Financial Instruments & Intermediations Contracts PDF

FINANCIAL INSTRUMENTS & INTERMEDIATIONS CONTRACTS  THE BASICS OF FINANCIAL INSTRUMENTS The economic activities in any economic system can be viewed as contracts between economic agents. A financial instrument is also a contract; whose terms and conditions define the...

FINANCIAL INSTRUMENTS & INTERMEDIATIONS CONTRACTS  THE BASICS OF FINANCIAL INSTRUMENTS The economic activities in any economic system can be viewed as contracts between economic agents. A financial instrument is also a contract; whose terms and conditions define the risk and return profile of the instrument. In Islam, a contract is deemed legal and lawful by the Shariah if the terms of the contract are free of any prohibition.  If a contract does not involve any prohibited elements, such as Riba or Gharar, then it is considered valid, provided it does not violate any other rule or law. Contracts dealing with commercial and business transactions can be classified into four broad categories;  Transactional Contracts Social Welfare FINANCIAL Financing Contracts INSTRUMENTS Contracts Intermediation Contracts  TRANSACTIONAL CONTRACTS Dealwith the real sector economic transactions that facilitate the exchange, sale and trade of goods and services. The core transactional contracts are based on trade or exchange- based activities. Exchange could be on: i. the spot or on a deferred basis and; ii. could be of goods for goods, iii. or of goods for price, iv. or goods for promise to pay.  TRANSACTIONAL CONTRACTS Sale of Rights to Sale of use Usufruct Ownership (e.g. Ijarah/Istisna) Bay’ (Sale/Purchase) Bay’ Sarf (Currency Exchange/Spot)  FINANCING CONTRACTS Offer ways to create and extend credit, facilitate financing of transactional contracts, and provide channels for capital formation and resource mobilization between investors and entrepreneurs. Financing contracts are meant either for: i. the financing of transactional contracts in the form of trade finance or asset-backed securities, ii. or for providing capital through equity partnership, which can take several forms, such as partnership, co-ownership or diminishing partnership.  FINANCING CONTRACTS Asset-Backed Equity Trade Financing (e.g. Partnership (e.g. Murabahah) Ijarah/Istisna) (e.g. Musharakah)  INTERMEDIATION CONTRACTS To facilitate an efficient and transparent execution of transactional and financial contracts. Provide the economic agents: i. with a set of tools to perform financial intermediation; ii. as well as to offer fee-based services for economic activities.  INTERMEDIATION CONTRACTS Fee-based Partnership Security Takaful Services Consolation/ Representati Fee-based Guarantee Pawn on Musharakah Mudharabah Service (Kafalah) (Rahn) (Wakalah) (Ju’alah) Custody (Amanah/W adiah)  In intermediation contracts, Islamic banks perform as Islamic Financial Intermediary (IFI), able to offer wide array of commercial- and investment-banking products and services. Ffunding/ resource mobilization Investment/revenue generation Murabahah Salam Islamic bank Mudharabah Ijarah Investors Wakalah (Depositors) Istisna Amanah/Wadiah Musharakah Ju’alah  SOCIAL WELFARE CONTRACTS Contracts between individuals and society to promote the well-being and welfare of the less privileged. Althoughfacilitation of social welfare contracts is beyond the scope of intermediation, an intermediary can certainly offer community services by institutionalizing social welfare contracts.  SOCIAL WELFARE CONTRACTS Gratuitous Loan Trust (Waqf) (Qard Hasan)  FINANCIAL INSTRUMENTS/ CONTRACTS Transactional Financing Intermediation Social Welfare Contracts Contracts Contracts Contracts Sale of Right to Trade Financing Sale of Fee-based Gratuitous Loan use Usufruct (e.g. Partnership Ownership Services (Qard Hasan) (Ijarah/Istisna) Murabahah) Asset-Backed Bay’ Representation (e.g..Ijarah/Isti Musharakah Trust (Waqf) (Sale/Purchase) (Wakalah) sna) Bay’ Sarf Equity Custody (Currency Partnership Mudharabah (Amanah) exchange/Spot) (Musharakah) Consolation/ Security Fee-based Service (Ju’alah) Guarantee (Kafalah) Takaful Pawn (Rahn) THANK YOU Q&A