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#2 Types of Islamic Finance - ACCA / CPA / SFM -By Saheb Academy - YouTube
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academy now let's go to the video
hi everyone welcome back to second video
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of islamic finance
this topic of financial management that
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we have started. Now in the previous
video in the first video of islamic
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finance we have discussed a brief
concept about it
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and we have also seen that this system
entirely relies upon the islamic law
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or in arabic it is also called Sharia
fine
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okay and then we also discuss about a
bit history over there you can see that
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in the previous video not that
important
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but the most important thing is the
principles of islamic finance yeah
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this is very important see here
principles of islamic finance
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in islam interest is completely
forbidden yeah you can't
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use money to make money paying or
charging interest from people is
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completely forbidden in islam all right
so if any transaction involves interest
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then that's not allowed in islamic
financial institutions
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right and then investing in businesses
involved in prohibited activities yes
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islamic financial institutions you know
they can't be involved in any businesses
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which deals in prohibited activities
prohibited activities such as you know
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gambling, prostitution, pornography and then what
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do you say
alcohol the businesses which deal in
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alcohol, pork yeah all these are
prohibited activities in islam music
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industry
yeah all these things fine so if any
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businesses are involved in these
activities
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they can't get credit or anything from
islamic financial institution they can't
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get in contract with
islamic banks fine and then speculation
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is also not allowed okay you can't deal
in what you say futures market or option
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market right and then
uncertainty and risk if any contract
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where you know the terms of the contract
are not
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clear yeah not clearly mentioned and
they depend on some future event
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then that's also not allowed all right
because there is too much risk
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it is equal to gambling yeah both of
these things are like
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gambling only so that's a prohibited
activity in islam so you can't deal in
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those type of transactions
and those type of contracts you know
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such as complex derivative instruments
and short selling
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are completely prohibited fine and the
main principle one more principle is the
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risk should be shared yeah the risk of
any contract between the lender and the
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borrower must be shared
fine that's the main principle of
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islamic finance fine and then the last
is wealth must be generated from
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legitimate trade and asset-based
investment either it should be
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asset-based or asset-backed
all right for every every transaction
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there must be an underlying asset
yeah you can't just use money to make
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money that's just interest
all right you can't do that so that's
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the last principle of islamic finance
fine
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so i hope you have recalled whatever we
did in the first video
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yeah if you want to go deeper then
please go in the first video and watch
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it again all right
okay then i'll put the link in the
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description below now coming back to
this video
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in this video what we're going to do is
in this video we are going to see
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different forms of contracts of islamic
finance yeah different types of products
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or the services that are offered by
islamic banks
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fine so what are the allowed ways to do
you know
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banking that's what we are going to see
over here now as you can see the
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principles of islamic finance there are
so many restrictions so tell us what is
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allowed
yeah this is it right these are the five
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major contracts that are allowed
in islam fine so now let's discuss this
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one by one madaraba musharraka sukuk
yeah let's discuss this one by one okay
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now here we have the first contract of
islamic finance see here Mudaraba
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Mudaraba is same like partnership okay
partnership or joint venture
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here what will happen is here there will
be two person involved okay
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maximum two person only yeah it can't be
more than two so one party will bring
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the capital
yeah one party will bring the money and
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the other party will bring the
skill yeah it's a partnership
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transaction where
one party supplies the money hundred
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percent of capital
and the other provides management
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expertise yeah other party will bring
the skill
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now this party who brings the capital
will be called as money supplier of
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financer in english
but in arabic it is called as he is
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called as rab-al-maal
okay rab-al-maal and then the party which
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brings the skill
the management expertise the labor
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provider who will do all the work
yeah this person the working partner
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will be called as Mudarib
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okay so now this person who is the money
supplier the financer
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he will only contribute capital he will
not participate in management okay he'll
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be the sleeping partner
working partner sleeping partner is that
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clear right
so now here what will happen this
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business either this business will make
profit if it makes profit then it will
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be distributed in the
pre-decided ratio okay the ratio the
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profit sharing ratio will be decided in
beforehand itself okay but if in case
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god forbid there is a loss then entirely
the loss will be borne by the
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financer okay the who the rab-al-maal
the money supplier the person who has
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brought in the capital entire
loss will be borne by the the capital
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provider
okay why is it like that see here
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because it is considered that you know
this person has done his 100 person yeah
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he has
participated and he has worked really
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hard and still he couldn't earn profit
he couldn't make profit in this business
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then it is believed that it is argued
that you know
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he has done 100% of his work so he can't
be penalized yeah he can't be because he
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doesn't have the money that's why he has
only brought his skill
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yeah yeah he doesn't have money and or
anything so that's why he can't
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bear the loss only the finance provider
will bear the loss it's argued like that
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in islam
okay is that clear so this is what
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mudaraba is
only two people one will bring the
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capital other will bring the skill
yeah if there is a profit it will it
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will be divided in the it will be
distributed in the pre-decided ratio
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yeah and if there is a loss the loss
will entirely be borne by
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the capital provider and there is an
exception over here if this person is
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involved in some fraud or anything
yeah if the loss is because of his
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negligence or his
he is guilty then the loss will be borne
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by this person okay
in case mistake is there by this person
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clear otherwise normally the entire loss
will be borne by the capital provider
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this is what Mudaraba contract is simple
partnership
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all right now let's see another one now
you can pause the video and take this
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note if you like yeah otherwise just
continue on
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now here we have the second form of
contract see here Musharaka
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now Musharaka is also same like
mudaraba only but there are big
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differences so see here
it's a joint enterprise or partnership
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structure yeah same like Mudaraba
only where at least two parties or more
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yeah that's the main thing here the
parties can be more also
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in mudaraba we saw there will be only
two parties right
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one rab-al-maal the finance provider and
one the
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labor provider Mudarib but here it's not
like that here the parties can be
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more yeah multiple parties can be there
yeah so see here multiple parties can be
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there they will bring their capital as
well as skills
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bring capital and skills and everyone
are working partners
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yeah or they want they can be sleeping
partners but everyone can be
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what they can be working partner they
can participate in the management of the
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business
all right and these person the partners
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they are called as
musharrek in this contract okay
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musharik everyone are musharik
musharik musharik musharik
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fine everyone can participate in
management now the
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main difference here is if there is a
profit then the profit will be
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distributed in the
pre-decided ratio all right whatever
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they decide in the beginning itself
but then if there is a loss then the
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loss has to be strictly it has to be
distributed in the capital ratio okay
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whatever capital
they brought in that ratio only the loss
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will be
shared among them build among them all
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right so this is what Musharaka is okay
the main difference is the loss
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difference in the mudaruba
in the mudrabah we saw the loss is
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entirely borne by the finance provider
yeah but here the finance is provided by
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everyone
so what will happen here is that the
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loss will be
distributed in the capital ratio of the
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mushariks the partners
clear and one more difference was that
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everyone are working partner over here
everyone can participate in management
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but here
only the the skill provider the manager
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he's the manager right he's only
participating here in mudaraba
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in mudaraba I mean yeah. In Musharaka here
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everyone can participate in the
management of the business clear so this
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is what Musharaka is simple very simple
now let's move on to the third contract
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you understood right Musharaka nothing
it's simple
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and then we have sukuk now what are
sukuk? sukuk are the islamic bonds you
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know the bonds that are structured in
such a way
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as to generate returns to investors
without infringing islamic law
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that prohibits interest now normally
conventionally what happens
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yeah normal bonds how are they ? when the
company issues bond the conventional
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bonds then
they pay interest on them to the bond
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holders right if you have purchased the
bonds that means you are receiving
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interest from them
yeah you as an investor if you have
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purchased any bonds then you will be
receiving interest
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from the company which has issued the
bonds isn't it yes that's what
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conventionally normally happens but here
in islam
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interest is completely forbidden
interest is not allowed
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so if interest is not allowed then how
can bonds work
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that's what you have to think about all
right so here the bonds are structured
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in such a way
to generate returns to investors without
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infringing islamic law that prohibits
interest interest can't be there
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in these bonds in this these bonds
interest are not there but investors are
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getting returns
how does that work let's understand this
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see here sukuk aims at
profit sharing by offering the investor
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ownership in business and assets now
let's take an example and understand
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this see here
let's say i have a company right and
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let's say this company issued
bonds yes it is should so cook so
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car issued fine so now let's say you
subscribe you purchase those to cook now
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you will be paying money right so i'm
getting dollars i'm getting money
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so now what i'm going to do as a company
first i will appoint and manager sukuk
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manager
right so that sukuk manager will be you
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know in managing
everything related to these bonds fine
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so now what the company will do is
company will purchase an asset normally
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why do you raise
debt finance mostly to purchase asset
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right so what you're going to do is you
are going to purchase an asset the
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company is going to purchase an asset
right so now what the company will do is
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company will give you
ownership in those assets because which
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money is this
this money is of bond holders you are a
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bondholder right why you are a
bondholder
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because you have subscribed to the bonds
the sukuk right so you will get
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ownership of the
asset which has been purchased from your
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money yeah the cash flow which the
company will get from you
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yeah after issuing the bonds from that
they will purchase the asset
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and the ownership of that asset will be
given to you to the bondholders
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fine so when you become owner of
something yeah when you become owner of
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something
then you are entitled to the benefits
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and risk coming out of that
asset right so whatever income that will
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be generated from that asset
you will get a part of that so that's
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how you will receive
income from these bonds okay you will
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not get interest okay interest is
completely forbidden in islam
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you know that yeah but here in sukuk
there is a profit sharing objective
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by offering the investor ownership in
asset
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right when you get the ownership you are
entitled to the benefits as well as the
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risk of that asset
so whatever money has been generated
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because of that asset
yeah a part of that will be sent to you
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yeah it will be given to you it will be
distributed to you right participation
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in profit that's how you will
participate in the
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profit of that asset yeah because you own
it
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right you as a sukuk holder fine so this
is how sukuk works
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so unlike conventional bonds sukuk are
linked to an
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underlying tangible asset yeah an asset
will be there
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you remember the what the last principle
of islamic finance
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wealth must be generated from legitimate
trade and
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asset based investment okay this is what
it is yeah there is an
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underlying asset over here you are not
just getting
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you know interest no you are not getting
interest over here you are getting
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profit you are getting
income over here from the asset based
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investment okay
is that clear easy right so this is what
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sukuk is
all right simple okay and then the
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fourth type of contract we have
is ajara ijara is similar to a lease
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contract okay
so when we think about leases what comes
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to our mind we think about the principal
amount
[760]
plus interest yes that's how leases
works isn't it the lessee will make
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payment to the lesser
for using the asset and that payment
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will include
what principal amount plus interest but
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now here in islam
interest is completely forbidden so how
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these contracts are going to work
yeah how is it going to work so see here
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that's what we have to understand
an ijara transaction is the islamic
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equivalent of a lease contract
where one party lessor allows another
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party lessee
to use their asset against the payment
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of a rental fee
now here since interest is forbidden so
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a predetermined rental fee will be
agreed upon
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between the parties the lesser and
lessee and that rental fee will be paid
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which doesn't include interest it is a
predetermined fee okay it's not like
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compounding interest and all
all right yes so now let's understand
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that in very much detail see here
let's say you need a car and you don't
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have money to purchase it outright okay
immediately you don't have money
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to purchase it so what are you going to
do is you are going to approach islamic
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bank
okay and you will get an agreement with
[824]
them of a
ijara yeah you will get an ijara contract
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now what is this ijara contract what
will happen is see here
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as i said you need a car so bank will
purchase the car and make the payment in
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whole in one go
right so they will make the whole
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payment to the vendor
and bank will instruct the vendor this
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honda showroom this manager
to deliver it to you okay so the car
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will be delivered to you
okay you will have the position of the
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car yeah and you will have to make an
initial deposit to the bank okay initial
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some money you have to
pay to the bank for the guarantee or
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something yeah
but the ownership of that car will
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remain with the bank
all right the ownership will remain with
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the bank so whatever benefits and risk
are there of that asset of that car will
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remain with the
bank itself so if there is any major
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maintenance cost
yeah there's any maintenance then the
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bank will have to build the maintenance
cost and everything
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yeah but if there's a minor maintenance
or something then you will have to build
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it
yourself but now how you are going to
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pay to the bank
you are going to pay in form of rentals
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okay the rentals will be agreed
in the beginning itself okay
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predetermined rentals fine
so you will pay the rentals and at the
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end of the lease period
yeah you will also decide the least
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period also with the bank at the
beginning itself
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so at the end of the lease period what
will happen is
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at the end of the lease period the bank
will give you option
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do you want to buy the asset yeah buy
the car
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just by making some extra additional
payment yeah a new agreement will be
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made
or do you want to return the car back
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to the bank yeah
that's the option will be given to the
[919]
to the lessee
yeah to you fine so this is what a ajara
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contract is
all right it's a simple contract you
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understood this initial deposit you will
make
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bank will purchase the car for you and
make the payment to the this honda guy
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yeah this manager
then this manager will deliver the car
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to you he will give the position to you
but the ownership will remain with the
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bank and bank will
you know bank will be responsible for
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any maintenance cost and everything
because
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the risk and reward are with the bank
because they have the ownership right
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so yes and you will be paying regular in
rentals to the bank and
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at the end you will be given the option
either to buy or return the asset back
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clear this is what a lease contract is
simple lease contract yeah
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if you want you can pause the video and
take this down right okay
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so now let's move on now here we have
the last the final contract of islamic
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finance
that you're going to see in this video
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Murabaha the fifth contract
so far we have covered four contracts
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mudaraba musharaka
sukuk and ijara so now what is this
[978]
Murabaha
see Murabaha is nothing but just a credit
[981]
sale okay credit sale contract that's
all
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Murabaha is. See the meaning over here a
Murabaha transaction is a deferred payment
[988]
sale
or an installment credit sale and is
[991]
mostly used for the purchase of goods
for immediate delivery on deferred
[996]
payment basis
now you already know what is installment
[999]
credit sale if the goods are of hundred
dollars you will pay
[1002]
20 20 20 in installments but now what is
deferred payment basis?
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deferred payment means what you are
postponing the payment
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at a later date okay you will pay at a
later date that's what deferred payment
[1015]
basis is simple
but now let's understand how this muraba
[1019]
will work
see for example let's say you need to
[1021]
buy an asset or some goods
and you don't have money to buy it
[1025]
outright immediately you don't have
enough money
[1027]
you have some money so now what are you
going to do is you have to get into
[1030]
a contract contract with the bank
islamic bank obviously
[1035]
right so now what the bank will do is
bank will purchase the asset or the
[1039]
goods for you
and the bank will sell it to you at a
[1042]
profit margin
for example if the bank purchased that
[1046]
asset for 100
right so what the bank will do bank will
[1050]
add 20
more profit 100 plus 20 a markup
[1054]
and sell it to you for 120 and in the
beginning only they will be
[1058]
it will be decided yeah the markup and
everything will be different decided at
[1062]
the
beginning itself it is not like the bank
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will hide any terms of contract from you
okay
[1067]
they will disclose everything so it will
not be injustice to you
[1071]
right and then what you have to do is
after getting the asset
[1075]
you have to pay in form of installments
okay whatever you agreed upon
[1078]
yeah in installments or on deferred
payment basis you can also promise them
[1083]
to pay at a later date
yeah that can also happen yes simple
[1086]
yeah this is what Murabaha
is yeah you want to ask it you approach
[1090]
to the bank bank will purchase it for
you and sell it to you
[1093]
with a profit margin cost plus profit
you have to pay in form of installments
[1097]
or
deferred payment basis clear that's what
[1100]
muraba
is simple is that easy so now what i'm
[1104]
gonna do is i'm gonna add timestamps in
the video if you want to revise or go
[1108]
back to any of these contracts
then just go to the description and see
[1111]
the timestamps and go back and
watch these okay fine okay then see in
[1116]
the next video right that's it for today
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