Is There Nothing In Our Country For Youth

It is a true incident of my life which I want to share with all of my brother and sisters specially in our country. I use net from an ISP once speed of net reduced so much that it started to tense my nerves while browsing.Therefore simply I launched a complaint on the help line of the company. As usual my ISP complaint resolving centre tried to resolve the issue through technical help on live cell phone call. But unfortunately we failed to resolve the issue. Therefore my ISP provider sent an expert to my home to resolve the issue. There came a young man with good manners and representing his parent organization.

To me every human being or living things comes to me is a blessing and gift of ALLAH, so I try my best to serve as much as I can. So I most humbly lead him to my study room where my laptop and wifi devices for waiting for his expert help. I asked him in a brotherly manners some personal questions let us presume his name was Mr. Amjad. Our discussions during upgrading of software of installed wifi equipment our discussions were as under.

Me: How are you Amjad?

Amjad: I am fine sir.

Me: Can I ask about your qualification.?

Amjad: Yes Sir I have got degree of engineering in Electronics & Telecommunication.

Me: Very good how is life

Amjad: Usual Sir no body cares about youth here.

Me: Why are you disappointed brother, you are still too young a long journey and lots of opportunities are waiting for you..

Amjad: No sir ; In countries of west opportunities and attractions as well as care and respect for  hardworking talented persons are more. Who cares in our country and give reward of talent as well as hard work. Look I got 1st position in F.Sc. in the district of Toba Tek Singh. Got engineering degree even then I lost  two years to search job and what I got is up to Rs.10000/- salary per month.

Me: You are right I agree with you to the point that system implemented here dose not care and support talented individual without bribery or political support. But brother if we realize that we are Muslim then each and every thing comes in perfect place. Being Muslim we here the call from ALLAH subha a Natala 5 times per day…..this luxury will not be available in any west country. We meet lot of Muslims and say Asslamoallikum many times and earn hassana which is also most precious. Some time before brother my father expired. Lot of  my friends and relatives came to me and prayed for my deceased father. If I would not have been in Pakistan and was residing in any countries of west will there be any Muslim come to pray for my father? If any how many? just few. So dear If we believe in ALLAH then we are respected as well as provided by all types of opportunities. I agree there will be hardships in this path but living human can face and only dead bodies cannot face the heard ships.So a wise man said

          Happiness Is not Getting What You Want All The Time……It is about loving what you already have and being grateful for it.


Never let success get to your head and never let failure get to your heart.

Amjad: Yes Sir absolutely true….. we had very nice discussion.

Me: Brother promises me that in your life if any living being comes to you in the hope of help never let him down even if you suffer any hardship in helping him please never leave him alone.

Amjad: I promise you sir.

Me: If every Pakistani youth (at least) promise that then we can be the best nation.

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Tribute To My Mothers

 I am here just because of my family who took care of me in all possible ways with in their reach from my birth to their death. But on this piece of some ….lines… I just want to share how my moms took care of me and how do I miss them. I know I am not a first class writer so I may not be able to explain all. But I still want to share that at every single moment I miss them.

   I was a special child for my family because I born after 10 years of my fathers marriage to his 2nd wife ( my mother). To have me my father sacrificed his first love of life my step mother( the word stop is used only to distinguish both personalities and from hereto end I will use word First mother in place step mother, who live in my heart and without whom I was no where) and my First mother also sacrificed her place of only one women in my fathers life by allowing and finding him my mother as his 2nd  wife.

From my child hood my moms cared me more than any thing even those days when automated machines were not available my first mother purchased new dress for me every day and herself stitched it for me to wear it in just a single day. So every day with new dress and new snap.From childhood some problems accompanied me which needed medication and I still remember that my first mother took me to hospitals, doctors, hakeems in far flung areas where ever she was expecting a cure. Family income was not high still I don’t understand how they provided best possible care. Mostly my First mother walked for miles to provide me care having me on her shoulders till the age 11.My mother went for Hajj and prayed five times a day and just asked one Dua from ALLAH … Let my child eat every thing and her prays were accepted and I was allowed to eat any thing I want at the age of 22.My First mother went for Hajj and she prayed there every moment for me  and done 17 Tawaf per day for me.

My mothers remaind usually away from me because b she was working women…… I missed her always …. and when ever i felt lonely or sick my First mother took me on her shoulders and keept me there even whole nights and walked in the home carrying me to keep me relax.

I still remeber the food that was always cooked specially for me separate from the food of all other family members. I still remeber how carefully and with love my First mother taught me the Nobel Quran and my Mother taught me the stories and life events of all Prophets, specifically Hazrat Mohammad (Salla ALLAH ho alihi wa alihi wassalam). She always requested me to pray for her after her death…. and said She only hope it from her all childs…. but I dont find myself doing prfectally as she desired….. My first mother said to me she want to daie in my hands only…. she spent her last year of life with me….. but again … life had a diffrent plan.

My first mother always said you are unique because general people do every thing with in a comfortable life and you have to fight every second pain and obstacles to achieve what u want. Every moment my heart breaks …. my eyes weep and my soul asks ALLAH to keep them in piece and forgive me for not  taking their care as much as they needed during their travel from this life to after life……

 

 

 
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Types and Structure of Sukuk

Types and Structure of Sukuk

Sukuk are among the most recent products that are created using structural application in the Islamic financial markets. In order to design flexible securities that could respond to different financing needs of economic agencies in the capital market on one hand and to comply with Islamic principles and standards on the other hand, Muslim scholars started thinking about designing Islamic financial instruments. To this aim, expansive studies were conducted into Shariah-compliant contracts and their ability to be used as instruments so that to design financial instruments that would be able to replace bonds and preferred stocks, which are mainly based on Riba and loans with interests. Eventually, Sukuk was designed as an alternative investment instrument for securities with fixed returns such as bonds that are Hiram in the holy Shariah of Islam. After the successful implantation of the Riba-free banking, Muslim scholars managed to design different financial instruments based on Sharia rules and the actual needs of the Islamic countries. These instruments could be divided into three categories:

First, non-profitable financial instruments that are based on the interest-free contracts. Second, profitable financial instruments with specified return rates that are designed based on trade contracts.

Third, profitable financial instruments that are designed with expected profit rates based on partnership contracts.

Now we discuss the some of the fourteen types of sukuk with respect to different types

1-Ijarah Sukuk:

Ijarah Sukuk are related to leased properties and assets, they carry equal values, and are issued by the owner of the leased property or his agent. The aim of the transaction at the end is to sell the leased  property through issuing Sukuk, accordingly, the holders of the certificates or Ijarah Sukuk own the asset and its charges during the rental period, each in proportionate to the certificates of Sukuk held in the leased  asset. Under an ijarah contract, the usufruct of a particular property is transferred from the owner to another person in exchange for a rental payment. In other words, it is a leasing agreement with the lessor referred to as the mujir, the lessee called the mustajir and the rent paid to the lessor called ujrah. Sharia law imposes restrictions on ijarah agreements that are not present in conventional leasing contracts, largely to protect the parties as far as possible from uncertainty and to ensure there is no ambiguity in the agreement

For example, there might be a leased building, the monthly or annual income of which goes to the certificate of Sukuk holders who are considered as partners in the ownership of the building. In addition to the return from rent, the holder of Sukuk may sell the same in the stock market.

In particular the duty to repair and maintain the property being leased remains with the lessor as owner as if the lessee was liable this would introduce an additional element of uncertainty with respect to the costs to the lessee as maintenance payments could be regarded as an extra rental element. Expenses related to the operation of a leased asset are, however, the responsibility of the lessee, such as fuel in the case of a leased vehicle or aircraft, or fertilizer and seeds in the case of leased land. Where a leased asset is accidentally destroyed or its usufruct value reduced, as in the case of leased farmland during periods of prolonged drought, then ijarah contracts can be cancelled by the lessee, but in modern practice leased assets usually are insured against such contingencies. If lessees are negligent in using the asset, which results in a reduction or the complete destruction of its value, they may be liable to compensate the owner. In practice ijarah leasing agreements have many clauses that are similar to conventional leasing arrangements. Where payments are late, the lessor cannot impose a penalty, as any gain from this would represent an additional burden for the lessee and a gain for the owner that would be comparable to Riba. The lessee may be obliged to donate an amount to charity however, as recognition that there has been a delay in the rental payment. If no payment is made, then use of the leased asset will revert to the owner, and the lessee may still be liable for the rental payments stipulated in the original contract. As an ijarah contract is for a predetermined period, and as the rent provides a regular monthly, quarterly or annual income, it is clearly well suited to be covered by the issue of securities that have many of the characteristics of bonds. As ijarah bonds are securities representing the ownership of well-defined assets subject to a lease contract, they may be traded in a secondary market at the prevailing price determined by market forces. There can be many issuers of ijarah securities, including ministries of finance, central banks, municipalities, and authorities responsible for waqaf or religious endowments, investment banks, or public or private companies. Such securities have maturity periods of five years or more, although at present there are few issues running for more than 10 years. It is important to note that ijarah certificates or securities represent a proportionate ownership claim over a leased asset, and therefore those who hold the securities have ownership responsibilities that only terminate when the securities mature, or if they are sold to another party who then assumes the responsibilities.

2- Contractor’s Sukuk:

A contractor’s or a supplier’s Sukuk can be issued by a contactor or a supplier of a good or a service. The Sukuk could be for existing commodities or those which would be offered during a contracted time in future. These sukuk carries equal values issued by a covenanter to provide or sell services described in the security, such services are to sold in a form of sukuk, so that the holders of the same shall to be the owners of such services and shall gain the proceeds from selling the same in the markets. An example of that is to provide educational or health programs in universities or hospitals. The holders of sukuk contribute in financing such educational or health programs till they are ready for the demanding students or patients. The sales income of such programs for the beneficiaries is one fourth return to the sukuk holders.

3-Potential Services Sukuk:

These Sukuk carries equal values issued by a contractor (or a supplier) or an agent having

A saleable services to Sukuk holders and such holders shall have the right to sell the same

In the stock market.

4- Istisna’a Sukuk:

Project financing can be undertaken through an Istisna’a contract, whereby funds are advanced to pay for the supplies and labor costs by an Islamic bank. Once the project is Overview of the sukuk market Originally, Istisna’a was seen as an appropriate way of financing manufacturing as goods have to be produced and costs incurred before they are sold. To introduce sukuk based on Istisna’a a parallel Istisna’a contract is generally used whereby the financier enters a contract with a subcontractor who actually builds the facility being financed. To use Istisna’a, the public authority or private company commissioning the project provides details of the specifications and timing of the schemes. The financier then sets these out in the tender documents. Bids are subsequently invited from contractors who will specify how they intend to sell completed parts of the project over time and the amount of each payment instalment expected. These instalments will include an element of profit over the construction costs. As the financier is expecting a stream of payments over a specified period, certificates can be issued based on the income expected. It should be noted that as the deferred price certificates represent debt obligations they cannot be traded for cash at below face value in a secondary market. They can, however, be used to purchase goods or services whose price is equal to the face value of the certificate. The purchase price of the goods may be less than the deferred price as this represents a trading transaction. Permission to transfer the debt contract from the financier to a supplier of goods and services must be sought from the original debtor, the public authority or private company commissioning the project. Istisna’a is applicable on building and establishing ships, airplanes, bridges, roads, power generation stations, water supply stations and the alike according to a specific specifications stipulated in the contract and according to a pre-stated delivery date and value

5- Salam Sukuk

Sukuk or certificates of Salam carry equal values for mobilizing the capital necessary to produce some specified commodities contracted for deliverance at specified periods of time in future hike their value prices are fully paid in advance.  A separate parallel Salam contract could be signed by the Salam item buyer with a third party, without linking it to the first contract. Ethically, the contractors should be committed towards their contract parties, and should not transfer their own responsibilities in a contract to their parties in another one.

6- Murabaha Sukuk

These Sukuk carry equal values and are issued by the merchant or his agent in order to finance the purchasing a commodity then to sell the same at a known Murabaha as for equipment’s required within an Istisna’a contract where the equipment’s shall be purchased on a known Murabaha and the holders of Sukuk will be the owners of such equipment’s and of the sales income from the same. Murabaha Sukuk Murabaha Sukuk are more likely to be used in respect of purchases of goods by the public sector. In case the government needs items of huge price, it may purchase them through credit sale by paying in installments. The seller will amortize his cost and return over the period of installments. Any ‘Murabaha Funds’ can also issue Murabaha Sukuk proceeds of which could be used for sale of assets on the basis of Murabaha to give quasi fixed return to the Murabaha Sukuk holders.

5.  Zero-coupon non-tradable Sukuk

Another possible sukuk structure can be created where the assets to be mobilized do not exist yet. Consequently, the objective of the fund mobilization would be to create more assets through Istisna’a. However, certificates of this nature would not readily be tradable because of Shariah restrictions. The primary asset pools to be generated would be of a nature warranted by Istisna’a and instalment purchase/sale contracts that would create debt obligations. The certificate on these debt arrangements can be termed as fixed-rate zero-coupon sukuk.

6. Musharaka Sukuk

These Sukuk carry equal values and are  issued by the supplier (entrepreneur or a covenanter )or his agent, to finance a project or projects where the holders of Sukuk will be the owners of such projects, this is far similar to partnership companies although they might differ if the S Musharaka involves establishing a partnership or company to provide financing with the participants sharing in the profits in relationship to the size of their investment share Notes can be issued on the basis of such financing and both Sudan and Iran have launched such securities. Sukuk issuer is authorized to select the projects which are transferred and constructed.

7– Mudarabah Sukuk

Mudarabah has been most successful in the case of investment deposits with an Islamic bank where the return is calculated annually based on the bank’s profits. Certificates of deposit based on these Mudarabah deposits could be issued and traded, although this has not happened so far. It should be noted that holders of Mudarabah sukuk do not enjoy the same rights and benefits as equity investors as they are only entitled to a profit share and there is no provision for capital gains based on the market valuation of the company. This type of Sukuk, carry equal values   issued by the contractor to provide the entrepreneurship  and to manage the proposed project, for the purpose of financing such project or  a combination of projects which are specified or those in which he is authorized to act upon. Thereby, the Sukuk holders shall be the owners of the capital of the project and the project shall remain a  partnership between them and between the entrepreneur at an agreed portion of the profits and shall bear the expected losses in capital The Mudarabah stakeholders are not registered owners, and cannot attend or vote at the annual general meeting. On the other hand, although the value of their notes cannot be guaranteed.

Institutional Investor PLC shareholders rather than Mudarabah sukuk holders who are more likely to suffer from capital losses in the event of the company performing badly. In the case of bankruptcy the note holders will be in a higher position in the pecking order than equity investors, who are likely to lose all of their money. Mudarabah sukuk were first issued in Pakistan under an ordinance passed in 1980, with companies with a paid-up capital of at least PRs5 million allowed to offer such certificates. These enjoyed some limited success but the returns were disappointing, partly reflecting the weakness of the companies involved and, more generally, the poor performance of Pakistan’s economy. The Jordanian Ministry of Waqaf has issued Mudarabah sukuk, although there was some controversy concerning the guarantee of capital on maturity, and the Islamic Fiqh Academy recommended that this should be a voluntary commitment, referred to as Tabarru, rather than an absolute guarantee. Conventional banks in Egypt, notably Bank Misr, have also issued Mudarabah sukuk as one of their Islamic products, but there has been some concern about possible co-mingling of funds and the guarantees of the bond principal, which violate the Sharia principle of no reward without risk or effort.

8.  Hybrid/Pooled Sukuk

The underlying pool of assets can comprise of Istisna’a, murabaha as well as ijarah. Indeed, having a portfolio of different classes of assets allows for greater mobilization of funds. Murabaha and Istisna’a assets can comprise a portfolio of funds. However, at least 51% of the pool must be made up of ijarah assets. Due to the fact the murabaha and Istisna’a receivables are part of the pool, the return on these certificates can only be a pre-determined fixed rate of return.

The above-mentioned two types of sukuk would partially represent the strength of the issuer’s balance sheet.

9- Muzaraa Sukuk:

These Sukuk carry equal values issued by the owner of the agricultural land in order to finance the agricultural costs according to a Muzaraa contract where the holders of Sukuk become partners in the produced crops as per the terms stipulated in the contract

10-Musaqat Sukuk:

These Sukuk carry equal values, issued by the owner of the plants, the subject of the contract, in order to finance the processes of irrigation and cultivation, where the holders of Sukuk become partners in the produced crops as per the terms stipulated in the Musaqat contract.

 

11 – Musharaka Sukuk in Investment Agency:

These Sukuk carry equal values and are issued by an investment agent. They represent projects and activities, where the investment agent shall be appointed as a mediator who manages the investment on behalf of the Sukuk holders in consideration of a percentage out of the profits.

12- Mugharasah Sukuk (Planting):

These Sukuk carry equal values and are issued by the owner of the land subject of the contract for financing the costs of plantation under Mugharasah contract. The holders of the Sukuk shall jointly share the ownership of the trees planted together with the ownership of the land on which such trees were planted according to the contract.

13- Sukuk of Reducing Ownership:

These Sukuk carry equal values issued by the owner of the innovated idea, the subject of the contract, in order to finance a project pursuant to the establishment contract ending by transferring the ownership of the assets or services to the owners of the idea or to the founding after a specified period of time. The owners of the innovated idea shall be partners in the project either by employment (work), by capital or both together. i.e. the partner shall be an employee who entitles a wage against his work, or a partner by business who shall start paying for the value of the project to the holders of Sukuk out of 6his share in the profit in a manner reducing the number of Sukuk holders making him a partner with an increasing share, the more he is able to pay out of his share. Thus the shares of Sukuk holders diminishes, while the shares of the working partners increases ending to stage where the ownership of the assets and its associated services, the asset alone or the services alone in favor of the partners. This formula combines the limited period lease Sukuk for assets and services.

The above could be summarized as, funds would be mobilized for establishing companies that could be partially owned by the holders of the Sukuk certificates. Gradually, the Sukuk holders can buy the capital share of their partners in the company so that they entirely own the company, as per the agreed contractual conditions. The Issuance of Sukuk depends on conducting approved feasibility studies which explain the expected costs and returns, the payback period, to evaluated and classify the same by competent evaluation entities further to the other requirements which constitutes the pre-conditions of approving their issue by the competent authorities. The administration of Sukuk issuing process shall be organized through banks and financial and consultant institutions.

 

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SAKUK (ISLAMIC BOND)

SAKUK (ISLAMIC BOND)

Why have Islamic bonds?

Conventional bonds that yield interest, or Riba, are of course prohibited under Shari ‘a law. Furthermore, those who buy and sell conventional bonds are rarely interested in what is actually being financed through the bond issue, which could include activities and industries that are deemed haram such as the production or sale of alcohol. Companies that are highly leveraged with bank debt may seek refinancing through issuing bonds, but such companies are not regarded as suitable for Muslim investors. The aim of bond traders usually is to make capital gains as fixed-interest bond prices rise when variable market interest rates fall. Bond trading is therefore largely about exploiting interest rate developments and trading in paper that is usually unrelated to the value of any underlying asset. The major risk for holders of conventional bonds is of payments default, but this risk is usually assessed solely on the basis of credit ratings, with the ratings agency rather than the bond purchaser estimating the risk. Hence the bonds are regarded as mere pieces of paper with third parties estimating the risk and the purchaser, at best, only making a risk/return calculation without any reference to the business being financed. A number of Shari ‘a scholars, most notably Muhammad Taqi Usmani, have stressed that one of the distinguishing features legitimizing Islamic finance is that it must involve the funding of trade in, or the production of, real assets. Merely funding the purchase of financial securities would involve second order financing akin to lending for derivatives, the subsequent gearing being speculative and increasing uncertainty, or Gharar. Hence, with murabaha, commodities are purchased on behalf of a client and resold to the client, the temporary ownership of the commodity justifying the financier’s mark-up. Istisna’a involves the financing of manufacturing capacity through pre-production payments, but these relate to construction or equipment purchases where real capacity can be identified. Similarly, ijarah involves the leasing of real assets, with the use of the assets justifying the payment of rental to the owner. As Islamic finance is by nature participatory, purchasers of sukuk securities arguably have the right to information on the purposes for which their monies are to be allocated. In other words, the funding raised through Islamic bond issues should be hypothecated or earmarked rather than used for general unspecified purposes, whether by a sovereign or corporate issuer. This implies that identifiable assets should back Islamic bonds.

The issuance of Sukuk on the basis of the rules of the Shining Shariah of Islam is among the objectives of Islamic banking, and is also one of the greatest means of establishing Islamic economies in society. This, however, is on condition that the tools used to develop and structure Sukuk are in consonance with the fundamental principles which distinguish Islamic economic systems from others. The interest-based system prevalent in the world today regularly issues bonds that yield interest from capital-intensive enterprises that bring great profits and regular revenues. Yet, the holders of such certificates are no more than lenders to the sponsors of such enterprises; and their earnings come from the interest on their loans in a percentage that accords with the price of interest in the marketplace. The profits of these enterprises after costs, including interest payments1, return exclusively to the sponsors. The basic concept behind issuing Islamic Sukuk, however, is for the holders of the Sukuk to share in the profits of large enterprises or in their revenues. If Sukuk are issued on this basis they will play a major role in the development of the Islamic banking business and thereby contribute significantly to the achievement of the noble objectives sought by the Shariah. Sukuk in general may be understood as a shariah compliant ‘Islamic Bond’. In its simplest form sukuk represents ownership of an asset or its usufruct. The claim embodied in sukuk is not simply a claim to cash flow but an ownership claim. This also differentiates sukuk from conventional bonds as the latter proceed over interest bearing securities, whereas sukuk are basically investment certificates consisting of ownership claims in a pool of assets.

Sukuk (plural of word sak) were extensively used by Muslims in the middle Ages as papers representing financial obligations originating from trade and other commercial activities. However, the present structure of sukuk are different from the sukuk originally used and are akin to the conventional concept of securitization, a process in which ownership of the underlying assets is transferred to a large number of investors through certificates representing proportionate value of the relevant assets.

            The AAOFI defines sukuk as

“Certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity”.

Benefits and Features

  • Tradable shariah-compliant capital market product providing medium to long-term fixed or variable rates of return. Assessed and rated by international rating agencies, which investors use as a guideline to assess risk/return parameters of a sukuk issue.
  • Regular periodic income streams during the investment period with easy and efficient settlement and a possibility of capital appreciation of the sukuk.
  • Liquid instruments, tradable in secondary market.
  • Sukuk are among the best ways of financing large enterprises that are beyond the ability of a single party to finance.
  • Sukuk provide an ideal means for investors seeking to deploy streams of capital and who require, at the same time, the ability to liquidate their positions with ease whenever the need should arise. This is because it is envisioned that a secondary market for the trading of Sukuk will develop. Thus, whenever investors require cash from their investments, or from a part of the same, it will be possible for them to sell their Sukuk holdings, or a part thereof, and receive their value from their original investment plus earnings, if the enterprise is profitable, in cash.
  • Sukuk represent an excellent way of managing liquidity for banks and Islamic financial institutions. When these are in need of disposing of excess liquidity they may purchase Sukuk; and when they are in need of liquidity, they may sell their Sukuk into the secondary market.
  • Sukuk are a means for the equitable distribution of wealth as they allow all investors to benefit from the true profits resulting from the enterprise in equal shares. In this way, wealth may circulate on a broad scale without remaining the exclusive domain of a handful of wealthy persons. This is clearly among the most important of all the higher purposes sought by an Islamic economic system.

Sukuk vs. Conventional Bonds

  • A bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal, whereas, the sukuk holders claims an undivided beneficial ownership in the underlying assets. Consequently, sukuk holders are entitled to share in the revenues generated by the sukuk assets as well as being entitled to share in the proceeds of the realization of the sukuk assets.
  • A distinguishing feature of a sukuk is that in instances where the certificate represents a debt to the holder, the certificate will not be tradable on the secondary market and instead is held until maturity or sold at par.

These characteristics are not to be found in Islamic Sukuk, at least not directly. Even so, the issuers of Islamic Sukuk today have attempted to distinguish their Sukuk, however indirectly, with many of these same characteristics. For this reason they have developed a variety of mechanisms.

Issuance Of sukuk

To issue a Sukuk, a financial institution or other entity (such as a sovereign) will typically incorporate a special purpose company, an Islamic Global Sukuk Company (IGS).  The IGS issues Sukuk certificates to investors and uses the proceeds raised to purchase a rental generating real property or other cash generating asset from the financial institution or other entity.  The IGS in turn leases the property or asset back to the financial institution or other entity for a period corresponding to the duration of the tenure of the Sukuk certificates with the property or the asset being held on trust for the Sukuk holders.

The rental payments due from the financial institution or other entity to the IGS will exactly match the periodic payments under the Sukuk holders.  These rental payments may be fixed, or under more recent jurisprudence, calculated with reference to the interbank offered rate plus a margin which represents the market rate for rental payments.

In structuring such transactions it is important to note that all amounts due to the IGS, including the rent that will fund the periodic payments under the Sukuk certificates are direct, unconditional and irrevocable obligations of the financial institution or other entity.  The financial institution or other entity is obliged to purchase from the IGS the asset or property upon the maturity of the lease at an agreed price which will be used for the repayment of the principal to the Sukuk holders.

1. Bond Holders’ Ownership of Enterprise Assets

The first point, or the bond owners’ ownership of enterprise assets, is that the majority of Sukuk are clearly different in this respect from interest-based bonds. Generally, Sukuk represent ownership shares in assets that bring profits or revenues, like leased assets, or commercial or industrial enterprises, or investment vehicles that may include a number of projects.

2. Regular Distributions to Sukuk Holders

In reference to the second point, most of the Sukuk that have been issued are identical to conventional bonds with regard to the distribution of profits from their enterprises at fixed percentages based on interest rates (LIBOR).

Bahrain’s sovereign sukuks

On 13 June 2001, the Bahrain Monetary Agency offered, for the first time in the Gulf, Overview of the sukuk market Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk – Overview of the sukuk market. The bills were worth US$25 million, and were in the form of three-month paper, referred to as sukuk sallam securities. Although the Malaysian government has offered Islamic bonds since the 1980s, as already indicated, some governments in the Arab world have been forced to borrow in international markets rather than locally because of Islamic objections to trading in debt and interest-based securities. Governments have issued paper that the local commercial banks have held to maturity, but not traded. This, however, restricts the liquidity of bank assets and makes it more difficult for the government to raise finance directly from the public. With its new sukuk sallam securities, Bahrain has overcome this problem by providing a fixed return, equivalent to 3.95 per cent at an annualized rate, for the first Islamic bill issue which is not based on interest. The return has been calculated in relation to the real benefit the government expects to obtain on the funds, rather than with reference to market interest rates. The first securities matured on 12 September 2001 and a new issue was launched, a process that has been repeated every three months. The establishment of the Islamic money market in Bahrain will, it is hoped, result in the emergence of markets in longer-term Islamic securities, notably bonds, with Bahrain playing a similar role in the Gulf and west Asia to that of Kuala Lumpur in South-east Asia. The initial offer of bills in June 2001, worth US$25 billion, was oversubscribed with almost US$60 million being offered. The minimum subscription was fixed at US$10,000, which meant that relatively small financing houses could participate as well as private investors seeking a non-banking home for their dollar-denominated liquidity. The same minimum subscription limit was set for the longer-term ijarah leasing securities, worth US$100 million, that were offered in August 2001. These were issued on 4 September 2001 and will mature in 2006. They offer a rental return of 5.25 per cent per annum guaranteed by the government of Bahrain. By October 2003, the total sukuk portfolio managed from Bahrain exceeded US$1 billion and prospects for the years ahead look very encouraging.

In February 2002 in Bahrain, an Islamic Liquidity Management Centre was established, with the Kuwait Finance House, the Dubai Islamic Bank and the Bahrain Islamic Bank each subscribing US$5 million for the center. Shari ’a-compliant assets are purchased through the center from governments, financial institutions and companies and then pooled. Sukuk securities are then issued based on the value of the underlying assets and can then be traded.

 

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Risk Management in Islam Banking & Finance

Risk Management in Islam Banking & Finance

The Risk arises when there is a possibility of more than on e result and the ultimate result is unknown. Risk can be defined as the variability or volatility of unexpected results. It is usually measured by the standard deviation of historic outcomes. Though all businesses face uncertainty, financial institutions face some special kinds of risks given their nature of business. The objective of financial institutions is to maximize profit and shareholder value-added by providing different financial services mainly by managing risks.

There are different ways in which risks are classified. One way is to distinguish between business risk and financial risks.

1-Business risk comes from the nature of a firm’s business. It relates to factors affecting the product market.

2-Financial risk arises from possible losses in financial markets due to movements in financial variables.

3-This is mostly associated with leverage with the risk that obligations and liabilities cannot be met with current assets.

There is a 2nd way of decomposing risk is between systematic and unsystematic components. While systematic risk is associated with the total market or the economy, unsystematic risk is linked to a specific asset or firm. While the asset-specific unsystematic risk can be reduced in a large diversified portfolio, the systematic risk is non-diversifiable. Parts of systematic risk, however, can be reduced through the risk mitigation and transferring techniques.

This was general discussion about risk and its types… now before going into the mitigation it is better to analyze the specific nature of business in Islamic banking. Moreover we summarize the risks which are generally faced by conservative banks.

1-Market Risk is the risk originating in instruments and assets traded in well-defined markets.

2-Interest Rate Risk is the exposure of a bank’s financial condition to movements in interest rates.

3-Credit Risk is the risk that counterparty will fail to meet its obligations timely and fully in accordance with the agreed terms.

4-Liquidity Risk arises due to insufficient liquidity for normal operating requirements reducing the ability of banks to meet its liabilities when it falls due.

5-Operational Risk is not a well-defined concept and may arise from human and technical errors or accidents.

6-Legal Risks relate to risks of unenforceability of financial contracts.

Now we compare the types of risks which Islamic banks have as compared to the conventional banking.

Islamic Bank                          Conventional Bank

  • Credit Risk                                          Yes                                          Yes
  • Equity Investment Risk                      Yes                                          No
  • Market Risk                                        Yes                                          Yes
  • Inventory Risk                                                Yes                                          No
  • Liquidity Risk                                     Yes                                          Yes
  • Rate Of Return Risk                           Yes                                          No
  • Interest Risk                                        No                                           Yes
  • Operational Risk                                 Yes                                          Yes

There are detailed principles to mitigate the risks but some of specifaied ways which are summarized below.

1-IBIs shall have in place a comprehensive risk management and reporting process,

including appropriate board and senior management oversight, to identify, measure,monitor, report and control relevant categories of risks.

2-IBIs must have in place a strategy for financing, using various instruments in compliance with Shariah, carry out a due diligence review in respect of counterparties prior to deciding on the choice of an appropriate Islamic financing instrument and have in place Shariah-compliant credit risk mitigating techniques appropriate

for each Islamic financing instrument.

3-IBIs must have in place appropriate strategies, risk management and reporting processes in respect of the risk characteristics of equity investments, ensure that their valuation methodologies are appropriate and consistent and define and establish the exit strategies in respect of their equity investment

Activities.

4-IBIs must have in place an appropriate framework for market risk management (including reporting) in respect of all assets held, including those that do not have a ready market and/or are exposed to high price volatility.

5- IBIs must have in place a liquidity management frame work, assume liquidity risk commensurate with their ability to have sufficient recourse to Shariah-compliant funds to mitigate such risk.

6- IBIs must have in place adequate systems and controls, including Shariah Advisor.

THE RISK MANAGEMENT:

            The main elements of risk management include identifying, measuring, monitoring, and managing various risks. These cannot be effectively implemented unless there is a compact process and system in place. The overall risk management process should be comprehensive regarding departments/sections of the institution so as to create a risk management culture. It should be pointed out that the specific risk management process of individual financial institutions depends on the nature of activities and the size of an institution. The risk management system outlined here can be a standard for banks to follow. A comprehensive risk management system should encompass the following three components. We outline the basic concept of the risk management process and system in this section.

The board of directors is responsible for outlining the overall objectives, policies and strategies of risk management for any financial institution. The overall risk objectives should be communicated throughout the institution. Senior management is responsible to implement these broad specifications approved by the board. To do so, the management should establish policies and procedures that would be used by the institution to manage risk. Furthermore, clear rules and standards of participation should be provided regarding position limits, exposures to counterparties, credit and concentration. Investment guidelines and strategies should be followed to limit the risks involved in different activities.

Banks must have regular management information systems for measuring, monitoring, controlling and reporting different risk exposures. Steps that need to be taken for risk measurement and monitoring purposes are establishing standards for categorization and review of risks. Risks that banks take up must be monitored and managed efficiently.

1-Banks should have internal controls to ensure that all policies are adhered to. An effective system of internal control includes an adequate process for identify and evaluating different kinds of risks and having sufficient information systems to support these.

2-The board of directors should outline the overall credit risk strategies by indicating the bank’s willingness to grant credit to different sectors, geographical location, maturity, and profitability.

3-Banks should have a system for ongoing administration of various credit risk-bearing portfolios. A proper credit administration by a bank would include an efficient and effective operations related to monitoring documentation, contractual requirements, legal covenants, collateral.

4-As banks deal with other people’s money that can be withdrawn, managing liquidity is one of the most important functions of the bank. The senior management and the board of directors should make sure that the bank’s priorities and objectives for liquidity management are clear. Senior management should ensure that liquidity risk is effectively managed by establishing appropriate policies and procedures.

5-As operational risk can arise due to failures in people, processes, and technology, management of this risk is more complex. Senior management needs to establish the desired standards of risk management and clear guidelines for practices that would reduce operational risks. As mentioned above, operational risk can arise from different sources.Some aspects relevant to operational risk in Islamic banks are the legal risk involved in contracts, the understanding of the modes of financing by employees, producing computer programs and legal documents for different instruments, etc.

SOME IMPORTANT TECHNIQUES  OF RISK ANAYLYSIS:

 

1-GAP Analysis.

2-Duration-GAP Analysis.

3-Value at Risk (VaR)

4-Risk Adjusted Rate of Return (RAROC).

5-Securitization.

6-Credit Derivatives.

 

 

SUREVY OF RISK TO ISLAMIC BANKS

Number of Relevant      Average Rank*

                            Responses

Credit Risk                  14                                            2.71

Mark-up Risk              15                                            3.07

Liquidity Risk             16                                            2.81

Market Risk                10                                            2.50

Operational Risk         13                                            2.92

*The rank has a scale of 1 to 5, with 1 indicating ‘Not Serious’ and 5 denoting ‘Critically

Serious’.

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RENTAL BASED MODES OF ISLAMIC BANKING AND FINANCE

RENTAL BASED MODES OF ISLAMIC BANKING AND FINANCE                                                                  

IJARA:

            In this product the owner of the asset transfers its usufruct to another person for an agreed period (owner ship is not transferred), at an agreed consideration.

BASIC CONDITIONS:

1-      Subject of Ijarah should be valuable, identified and quantified.

2-      All consumable things cannot be leased out.

Since the corpus of Ijarah article remains in the ownership of the seller and only usufruct is transferred to the customer. Thus anything which cannot be used without consuming cannot be leased out.

3-      All liabilities of ownership are borne by lessor.

As discussed above ownership lies with seller therefore all liabilities emerging from ownership shall born by the lessor.

4-      The period of Ijarah must be defined with clear boundaries.

5-      The item of Ijarah must be fully identified.

6-      Lessee cannot use the Ijarah asset for any purpose other than specified in Ijarah

7-      In case of any harm due to misuse/ negligence of Ijarah asset lessee is liable to compensate lessor.

8-      Any harm or loss affecting Ijarah asset due to circumstances beyond control of the lessee will be borne by lessor.

9-      Ijarah can be done for a property owned by two or more persons but rentals should be distributed among all according to their share.

10-  A joint owner of property can make Ijarah of his proportionate share only to his co-share holder and nobody else.

11-  The rent must be determined for whole period of Ijarah at the time of Ijarah contract.

12-  It is permitted that different amount of rent is fixed for different periods with condition that all those amount with respect to the periods must be agreed upon at the time of Ijarah agreement.

13-  Determination of cost of Ijarah article on the basis of age gate cost incurred is permitted.

14-  The lessor cannot increase the rent unilaterally.

15-  The rent can be recovered in advance from the customer but will remain in the bank “on account of” payment and can only be adjusted towards rent income after delivery of the Ijarah asset.

16-  Ijarah period will commence from the date asset is being delivered to the customer.

17-  Agreement of Ijarah can be effected from future date.

18-  Lessor is owner of the asset he is liable to pay all expenses incurred in the process of purchase.

19-   Penalty for late payment would be given to charity.

20-  If the lessee contravenes any terms of agreement of Ijarah then it can be terminated by lessor unilaterally however unrestricted power of termination of Ijarah on sole discretion on the basis of lessor unilateral judgment is not allowed.

21-  On termination of Ijarah by lessor rentals for remaining period cannot be charged.

22-  If tactful is obtained for Ijarah property then expenses should be borne by the lessor.

23-  The Ijarah asset shall be the sole property of lessor, and after the expiry of Ijarah period, the lessor shall be at liberty to take asset back, or renew Ijarah, make Ijarah with any other party, the lessor cannot force lessee to sell to him the asset on nominal price. However lessor and lessee can enter in a separate promise to sell the asset to lessee at the close of Ijarah.

IJARAH WA IQTINA:

It is allowed that at a separate promise is signed by lessor and lessee that the asset of Ijarah will be given as a free gift to the lessee at the termination of Ijarah., subject to his payment of all amount of rent.

BASIC CONDITIONS:

1-      The Ijarah agreement should not be subject to the signing of this promise.

2-      The promise should be unilateral and binding on the promisor.

3-      In case of asset of Ijarah is used for different purposes by different users the lessee cannot sub lese the asset without express permission of lessor.

IJARAH  MUNTAHIA BITTAMLEEK:

The customer approaches bank for financing of an asset. Bank purchases the asset and pay the price to vendor and obtain the ownership title. The asset is delivered to customer; the customer pays specified amounts duly agreed upon on agreed intervals and after completion of agreed upon period ownership is transfer to the customer as per already agreed process.

 

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Trade Based Mode of Islamic Banking & Finance

Trade Based Mode of Islamic Banking & Finance

We briefly discuss the trade related modes of banking and finance as under.

MURABAHA:

It is a particular kind of sale where the seller expressly mentions the cost of the sold goods he has incurred, and sells it to another person by adding some profit thereon. Therefore it is kind of sale agreement for cash/deferred price.

In banking it involves purchase of commodity by a bank on behalf of the customer and resale to the latter on cost plus profit under this agreement the bank discloses its cost and profit margin to the client

Today in Islamic banking world over 66% of all investment transactions are through Mudarbahah.

There are two main types of Murabha which are as under.

Simple Murabhah: It is the type of Murabha in which payment is made.

Murabhah Muajjal: it is the type of Murabhah which is on differed payment basis.

BASIC RULES:

1-    The subject of sale must exist at the time of agreement hence no sale can be made for any subject which does not exist.

2-    The subject matter should be in the ownership of the seller at the time go agreement.

3-    The subject of sale must be in the physical or constructive possession of the seller when he sells it to another person.

4-    The sale must be instant and absolute. Thus an agreement or/ sale for future date is void.

5-    The subject matter sold should have value.

6-    The subject of sale should not be used for un-Islamic purpose.

7-    The subject of sale must be specifically known and identified by the buyer.

8-    The subject sold should be delivered with certainty.

9-    The price must be certain.

10- The sale must be unconditional.

Detailed Transaction Style:

1-    The customer and the bank sign a promise, in which bank promise to sell and the customer promise to buy from time to time commodity on agreed ratio of profit added to the cost.

2-    Furthermore above mentioned agreement may specify the limit to which the facility may be availed.

3-    An agency arrangement is being signed between parties where bank appoint its customer as an agent.

4-    Customer purchases the commodity on behalf of the bank and takes possession of the commodity as agent of the bank.

5-    Customer informs the bank that it has purchased the commodity and offers the bank to let him purchase the same from bank.

6-    The bank accepts the offer and sale is concluded, the ownership and risks are transferred to the customer.

7-    The most important factor which distinguishes the whole process from interest based to Islamic base is that the risk of the commodity remains in the risk of bank during step4 and step 5.

SUCARITIES:

1-    Security for repayment assurance can be obtained in shape of mortgage, hypothecation, lien or charge.

2-    The bank can ask the customer to provide 3rd party guarantee in case of default. There are two important factors to be considered

a)    The guarantor cannot charge fee from the customer.

b)    However documentation expenses can be charged by the guarantor.

   PENALTY:

No penalty can be charged or purchase price cannot be charged. But in order to deal with dishonest customer who default in payment deliberately.

a)    Defaulter may be given grace period at least for one month.

b)    When it is proven beyond doubt that customer is willful default then an undertaking may be obtained from him that if he does not pay back is finance after certain date then he will pay a certain amount in charity.

IMPORTANT RULES:

1-    Murabhah cannot be rolled over.

2-    Rebate on early repayment n all transactions is not allowed in general however bank on its own discretion allow it in a needy case.

3-    If the accurate cost of any commodity cannot be ascertained then Murabhah transaction cannot be done.

4-    This product can only be used if specific commodity which can be the subject of sale is required by the customer.

5-    It cannot be allowed on already purchased items.

SALAM:

          This mode of financing can be used especially by the banks for financing of agriculture commodities. In Salam the seller undertakes to supply specific goods to the buyer (bank) at a future date in exchange of an advanced price fully paid on spot. The price is in cash but the supply of goods is deferred.

PURPOSE:

1-    To meet the small farmers needs who need money to grow crops and feed their families.

2-    To meet the needs of traders for import and export purpose.

BASIC RULES:

1-    Full payment by the buyer to the seller at the spot is necessary.

2-    Only those goods can be sold von Salam whose quality and quantity can be exactly specified.

3-    All details in respect of quality of goods sold must be expressly specified.

4-    Quantity of the commodity is agreed upon on absolute terms.

5-    The exact date and place must be specified.

6-    Salam cannot be effected f things which must be delivered on spot like Gold, Silver etc.

7-    The commodity of Salam should remain in the market right from the date of contract to the date of date of delivery.

8-    Security in the form of mortgage, guarantee or hypothecation can be obtained.

9-    The seller at the time of delivery delivers commodities and no money to the buyer.

10-  Parallel Salam can be done but it cannot be used as buy back facility.

ISTISNA:

It is a sale transaction where commodity is transacted before it comes into existence. It is an order to manufacturer to manufacture a specific product for purchase. The manufacturer uses his own material to manufacture the product. In this transaction price and all specification must be fixed and fully settled.

IMPORTANT POINTS:

1-    The price does not need to be paid in full in advance or on date of delivery however it can be deferred to future dates as per agreement.

2-    Time of delivery does not have to be fixed.

3-    Contract can be cancelled before manufacturer starts work.

4-    However purchaser can fix maximum time for delivery.

5-    Purchaser has right to reject the goods after seeing if they are not as per specified standard.

ISTIJRAR:

Purchasing goods time to time in different quantities. In Islamic terms buyer purchases something’s from time to time, each time there is no offer and acceptance or bargain. There is one master agreement where all terms and conditions are finalized.

There are mainly two types.

1-    Price is determined after all transactions have been concluded.

2-    Price is determined in advance but purchase is made time to time.

Only 1st kind is permissible with certain conditions.

a)    When seller discloses the price of goods at the time of each transaction, the sale becomes valid only when buyer possesses the goods. The price is paid after all transactions have been completed.

b)    If the seller does not disclose each and every time to the buyer the price of subject matter, but contractors know that it is being sold on market value and market value is specified and determined.

c)     If at the time of possession the price of subject matter was unknown or contractors agree that whatever the price shall be the sale will be executed. When there is significant difference between market price and sale value then on possession sale will not be valid, however it will be valid at the time of settlement of price.

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