Enat Bank interest free banking Training.p

Training material

1. Fundamentals of Interest free banking

2. Faris Ahmed Presented by:

3. Objectives of the Training Know the Historical Background of Islamic Banking/Finance, the definition and the various names used to describe this type of Banking; Understand the basic principles of Interest free banking, Understand the operation of Interest free banking, Know the various products and services delivered through Interest Free Banking (Manner of Deposit Mobilization and Modes of Financing or Utilization) and the underlying Shari’ah Contracts. understand the major difference between Conventional and Interest Free Banking Services

4. What Is Interest Free Banking?

5. Naming Variations Islamic Banking commonly used worldwide Interest Free Banking – Ethiopia Non-Interest Banking – Nigeria Participation Banking – Turkey & North Africa La- Riba /No Riba - USA Ethical Banking Community Banking …

6. Definition Interest Free Banking Business refers to a banking business in which mobilizing or advancing of fund taken in a manner consistent with Islamic finance principles and mode of operation that avoids receiving or paying of interest. (NBE’s Directive No.SBB 51/2011) Interest Free Banking Business refers to a banking business in which mobilizing or advancing of fund undertaken in a manner consistent with Islamic Law or Shari’ah principles. (NBE’s Directive No.SBB 72/2019)

7. Definition Cont … A banking system that is based on the principles of Islamic law (sharia) and guided by Islamic Economics . Islamic banking, in the more general term, is based not only to avoid interest-based transactions but also to avoid unethical and un-social practices .

8. Fundamental Concepts of Interest Free banking 1. Shari’ah –Islamic Law Shari’ah is the set of rules which includes and clarifies obligations, prohibitions , recommended duties, what is lawful and unlawful etc. Therefore it includes ethics, manners, laws, public life, social life, economic life, politics etc. Sources of the Shari’ah The two Primary sources of the Shari’ah are the Qur’an and the Sunnah . Other sources include Ijma ’ (consensus) and Qiyas (analogy of jurist)s

9. Fundamental Concepts…..

10. Fundamental Concepts…. 2. Riba (Interest/ Usury) Riba , literally means “growth” or “increase” & denotes the payment or receipt of interest for the use of money. Riba , from Shari’ah perspective, refers to any predetermined and conditional extra amount, big or small, that must be paid by the borrower to the lender above and over the actual principal amount.

11. Fundamental Concepts… There are two common types of Riba a. Rate-for-duration ( Riba Al Nasiah )- Specified, predetermined repayment in excess of loan/capital. (Fixed, Guaranteed, Increases with the increase of time) E.g. Simple & Compound interest b. Excess Exchanges ( Riba Al Fadl )- When specified items are exchanged for the same kind at unequal measures or on deferred basis, this is Riba . Eg One Kg of salt is exchanged for two kg. One kg of dates is exchanged for two kg of dates, irrespective of quality

12. Fundamental Concepts… Prohibition of Riba In prohibiting Riba , Islam seeks to foster an environment based on fairness and justice. A loan with a fixed return to the lender regardless of the outcome of the borrower’s course of action is viewed as unfair. Riba is also believed to be exploitative and unproductive because it is considered to represent sure gain to the lender without any possibility of loss as well as a reward in return for no work.

13. Fundamental Concepts… More about Riba Is Riba prohibited in Islam only? The Bible: Exodus 22;25; Leviticus 25:36,37; Deuteronomy 23:19,20; Psalms 15:5; Proverbs 28:8; Ezekiel 18:8, 13,17 Ezekiel 22:12.

14. Quotes

15. Quotes “The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest… Wherefore of all modes of getting wealth this is the most unnatural.” (Aristotle, Greek Philosopher and Scientist)

16. The Three Legal Maxims The Three Legal Maxims General Permissibility : Everything is allowed unless specifically prohibited PLS (Profit and loss sharing) : The one who takes the risk has the right to share in the profit Asset Backed Financing : If you want the asset financing then you have to show the asset

17. Fundamental Principles of IFB 1. Any predetermined, conditional payment over and above the actual Principal amount is prohibited. 2. Profit and loss principle is proportional to the risk Islam encourages Muslims to invest their money and to become partners in order to share profits and risks in the business instead of becoming creditors. Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures.

18. Fundamental Principles …. 3. Making money from money is not acceptable Money is only a medium of exchange, a way of defining the value of a thing; but it does not view money as a commodity that should be bought and sold at a profit, simply by being placed at a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it.

19. Fundamental Principles …. 4 . Gharar (Uncertainty, Speculation, Ignorance, Deception) is also prohibited. uncertainty and/or ignorance of one/both parties in a contract over the subject or attributes of the object of sale, or doubt over its existence and availability at the time of contract Rationale for prohibition: To ensure full consent and satisfaction of the parties in a contract

20. Fundamental Principles …. There are several types of Gharar , all of which are haram. The following are some examples: Selling goods that the seller is unable to deliver. Selling known or unknown goods against an unknown price, such as selling the contents of a sealed box Selling goods without proper description, such as shop owner selling clothes with unspecified sizes Selling goods without specifying the price, such as selling at the 'going price‘ Making a contract conditional on an unknown event, wherein the time is not specified Selling goods on the basis of false description Selling goods without allowing the buyer the properly examining the goods

21. Fundamental Principles …. 5. Maysir (Gambling) The act of playing for stakes in the hope of winning including payment of price for a chance to win prize, The gain of one party depends on the loss of the other, There is no gain & loss for one party without loss & gain to the counter party in their respective order; Make/Lose money easily, without effort or work, & through excessive risk; Contradicts the concept of productivity;

22. Fundamental Principles …. The combined elements inside for prohibition: The competing players or gamblers to pay amount set for the bet, The source of the uncertain prize for the winner hoping to win being the amount for bet, The flow of wealth from the loser to the winner, But not the game alone or by itself; Exceptions/Reversal Competition arranged without having the elements stated from one through three all together;

23. Fundamental Principles …. 6. Products & Services invested in, must be permissible Trading in Pork, dead animals, alcohol, would not be financed by IFB; property financing cannot be made for the construction of a casino, Gambling Houses, Houses that engage in pornography/prostitution; and an IFB could not lend money to other banks at interest.

24. Fundamental Principles ….

25. IFB Emergence and Growth IFB has its root in the broader concept of Islamic finance whose principles dates back to 1,400 years, The first modern-day trial of Islamic Banking :The pioneering effort, led by Ahmad Elnaggar , that took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. Became part of the mainstream financial system largely in the 1970s and the oil boom triggered a rapid growth of Islamic financial institutions, Popular in U.S., England, RSA, KSA, UAE, etc.

26. IFB Emergence and Growth

27. IFB Emergence and Growth The size of Islamic Financial Industry is growing in Muslim countries including Bahrain, UAE, Saudi Arabia, Malaysia and Pakistan, But also growing tremendously in non-Muslim countries including USA, UK, Canada, Switzerland, South Africa and Australia Leading foreign Banks have opened Islamic Banking windows or subsidiaries such as: Standard Chartered Bank Citibank HSBC

28. WHY WE NEED IFB?

29. Rationale for IFB in Ethiopia Tailor-made banking services facilitate financial inclusion which in turn helps for high deposit resource Current Demand cannot cater with conventional banking Untapped Market and Market share Existence of Customer demand inferred from Request for IFB service for long Primary Target population represent large group Non Interest Bearing Account Customers & deposit has been growing Its an alternative banking service It may serve as a Competitive advantage

30. Models of Interest Free Banking 1. Dedicated Window Model: Refers to conventional banks that offer Islamic banking products and services using their existing infrastructure, including staff and branches. Usually assurance is given for the segregation of client’s funds with any interest-based funds. E.g . CBE, OIB, AB, DB……

31. Models ……. 2. Dedicated Branch Model: Banks sometimes dedicate Branch/ es to give IFB services only. The Branches are established to deliver Shari’ah Complaint products under the supervision of a unit/ Department in Conventional Banks. This model is similar to Window Model.

32. Models ……. 3 . Subsidary Model: In this Scenario, a conventional Bank develops a subsidiary under its entity to deliver Shari'ah compliant products, advantage can establish its own process and an independent operating structure. It can also formulate its own policies that are in line with Shari'ah but still manage to fall within the parent company’s strategies.

33. Models ……. 4 . Fully Fledged Islamic Bank Model: Refers to a bank dedicated to only offering Islamic Banking products/services. Operations and management are clearly separated between the subsidiary Islamic bank and the parent conventional bank. E.g. Zamzem Bank, Hijra Bank…..

34. Arguments for Islamic Banking Windows 1. Gradual implementation It takes time to Build a customer base Educate people Change regulatory environment Develop human resource capabilities Acquire adequate infrastructure 2. Efficiency Lowest cost within the shortest period of time Leverage on existing infrastructure (people and physical resources) Avoid duplication of resources

35. Arguments …… 3. Effective development Market familiarization of products Wider marketing base 4. Take advantage of technological advancement of conventional banks Standard operating procedures, information systems, control and monitoring systems 5. Capture non-Muslim market

36. Challenges of IFB Window Model Lack of clients confidence that their funds may be co-mingled with funds in the conventional Efforts made for the innovation of investment products that meets clients towards diversification of investments are always below expectations compared to wide-range of conventional products.

37. Arguments for Full-Fledged Islamic Bank Ensure implementation more in line with the Shari’ah No commingling of funds Shari’ah compliance in all aspects Avoid conflict of interest in management objectives and organizational constraints Easier comparison of performance Easier regulation and assurance of compliance to Shari’ah requirements Attract international (esp. Middle Eastern) investors Employees and management more focused Development of relevant and necessary competencies and knowledge

38. IFB Contracts First we shall discuss Islamic Business Principles which are the bases of IFB contracts Honesty & Truthfulness Anyone involved in business should imbibe the quality of truth in the business practice Disclose Faults, Avoid Deception & Misrepresentation It is incumbent upon the seller to disclose the faults of an item prior to its sale. Untrue declarations of the benefits or use of a particular product is also reprehensible. It is not permissible to sell something that contains delusion. Avoid Selling Forbidden Items

39. IFB Contracts… Avoid Two Sales/contracts in One It is disallowed combining two sales in one contract in Islam. e.g . loan and sale in one transaction Avoid Back-to-back Sales It is disallowed back-to-back sales of the same object between the same contracting parties, changing roles in a contract, the second sale being dependent on the first. Selling a debt with a debt is prohibited It is not permissible to sell something that does not exist (in terms of an asset or commodity). A common example of the sale of debt in modern finance is the factoring of debt.

40. IFB Contracts… Contract : Aqd A contract is a transaction that is executed between two or more parties for mutual benefit. An Aqd (contract) implies an obligation arising out of mutual agreement. For a contract to be valid At least two independent parties Material effect following the exchange of the item under consideration Offer and acceptance relating to the item and the price of the item

41. IFB Contracts… Elements of a valid contract 1. Contracting Parties The contracting parties must be Sane and mature 2 . Subject Matter Existence: The object must be in existence. Valuable : The object should hold value in the light of the shariah . Ownership: The seller must have ownership of the object at the time of sale. Physical or constructive possession of the subject matter. Delivery : The subject matter must be able to be delivered at the time of the contract. Specific : The element of uncertainty must be removed by ensuring that the subject matter can be specifically determined. The subject matter should be inspected or described in sufficient detail as to avoid uncertainty and ambiguity

42. IFB Contracts… 3. Offer & Acceptance ( Ijaab & Qabool ) The term ‘offer’ refers to one person’s intent to sell to another or an intent to buy from another, a specific quantity at a specific price. An ‘acceptance’ refers to the person that has approved the ‘offer’ that was made at a known quantity and specified price Conditions for the Offer & Acceptance to be valid: The acceptance should be unconditional and absolute The offer and acceptance should take place at the same meeting The offer holds until it is withdrawn

43. IFB Contracts… Types of IFB Contract Modalities There are four Basic categories of IF Banking Legal Contracts , and are commonly called SPAS Sales/Exchange Contracts: Markup ( Murabaha ) Contract- for purchase & sell of goods Forward Sale (Salam) Contract- For produce and Sale; Leasing ( Ijarah ) Contract- For Make/buy and lease of durable, fixed assets; Work-in-Progress Financing ( Istisna ) Contract -for Construction/Assembly/manufacturing of assets

44. IFB Contracts… Partnership Contracts: Profit and Loss Sharing ( Mudaraba ) Silent partnership Profit/Loss Sharing ( Musharaka ) Joint Venture Agency Contracts ( Wakalah ): Assignment of rights and obligations to other party, Security Contracts: Surety ( Kafala ) Contracts- for performance guarantees; Transfer of debt ( Hawalah ) contracts - for Local/Foreign Money Transfer; Pledge and mortgage ( Rahn ) contracts - for debt collateral

45. Penalty Payments for Late/ Defaults. Three Views: The principle doesn’t allow to penalize defaulters; The defaulters have to be fined for fairness reason; Can be fined using initial agreement but exclude from income (Charity)

46. Ethical behavior expected from IFB operator Competence: - possess the required skill and knowledge Courtesy : - friendly, respectful and considerate Credibility : - the employee must exhibit trustworthy Reliability : - perform consistently & accurately Responsiveness : - the employee must respond quickly to customers’ requests and problems Communication : - the employee shall make an effort to understand the customer and communicate clearly.

47. Unethical sales behavior Lying or exaggerating about the benefits of a product or service, (Monthly Mudaraba Profit rate is highly exaggerated) Lying about the competition, Giving answers when the answer is not known, Releasing information about the customers’ that is deemed private, Disclosing any customer information without legitimate cause, Using incorrect terminology in a sale Loans, interest rate, lending, etc.

48. IFB Deposit/Investment Product

49. IFB Deposit/Investment Product In the case of IFB there are a number of deposits and investment facilities created using Islamic contractual arrangements. 1. Wadi’ah Saving Account 2. Qard current account 3. Mudarabah saving account 4. Mudarabah Investment Accounts Unrestricted Investment Account Restricted Investment Accounts

50. IFB Deposit/Investment Product…. Wadi‘ah Saving Account Wadi’ah Deposit is a trust agreement where the Bank accepts deposit from its customers looking for safe custody of their funds & degree of convenience in their use. The bank offer this saving account with an aim of drawing in and persuading depositors to enjoy this safe keeping facility .

51. Basic features of Wadiah Saving Account This is a non profit and loss bearing product just for safe custody The customer does not share any risk or profit with the Bank Source of deposit should be from Halal Source ( Shari’ah compliant business) Bank gives the guarantee to return the full amount Bank can invest this deposited fund with the permission of the depositor Bank may share the profit with the form of Hiba /Gift (Banks’ discretion) in monetary or in kind. Operated by passbook , vouchers & cards Minimum Deposit amount can be specified

52. Special Wadi‘ah Saving Account a. Hajj Wadi'ah Account Single purpose (Hajj pilgrimage) Wadi’ah saving account to customers that aspire to travel for the Islamic pilgrimage in Meca . b. Children Wadi’ah Saving Account Shari’ah compliant safekeeping (saving) account for minors operated by legal guardians, in which the minors learn to save and money management. Whenever the youth reaches 18 years of age the account may be changed to the normal Wadi'ah saving account or any.

53. Special Wadi‘ah Saving Account…… c . Women Wadi’ah saving Account Shari’ah compliant safekeeping (Saving) account for Women customers designed specifically to meet the financial needs of women & tailored to help them achieve their savings goals and financial independence.

54. Basic Eligibility Requirements For Natural Person Present valid and renewed ID card and recent photographs For Artificial/Legal Persons Business/Investment license, commercial registration and TIN Authenticated MoA and AoA , Partnership Agreement Minutes of the BoD [Share Companies]

55. IFB Deposit/Investment Product…… Qard Current account The Current Account product, offered based on the contract of Qard, shall allow current account holders ready access to their money placed with the Bank.

56. Basic features of Qard The customer does not share any risk or profit The bank can use mobilized fund in any ‘permissible’ area Operated similar to the conventional current account by using Cheque book to provide ease of withdrawal The Bank, at its discretion, can provide a gift/ hibah Free monthly account statement Source of deposit should be from Halal Source ( Shari’ah compliant business) Minimum Deposit amount can be specified

57. Basic Eligibility Requirements For Sole Proprietors Valid and renewed ID Business/Investment license, commercial registration and TIN For Artificial/Legal Persons Business/Investment license, commercial registration and TIN Authenticated MoA and AoA , Partnership Agreement Minutes of the BoD [Share Companies]

58. IFB Deposit/Investment Product…… Mudarabah saving Account It is a distinct type of partnership, wherein one partner provides the capital to an entrepreneur (another partner) for investing in a commercial initiative, with the objective of sharing profit from the commercial entity. The entrepreneur then undertakes the activities and management of the entity and the profit is shared between the partners in a predetermined quantum, while loss is borne by the investing partners.

59. Basic features of Mudarabah S aving Account Both Bank and Customers agree on the profit sharing ratio. Any profit earned is shared between both of them on a pre-agreed ratio, while loss is entirely borne by the provider of the capital (Customer). No restriction on withdrawal. However, Account that short fall of the minimum deposit requirement, on Profit Payment period, shall not be eligible for profit sharing. Shall be operated by with or without pass book & card Minimum Deposit amount can be specified It shall be backed by Mudarabah contractual agreement

60. IFB Deposit/Investment Product…… Unrestricted Mudarabah Investment Account It is similar with Mudarabah Saving account but is opened for a limited period ( term) It refers to a type of investment account where the investment account holder provides the Bank with the mandate to make the ultimate investment decision without specifying any particular restrictions or conditions

61. Basic features of Unrestricted Mudarabah Investment Account Profit sharing margin can be variable among customers based on duration and volume of their deposit. Is time bound. i.e., the deposit period is determined in the contract to be made between the depositor and the bank; Limitations on withdrawal during specified period based on prior agreement Any losses arising from the investment will be borne by the capital provider (customers). The minimum amount required to have such investment Account shall be Specified by the bank

62. IFB Deposit/Investment Product…… Restricted Mudarabah Investment Account It refers to a type of investment account where the investment account holder provides a specific investment mandate to the Bank such as purpose, asset class, economic sector and period for investment operate under the Mudaraba principle but usually directed towards larger investors and institutions

63. Basic features of Unrestricted Mudarabah Investment Account Profit sharing margin can be variable among customers based on duration and volume of their deposit. Is time bound. i.e., the deposit period is determined in the contract to be made between the depositor and the bank; Limitations on withdrawal during specified period based on prior agreement Any losses arising from the investment will be borne by the capital provider (customers). The minimum amount required to have such investment Account shall be Specified by the bank

64. IFB Financing Products

65. IFB Financing Products 1 . Trade Based Financing 1.1. Murabaha 1.2. Istis’na 1.3. Salam 1.4. Ijarah 2. Equity Based Financing 2.1 . Musharaka 2.2 . Mudarbah 3. Qard al Hassan 4. Kafala

66. 1. Trade Based Financing Murabahah /Markup/Cost-Plus-profit / It is a contract wherein the institution, upon request by the customer, purchases asset from the third party usually a supplier/vendor and resells the same to the customer in a deferred payment basis. based on client’s promise to buy goods, bank buys an item identified by and for a client. The client agree to repay the bank the price and an agreed profit later either on installment or lump sum bases The distinguishing feature of Murabaha from ordinary sale is The seller discloses the cost to the buyer And a known profit is added

67. Process flow of Murabaha 1 . Client approach the bank and sign an agreement to enter into Murabahah through a Master Murabahah Financing Agreement (MMFA)..

68. Process flow of Murabaha …… 2 . Client appointed as an agent to purchase goods on the Bank’s behalf.

69. Process flow of Murabaha …… 3. Bank disbursers money to the supplier/agent for purchase of goods.

70. Process flow of Murabaha …… 4. The agent takes possession of goods on the Bank’s behalf.

71. Process flow of Murabaha …… 5(a ). Client makes an offer to purchase the goods from the Bank through a declaration.

72. Process flow of Murabaha …… 5(b). Bank accepts the offer and sale is concluded / culminated.

73. Process flow of Murabaha …… 6 . Client pays agreed price to the Bank according to an agreed schedule. Usually on a deferred payment basis

74. Rules of Murabaha Financing The subject matter of sale must exist at the time of the sale. The subject matter should be in the ownership and possession of the seller, The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. The subject matter should be a property having value. The subject matter of sale should not be a thing used for impermissible purpose. The subject matter of sale must be specifically known and identified to the buyer. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance. The certainty of price is a necessary condition for the validity of the sale. If the price is uncertain, the sale is void. The sale must be unconditional.

75. 1. Trade Based Financing ……. Salam/Advance Payment against-deferred-delivery-of-goods/ Seller agrees to supply specific goods to the buyer at a future date in exchange for an advanced price fully paid at spot. Price is in cash but the supply of goods is deferred. Purpose of Salam To meet the needs of small farmers who need money to grow their crops and to feed their family up to the time of harvest. To meet the need of working capital

76. Conditions of Salam The buyer pays the price in full to the seller at the time of affecting the sale Salam can be affected in those commodities only the quality and quantity of which can be specified exactly. Salam cannot be affected on a particular commodity or on a product of a particular field or farm. It is necessary that the quality of the commodity (intended to be purchased through Salam) is fully specified leaving no ambiguity which may lead to a dispute. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms The exact date and place of delivery must be specified in the contract

77. Parallel Salam After the execution of Salam agreement with one party, the Bank executes another salam agreement with third party, that we call it parallel salam Conditions for Parallel Salam: ( a) there must be two different and independent contracts, these two contracts cannot be tied up and performance of one should not be contingent on the other. ( b) Parallel Salam is allowed with third party only.

78. 1. Trade Based Financing ……. C. Istisna /Work-in- Progress/ It is an order to produce or to manufacture a specific commodity for the purchaser. Istisn’a is widely used to finance manufacturing activity like aircrafts, ships, machines and equipment, as well as construction of real estate related activity like buildings, warehouses, showrooms, shopping malls, residential towers and villas

79. Essential requirement for Istisn’a The nature and quality of the item to be delivered must be specified. The manufacturer must make a commitment to produce the item as described. The delivery date is not fixed. The item is deliverable upon completion by the manufacturer. The contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contracted terms. Payment can be made in one lump sum or in installments, and at any time up to or after the time of delivery.

80. Parallel Istisn’a It is parallel arrangement for another Istisn’a transaction that follows first Istisn’a ; The second transaction is also an Istisn’a transaction in all manners and conditions; This arrangement of two transaction has been introduced to reduce the risk of buyer (Bank) for holding the commodities/goods. In a Parallel Istisn’a contract, the buyer enters into a Parallel Istisn’a contract in which he is a seller to another buyer; Applying to banking, in one of these two transactions, the Bank is the buyer and in the second it is the seller.

81. Conditions for parallel Istisn’a Each of the two contracts must be independent of the other; They cannot be tied up in a manner that the rights and obligations of one contract are dependent on the rights and obligations of the parallel contract; Similar to Parallel Salam, Parallel Istisn’a is allowed with a third party only; Therefore, Parallel Istisn’a to the same party (seller in first Istisn’a ) is not allowed.

82. 1. Trade Based Financing ……. B. Ijarah /Leasing/ Ijarah is where the bank buys/prepares an item for a client and leases it to him/her for a special rent and term. The term may be the assets’ expected/economic life. The owner of the asset (the bank) bears all the risks associated with ownership. Initial ‘promise to give’ or ‘promise to sale’ is required when the agreement is either to finally give or sale the leased item to the lessee.

83. Basic Rules of Ijarah Subject matter of Ijarah should be Valuable, Identified and Quantified; The period of Lease must be determined in clear terms; Any damage to the asset not caused by the Lessee’s neglect, is to be borne by the Lessor; Lessee will be responsible for Normal maintenance; The lease period starts when the asset has been delivered to the lessee in usable condition whether or not the lessee has started using it; The rent may be tied to a known benchmark, acceptable to both the parties.

84. 2. Equity Based Financing The ultimate goal of this financing base on Profit-and-loss-sharing (PLS) with two modalities: Mudaraba (Silent partnership) Musharaka (Joint Venture)

85. 2. Equity Based Financing……. 2.1. Mudarabah It is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called “ rabb - ul -mal”, while the management and work is an exclusive responsibility of the other, who is called “ mudarib ”. A profit-sharing and loss-bearing whereby the financier provides capital and the beneficiary provides labor and skills (profits are shared, but losses would be borne by the financier)

86. Features of Mudarabah : There should be two parties: Rabb - ul -mal (capital provider) and Mudarib (businessman). There should be written agreement/contract between the Bank and the businessman which includes nature of business, period/time, sharing of profit etc. Bank will finance and the businessman will run the business by providing his labor & skill. The Bank will not interfere in the business. The Bank however, reserves the right to check/verify the accounts of the business at any time . The Mudarib shall only be responsible for losses if the loss happened due to his negligence and wilful misconduct.

87. Features of Mudarabah : There should be two parties: Rabb - ul -mal (capital provider) and Mudarib (businessman). There should be written agreement/contract between the Bank and the businessman which includes nature of business, period/time, sharing of profit etc. Bank will finance and the businessman will run the business by providing his labor & skill. The Bank will not interfere in the business. The Bank however, reserves the right to check/verify the accounts of the business at any time . The Mudarib shall only be responsible for losses if the loss happened due to his negligence and wilful misconduct.

88. 2. Equity Based Financing……. 2.2. Musharaka (Joint Venture ) Musharaka is a contract of partnership between two or more parties in which all the partners contribute capital, participate in the management, and share the profit as per pre-agreed ratio and bear the losses, if any, in proportion to their capital/equity ratio. Types of Musharaka Permanent Musharaka : is a partnership of permanent nature Temporary (Redeemable) Musharaka is partnership for limited time Redemption of Musharakah will take place through sale of shares from one partner to other partner or third person Diminishing/declining Musharaka is a special form of partnership in which one of the partners buys the share of the other partner gradually until the ownership of the asset or property is completely transferred to second partner

89. Difference between Musharakah & Mudarabah MUSHARAKAH All partners invest Management of the business by any/all partners All partners share the loss to the extent of the ratio of their investment Unlimited liability of partners All partners share in the ownership of the assets pro-rata to their investment Musharakah is a partnership in profit and capital , MUDARABAH One party, Rabb - ul -Mal, invests Management of the business by Mudarib Only Only Rabb - ul -Mal suffer the loss provided that the Mudarib acted with due care while the mudarib suffers the loss of his labor . Liability of Rabb - ul -Mal is limited to its investment The assets are owned by the Rabb - ul -Mal and no share is owned by the Mudarib . Mudarabah is a partnership in profit not in capital.

90. Implementation Approach As per the NBE Directive requirement the following points need to be addressed by the Bank Keeping separate books of accounts Ensuring proper maintenance of records for all transactions for segregation of funds . ((NBE’s Directive No. SBB 72/2019);

91. How Does EB Segregate the fund? Dedicating window with Ummi brand Assigning dedicated staff In the system :- Created Separate virtual Branch Same COA Separate cash vault maintained in the system Expense and income emanated from the window recorded separately The Deposit amount collected from IFB Window will be deployed for IFB Financing only Separate Financial statement produced(GL, B/sheet …) Different Contract and Forms available for the service SAC ( Shari’ah Advisory Committee) appointed

92. Procedure in Opening IFB Accounts Apart from the criteria in the conventional Domestic Banking operations Policy and Procedure for opening or closing of accounts we need extra precaution during opening IFB ACCOUNT :- Cross check the sources of income Use IFB Format only to open the account All the term and condition should be attached with the opening form and encourage them to read it Carefully verify the customer demand on the type of Account he/she wants to open Clearly explain to them the basic future of the account Forward any issue to IFBD or SAC if it is shar'ah Related matter rise by customer before you explain to them

93. Differences between Conventional and Islamic banking

94. Differences between Conventional and Islamic banking

95. Differences between Conventional and Islamic banking

96. Differences between Conventional and Islamic banking