Practiced by more than 100 financial institutions in more than 45 countries.

Growth rate of more than 15% per year.

Annual turnover increased from $5 billion in 1985 to over $100 billion in 2000.

Potential market around the world making 25% of the world population.

Islamic Financing: Islamic Financing: Shares Margin FinancingShares Margin Financing

Imran Adeel HaiderMuhammad Akbar

Taha Lateef

Financial Accounting

AgendaAgenda Islamic Financing

Key Concepts

Principles of Islamic Financing

Islamic Financing Modes

Equities Financing Key Concepts

Margin Financing

Islamic Shares Financing Forming Murabaha Fund

Murabaha Model

Murabaha Transactions

Q & A

Islamic FinancingIslamic Financing

What is Islamic Financing?What is Islamic Financing?With conventional financing, a customer can walk into a bank, request a loan, and then pay the loan back over a period of time with interest.

Money (Loan)

Money (Loan repayment) + Interest

Conventional Financing

CustomerBank

What is Islamic Financing?What is Islamic Financing?In Islamic financing, the bank would purchase the product or service that the customer requires the loan for, and sell this onto the customer at a higher price over an agreed period of time, thus making a profit.

Product/Service

Money

Islamic Financing

Bank Customer

Principles of Islamic FinancingPrinciples of Islamic Financing

Prohibition of Interest

Risk Sharing

Money as “Potential” Capital

Prohibition of Speculative Behavior

Sanctity of Contracts

Shariah-approved Activities

Islamic Financing ModesIslamic Financing Modes

Trade with Markup or Cost-plus Sale (Murabaha)

Leasing (Ijara)

Profit-sharing Agreement (Mudaraba)

Equity Participation (Musharaka)

Sales Contracts

(i) Deferred-payment Sale (Bay’ Mu’ajjal)

(ii) Deferred-delivery Sale (Bay’ Salam)

Basic Islamic Rules of SaleBasic Islamic Rules of Sale1. The subject of sale must be existing at the time of sale.

2. The subject of sale must be in the ownership of the seller at the time of sale.

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.

5. The subject of sale must be specifically known & identified to the buyer.

6. The subject of sale must be a property of value.

7. The subject of sale should not be a thing which is not used except for a Haram purpose, like pork, wine etc.

8. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance.

9. The certainty of price is a necessary condition for the validity of a sale.

10. The sale must be unconditional. A conditional sale is invalid, unless the condition is recognized as a part of the transaction according to the usage of trade.

Traditional Traditional Equities FinancingEquities Financing

Key ConceptsKey Concepts• Delivery

– The legal transfer and receipt of ownership rights.

• Settlement– The date by which an executed security trade must be

settled. That is, the date by which a buyer must pay for the securities delivered by the seller.

• Margin– Borrowed money used to purchase securities. The practice

is referred to as "buying on margin". – Amount of equity contributed by a customer as a

percentage of the current market value of the securities held in a margin account.

• Initial Margin– The percentage of the purchase price of securities (that can

be purchased on margin) that the investor must pay for with his or her own cash or marginable securities.

• Maintenance Margin– The minimum amount of equity that must be maintained in

a margin account.

Key ConceptsKey Concepts• Collateral

– Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.

– Collateral is a form of security to the lender in case the borrower fails to pay back the loan.

– Example: For a mortgage, the collateral would be the house. In margin trading, the pledged securities in the account are the collateral.

• Hypothecation– When a person pledges a mortgage as collateral for a loan,

it refers to the right that a banker has to liquidate goods if he fails to service a loan.

• Margin Call– A broker's demand on an investor using margin to deposit

additional money or securities so that the margin account is brought up to the minimum maintenance margin.

Buying Shares on MarginBuying Shares on Margin• Rationale

– Use the Leveraged Position to Buy More Shares– Maximize Profitability from Appreciation of Rates

• Result– Investors Can Buy More Shares than the Money

They Have– Thus Resulting in Increased Profits if Prices Go Up

• Risks– If the Share Prices Go Down, the Investor Bears all

the Loss– Losses can be Substantial and Even Bankrupt the

Investor– If the Investor Goes Bankrupt, the Bank May Not

Recover its Investment

Share Financing Process Customer/Investor approaches a financing institution He pledges collateral (Cash, Shares, Other Securities) The institution hypothecates the investor and sets a

limit Margin Limit = Value of Collateral / Margin Percentage The investor can then buy shares not exceeding the

Margin Limit If share prices drop, the investor’s collateral may fall

below maintenance margin The financier issues a Margin Call, upon which the

investor deposits more collateral If the Investor doesn’t respond, the financier

liquidates the collateral to cover its position Since the duration of contract is unknown, the

interest is charged daily

Valuation of ClientValuation of Client

3- The Credit Appraisal Department valuates the pledged collaterals and hypothecates the worth of the Customer. A financing limit is

then assessed for each Customer, which is then stored as a Master Agreement/Maximum Financing Limit. All Financing Requests from

each Customer are then checked against this limit.

Customers’ applications are sent to the Credit Appraisal Committee

for review and valuation.

Customer approaches the Financing Institution and

subscribes to the Murabaha Financing Service for Purchase of

Shares of Listed Companies.

Trading on MarginTrading on Margin

Customer Bank

KSE

No – Buy 100,000 PTCL@ Rs. 64

The Customer wants to buy 100,000 shares of PTCL @ Rs. 64.00

The Bank checks the allowed limit of the Customer

If the required financing does not exceed the allowed limit, the request is honored and the transaction is executed. Otherwise it is denied.

CDC Account of Bank

Main Account

PTCL – 100,000 @ Rs. 64.00

Transferred to Customer

Customer’s Sub-Account

Yes

Islamic Shares FinancingIslamic Shares Financing

Murabaha Shares Financing• Bank Assigns Credit Limit to the Investors • Investors Request the Bank to Purchase

Shares on Murabaha Basis• The Bank Checks the Requests Against

Allowed Limits• The Bank Purchases the Shares• After Settlement, the Shares are Sold to the

Investor at a Higher Price• The Investor Pays Back the Full Price in

Agreed Installments• If the Investor Wishes to Pay Earlier, it is

Bank’s Discretion if it should Waive the Remaining Balance

• If the Investor Pays Late, the Bank can Charge a Penalty

• Penalty Amount Cannot be Treated as Revenue

• The Investor May Sell the Shares Anytime

Bank

Forming Murabaha Fund

Investors

Trading & Financing Customers

Repayment

Schedule

DailyPayments

Murabaha Transactions

Customer

Bank

3- Day Contract

Customer

Bank

Transaction Day

Day 1

Customer

Bank

Day 2

Customer

Bank

Day 3

Transactions

Shares - Bank 600,000

Cash 600,000

Receivables - Client 600,600

Shares - Bank 600,000

Unrealized Profit 600

Cash 200,200

Client Receivables 200,200

Unrealized Profit 200

Profit 200

Cash 200,200

Client Receivables 200,200

Unrealized Profit 200

Profit 200

Cash 200,200

Client Receivables 200,200

Unrealized Profit 200

Profit 200

Buy 10,000 shares,PTCL @ Rs. 60.00

Profit = 12%

Murabaha – Considerations• Delay in Payments

– Penalties of fixed amount– Donated to charities

• Devaluation of Collateral– Customer to deposit additional amount to ensure

minimum pledged collateral value

• Default– Collateral liquidated by bank– Amount remaining after covering liabilities to bank is

returned to customer

Questions and Answers

Thank You