5. Murabaha, Ijarah, Salam & Istisna (Modes of Financing) | Islamic Finance 101

[Music] asalam alikum and welcome to Islamic Finance 101 today we are continuing our discussion on the modes of financing we are looking at a debt based mode of financing so let's start [Music] BM just before we continue with this today's episode I want to let you know that this course will be available on our platform Muslim Money Matters with additional challenges examples and uh assessments where you can test your knowledge by registering with us and becoming a member also when you complete this assessment you will be able inshallah to get certificate of Islamic Finance 101 so check out Muslim Money Matters website for more details let's get into today's episode today we are talking about second way of doing your financing Arrangement that is not profit and loss sharing it's not based on the uh partnership now often when you want to do partnership with financing you are engaging with a group of people or somebody else to do something but that something will ultimately lead to having to buy sell or lease some asset so even when it comes to the financing through the partnership the the way that is done is at the end still with sale or lease of some some kind of a product partnership is really just the way you come together partnership is not the way you make money partnership way you are pulling your resources to do then something start a business that will create money or buy something and sell it or leas it to make you a profit now today we are looking at a simple transaction where you are not necessarily looking to get into the partnership with someone we are going to look primarily at leasing orara moraba or sale with a markup and a few other forward contracts so first one I want to talk to you um is a leasing what is the leasing we see the leasing um is talked about in Quran we have example uh when the Musa is exiled and you know he goes through that Journey he meets to young ladies which he helps and U uh water their flock at the end of that story we see example when one of the young ladies goes to her father and she says to her father or my father hire him indeed the best one to hire is the strong and trustworthy so we see here uh legitimacy of hiring somebody in the past it used to be that we used to hire a person to do a job and this is by the way beautiful reminder that when we do hire what is it that we looking in people we look at their strength strength which is ability to do their work and comp this is a competence and the trustworthiness which is that they will not corrupt that ability or strength or competence with intentions that go against the reason for which you hire them so they can be trusted they can be RI upon that they will not uh fail that amama or obligations moral obligation and trust that you put them in and so there are many other narrations that clearly show legitimacy of hijara in another narration it he said give worker his vages before his sweat dries and in hadithi Allah mentioned that I'm opponent of three on the day of resurrection and if I'm someone's opponent I will defeat him a man who makes a promise in my name then proves treacherous a man who sells a free man as a slave and consume his price and a man who hires a worker make use of him then does not give him his vages obviously that means uh uh hiring somebody for a vage is permissible this is a sort of normal standard let's say contract of employment um and we see the eates involve ad up of paying on time paying person who does the job being fair and so on in the past it used to mean employ uh the service of a person on vages now today we are also looking at this as something that is given on a rent so you are transferring the right to use a particular property or item to another person in exchange for a rent claim from him so this could be used as a form of investment or a mod of financing sometimes you might buy commercial building and in that case you might give it for release and then you profit from that or you might join L buy something Shopping Center or whatever is it that people are buying and then again generate the profit through the lease and at the banking level uh we seem very popular is to structure it as a home financing Arrangement where you are leasing something it's sort of a lease that ends with ownership now what's the difference between conventional finance and financing through the lease well as we said you need to have some asset you are leasing something you are making profit against something that is tangible and so all of these Arrangement need to follow the rules of lease that you do end up uh getting some asset that you are engaging and structuring around that asset and sometimes it's not easy especially I see in many Western countries in terms of U how the profit is calculated or rent price sometimes there are larger forces in society that affects this or Arrangement or a benchmarks these are all of the things that Scholars and practitioners are always working to improve but as a general idea we cannot just structure this Arrangement where interest is replaced with the word rent and it's all good I see a lot of times you might have just a broker who says okay I have this paper to say that this interest is rent and this therefore it's Halal this is not how it works so there has to be a solid Arrangement there needs to be a way that we are transacting something and this has to follow the normal rules of Islam when it comes to the transactions we cannot just change the names and this remains always the challenge in many of these jurisdictions where we cannot as easily execute this transaction as we wish but we need to make sure that it is not just changing of the name but it is something that is structurally different in terms of bigger financing opportunity we see uh lease also use in bigger project where we can structure bigger Arrangement which we call suuk or what is equivalent of investment certificate sometimes people say this is a type of Islamic Bond or something like that but we have a sukuk which is a lot more people pulling their money to buy property and uh lease it and make a profit so whether you call this sukuk or fund or any other arrangement the idea is the same we pull the money we do something with money and like buying the property or you might have even these Real Estate Investment Trust RS they are also very similar to sukuk and to these funds they might pull certain asset and then they might lease and then proceeds are distributed to the investor so from investment opportunity to the financing opportunity we see the lease is very versatile can be used in number of the way and often you would find certain government organization might lease certain assets they would be um uh very convenient way I only uh suggest that you know rather than in these some of these structures rather than using existing infrastructure to really encourage economic growth that we build new assets and genuinely contribute create a job employment and so on and then structure around these when we are releasing it particularly in Sovereign sukuk and so on another way of financing is what we call murabaha murabaha is sometimes called Cost Plus sale so what is simply muraba is when financial institution let's say wants to finance the car they would have to get it from the supplier let's say for $20,000 and then they offer it to the customer for markup price which is let's say $20,000 plus whatever profit they add $5,000 and so this markup is the profit for the financial organization now Banks should take ownership of the asset before they selling it and this is deferred Cost Plus sale murabaha now a lot of the times we hear uh this murabaha being uh looked very suspiciously is it a problem because you know spot price is something and then the thir price is something else well as long as in the beginning of your transaction you are clear for which price you are going it's okay to uh sell something on deferred basis for a higher price as long as in the beginning you say okay you want to pay this in five years this is the price uh you what you cannot do is once the contract start start changing the price um as the contract or the length of time goes on and on and on now in a lease contract because every year you have uh uh or whenever is your period that you are charging the rent because you are still the owner of the asset you can tie the price to some Benchmark and you can have that variable impact so you might say uh in the lease I will uh charge you $1,000 plus whatever is inflation next year inflation go by 5% then your price is 5% more or something like that and so you both can agree on something that is not too volatile you could limit this a little bit but you are agreeing to some objective blench Mark especially in the long-term lease contract in murabaha in a sale you cannot have that variable element because unlike in lease you are not anym owner of the asset you sold the asset so the price must be fixed this is one of the different feature of these two and so uh you want to make sure that in the beginning you prce in moraba how much are you getting it so there is no problem if uh in the spot is a different price versus deferred payment is a different price as long as you know uh uh what is your price now uh some of the main issue with murabaha comes again that people see murabaha being used and abused and often the way that murabaha is abused is when there is a two sale back to back one is a spot and the third sale when they are joined or there is some sort of a transaction which is used which is using murabaha and then the spot sale attached to it to create like a banking loan where asset is sold back and forth so asset is just sold on paper to create the loan this is what we call bail Ina or synthetic or organized transactions even when it is what is called tar that is pre-organized or whether it's through some Brokers where there is no real buying and selling so any of these synthetic transactions where the aim is just to get a loan through the synthetic buying and selling of the assets which are not buying and selling pre-organized uh this we would say that this is what creates the problem but what you want to do is that if you are engaging in this particular sale it's very important that you follow the rules of sale so that asset exist uh there there must be ownership identified it comes into your uh possession uh sale is instant and absolute there is a property of value and we know specifically uh what we are buying and selling uh the sale shouldn't depend on any contingency or chance there is a certainty or price and sale must be unconditional so if we are satisfying these old condition and we are not just creating a loan and substituting the markup and all of the names Islamic names and profit and we are not just playing the game then this is a valid sale and usually in um institutions it is organized by appointing somebody as a agent to buy and then they organize the paperwork how to sell it and of course again just like with any other Arrangement especially in the Western countries how the institutions takes possession and how they do this you want wanted to be genuine sale real sale we are we have to work towards that in that case if that all is done then uh this is one of the permissible ways of doing the transactions in moraba and in general when it comes to the late uh fees uh there they canot be charge person cannot profit from these things this is increase on debt that is Ruba so we see in these institution they would usually uh have a mechanism where that penalty is given uh as a charity in moraba particularly you cannot do roll over because you don't have any more assets and if you are doing similar securitization of murabaha where you're pulling asset through the sukuk or fund or some other instrument once you sell that asset out of that fund what are you owner of you are the owner of the debt that is coming so if you got a $100 million building there and then you sold 110 then you are proportionate owner of that debt okay so be very mindful that's why sometimes when they structure some of these funds they put some other assets so that this is not majority so that with the tangible assets like let's say you put more than half a lease assets where you have retained ownership of a building and there is some uh that you sold on the def deferred payment basis there is still something to negotiate then they can package that and then they can sell that on a secondary Market on a stock exchange and so on this is again just for those of you who are into these sorts of things and finally two more contracts very quickly Salam and so you you know how sometimes you don't have something and you need money to do some business and you will have a product later on this is reversal of what we were talking now um in murabaha you don't have money but you need asset so Financial Arrangement is to give you asset first get the money later and usually there will be increase in the price now Salam and is are reverse when you need money now but they will be asset later so it's total reversal so what are these two things okay so the first we call it Forward uh selling contract sellum different from Futures you know Futures is when both things are deferred in a future date which is not permissible type type of contract where both uh offer and acceptance or uh payment and the delivery is in the future this is debt for debt this is never permissible in Islam by consensus so when you have a forward something is coming now something is coming later sellum is the say where the seller undertakes to supply some specific Goods to the buyer at the future date in exchange of Advance price fully paid at spot okay so what is the legitimacy of this we see that during the time of the Prophet sallallahu alhi wasallam there would be situation where the Prophet would come to Medina and people would sell their produce like dates uh that are coming in the future for a price now we see the Quran talks about legitimacy of contract of Salam when it says all you who believe when you deal with each other in transactions involving future obligation in a fixed period of time reduce them to writing and IB C uh talks about this situation uh where the Prophet sallallahu alaihi wasallam said whoever pays money in advance for dates to be delivered later should pay it for non specified measure and weight of the dates for a specified date so we see the prophet here is trying to clarify that don't just engage in this transaction without clarifying what kind of dates you going to get what is this product going to be so just to avoid any future a problem that might happen why do we need this this type of financing is usually used for the people who are farest Merchant businesses involved in agriculture and industrial production and trade and so anybody who needs the capital now and they will produce something tomorrow and what are the permissible type of Commodities it is something that is standardized usually something that is the same or standardized that is very well known and understood these are your fible goods the second type of these contract This Time Manufacturing contract is called is it's another type of sale where commodity is transacted before it comes into existence this is for manufacturing of specific Commodities so anything that is uh in need of being manufactured and it's not standardized for which we have sellum but it's specifically made you say I want this sort of table I want this sort of house a ship and whatever you need to specify it and give as much as detail possible to avoid any kind of future misunderstanding for this we use contract of is you might see similar types of contract being used today in modern uh transactions to build the highways where company might build operate and then transfer on this same basis because think about it something like this seen being used in Turkey where for example the company might build a highway and as a payment they are given right to uh charge certain fees for certain period of time and then within let's say a decade or two this pass back into the owners of the government so there are number of ways that these transactions can be used I'll give you one example let me know where do you think what contract is very suitable let's say a country that produc produces oil that wants to expand its refining facilities they may sell oil products through which contract instead of borrowing on the basis of interest and use the price received in advance so they want to expand their capacity in the refining facility and they want to get money now and they want to give oil later so think about in this circumstances what would be Salam or is this not type of a contract where they are engaging in this case because the oil it's a fible it would be a sell type of contract but in any case these kinds of arrangement can be made to finance major infrastructure and other projects in the country so this brings us at the end of this course what we hopefully learn is that to look Islamic Finance or commercial transaction we need to look at the basic DNA of the transaction what is at the end of the day transacted what is subject matter of the contract what is the consideration and we have seen the rules that affect these two basic type of transaction where one transaction is a charity or not for-profit activity when what is transacted is same for same versus transactions where what you are buying and selling is monetary for non-monetary asset in these cases you can make money you can create you can have profit and So based on these two principles we are then constructing the mechanisms to engage in financial transactions and so Islamic financial institutions or us personally when we are creating solutions that we need today are looking that it is asset back it's involved buying and selling something real and not just moving money around so by using the asset backing our transaction with the real economic activities we are then engaging in something that is hopefully growing economy positive way impacting Society does not contribute to the financialization in the way that conventional financial institution contribute but it is contributing to the real products and services through which we derive all that we need all the solutions that we need to society in direct way and just because we're doing something in Islamic way doesn't mean that we are limited in fact we are limiting unethical immoral behavior and things that in aggregate detrimental detrimental impact on the society what we are enabling is real product and services financing those things that actually have impact on our life and so whether it's at a small level or a bigger level whether you are a government financing or you are individual trying to organize your transactions or just buy home or a car there are number of ways that we want to engage and for finance provider in in our community we want to make sure that they continue to build their products and services in line Sharia understand and satisfy these requirements and we hope that inshallah this was a beneficial course I'll see you in another video don't forget on our website Muslim Money Matters you can engage more deeper in this course we are also having professional development courses that go into much more details and if you want to test your knowledge about things that we have talked about here again you go to Muslim m matters website register and when you pass inshallah all the assessments you will inshallah get um uh certificate for this particular course I hope to see you in the next course or video or a seminar that we are organizing all the best may Allah bless you Alay thank you for spending time to watch this video if you would like to learn more about finance and economy from Islamic perspective head to our new platform Muslim Money Matters where we go in much greater details regarding the content until next time my name is Al chanam alum

In the final episode of the Islamic Finance 101 series, we explore asset-backed financing methods, including leasing (ijarah), murabaha and forward contracts like salam and istisna. Learn how these methods contribute to real economic growth, avoiding the pitfalls of conventional financial systems. For deeper insights, assessments, and to earn your "Islamic Finance 101" certificate, register on our platform, Muslim Money Matters: 👉 https://www.muslimmoneymatters.com Playlist of all episodes: https://youtube.com/playlist?list=PL648OdKhWVX_8PeSlT112XSaVtErfX8w2&si=hlQ5vTduS5uB_ngJ -------- 📲 Connect with Almir on social media: 🔗 Links: https://www.almircolan.com/links 📩 Subscribe to Almir's email updates: 🌍 Website - https://www.almircolan.com