Key Features of Financing Products

Definition

Murabaha is a sale transaction, whereby the seller (Bank) expressly mentions the cost and the Profit charge thereon while quoting the price.

Purpose

The purpose is to cater the short-term financing requirements of the customer. Under Murabaha arrangement BANK AL HABIB-ISLAMIC BANKING DIVISION allows customers to purchase the goods / commodities (raw material/ finished goods etc.) from time to time for business use up to a specific limit assigned.

Basic Rules of Murabaha

The subject matter must exist at the time of sale.
The subject matter must be in the ownership of the seller.
The subject matter must be in the possession (absolute or constructive) of the seller.
The price must be agreed and fixed at the time of sale.
The subject matter must have value from Shariah perspective.
The transaction can either be spot or on deferred payment basis.

Target Market

The target Market for Murabaha Finance is Corporate / Commercial / Retail and SME sectors to meet their working capital needs. These entities must fulfill BANK AL HABIB-ISLAMIC BANKING DIVISION credit entitlement criteria.

Difference between Murabaha & Conventional Loan

Distinguishing Factor	Murabaha	Conventional loan
Contract	A sale contract whereby bank sells asset (goods / commodities) to customer.	A loan contract, whereby Bank lends money to customer.
Relationship	The relationship between bank and customer is that of seller and buyer.	The relationship between bank and customer is that of lender and borrower.
Income	Income on Murabaha is the outcome of sale i.e. Profit	Income is based on Mark-up on loan.
Delayed Payment	In case of delayed payment, the customer undertakes to pay charity	Mark-up continues to accrue till the loan is repaid.

Definition

Istisna is a sale contract which is executed for goods which needs to be manufactured or constructed as per customer’s specification, with the obligation of the seller (manufacturer) to deliver the goods upon completion.

Purpose

BAHL-IBD offers Istisna finance to meet the entire working capital finance requirements of Corporate and SME sector that manufactures / constructs assets to be sold in local and international market.

Basic Rules of Istisna

The description and the quantity of goods must be explicitly defined
The price and time of delivery must be fixed.
The price may be paid in advance, in installment or at the time of delivery.
Manufacturer becomes the owner of the funds disbursed as Istisna price and can use it for all business requirements.

Target Market

The Manufacturer in Corporate and SME sector who qualify the BAHL’s minimum credit criteria.

Difference between Istisna & Conventional Loan

Distinguishing Factor	Istisna	Conventional Loan
Contract	A sale contract whereby bank purchase the asset needs to be manufactured by the customer.	A loan contract, whereby bank lends money to customer.
Relationship	The relationship between bank and customer is that of buyer and seller.	The relationship between bank and customer is that of lender and borrower.
Financing	Financing is created by paying the Istisna Price to customer.	Financing is created by granting loan.
Income	Income on Istisna is the outcome of sale i.e. profit.	Income is based on Mark-up on loan.
Customer’s Liability	Customer is liable to deliver the asset at agreed future date.	Customer is liable to repay the loan at future date.

Definition

Musawama is a sale transaction, whereby the seller (Bank) quotes the price without any reference to cost or profit.

Purpose

To cater the post manufacturing / shipment financing requirement of the client by purchasing the inventory from the customer and subsequently sell the same by appointing the customer as an agent.

Under Musawama arrangement BAHL-IBD agrees with customer to purchase goods / commodities (finished goods) from time to time, up to a specific limit assigned.

Basic Rules of Musawama

The subject matter must exist at the time of sale
The subject matter must be in the ownership of seller
The subject matter must be in the possession of seller
The Price must be certain and agreed at the time of sale
The subject matter must have value from Shariah perspective
The transaction can either be spot or on deferred payment basis.

Target Market

The target market for Musawama Finance is Corporate / Commercial / Retail and SME sectors to meet their post manufacturing / shipment financing needs. These entities must fulfill BAHL-IBD credit entitlement criteria.

Difference between Musawama & Conventional Loan

Distinguishing Factor	Musawama	Conventional Loan
Contract	A sale contract whereby bank buys goods from customer.	A loan contract, whereby bank lends money to customer.
Relationship	The relationship between bank and customer is that of buyer and seller. Subsequently principal and agent.	The relationship between bank and customer is that of lender and borrower.
Income	Income on Musawama is the outcome of sale i.e. profit.	Income is based on Mark-up on loan.
Financing	Financing is created by paying the Musawama Price to customer.	Financing is created by granting loan.

Definition

Ijarah is a term of Islamic fiqh and it means “to give something on rent” or “to acquire service”. Ijarah can be defined as “transferring of usufruct of an asset to another person for an agreed period and agreed rent”. The asset should be valuable, identified and durable not consumable.

Purpose

To meet the long term business requirements, such as project financing, BMR activities and fleet financing.

Target Market

Corporate, Commercial and SME sectors who qualify the BAHL’s minimum financing criteria.

Difference between Ijarah & Conventional Loan

Distinguishing Factor	Ijarah	Lease
Ownership and risk	The asset is owned by bank and all ownership related risks are assumed by bank.	No clear demarcation between rights and liabilities of bank and customer.
Commencement	Rental commenced after the delivery of asset.	Installment normally starts before the delivery of asset.
Delayed Payment	Customer pays charity in case of delayed payment of rental, which will not be part of Bank’s income.	In case of delayed payment a penalty is charged and taken to income

Definition

According to the concept, a Bank and customer participates either in the joint ownership of a property or an equipment/Asset, or in a joint commercial enterprise. The share of the Bank is further divided into a number of units and it is understood that the client will purchase the units of the share of the Bank one by one periodically, thus increasing customer’s own share till all the units of the financier are purchased by the customer so as to become sole owner of the property, or the commercial enterprise.

Purpose

To meet the long term business requirements, such as project financing, BMR activities, fleet financing car financing and house financing.

Target Market

Corporate, Commercial, SME and Consumer sectors who qualify the BAHL’s minimum financing criteria.

Difference between Diminishing Musharakah & Conventional Loan

Distinguishing Factor	Diminishing Musharakah	Conventional Loan
Contract	It is a partnership contract.	It is a loan contract.
Commencement	Rental commenced after the delivery of asset.	Installment may starts before the delivery of asset.
Ownership & Risk	Asset is jointly owned and the risk is shared in proportion of ownership.	Asset is owned by the customer and all risks are borne by him.
Income	Income is generated by renting out the bank’s ownership.	Income is generated by charging mark-up on loan.
Repayment	Customer pays the rental, and purchases the units.	Customer pays the installment comprising of mark-up and principal repayment.