rental obligation

By the date of agreement After the handing over the asset to

the lessee.

5. Fines Fines are added to the total

payment and is consumed by the

bank itself

The fines although deducted are

given to charity.


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6.Premature

Termination

Happens in case the lessee violates

the lease code. All obligations still

prevail even after the termination

of the contract.

Allowed, in case the lessee has

violated the terms of the lease. And

that moment onwards the lessee is

not viable to any payments.

7. Rent: Interest rates prevailing in market

will decide the value of the rent.

The interest rates are compounded

over the term period.

KIBOR is used as a benchmark but it

is not standardized. Rather it can be

changed if a more appropriate

substitute is available.

8. Insurance: Insurance is paid by the lessee Insurance (takaful) is under the

liability of lessor

5.4 Analysis

According to Ijarah the leased property must remain under the ownership of the seller andonly its right to use should be transferred to the lessee. Meezan bank bears the all

ownership related risks which makes it the true owner of the asset. Hence, Meezan bank

takes the responsibility of an owner. Under Ijarah the lessor should bear risk throughout the lease period. Therefore, Meezan

bank bears risk throughout the lease period. Only usage related risks lie with the user.

According to Ijarah, the lessee is liable to compensate the lessor for any damage to thereleased asset caused by any misuse or negligence on the part of the lessee. Hence, Meezan

bank makes its customers liable because usage related risks lie with the customers.

Under Ijarah if the asset has been stolen or destroyed, the concept of rental becomes void.Therefore, Meezan bank does not charge the lease rental if such incident happens.

In order to ensure the car leasing fully permissible, Meezan bank insures leased carsthrough Takaful that is the Islamic instrument of insurance.

According to Ijarah, The lessor cannot charge an additional amount in case the lessee delayspayment of the rent. Penalty of late payment is given to charity by lessee. Therefore, bank

maintains a charity fund where such amounts may be credited and disbursed for charitable

purpose.

According to Meezan Bank, upon completion of the lease period the customer getsownership of the car against his initial security deposit. But under Ijarah, lease is not

contingent upon purchase and there can only be a unilateral promise by lessor to sell. But

here it is not clear whether it is unilateral promise only by bank or it is bound on lessee also.


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6 CONCLUSION

From the research of our interview from the The Area Manager, Mr Tariq of Meezan Bank,

conclusion is being drawn that Meezan Bank is backed by Shariah Advisory Council and following

all the rules very strictly. All the Financing modes including; Musharaka & Diminishing Musharaka,

Murabaha, Mudarabah and Ijara used by Meezan Bank are following the Shariah based conditions.

There are some exception in their practices in relative financing mode which they have proven to

be customer concern.

In Musharaka & Diminishing Musharaka;Meezan bank dont allocate the ownership of a house at 1st

installment to the client. The justification they have provided is in favor for the customer that

customer will not be liable to encounter all the registration charges if they dont allocate the

ownership at 1stinstallment. Nevertheless, customer is being allotted with the certification of house

in 1st month and complete ownership in the end of the agreement. However in Murabaha; The

conditions that are not being followed in this type of financing scheme is that although it is being

done on Musawama basis all the conditions of Murabaha are being implemented except thementioning of the profit margin that the bank is charging and the actual cost of the laptop. On the

other hand, another observation we identified in Mudarabah while conducting the Interview at

Meezan bank was that the capital injected by the Rub-ul-Maal can also be accounts receivable,

which was contradictory to what we were taught in the Islamic theory & Finance course. In Ijara;

According to Meezan Bank, upon completion of the lease period the customer gets ownership of the

car against his initial security deposit. But under Ijarah, lease is not contingent upon purchase and

there can only be a unilateral promise by lessor to sell. But here it is not clear whether it is

unilateral promise only by bank or it is bound on lessee also.

Other areas of Meezan Mubarabah mode of Finance was in line with the actual theory based on

Shriah and we are quiet convinced that they actually implement the theory practically.


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7 ANNEXURE

Questionnaire

Musharakah

Is Rental to Third party by the customer isallowed?

Condition to buy the house is necessary? Transfer of ownership at 1st installment? What type of collateral is taken as

security?

In case of customer being Default? What is the Effect of late payments by the

customers?

What are the various rules of Musharakafollowed by the Meezan Bank and

customer?

What are Practical Problem faced byMeezan Bank in Musharakah and what

techniques it is using?

What are the differences betweenconventional bank partnership and

meezan musharaka

What are the main differences betweenDiminishing Musharaka house financingand Conventional house financing

Murabaha

What are the features of meezan laptopease program?

What are the conditions necessary forMurabaha ?

What is the The process flow of thisscheme:

Is buy back allowed in meezan bank? What are the Basic mistakes in Murabaha

Financing:

What are the issues involved in dailyMurabaha transactions?

Mudarabah

What is the Mudarabah process followedby the Meezan Bank?

How the Agreement of Mudarabahfinancing take place?

What are the Requirements Relating toCapital?

How Termination of Mudarabah in MeezanBank take place?

Ijarah

What are the Key features of car Ijarah? What are the Rights and Liabilities of

owners and user?

Difference between the Continuation oflease rentals in case of total loss and theft

of vehicle from Islamic and conventional

perspective?

The use of Takaful instead of Insurance? Permissibility for Penalty of Late Payment

of Rent under Islamic Shariah andconventional banking system?

What is the role of Meezan bank Ifcustomer wants to lease Used car

financing?

What is the Residual value Ijarah in carlease?

Comparison of Conventional lease andIjarah

Date post:	05-Apr-2018
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