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As we have noticed, many Islamic financing modes involve trading. Islamic banks
can establish companies that finance the credit purchase of commodities and as
well as assets. Those companies will buy commodities and assets and sell them to
their customers on basis of deferred payment. However, this may involve equity
participation. We may therefore say that Islamic banking is closer to universal
banking model. Islamic banks would benefit from this by using combination of
shareholding and other Islamic modes of finance like Mudarabah, Musharakah etc.
Credit worthiness remains relevant but the crucial role is played by productivity and
profitability of the project financed.
Under the principle of Mudarabah an investor bears the risk of losing the capital
invested by the Islamic bank, which means the investment risk is similar to that of
shareholders of conventional banks which bear the risk to losing their capital as
equity owners of the corporation.
A duty arises out of relationship a such that the bank must defer to the
management, investors and shareholders alike in the decision making process.
Islamic banks, as part of open and transparent procedures concede the right of
investor’s to monitor the performance of their investments and associated risks
which, however, is not the case in conventional banks.
Ideal mode of financing under the Islamic banking is financing on profit and loss
basis (PLS). The bulk of financing is equity oriented. In this mode of financing losses
are shared by financier along with entrepreneur in the ratio of their respective
capitals. The profits are, however, shared in an agreed ratio. Various other modes of
financing and products are as follows.
NOTE: Almost all aspects of Islamic banking are controversial. With reference to
articles of Najam ul
Hassan, CEO Gulf African
Bank; Tarik Rashid CEO
Tarik Rashid (Pvt) LTD.
Insurance is a very important tool for risk management. It is used to transfer risk
from one entity to another in exchange of a premium. Insurance is a commutative
contract between the client and the insurance company i.e. it is a sale contract with
an intention to make profit.
Insurance companies work on the ‘law of large numbers’ which states that as the
number of exposure units increases the actual results are likely to become close to
expected results. A large number of people give premium to the company in
exchange of transferring their risk. Premiums are received keeping in mind the risks
associated with each ‘Insured Interest’. From these premiums a pool is made which
is under the ownership of the company and it is used to indemnify for losses arising
in the future; from the pool investments are made in almost all avenues including
interest based investments. Returns from the investments remain property of the
insurance company.
Scholars have no objection with the principle of insurance but its mechanism raise
questions. Insurance is a sale contract between the company and the client and by
Shariah Law any ambiguity/uncertainty in a sale contract is not permissible. The
uncertainty arises from the perspective of future losses; the company and the client
both are not aware of future misfortunes. Secondly and most importantly
conventional insurance invests in interest based instruments and returns generated
from such investments are harram. Another point of concern in relation to Interest
is that when a client pays premium for a sum insured and incase of loss it recovers
more than the amount paid from the pool which is under the ownership of the
company, this in its pure sense is riba, however, in takaful the premiums or
contributions remain the property of policy holders/participants and they contribute
with an intention of helping each other (donation; normally non-refundable). Takaful
is not a sale contract, it is a non-commutative contract which allows uncertainty but
with an intention to minimize it as it is not for profit but for mutual assistance.
Takaful pool is called Participants Fund (as it is owned by them) from which claims
are dispatched and non-riba investments are made. Returns generated from the
investments are distributed back to the participants. So in takaful risk is not
transferred but rather shared by participants. As takaful is based on Islamic
principles and recognizes that risk cannot be avoided and is not in one’s hand the
rate charged to the clients is same, emphasizing on the concept of equality.
Wakalah Model: Under this model, the TO and the Takaful Participants form a
principal-agent relationship whereby the TO acts strictly as an agent on behalf of
the Takaful Participants as the principal, to run both the investment and
underwriting activities. In return for the services rendered by the TO as Wakil
(agent), TO receives a set upfront fee called Wakalah Fee. The Wakalah Fee must
be pre-agree and written the Takaful Contract. For the To the Wakalah Fee is
expected to cover the total sum of: (a) management expenses; (b) distribution cost
including remuneration; (c) a margin of operating profit to the TO.
In addition, Wakalah Model may permit the TO to receive part of the remuneration
as wakil in the form of a performance-related fee as an additional incentive. A
performance-related fee as agreed in the Takaful Contract is typically related to
underwriting.
Wakalah-Modarabah Model: Under this model the Wakalah Model is adopted for
underwriting activities, while modarabah contract is employed for the investment
activities.