#2 Types of Islamic Finance – ACCA / CPA / SFM -By Saheb Academy

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hi everyone welcome back to second video of islamic finance
this topic of financial management that we have started. Now in the previous
video in the first video of islamic finance we have discussed a brief
concept about it and we have also seen that this system
entirely relies upon the islamic law or in arabic it is also called Sharia
fine okay and then we also discuss about a
bit history over there you can see that in the previous video not that
important but the most important thing is the
principles of islamic finance yeah this is very important see here
principles of islamic finance in islam interest is completely
forbidden yeah you can't use money to make money paying or
charging interest from people is completely forbidden in islam all right
so if any transaction involves interest then that's not allowed in islamic
financial institutions right and then investing in businesses
involved in prohibited activities yes islamic financial institutions you know
they can't be involved in any businesses which deals in prohibited activities
prohibited activities such as you know gambling, prostitution, pornography and then what do you say
alcohol the businesses which deal in alcohol, pork yeah all these are
prohibited activities in islam music industry
yeah all these things fine so if any businesses are involved in these
activities they can't get credit or anything from
islamic financial institution they can't get in contract with
islamic banks fine and then speculation is also not allowed okay you can't deal
in what you say futures market or option market right and then
uncertainty and risk if any contract where you know the terms of the contract
are not clear yeah not clearly mentioned and
they depend on some future event then that's also not allowed all right
because there is too much risk it is equal to gambling yeah both of
these things are like gambling only so that's a prohibited
activity in islam so you can't deal in those type of transactions
and those type of contracts you know such as complex derivative instruments
and short selling are completely prohibited fine and the
main principle one more principle is the risk should be shared yeah the risk of
any contract between the lender and the borrower must be shared
fine that's the main principle of islamic finance fine and then the last
is wealth must be generated from legitimate trade and asset-based
investment either it should be asset-based or asset-backed
all right for every every transaction there must be an underlying asset
yeah you can't just use money to make money that's just interest
all right you can't do that so that's the last principle of islamic finance
fine so i hope you have recalled whatever we
did in the first video yeah if you want to go deeper then
please go in the first video and watch it again all right
okay then i'll put the link in the description below now coming back to
this video in this video what we're going to do is
in this video we are going to see different forms of contracts of islamic
finance yeah different types of products or the services that are offered by
islamic banks fine so what are the allowed ways to do
you know banking that's what we are going to see
over here now as you can see the principles of islamic finance there are
so many restrictions so tell us what is allowed
yeah this is it right these are the five major contracts that are allowed
in islam fine so now let's discuss this one by one madaraba musharraka sukuk
yeah let's discuss this one by one okay now here we have the first contract of
islamic finance see here Mudaraba Mudaraba is same like partnership okay
partnership or joint venture here what will happen is here there will
be two person involved okay maximum two person only yeah it can't be
more than two so one party will bring the capital
yeah one party will bring the money and the other party will bring the
skill yeah it's a partnership transaction where
one party supplies the money hundred percent of capital
and the other provides management expertise yeah other party will bring
the skill now this party who brings the capital
will be called as money supplier of financer in english
but in arabic it is called as he is called as rab-al-maal
okay rab-al-maal and then the party which brings the skill
the management expertise the labor provider who will do all the work
yeah this person the working partner will be called as Mudarib okay so now this person who is the money
supplier the financer he will only contribute capital he will
not participate in management okay he'll be the sleeping partner
working partner sleeping partner is that clear right
so now here what will happen this business either this business will make
profit if it makes profit then it will be distributed in the
pre-decided ratio okay the ratio the profit sharing ratio will be decided in
beforehand itself okay but if in case god forbid there is a loss then entirely
the loss will be borne by the financer okay the who the rab-al-maal
the money supplier the person who has brought in the capital entire
loss will be borne by the the capital provider
okay why is it like that see here because it is considered that you know
this person has done his 100 person yeah he has
participated and he has worked really hard and still he couldn't earn profit
he couldn't make profit in this business then it is believed that it is argued
that you know he has done 100% of his work so he can't
be penalized yeah he can't be because he doesn't have the money that's why he has
only brought his skill yeah yeah he doesn't have money and or
anything so that's why he can't bear the loss only the finance provider
will bear the loss it's argued like that in islam
okay is that clear so this is what mudaraba is
only two people one will bring the capital other will bring the skill
yeah if there is a profit it will it will be divided in the it will be
distributed in the pre-decided ratio yeah and if there is a loss the loss
will entirely be borne by the capital provider and there is an
exception over here if this person is involved in some fraud or anything
yeah if the loss is because of his negligence or his
he is guilty then the loss will be borne by this person okay
in case mistake is there by this person clear otherwise normally the entire loss
will be borne by the capital provider this is what Mudaraba contract is simple
partnership all right now let's see another one now
you can pause the video and take this note if you like yeah otherwise just
continue on now here we have the second form of
contract see here Musharaka now Musharaka is also same like
mudaraba only but there are big differences so see here
it's a joint enterprise or partnership structure yeah same like Mudaraba
only where at least two parties or more yeah that's the main thing here the
parties can be more also in mudaraba we saw there will be only
two parties right one rab-al-maal the finance provider and
one the labor provider Mudarib but here it's not
like that here the parties can be more yeah multiple parties can be there
yeah so see here multiple parties can be there they will bring their capital as
well as skills bring capital and skills and everyone
are working partners yeah or they want they can be sleeping
partners but everyone can be what they can be working partner they
can participate in the management of the business
all right and these person the partners they are called as
musharrek in this contract okay musharik everyone are musharik
musharik musharik musharik fine everyone can participate in
management now the main difference here is if there is a
profit then the profit will be distributed in the
pre-decided ratio all right whatever they decide in the beginning itself
but then if there is a loss then the loss has to be strictly it has to be
distributed in the capital ratio okay whatever capital
they brought in that ratio only the loss will be
shared among them build among them all right so this is what Musharaka is okay
the main difference is the loss difference in the mudaruba
in the mudrabah we saw the loss is entirely borne by the finance provider
yeah but here the finance is provided by everyone
so what will happen here is that the loss will be
distributed in the capital ratio of the mushariks the partners
clear and one more difference was that everyone are working partner over here
everyone can participate in management but here
only the the skill provider the manager he's the manager right he's only
participating here in mudaraba in mudaraba I mean yeah.

In Musharaka here everyone can participate in the
management of the business clear so this is what Musharaka is simple very simple
now let's move on to the third contract you understood right Musharaka nothing
it's simple and then we have sukuk now what are
sukuk? sukuk are the islamic bonds you know the bonds that are structured in
such a way as to generate returns to investors
without infringing islamic law that prohibits interest now normally
conventionally what happens yeah normal bonds how are they ? when the
company issues bond the conventional bonds then
they pay interest on them to the bond holders right if you have purchased the
bonds that means you are receiving interest from them
yeah you as an investor if you have purchased any bonds then you will be
receiving interest from the company which has issued the
bonds isn't it yes that's what conventionally normally happens but here
in islam interest is completely forbidden
interest is not allowed so if interest is not allowed then how
can bonds work that's what you have to think about all
right so here the bonds are structured in such a way
to generate returns to investors without infringing islamic law that prohibits
interest interest can't be there in these bonds in this these bonds
interest are not there but investors are getting returns
how does that work let's understand this see here sukuk aims at
profit sharing by offering the investor ownership in business and assets now
let's take an example and understand this see here
let's say i have a company right and let's say this company issued
bonds yes it is should so cook so car issued fine so now let's say you
subscribe you purchase those to cook now you will be paying money right so i'm
getting dollars i'm getting money so now what i'm going to do as a company
first i will appoint and manager sukuk manager
right so that sukuk manager will be you know in managing
everything related to these bonds fine so now what the company will do is
company will purchase an asset normally why do you raise
debt finance mostly to purchase asset right so what you're going to do is you
are going to purchase an asset the company is going to purchase an asset
right so now what the company will do is company will give you
ownership in those assets because which money is this
this money is of bond holders you are a bondholder right why you are a
bondholder because you have subscribed to the bonds
the sukuk right so you will get ownership of the
asset which has been purchased from your money yeah the cash flow which the
company will get from you yeah after issuing the bonds from that
they will purchase the asset and the ownership of that asset will be
given to you to the bondholders fine so when you become owner of
something yeah when you become owner of something
then you are entitled to the benefits and risk coming out of that
asset right so whatever income that will be generated from that asset
you will get a part of that so that's how you will receive
income from these bonds okay you will not get interest okay interest is
completely forbidden in islam you know that yeah but here in sukuk
there is a profit sharing objective by offering the investor ownership in
asset right when you get the ownership you are
entitled to the benefits as well as the risk of that asset
so whatever money has been generated because of that asset
yeah a part of that will be sent to you yeah it will be given to you it will be
distributed to you right participation in profit that's how you will
participate in the profit of that asset yeah because you own
it right you as a sukuk holder fine so this
is how sukuk works so unlike conventional bonds sukuk are
linked to an underlying tangible asset yeah an asset
will be there you remember the what the last principle
of islamic finance wealth must be generated from legitimate
trade and asset based investment okay this is what
it is yeah there is an underlying asset over here you are not
just getting you know interest no you are not getting
interest over here you are getting profit you are getting
income over here from the asset based investment okay
is that clear easy right so this is what sukuk is
all right simple okay and then the fourth type of contract we have
is ajara ijara is similar to a lease contract okay
so when we think about leases what comes to our mind we think about the principal
amount plus interest yes that's how leases
works isn't it the lessee will make payment to the lesser
for using the asset and that payment will include
what principal amount plus interest but now here in islam
interest is completely forbidden so how these contracts are going to work
yeah how is it going to work so see here that's what we have to understand
an ijara transaction is the islamic equivalent of a lease contract
where one party lessor allows another party lessee
to use their asset against the payment of a rental fee
now here since interest is forbidden so a predetermined rental fee will be
agreed upon between the parties the lesser and
lessee and that rental fee will be paid which doesn't include interest it is a
predetermined fee okay it's not like compounding interest and all
all right yes so now let's understand that in very much detail see here
let's say you need a car and you don't have money to purchase it outright okay
immediately you don't have money to purchase it so what are you going to
do is you are going to approach islamic bank
okay and you will get an agreement with them of a
ijara yeah you will get an ijara contract now what is this ijara contract what
will happen is see here as i said you need a car so bank will
purchase the car and make the payment in whole in one go
right so they will make the whole payment to the vendor
and bank will instruct the vendor this honda showroom this manager
to deliver it to you okay so the car will be delivered to you
okay you will have the position of the car yeah and you will have to make an
initial deposit to the bank okay initial some money you have to
pay to the bank for the guarantee or something yeah
but the ownership of that car will remain with the bank
all right the ownership will remain with the bank so whatever benefits and risk
are there of that asset of that car will remain with the
bank itself so if there is any major maintenance cost
yeah there's any maintenance then the bank will have to build the maintenance
cost and everything yeah but if there's a minor maintenance
or something then you will have to build it
yourself but now how you are going to pay to the bank
you are going to pay in form of rentals okay the rentals will be agreed
in the beginning itself okay predetermined rentals fine
so you will pay the rentals and at the end of the lease period
yeah you will also decide the least period also with the bank at the
beginning itself so at the end of the lease period what
will happen is at the end of the lease period the bank
will give you option do you want to buy the asset yeah buy
the car just by making some extra additional
payment yeah a new agreement will be made
or do you want to return the car back to the bank yeah
that's the option will be given to the to the lessee
yeah to you fine so this is what a ajara contract is
all right it's a simple contract you understood this initial deposit you will
make bank will purchase the car for you and
make the payment to the this honda guy yeah this manager
then this manager will deliver the car to you he will give the position to you
but the ownership will remain with the bank and bank will
you know bank will be responsible for any maintenance cost and everything
because the risk and reward are with the bank
because they have the ownership right so yes and you will be paying regular in
rentals to the bank and at the end you will be given the option
either to buy or return the asset back clear this is what a lease contract is
simple lease contract yeah if you want you can pause the video and
take this down right okay so now let's move on now here we have
the last the final contract of islamic finance
that you're going to see in this video Murabaha the fifth contract
so far we have covered four contracts mudaraba musharaka
sukuk and ijara so now what is this Murabaha
see Murabaha is nothing but just a credit sale okay credit sale contract that's
all Murabaha is.

See the meaning over here a
Murabaha transaction is a deferred payment sale
or an installment credit sale and is mostly used for the purchase of goods
for immediate delivery on deferred payment basis
now you already know what is installment credit sale if the goods are of hundred
dollars you will pay 20 20 20 in installments but now what is
deferred payment basis? deferred payment means what you are
postponing the payment at a later date okay you will pay at a
later date that's what deferred payment basis is simple
but now let's understand how this muraba will work
see for example let's say you need to buy an asset or some goods
and you don't have money to buy it outright immediately you don't have
enough money you have some money so now what are you
going to do is you have to get into a contract contract with the bank
islamic bank obviously right so now what the bank will do is
bank will purchase the asset or the goods for you
and the bank will sell it to you at a profit margin
for example if the bank purchased that asset for 100
right so what the bank will do bank will add 20
more profit 100 plus 20 a markup and sell it to you for 120 and in the
beginning only they will be it will be decided yeah the markup and
everything will be different decided at the
beginning itself it is not like the bank will hide any terms of contract from you
okay they will disclose everything so it will
not be injustice to you right and then what you have to do is
after getting the asset you have to pay in form of installments
okay whatever you agreed upon yeah in installments or on deferred
payment basis you can also promise them to pay at a later date
yeah that can also happen yes simple yeah this is what Murabaha
is yeah you want to ask it you approach to the bank bank will purchase it for
you and sell it to you with a profit margin cost plus profit
you have to pay in form of installments or
deferred payment basis clear that's what muraba
is simple is that easy so now what i'm gonna do is i'm gonna add timestamps in
the video if you want to revise or go back to any of these contracts
then just go to the description and see the timestamps and go back and
watch these okay fine okay then see in the next video right that's it for today

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