Table of Contents
Parallel Istisna’ Home Financing
1. What is Istisna’?
- Simple Definition: It is a contract to buy something that hasn't been made yet.
- How it works: You order something to be manufactured or constructed according to specific descriptions.
- Price: The price and payment method are agreed upon at the start, but payment can be deferred or made in installments.
2. What is "Parallel" Istisna’?
- The Problem: The Bank is not a builder, so it cannot build the house itself.
- The Solution: The Bank enters into a second, separate contract with a real contractor to do the work.
- Contract 1: Between You (Customer) and the Bank.
- Contract 2: Between the Bank and the Contractor.
3. When is it used?
This type of financing is specifically for
properties under construction.
It is for customers who want to build a house on their own land or on land
they plan to buy.
4. How does the Process Work? (Step-by-Step)
- The Order: You (the customer) order the Bank to construct/complete a house for you. You sign an agreement for a fixed price (Cost + Profit).
- The Sub-Contract: The Bank hires a contractor (via a second contract) to actually build the house at the construction cost.
- Construction: The Bank issues a Letter of Undertaking to pay the contractor.
- Handover: Once finished, the contractor hands the house over to the Bank.
- Final Delivery: The Bank delivers the house to you, and you begin paying your monthly installments.
5. Key Rules to Remember
Independence: The two contracts (You & Bank / Bank &
Contractor) must remain separate and independent of each other.
Responsibility: The seller (Bank) is responsible for providing the
materials and labor (even if they hire someone else to do it).
Tawarruq Financing
1. What is Tawarruq?
- Simple Definition: It is a way to get cash (liquidity) by buying something on credit and selling it immediately for cash .
- The Goal: The main objective is to provide cash to the customer (mutawariq) while the bank earns a profit.
- The Structure: It is a 3-party or 4-party arrangement involving a buyer, a seller, and a third party.
2. How it Works (The Concept)
- Buy on Credit: You (the customer) buy a commodity (like metal or palm oil) from the Bank at a higher price, but you pay later (deferred payment) .
- Sell for Cash: You immediately sell that same commodity to a different person (Third Party) for a lower price, but you get paid cash instantly .
- Result: You now have the cash you needed, but you owe the Bank the deferred amount.
3. Organized Tawarruq (Tawarruq Munazzam)
- What is it? A pre-arranged version where the Bank manages the entire process for you. The customer usually never touches or sees the commodity physically .
- The Controversy: Some scholars (like the Fiqh Academy of Makkah) consider this specific organized form unlawful because it looks like "price rigging" just to get cash, rather than a real trade .
- The Rule: For it to be permissible, the third party you sell to must be truly independent from the Bank .
4. Tawarruq for Home Financing (Step-by-Step)
This is how banks use Tawarruq to help you buy a house:
- Selection: You pick a house and pay the 10% down payment (e.g., RM20,000) directly to the developer .
- The Bank's Purchase: The Bank buys a commodity (e.g., worth RM180,000) from Broker A .
- Sale to You: The Bank sells this commodity to you for a higher price (e.g., RM220,000) to be paid in installments over many years .
- Getting the Cash: You sell the commodity to a different broker (Broker B) for cash (RM180,000) .
- Paying the Developer: You use that RM180,000 cash to pay the remaining 90% of the house price to the developer .
Salam Financing
1. What is Salam?
- Simple Definition: It is buying something now but getting it later
- The Deal: You pay the full price immediately (in cash), but the seller delivers the goods at a future date .
- Purpose: It is a special permission (rukhsah) in Islamic finance to help people meet their economic needs, especially farmers or traders who need cash before their goods are ready .
2. How is it Different from a Normal Sale?
In a normal shop, you usually pay and get the item at the same time. Salam is
different in four key ways:
- Payment Timing:
- Salam: You must pay the full price right at the start (at the time of contract) .
- Normal Sale: You can pay now, later, or in installments .
- Possession of Goods:
- Salam: The seller does not need to own the item yet (e.g., crops that are still growing) .
- Normal Sale: You generally cannot sell something you don't own .
- Delivery Date:
- Salam: You must fix a specific date for delivery .
- Normal Sale: Immediate delivery is usually expected unless agreed otherwise .
- Type of Goods:
- Salam: Only goods that can be precisely measured or weighed (quality and quantity) can be sold this way .
- Normal Sale: Almost anything that can be owned can be sold .
Islamic Credit Cards
1. What is an Islamic Credit Card?
- Definition: It is a credit facility that lets you buy goods, services, or withdraw cash within a specific limit, just like a normal credit card.
- Key Difference: Instead of charging interest on the balance, it uses Shariah-compliant trade or fee structures.
2. How Does It Work? (The 3 Models)
Islamic banks use three main concepts to make credit cards work:
A. Ujrah (Fee-Based Model)
Concept: "Ujrah" means fee.
How it works:
- The Bank lends you money (gives you a "Qard" or loan) to pay for your shopping.
- You pay the Bank a fixed service fee (for managing the account) instead of paying interest.
- The Bank earns profit from this fee and merchant commissions.
B. Tawarruq (Monetization Model)
Concept: Converting a commodity into cash (similar to the Tawarruq
financing in Section 2).
How it works:
Step 1: The Bank buys a commodity (e.g., metal) from a broker.Step 2: The Bank sells this commodity to you at a higher price (cost + profit), which you pay later.Step 3: You (or the bank on your behalf) sell the commodity to a different broker for cash.
Step 4: This cash is put into your account (Wadi’ah account) for you to use.
C. Bai’ Al Inah (Sale and Buy-Back Model)
Concept: Selling and buying back an asset to generate cash.
How it works:
- The Bank sells you an asset (like shares in land) at a higher price.
- The Bank buys it back or the proceeds are deposited into your account.
- The money sits in a Wadi’ah (Safe Keeping) Account for you to spend.
3. Fees and Charges
Instead of interest, your account is debited for:
- Annual fees.
- Profit or service charges.
- Cash withdrawal fees.
Corporate Financing
1. What is Corporate Financing?
Definition: Banking activities that help businesses (companies,
firms, corporations) manage their money and capital.
What it covers: It helps companies with things like raising capital,
starting joint ventures, buying assets, and managing daily cash flow
(working capital).
2. The 4 Main Types
Islamic banks offer corporate financing in four main categories:
- Sale-Based: Selling assets to the company (e.g., Murabahah).
- Lease-Based: Renting assets to the company (e.g., Ijarah).
- Trade Financing: Helping with imports/exports (e.g., Letter of Credit, Bank Guarantee).
- Working Capital: Cash for daily operations (e.g., Overdraft).
3. Sale-Based Example: Murabahah (For Buying Assets)
This is used when a company needs to buy equipment or vehicles.
Concept: The Bank buys the item and sells it to the company at a
markup (Cost + Profit).
Step-by-Step Process:
- Selection: The company (Customer) finds the vehicle they want and pays a booking fee.
- Application: The company applies for financing with the bank using the booking receipt.
- Bank Buys: The Bank buys the vehicle from the vendor (e.g., paying RM49,000).
- Bank Sells: The Bank sells the vehicle to the company at a higher price (e.g., RM54,000) which includes their profit.
- Payment: The company pays the Bank in installments (e.g., monthly).
4. Lease-Based Example: Ijarah Muntahiyah Bittamlik
This is a "Rent-to-Own" model.
Concept: The Bank rents the equipment to the company, and at the
end, gives it to them as a gift.
Step-by-Step Process:
- Agreement: The company asks the Bank to buy an asset.
- Purchase: The Bank buys the asset from a vendor.
- Rent: The Bank rents it to the company for a specific period.
- Payment: The company pays monthly rent.
- Transfer: At the end of the lease, the Bank gives the asset to the company as a Hibah (Gift).
5. Working Capital: Overdraft (Cash Line)
This helps companies when they need extra cash for daily expenses. It often
uses the Bai’ Al Inah (Sale and Buy-back) structure.
Concept: Generating cash by selling and buying back an asset.
Step-by-Step Process:
- Bank Sells: The Bank sells its own asset to the company at a high price (deferred payment).
- Customer Sells Back: The company immediately sells the asset back to the Bank for a lower cash price.
- Result: The cash is put into the company's account to use as an overdraft facility.
- Repayment: The company pays the profit portion monthly on the amount they actually use.
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