2009-11-09T11:45:00.000-08:00

There are five Islamic instruments of financing . they may be discussed as under.

Musharika

A- agreement : it is an agreement between the bank and its clients to participates in a business on temporary basis by provided agreed amount of fund for sharing profits and losses for a specified period of time.
B- Bank,s Liabilities: the liabilities of the bank is restricted to the extent of funds contributed by it.
C- Purpose of Investment: the funds under this mode of investment are generally provided to finance the working capital requirement of business.
D- Management: the business is managed and run by the client. Bank examines and monitors the business activities.
E- Sharing of Profits: profits are to be shared as agreed between the bank and client.
F- Sharing of Losses: Losses must be shared strictly according to the capital contribution ratio of both parties. No other way of sharing losses is permitted in Islam.

Modaraba

Modaraba means the business in which one party participates in business with hi money and the other party participates with his knowledge, skill, experience, technique and know how.

A- Agreement: It is an agreement wherein one party contributes capital and other party contributes with his services.
B- Registration: Modaraba must be registered under the modaraba ordinance 1980 and its working is governed by the madaraba companies and the modara rules 1981.
C- Midrib’s Contribution: As per rules modrab must also contribute at least 10% of total capital investment.
D- Purpose: Modaraba may be for a specified purpose and may be for a multiple purpose.
E- Life: modraba may be formed for a specified period or for a perpetual life.
F- Transferable Certificates: Certificates issued by the mobaraba companies are transferale.
G- Sharing of Profit: In these types of agreement, profit is to be shared as per agreed ratio.
H- Sharing of Losses: Losses are to born by the financiers. The modarab suffers the loss of his services and job.

Participation Term Certificates (PTC,s)

It is another Islamic instrument of finance. It was introduced under companies ordinance 1984 to replace the debenture (An interest bearing mode of financial ). PTC,s is issued on profits and loss sharing basis.
A company is authorized to issue PTC,s to Scheduled bank and financial institution which are as under.

A- Mid and Long Term Financing: PTC,s is an instrument of mid and long term financing develop to replace the debentures.
B- Transferable: The certificates of PTC,s are transferable.
C- Sharing of Profit: Profits are shared as per agreed ratio.
D- Sharing of Loss: Losses are to be shared strictly in the ratio of bank’s and companies investment.
E- Issuance: Only joint stock companies can raise funds by issuing PTC,s certificates.

Equity Participation

Equity participation means sharing risks and rewards of ownership and the features are as under.

A- Purchases of shares: Under this scheme the bank and financiers purchases the shares of the company at market price or at an agreed price.
B- Sharing of Profit: Profit will be shared in the form of interim and annual dividend.
C- Sharing of losses: Loss will be born in the form of reduction of the market price of the purchase of shares.

Investment on Rent Sharing Basis

Rent sharing is generally applicable to finance the purchase or construction of houses. This instrument of finance has been be adopted by the house building finance Corporation of Pakistan.

A- Contribution of Funds: House building finance corporation and client contribute funds as agreed to purchase or construct a house.
B- Rent: Rent of the building is estimated area wise.
C- Sharing of rent: Rent will be shared as per ratio of investment. Rent may be revised after every three years.

Do you know about Non-Interest(Interest Free) based investment modes of finance?