Islamic Finance 2 PDF

( 3,5,8,28 33 ) :‫ساليدات املقالي‬ Chapter 5 Islamic Banking  The Principles of Islamic banking ‫اختياري او صح وخطأ‬ - Islamic banking, also referred to as islamic finance or shariah-compliant fi...

( 3,5,8,28 33 ) :‫ساليدات املقالي‬ Chapter 5 Islamic Banking  The Principles of Islamic banking ‫اختياري او صح وخطأ‬ - Islamic banking, also referred to as islamic finance or shariah-compliant finance, refers to finance or banking Religion activities that adhere to shariah (islamic law). - Two fundamental principles of islamic banking are the sharing of profit and Islamic loss and the prohibition of the collection Bank and payment of interest by lenders and Profit investors. - Islamic banks make a profit through equity participation, which requires a borrower to give the bank a share in their profits rather than paying interest 1. Musharakah:  The Arabic word Musharakah is a derivative from the root word sharaka which literally means sharing and mixing shares of two or more parties to make them interchangeable.  AAOIFI defines Musharakah as “an agreement between two or more parties to combine their assets, labour or liabilities for the purpose of making profit”  The Qur’an and Sunnah acknowledge the concept of partnership and remind partners on how they should behave towards each other. Types of Musharakah ‫اختياري‬  ‫ شرح على الفهم‬, ‫بخصوص الكالم اللي بي قوسي مو ترجمة‬ + ( ‫) ترجموا الكالم لـ األنقلش ألن ممكن تكون صياغة االسئلة كذا‬ ‫ضا ذاكروها نفس صياغة الساليد‬ ً ‫اي‬ ‫اختياري او صح وخطأ‬ 1. Partnership in Holding/Ownership (Sharikah Al-Milk)  It occurs when two or more people are joint owners of one thing. There is no formal Sharikah contract concluded between the parties involved.  There are two categories of sharikah al-milk: 1. Sharikah ikhtiyar ( By Choice): The ownership is established based on the acts of the partners such as an asset that has been jointly purchased by them or they became new owners of an asset as a result of a will or a gift. ( ‫ مثل الهدايا‬, ‫) شراكة بي شخصي‬ 2. Sharikah jabr ( Mandatory): The ownership is established mandatorily and not due to the acts of the partners. For example, they became new owners of an asset through inheritance. ( ‫ مثل امليراث‬, ‫) احلصول على شيء بشكل اجباري‬  In Sharikah al-milk, each and every one of the two or more partners is responsible for his share only and he cannot act on behalf of the other partner without his permission. ( ‫ شراكة اختيارية أفراد مع بعضهم البعض يشاركون ف اي عملية مثل اصل من األصول او الهدايا‬: ‫) مفهوم شراكة امللك‬ ( ‫) يحصل الشريك على امللكية بشكل إلزامي‬ 2. Partnership by Contract (Sharikah Al-‘Aqd)  Sharikah al-’aqd is a partnership affected by a mutual contract, which can be translated as a “joint commercial enterprise”.  It is an agreement between two or more persons to combine their assets, labour or liabilities for the purpose of making a profit.  This is considered a proper partnership because the parties concerned willingly entered into a contractual agreement for joint investment and the sharing of profit and risks. From the perspectives of capital and efforts of the partners, this type of partnership can be further divided into the following categories:  Sharikah Al-Amwal (Partnership in capital). ▪ In this type of Sharikah, all partners contribute capital for the company. It consists of two categories: ‫ ركزوا على املسميات‬, ‫اختياري‬ ‫شراكة العنان تسمى الشراكة العامة‬ 1. Sharikah Al-Inan (General partnership): ‫شراكة املفاوضة تسمى الشراكة املتساوية‬ 2. Sharikah Al-Mufawadah (Equal partnership) ‫) شراكة املفاوضة هي التفاوض بي شخصي حتى‬ ‫يشتركون ف نفس النسبة ( ممكن جتي اختياري بهذي‬  Sharikah Al-Amal (Partnership in services/labour): ‫الصياغة‬ ▪ This form of partnership is an agreement between two or more parties to provide services pertaining to a profession, vocation or skilled trade, or to render some services or professional advice or to manufacture goods, and to share profits according to an agreed upon ratio.  Sharikah Al-Wujuh (Partnership in goodwill) ▪ This is a form of partnership in creditworthiness (partnership of liability). ▪ It is a bilateral agreement between two or more parties to conclude a partnership to buy assets on credit on the basis of their reputation for the purpose of making profit, whereby they undertake to fulfil their obligations according to the percentages determined by the parties. The parties should determine for each partner, the percentage of profit-sharing and of liability- ‫ واحد يقدم املال وواحد يقدم‬: ‫)شراكة املضاربة‬ sharing. This form of partnership has no monetary capital ‫ بتجي بـ اكثر‬, ‫جهده ( ممكن جتي بهذي الصياغة‬  Sharikah Al-Mudarabah: ‫مهمة جًدا‬ ‫من سؤال وطرق مختلفة‬ ▪ Technically, Mudharabah is a partnership in profit whereby one party (Rabbul mal) provides capital and the other party (Mudarib) provides labour. ▪ Some of the jurists such as Hanafi and Hanbali use the term Mudharabah while Maliki and Shafi use Qirad. The profit, if any, will be shared between them on a mutually agreed ratio. In the case of losses, it will be borne by the capital provider (Rabbul mal) and the Mudarib will lose his efforts.  Basic Rules and Conditions of Musharakah 1. Contracting parties: All partners must have the capacity to contract. They must attain the age of capacity and must be a sane person. There is no objection to have a non- : ‫طريقة السؤال‬ Muslim or an institution as partner. ‫كيف طريقة حتديده وهل بيكون واضح ومحدد ف املشاركة او ال‬ 2. The ratio of profit-sharing between all the partners should be determined and mutually agreed at the conclusion of the contract which is in the form of an undivided percentage of profit, not a sum of money or a percentage of the capital. 3. This is very important to avoid any element of gharar (uncertainty) and the possibility of disputes in the future. 4. The capital of Sharikah should be contributed in the form of monetary assets 5. Tangible assets (commodities) allowed if monetary values of these assets are determined. 6. The business carried out by partners should be permissible. Musharakah Mutanaqisah (Diminishing Partnership) ‫مهمة‬  Diminishing Musharakah is a form of partnership in which one of the partners promises (wad) to buy the equity share of the other partner gradually until the title of the equity is completely transferred to him/her.  This transaction starts with the formation of a partnership after which buying and selling of the equity takes place between the two partners. It is, therefore necessary that this buying and selling should not be stipulated in the partnership contract.  In other words, the buying partner is allowed to give only the promise (wad) to buy. This promise should be independent of the partnership contract. 2. MUDARABAH ‫مهم‬  The word Mudharabah is derived from the phrase “al-darb fi al-ard” which means to make a journey.  Technically, Mudharabah is a partnership in profit whereby one party (Rabbul mal) provides capital and the other party (Mudarib) provides labour.  Some jurists like Hanafi and Hanbali scholars used the term Mudharabah while Maliki and Shafi’ scholars used Qirad.  The profit, if any, will be shared between them at a mutually agreed ratio.  In case of a loss, it will be borne by the capital provider (Rabbul mal) and the Mudarib will lose his efforts. b) Some important conditions related to Mudharabah profit ‫مهم‬ ▪ distributing profit must be clearly known that eliminates uncertainty and any possibility of dispute. ▪ The distribution of profit must be on the basis of an agreed percentage of the profit and not on a lump sum or percentage of capital. ▪ The parties should agree on the ratio of profit distribution when the contract is concluded. ▪ Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him. c) Some important conditions related to the labour of the contract The Mudharabah contract can be divided, from the work of the Mudarib perspective, into two categories: i. Unrestricted Mudharabah Contract: It is a contract in which the capital provider permits the Mudarib to administer a Mudharabah fund without restrictions on the type of work that is to be done, the location, the time, method of payment, etc. i. Restricted Mudharabah Contract: a contract in which the capital provider restricts the action of the Mudarib to a particular location or to a particular type of investment, or any other restriction as the capital provider considers appropriate but not in a manner that would unduly constrain the Mudarib in his operation.  Termination of a Mudharabah Contract:  Before the start of Mudharabah work, the contract is regarded as a nonbinding contract, and therefore it can be terminated by either of the two parties by giving a notice to the other party.  Other instances where a Mudharabah contract can be liquidated as stated by AAOIFI 1. On the date of maturity if the two parties had earlier agreed to set a time limit. 2. When the funds of the Mudharabah contract have been exhausted or have suffered losses. 3. The death of the Mudarib or the liquidation of the institution that acts as Mudarib. 4. Insanity of any of the parties to the Mudharabah contract. 1. Kafalah (Guarantee) ‫مهمة‬  Kafalah means guarantee of “al-nafs” or oneself.  Classical jurists defined kafalah as “a conjoining of the guarantor’s liability to the liability of the guaranteed”.  It may also be defined as a contract which combines one’s liability with another person’s liability.  Legally, in Kafalah, a third party becomes surety for the payment of debt unpaid by the person originally liable.  Kafalah is a guaranteed contract on a certain asset, usufruct and/or service provided by a guarantor to the parties involved. 1. Kafalah bi al-mal is a guarantee to return an asset to its owner. ‫مهم‬ 2. Kafalah bi al-nafs is a guarantee to bring someone to a specific authority, such as the judiciary. Kafalah bi al-mal may be further divided into three main categories: a) Kafalah bi al-dayn is a guarantee for the repayment of another party’s loan obligation. b) Kafalah bi al-ayn is a guarantee of payment for an item or a guarantee of delivery in a transaction. c) Kafalah bi al-darak is a guarantee that an asset is free from any encumbrances (liabilities/burdens). This guarantee is specific for transactions that involve the transfer of titles or rights and ensures that an asset is free from any encumbrances.  2) Rahn ‫مهم جًدا‬  Literally, Rahn is an Arabic noun derived from the word rahana which means either constancy and continuity, or holding and binding.  Technically, Rahn, which is also termed as pawning, mortgage, collateral, charge, lien and pledge, refers to taking a property as a security against a debt, whereby the secured property can be utilised to repay the debt in the case of nonpayment.  Conditions related to the debt/liability ‫مهم‬ Based on the different opinions of Muslim jurists, the conditions related to the underlying debt of Rahn can be summarised as follows: 1. The underlying debt must be an established, binding and enforceable one, either through a loan, sale, or damages in the torts against a property. 2. The underlying debt must be known and defined to both contracting parties. 3. The underlying debt must be matured/binding or about to be matured.  Conditions related to the receipt/possession of the pawned object The pawned object should be in the receipt or possession of the creditors. There are several conditions for its validity, mainly: 1. permission of the debtor. 2. eligibility of the contracting parties. 3. permanency of possession. Wakalah  Literally, the term Wakalah is a noun of the word wakkala which has several meanings, including performing a task on behalf of others, preservation and delegation of a job to another.  In technical terms, a Wakalah refers to authorising another person to undertake any dealings on one’s behalf.  According to the AAOIFI , Wakalah is “the act of one party delegating the other to act on its behalf in what can be a subject matter of delegation”.  The Wakalah is basically a nonbinding contract, whereby the principal or the agent may withdraw at any time by a mutual agreement, unilateral termination, discharging the obligation, destruction of the subject matter and the death or loss of legal capacity of the contracting parties.  Basic Rules and Conditions of a Wakalah Contract 1) Conditions related to the sighah (offer and acceptance)  Like other contracts, the sighah of wakalah also requires offer and acceptance.  The jurists agree that the acceptance of Wakalah is not restricted to verbal indication alone.  Rather, it can be established through several other means such as action, writing, sign (gesture), etc.  The jurists also rule that the acceptance can either be done immediately or delayed. 2) Conditions related to the principal (muwakkil) and the agent (wakil) Among the conditions that both principal and agent need to satisfy are: a) Being eligible to take the actions (ahliyyah). b) The principal should commission the agency based on his freewill without any coercion from others. In the same manner, the agent should not be forced in conducting the tasks delegated to him/her. 3) Conditions related to the object of agency contract a) The object of an agency contract should belong to the principal. Thus, he should have the right of disposal. b) The object of an agency contract should be eligible for legal authorisation, such as financial matters, etc. As such, a wakalah is impermissible in pure acts of worship such as prayer and fasting, oath-taking, and testimony. Meanwhile, in acts of worship that have a financial element such as zakat, hajj, and slaughtering sacrificial animals, the Wakalah is allowed by most scholars. c) The object of an agency contract should not involve activities prohibited in Shari á h or acts of dishonesty such as theft and usurpation of property, trading impermissible commodities or conducting riba-based business. d) The object of an agency contract must be known in order to avoid uncertainty (Gharar). e) The object of an agency contract cannot be the utilisation of public properties such as the collection of wood from public lands. Types of Wakalah Contract ‫مهم‬ ISLAMIC FINANCIAL MARKET ‫التشابتر مهم‬  ‫اختياري او صح وخطأ‬  Money Market is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.  The tenure in money market transactions is from overnight to 12 months, although the most common tenure is three months or less.  The money market can be described as the financial market for transactions in wholesale short-term funds.  Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, Treasury bills, commercial paper, federal funds and repurchase agreements (repos).  Capital markets  caters for long-term financial transactions with maturities longer than 12 months.  The financial instruments in the capital market vary more than the money market and they include Sukuk, Bonds, and Equities.  Transactions in capital market instruments are either exchange traded or OTC.  Commodity market  offers trading in commodities and precious metals and is used by hedgers and traders.  Derivative markets  are markets for financial instruments whose values are derived from underlying instruments such as from those in the money and capital markets. The instruments traded include futures, options, swaps and forward rate agreements.  The derivative market caters for future delivery in contrast to other markets where settlements are done on a spot basis.  Foreign exchange market  is a market for transactions in foreign currencies, both on a spot and forward delivery basis. All transactions in this market are OTC and done in currencies such as US Dollar, British Pound Sterling, Euro, Singapore Dollar, and Japanese Yen. ‫مهم ‪ ,‬اختياري او صح وخطأ او مقالي‬  ‫املكونات تعداد فقط‬  Treasury Bills  Treasury bills are short-term government securities traded on a yield basis; they represent the short-term debt obligations of a national government.  The typical maturities of a treasury bill are three, six and 12 months. The issuing government pays no interest on treasury bills.  Since they are traded at a discount from the face value, the investor’s yield is derived from the increase in value of the security between the time it was issued and the time it matures.  Repurchase Agreements  Repurchase Agreements (REPOs) are not a typical instrument but rather a widely used transaction in the money markets.  Generally, REPOs represent bilateral transactions encompassing the purchase and resale of securities by agreement; arranged by selling securities to an investor with an agreement to purchase them back from the investor at a fixed price on a fixed date.  Negotiable Certificates of Deposit  Negotiable Certificate of Deposit (CD) is created from a bank deposit and represents a bank-issued security that documents a deposit and specifies the interest rate and maturity date.  The purpose of creating this instrument is to enable these deposits to trade on the secondary market.  Due to the specified maturity, a CD is a term security.  The CD is a bearer instrument which implies that whoever holds the instrument at maturity receives the principal and interest.  Commercial Papers  Commercial paper securities are short-term, unsecured (promissory notes) debt instruments issued by corporations that mature in no longer than 270 days.  As this instrument is unsecured, it is usually issued by companies with a good credit rating.  Yields on commercial papers are typically higher than government securities of similar maturities, reflecting the risk spread.  Banker’s Acceptance  Banker’s acceptances (BAs) are short-term, zero coupon debt papers issued by companies.  They are guaranteed by a bank and are therefore known as BAs.  The bank guarantee enhances credit rating and makes them transferable, therefore they are suitable for secondary market trading.  ‫ مهم جًدا‬, ‫ مهم‬, ‫مهم‬ ‫ تعداد أربع فقرات‬, ‫مقاااالي‬ Islamic Conventional Interbank Market Utilizes Shariah-compliant contracts Issues debt contract for such as Mudharabah, Murabahah and placement of funds. Wakalah. Issuance Process Must be Shariah-compliant and Must be approved by the approved by both the Shariah Council respective financial and Shariah committee. regulator. Types of Structure Structured based on assets, equity and Structured based on debt debts. only. Investors Both Islamic and conventional Conventional investors investors. only. Money Market Mudharabah interbank. Investment Deposit types: Instruments Wadiah Acceptence. Qard commodity Interbank placement Murabahah. Wakalah Deposit. (deposit) Investmant Account Platform. Profit Calculation for Mudarabah Interbank Investment  The formula to calculate the Profit payable to the investing bank is as follows: 𝑃𝑟𝑡(𝐾) 𝑋= ‫مهم جًدا‬ 36500 Where: X = Amount of profit to be paid to investing bank P = Face value or principal amount of investment r = Gross profit rate before distribution declared by receiving bank on one year investments. t = Tenure in days of investment K = Profit-sharing ratio Suppose Kuwait Finance House (KFH) has RM5 million surplus funds and wishes to place it out for 30 days. Similarly, assume that Bank Islam Malaysia Berhad is in need of a similar amount for the same tenure. Further, assume both banks agreed that the profit-sharing ratio for this investment is 70:30 where 70% is in favour of KFH. Let us assume that Bank Islam declared a gross profit rate of 5.8% per annum before distribution. ‫مهم جًدا‬ KFH will therefore receive a net profit of RM16,684.93 or a return of 4.06% per annum for the 30-day investment. 𝑃𝑟𝑡(𝐾) 𝑋= 36500 Therefore, on Day 30, Bank Islam is liable to pay RM5,016,684.93 to KFH (i.e., the principal plus profit due). 2. COMMODITY MURABAHAH  Commodity Murabahah is a popular term used in the market to imply a contract of Tawarruq.  The term Tawarruq implies a sale contract whereby a buyer buys an asset from a seller with deferred payment, and subsequently sells the asset to the third party on cash with a price less than the deferred price, for the purpose of obtaining cash.  This transaction is called Tawarruq mainly because when the buyer purchases the asset on deferred terms, it is not the buyer’s interest to utilise or benefit from the purchased asset, rather it is to facilitate him/her to attain liquidity. Commodity Murabahah The formula to calculate the profit payable to the investing bank is as follows: 𝑃𝑟𝑡 ‫مهم جًدا‬ 𝑋= 36500 Where:  X = Amount of profit to be paid to investing bank  P = Face value or principal amount of investment  r = Annual profit rate  t = Tenure in days of investment Similar to MII, the total amount payable to the investing bank upon maturity will be compromised of the principal invested plus X, the profit earned based on Murabahah. 3. WAKALAH INVESTMENT  Between Islamic banks, interbank liquidity can be managed using a Wakalah agency contract.  Under a Wakalah agreement, the muwakkil (investing bank) appoints the investee bank (wakil) as its agent to invest in Shariah-compliant transactions on behalf of the muwakkil.  The investee bank, as the wakil, will notify the investing bank of the profits expected to be generated upon placement of funds. Find the price of an MITB that has a face value of RM 5,000,000 and is sold at a discount rate of 4.8% assuming that, the number of days to maturity is 30 days. ‫مهم جًدا‬ 4.8×30 Answer: Proceeds of MITB = 5,000,000 1 − 36500 Price of MITB = 5,000,000 [1- 0.003945205] = 5,000,000 (0.996054795) = RM 4,980,273.975  ‫مهم‬ Calculation of INID Price Issue date: 13 December 2014 Maturity date: 13 December 2015 Nominal Value: RM 5,000,000 Profit sharing ratio: 75:25 Expected dividend rate: 11.5% Profit date: Profit is paid quarterly 11.5×0.75×90 Price of INID with RM100 Nominal value: + 1 × 100 = 𝑅𝑀102.1267 36,500 Therefore, the price of the INID with RM 5,000,000 nominal value is: 102.1267×5,000,000 Price = = 𝑅𝑀 5,106,335 100 Takaful ( Islamic Insurance)  Concept of insurance in its essence is not prohibited in Islam; it is the riba or interest element, which is the financial back-bone of modern day conventional insurance, is what has been declared haram and prohibited in Islam  Insurance is the sale of money for money, of a greater or lesser amount, with a delay in one of the payments.  It involves riba, because the insurance companies take people’s money and promise to pay them more or less money when a specific accident against which insurance has been taken out happens.  ‫مهم‬ Riba ? ‫ ملاذا ت حتري التأمي التجاري‬: ‫صياغة السؤال ممكن تكون كذا‬  Conventional insurance contains riba in two situations: ‫ وجود الربا والغرر وامليسر‬: ‫اإلجابة‬ 1. No equality between insured’s and insurer’s compensation. 2. Profit which is received from its investment in riba-related transactions. Gharar  Gharar exists in insurance contracts whereby the subject matter of the contract is not certain until the insured event has taken place.  The insured does not know the amount of compensation S/he is likely to get in case of an accident or a peril as the insured does not know if there will be compensation as the outcome of the contract is not known Maysir  Insurance contains an element of Maysir because policyholders often bet premiums on the condition that the insurer will pay compensation in an amount higher than the premium paid during the occurrence of the insured event.  There are three aspects of mutuality embodied in Takaful, namely mutual help, mutual responsibility and mutual protection from losses. ‫مهم‬  Takaful is a system whereby participants contribute regularly to a common fund and intend to jointly guarantee each other, i.e., to compensate any of the participants who are inflicted with a specific risk.  When a person participates in a Takaful scheme, he does not only seek protection for himself but also jointly cooperates with other participants to mutually contribute to one another in case of need.  ‫مهم‬ The fundamental difference between Takaful and conventional insurance is rooted in the type of contract adopted:  Conventional insurance adopts bilateral contracts, i.e. payment of premium in consideration of payment of compensation in the event of defined loss.  Takaful is based on Tabarru (Charity) which is unilateral in nature.  All Takaful participants mutually insure one another based on the spirit of brotherhood, mutual help and mutual indemnity. 2) Wakalah model ‫مهم جًدااا‬  In a Wakalah model, participants are the owner of the Takaful and operators serve as their agent (wakil) to manage the fund for a defined fee.  Takaful operator in a Wakalah model cannot share in the investment profit; rather they are entitled to a fee based on their performance in the investment.  ‫مهم‬ 3) Hybrid Mudarabah and Wakalah model  In a hybrid of Wakalah and Mudarabah models, the Takaful operator is entitled to an agency fee for managing the fund as a Wakil and a share of profit for managing the investment of the fund as the Mudarib. 4) Waqf model (endowment) ‫ اختياري او صح وخطأ‬, ‫مهم‬  A Waqf fund consists of shareholders’ donations and participants’ contributions in which they (shareholders and participants) lose ownership rights because the Waqf fund can only be used for the benefits of all participants.  Islamic Microfinance and Social Finance ‫التشابتر اغلبه مهم‬ Chapter8  Introduction to Islamic Microfinance ‫مهم جًدا‬  Islamic microfinance refers to the provision of financial services to low-income individuals or groups in compliance with Islamic law (Sharia). These services are designed to help this demographic start or expand small businesses, manage risks, and improve their overall economic status without contravening Islamic principles against interest (Riba). In another words, Micro Finance means of providing financial services to poor.  Average transaction size is very small.  Services offered by profit and non-profit organizations.  Microcredit, micro savings, micro insurance, and other transactional products.  Principles of Islamic Microfinance  Prohibition of Interest  Risk Sharing  Social Development Mission  Prohibition of Speculative Behavior.  Purity of Contracts.  Asset Based Financing.  Shariah -Approved Activity..  Islamic Microfinance Products Murabaha – Cost Plus Sale Murabaha means a sale on mutually agreed profit, also known as cost plus sales, it is one of the most widely used instruments for short-term agricultural financing where the Bank/MFI undertakes to supply specific goods or commodities at mutually agreed profit to the client. Utilization : Murabahah can be utilize for Purchase of seed, fertilizer, harvesting and planting equipments, agri. Inputs, tractor, pesticides, farming goods, Solar Tube-wells etc. Salam – Forward Sale Salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific crop/goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract Utilization. Salam is ideal product for Agricultural Financing, through which a farmer can fulfill all the financial needs of the crop circle e.g. liquidity, seed, pesticide, fertilizer, harvesting,  Islamic Microfinance Products Istisna - Manufacturing contract A pre-delivery financing instrument used to finance projects where commodity is transacted before it comes into existence. It is an order to manufacture and payment of price, unlike Salam, it’s flexible, where price may be paid in advance, or in installments or on delivery of good. Utilization: Istisna May Utilize for small manufacturing Business, dairy or Agri. production, Construction of godowns and cold storage, Rural entrepreneur Development etc. Ijara – Islamic Lease Ijarah Means Operating lease. It is an arrangement in which the Islamic Bank lease Agri. equipments, Tractor & light vehicles, Agri. Instruments, buildings or other facilities to a client, against an agreed rental. Utilization : Leasing of Tractors, Agri. Equipment, Threshers, Tub wells, small production unit lease, Sugarcane planter, Rice planter, harvesting vehicles etc.  Islamic Microfinance Products Diminishing Musharkah Diminishing Musharkah is a form of Musharakah where the Bank/MFI and the client participate in a joint commercial enterprise or property. This attains the form of undivided ownership of both, Over certain period the equity of financier is purchased by the client Utilization: It can be utilize for Rural housing, forest development, agri. Inputs, farming, sprinkler/drip/solar pumps, tube wells, Refrigeration vans etc. Musharakah & Mudarabah- Partnership Musharakah & Mudaraba means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. Utilization : Musharkah and Mudarabah can be used for Microenterprise & SME’S setup’s, Agricultural Joint venture projects, Dairy and livestock development etc.  Concept Of Social Finance  Social economy usually refer to the economic activities of third sector.  The primary objective of the third sector is to realize the social welfare of its members, customers, or society as a whole, especially the underprivileged.  Social finance tries to resolve social, economic or environmental issues that are ignored or inadequately addressed by the formal public sector and profit- oriented private sector.  Social finance institution aim to fill the gap between social impact and financial profit in their financial decision. Social finance serves as a middle ground between traditional business, whose main driver is to achieve financial value and traditional charity, whose main driver is to achieve social value. Social Charity Profit Finance Philantropy (Securing enough (Investment) (Taking care of social profit for securing its need of society) sustainability) ROLE OF ECONOMIC AGENTS IN SOCIAL FINANCE  Bayt al-mal  Bayt al-zakah  Waqf institutions  Non-Governmental Organization (NGOs) and charitable organizations  Private sector business  Banks  Microfinance Institutions  Takaful and micro-takaful  BAYT AL-MAL  Bayt al-mal is the public treasury initiated by Prophet Muhammad SAW.  Its sources of funds included zakah, donations and other sources.  The funds collected were channeled to fulfil the responsibilities of the nation such as defense, the salary of government employees, and other public expenditures, taking into consideration the social needs of the society as a priority.  When state revenues increased near the end of the Prophet’s (SAW life, he repeatedly proclaimed, “Whoever leaves behind wealth, it is for his family; and whoever leaves behind a debt or family in need, they are my responsibility” (Muslim, hadith no. 867)  BAYT AL-ZAKAH  Historically, it was under bayt al-mal and it played an important role in the distribution of income and wealth to create social welfare.  In addition to its role as part of the fiscal system, bayt al-zakah formed the backbone of social justice.  Zakah is not merely a mandatory religious tax; it ensures that wealth circulates throughout the entire society, as mention in the following verse: “……….this is so that it does not just circulate among those of you who are rich” (Surah al-Hashr: 7)  Zakat today can still be a major source of funds to encourage community economic empowerment and the equal distribution of resources.  It not only reduces poverty but also establishes social justice.  Waqf Institutions  Apart from zakah, waqf is another instrument in Islam which is used for socio-economic development.  Waqf has two function: (1) ‘ibadah (2) social function  It comes from a strong sense of faith and solidarity among human beings.  However, waqf has not been active in most Muslim countries in the past few decades as compared to earlier times, for example, during the Ottoman empire.  Mismanagement was probably among the key reasons that prevented waqf achieving the expected results.  To reactive waqf there is a need for the effective coordination of waqf at the micro and macro levels.  OTHER INSTITUTIONS Business can contribute to the Extended financing to small and social economy by considering medium sized enterprises (SMEs) the social impact of their No track record of paying Big Data debts. activities as an integral part of Lack of collateral to secure their decision making. loan Portfolio PRIVATE BANK for SMEs BUSINESS MICRO TAKAFUL, MICRO- Provide financial services including insurance, saving and financing to FINANCE TAKAFUL Takaful concepts is about lower income clients. mutual help and Designed to reach low-income collaboration. communities to boost real sector growth with relative small financing scheme.  What Is Social Security?  Social security is a fundamental human need.  The sufferings from events such as sudden sickness, death, disability, disease, unemployment, fire, flood, storm, drowning, accidents related to transportation, and the financial loss take the victim and his dependents towards poverty.  This actuality requires that social security should be treated as a basic human need over a very wide range of human activities and situations.  The economic situation of the affected people becomes so unsound that they need economic help.  Modern Concept Of Social Security  The modern concept of Social Security has assumed the shape of old-age pension, unemployment benefit, sickness benefit, death grant, disability allowance, family allowance, etc.  In the United States, Social Security provides a minimum "foundation of protection" for retired workers, and for workers and their families who face a loss of income due to disability or the death of a family wage earner.  Nowadays these programs are designed to provide allowances and services to individuals in the event of retirement, sickness, disability, death or unemployment. In particular, it refers to the social insurance portion of that act, which uses contributions made by workers and employers to provide income to people and their families during retirement or in the case of unemployment, disability or death.  Islamic Concept Of Social Security  In Islam, right from the beginning, fulfillment of the basic needs of everyone who is unable to meet his/her needs was conceived to be the concern of the State.  Zakat is the first institution of social security in Islam. Payment of 2.5 percent of his/her savings for the zakat fund is one of the fundamental duties of a Muslim.  The State is responsible to collect zakat and make arrangements for its distribution. Non-payment of it is equivalent to waging war against the State.  Non-Muslims are also included in one of the categories of the recipients of zakat. While prescribing laws for the distribution of zakat, the Qur'an includes them among those 'whose hearts are to be conciliated'. Roles Of Islamic Instruments As Social Security WAQF