Investment Mode

—

Objectives & Modes of Investment under

Islamic Principles with reference

 to Maquasid-Al-Shariah

The Primary Objectives of the Shari’ah

—  To be a blessing for mankind (وما أرسلناك إلا رحمة للعلمين)

—  The word عالمين including everything other than God

§  All human beings or mankind, including  muslims as well as non-muslims

§  Animals, birds and insects

§  Physical environment

—  How to be a blessing for everyone and everything included in عالمين? For this purpose we need a vision and a strategy

Vision and strategy

—  The Islamic vision is defined by the maqasid al-shari‘ah

—  The maqasid al-shari‘ah are, according to imam ghazali, enrichment of:

q    The human self              )

q    Posterity                          )              well-being of all

q    Faith                   )

q    Intellect                            )              strategy

  Wealth              

The Human Self and Posterity

—  Human beings are the end as well as the means of development

§  Since they are the end, their well-being (falah) must be ensured

§  Since they are also the means, they must have the motivation as well as the character and ability to do whatever is necessary for ensuring their well-being

—  This demands: reform  of human beings (improvement in their motivation as well as their character and  ability)

§  How to improve their motivation ?

§  How to improve their character and ability?

§  The three other maqasid are indispensable for improving their motivation, character, and ability.

§  Faith

—  Gives the right worldview

—  Provides values or rules of behaviour (institutions)

—  Provides the right  motivation

—  Provides direction for the creation and use of wealth

—  Provides guidelines for proper upbringing and education – moral as well as material

—  Emphasizes the need  for  good governance

—  Intelect

—  Relationship between faith and intellect

—  How to enrich the intellect? Through high quality of moral as well as material education and an enabling family, social and intellectual environment.

Wealth and Finance

—  Without wealth it would be difficult to realize the other four maqasid

—  Wealth cannot, however, be developed

§  Without strengthening the other four,  and

§   Without finance and its proper utilization

—  Finance has a crucial role to play in development with justice.

§  There can be no dignity, brotherhood and freedom:

o       If poverty is not removed, needs are not fulfilled and equitable distribution of income and wealth are not ensured

A society can be very rich and yet

—  The role of the financial system in promoting development with justice

—  Role of the financial system: financial intermediation - mobilize savings from savers and make them available to users

—  Purpose? Ensure  development as well as justice through this intermediation

—  Development requires:

q  Improvement in the motivation, character and motivation of human beings

q  Promotion of  productive investment, employment and development

q  Curbing of  wasteful spending and conspicuous consumption

q  Promotion of  venture capital

—  Justice requires:

q  The sharing of risk by both the financier and the entrepreneur: “no risk, no gain” – this will also help inject discipline into the financial system and help promote the health and stability of the system.

q  Promotion of  microfinance

q  More effective use  of zakah and awqaf

Investment under Islamic Principles :

Main Mechanism of Islamic Investments :

               a) Bai :     i)   Bai- Murabaha

                                                ii)  Bai-Muajjal

                                                iii) Bai-Salam

                                                iv) Bai-Istisna

               b) Share:                i)   Mudaraba

                                             ii)  Musharaka

               c) Ijarah:                i)   Ijara Bil Bai

                                                ii)  Hire Purchase Under Shirkatul Melk                                    (Hire Purchase Musharaka Mutanaqasa)

                       Bai-Murabaha:

     The word Bai-Murabaha is derived from the words “Bai” & “Rebhun”. Bai means purchase & sale and Rebhun means “Increase or agreed upon profit”.

     Bai-Murabaha may be defined as a contract between a Buyer and a Seller under which the seller sells certain specific goods (permissible under Islamic Shari'ah and the law of the land) to the buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump sum or by installments.

Bai-Murabaha are of two kinds:

      1.   Ordinary Bai-Murabah: 

             - Transaction between two parties buyer & seller  without any promise.

      2.   Bai-Murabaha on order & promise:

            - Participation of three parties.

            - Buyer 1st party promises to buy some goods placing   order to 2nd   party (intermediary trader).

            - The 2nd party procures the goods from the seller/supplier  the 3rd party.

            - Bank act as 2nd party (intermediary trader).

Features of Bai-Murabaha :

ó Sale is on agreed upon profit on agreement of seller & buyer

ó Cost of the goods and profit separately be informed to buyer

ó Purchasing of goods and selling the same to the later is a condition

ó  Existence  & availability of goods is essential for signing a Murabaha contract.

ó   Price once fixed cannot be increased due to delay in payment.

Bai-Muajjal (Deferred Sale):

     Bai-Muajjal may be defined as a contract between-a Buyer and a Seller under which the Seller sells certain specific goods (permissible under Shari'ah and Law of the Country), to the Buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installments.

    The seller may also sell the goods purchased by him as per order and specification of the Buyer.“

Features of Bai-Muajjal:

ó  Deferred sale, the agreed price of which is payable

     in some fixed future date

ó  Goods delivered, price deferred

ó  Sale must be after getting ownership by purchaser

ó  Goods must be visible and purchasable at the time of    execution of contract

Bai-Salam:

Bai-Salam may be defined as a contract between a Buyer and a Seller under which the Seller sells in advance the certain commodity (ies)/product(s) [permissible under Islamic Shariah and the law of the land] to the Buyer at an agreed price payable on execution of the said contract and the commodity(ies)/product(s) is/are delivered as per specification, size, quality, quantity at a future time in a particular place.

The components of Bai-Salam
contract are:

ó The contracting parties i.e. Seller and

     Buyer

ó The price and the merchandise

ó The specifica

Features of Bai-Salam:

ó Price paid in advance, goods deferred

ó Total price be paid/fixed at the time of agreement

ó Buy-sale is Halal without existence/visibility of goods in a Salam contract

ó If goods are in existence/visible, there will be no Bai-Salam

ó The agreement be contained name, particulars, quantity, shape, unit-price and total price of goods etc

ó To meet the needs of small farmers like working capital, liquidity problem.

ó Before delivery goods remain at the sellers risk and after delivery at the purchaser’s risk.

Istisna :

               Istisna'a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific product(s) after having manufactured, permissible under Islamic Shariah and Law of the Country after having manufactured at an agreed price payable in advance or by installments within a fixed period or on/within a fixed future date on the basis of the order placed by the buyer.

Mudaraba:

               The term ‘Mudaraba’ has been derived from one of the meanings of the Arabic word ‘ﺏﺮﺿ’ which means ‘Travel’. Thus the word ‘Mudaraba’ means ‘Travel’ for undertaking business.

    Mudaraba may be defined as a contract of partnership where the Shahib al-maal provides capital to the Mudarib for investing it in a commercial enterprise by applying his labour and endeavor. Both the parties share the profit as per agreed upon ratio and the losses, if any, being borne by the provider of funds i.e. Shahib al-maal except if it is due to breach of trust i.e. misconduct, negligence or violation of the conditions agreed upon by the Mudarib. If there is any loss incurred due to the reasons mentioned above, the Mudarib becomes liable fo

Musharaka:

               The word Musharaka has been derived from Arabic word ‘Shirkat’ (Shirk) which means partnership or sharing. Thus the literal meaning of 'Musharaka' is sharing.

               Musharaka may be defined as a contract of partnership between two or more individuals or bodies in which all the partners contribute capital, participate in the management, share the profit in proportion to their capital or as per pre-agreed ratio and bear the loss, if any, in proportion to their capital/equity ratio.

Ijara :

               The term Ijara has been derived from Arabic word which means consideration, return, wages or rent.

   This is really the exchange value or  consideration, return, wages, rent of service of an ASSET. Ijara has been defined as a contract between two parties, the Hiree and Hirer where the Hirer enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Hiree.

Ijara bil Bai (Hire Purchase) :

               Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete.

HPSM (HPMM):

               Hire Purchase under Shirkatul Melk is a Special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts:

—  Shirkat

—  Ijarah and

Sale

HPSM :

               Shirkat means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Melk contract