ISLAMIC BUSINESS MANAGEMENT IMPORTANCE OF ISLAMIC SYSTEM IN

ISLAMIC BUSINESS MANAGEMENT IMPORTANCE OF ISLAMIC SYSTEM IN MANAGING A BUSINESS v Islamic banking/finance is gaining more popularity in these few years, where we can see more international people are starting to trust this method of banking/finance v US and UK are starting to incorporate Islamic laws/methods in their banking/finance system v Some western universities are also starting to offer courses in Islamic banking/finance/business management

ISLAMIC BUSINESS MANAGEMENT IMPORTANCE OF ISLAMIC SYSTEM IN MANAGING A BUSINESS Islam has set clear procedures to follow Financial crisis 2008/2009 made a way for Islamic finance to develop Due to oil bloom, Muslim countries are becoming the most affluent consumers Level of foreign investment in Muslim countries is increasing

ISLAMIC BUSINESS MANAGEMENT BASIC ISLAMIC RULES IN CONDUCTING BUSINESSES HALAL/ permissible/ can be done v WAJIB/ Duty (Must be done) v MANDOOB/ Likeable (Not compulsory, but it is nice, if you can do it) v. MAKHRUH/ Not preferable (If you do it, it is not sinful, but it is better, if you don’t do it)

ISLAMIC BUSINESS MANAGEMENT BASIC ISLAMIC RULES IN CONDUCTING BUSINESSES MUSHTABEH/ Doubted v If you are not sure about some business decisions that you want to make, think very carefully about it and if you have still have doubt, then don’t do it

ISLAMIC BUSINESS MANAGEMENT BASIC ISLAMIC RULES IN CONDUCTING BUSINESSES HARAM/ Not allowed in Islam v Something that is forbidden in Islamic rules

ISLAMIC BUSINESS MANAGEMENT ISLAMIC MARKETING MIX 5 Ps Marketing Mix v Islamic marketing principles combine a value-maximization concept with the principle of justice for wider welfare of the society v Which means that these principles are aiming to increase the living standards of people through commercial pursuits v It is forbidden to exploit customers in any way v This is because, such actions are considered to be alienating the concepts of brotherhood/equality

ISLAMIC BUSINESS MANAGEMENT ISLAMIC MARKETING MIX 5 Ps Marketing Mix (PRODUCT) v Should be lawful v Must be deliverable v. Need of identification of extra cost-added v. Production process has to be guided by the criteria of the value and impact of product upon the whole society

ISLAMIC BUSINESS MANAGEMENT ISLAMIC MARKETING MIX 5 Ps Marketing Mix (PRICE) v Not allowed in giving high retail price v Not allowed to charge a price without altering the quality/quantity of product v Unethical lapses in pricing are considered to be sinful

ISLAMIC BUSINESS MANAGEMENT ISLAMIC MARKETING MIX 5 Ps Marketing Mix (PROMOTION) v It is unethical for salesmen to over-praise his products and attribute to them qualities which they don’t possess v Avoid false/misleading advertising v Avoid misleading sales tactics v Avoid sales promotions that use deception v. Do not use sexual, emotional appeal in advertising v. Do not use suggestive language and behaviour, do not use women in advertising

ISLAMIC BUSINESS MANAGEMENT ISLAMIC MARKETING MIX 5 Ps Marketing Mix (PLACE) v Not manipulating the availability of product for the purpose of exploitation v. Not using coercion in marketing v Not exerting undue influence

ISLAMIC BUSINESS MANAGEMENT ISLAMIC MARKETING MIX 5 Ps Marketing Mix (PEOPLE) v Emphasizes the importance of free and independent judgment on the part of the customer v A customer’s right to acquire products/services’ information is his right and is indicative of the status given to him by Islam

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING Description v. The whole practice of Islamic finance is based on models that do not involve interest (RIBA) v As a general rule, they involve the carrying out of investment and/or the purchase of goods, services and assets

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING MAJOR MODES OF FINANCING USED BY ISLAMIC BANKS v. First method is depending on profit and loss sharing and includes Mudarabah and Mushakarah v Second method is involving the sales of goods and services on credit and leads to indebtness (Mudarabah, Ijarah, Salam and Istisna)

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING MUDARABAH (PASSIVE PARTNERSHIP) v Contact between two parties v The investment comes from first partner- Rabb-ul-mal v Management and work is an exclusive responsibility of Mudarib v Profit is distributed between two parties

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING MUDARABAH (PASSIVE PARTNERSHIP) v Financial loss is incurred by capital owner v Investment manager cannot guarantee any profit generation v AL-MUDARABAH AL MUQAYYADAH (restricted mudarabah) v AL-MUDARABAH AL-MUTLAQAH (unrestricted mudarabah)

ISLAMIC BUSINESS MANAGEMENT MUDARABAH RULES v In case of loss, all loss will be borne by rabb-ul-mal and mudarib would not able to get anything v Capital must be in the form of cash v Percentage of profit sharing must be agreed upon akad v Contract can be cancelled anytime v. Business transactions must be halal

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING MUSHARAKAH (ACTIVE PARTNERSHIP) v Quite similar to musharakah v Differences are according to: participation in management, capital provision, profit and loss sharing

ISLAMIC BUSINESS MANAGEMENT MUSHARAKAH RULES v Concept of Wakalah v Percentage of profit sharing should be agreed upon during akad v. Capital must be in the form of cash v Deal can be cancelled v. Losses should be divided equally v Business transactions must be halal

ISLAMIC BUSINESS MANAGEMENT DIFFERENCE BETWEEN MUDARABAH AND MUSHARAKAH MUDARABAH MUSHARAKAH Investment is the sole responsibility of rabb-ul-mal Investment comes from all partners Members have no right in the management as it is carried out only by the mudarib All partners can manage their business and can work for it The loss is suffered by rabb-ul-mal All partners share the loss All goods purchased by mudarib are solely owned by rabb-ul-mal and mudarib can earn his share in the profit only in case he sells the goods profitability All assets become jointly owned by all of them according to the proportion of their investment

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING MURABAHAH (SALES CONTRACT AT A PROFIT MARK UP) v A kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred and sells it to another person by adding some profit v Murabahah is not a loan given on interest PROFIT RATE + ACTUAL COST = PRICE (to customers)

ISLAMIC BUSINESS MANAGEMENT MURABAHAH RULES v Sellers have to mention the actual cost of the products that they want to sell v Subject of sale must exist at the time of sale v Subject matter should be in the ownership of seller at the time of sale v Sales must be instant and absolute v Certainty of price is necessary v Agreement can be cancelled

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING IJARAH (LEASE/ RENTING) Pajakan atau sewa pajak v Rental of assets and properties v The one who gives the permission to rent the product is MU’AJIR v The lesse (tenant, occupant, renter)- MUSTA’JIR v Rent is called UJRAH v Products that are being rented- MA’JUR v Ijarah is not a mode of financing in its origin v It is a normal business activity like sale

ISLAMIC BUSINESS MANAGEMENT IJARAH RULES v Subject of lease must have a valuable use v It is necessary for a valid contract of lease that the corpus (physical product) of the leased property remains in the ownership of the seller v Costs of properties’ cleanliness and safety should be incurred by lessee v Period of lease must be determined in clear terms v The lessor cannot increase the rent unilaterally

ISLAMIC BUSINESS MANAGEMENT IJARAH CHARACTERISTICS OF PRODUCTS THAT CAN BE LEASED v VALUABLE (can be used by society) v PRODUCTS CAN BE USED BY MUSTA’JIR (renter) v PRODUCTS THAT ARE LAWFUL (halal) v PRODUCTS CAN BE USED (and not damaged)

ISLAMIC BUSINESS MANAGEMENT IJARAH Difference between Ijarah and Interest IJARAH INTEREST (RIBA) • Suppose you have a $100, 000 in cash • Starting with the same $100, 000 cash • You purchase a home and pay cash • You give someone the money for the home • They proceed to purchase the same • You rent the home to a tenant for home with those funds $500 per month • They pay you the same $500 per • At the end of the year, you have month, or 6% a year for use of the collected $500 X 12 or $6000 in rent money • That $6, 000 in rent is a 6% return for • This is basically rent on money your $100, 000 investment

ISLAMIC BUSINESS MANAGEMENT ISLAMIC BANKING TAKAFUL (Insurance) v Based on the system of ‘Tabarru’ v Objective of takaful is to pay a defined loss from a defined fund v Can be used to cover- properties, vehicles, goods, valuables, health, accidents and life v Principal- co-operation in protecting people against unexpected disaster and accidents

ISLAMIC BUSINESS MANAGEMENT TAKAFUL RULES v Must be performed with utmost sincerity v Schemes should be clearly defined and explained v Deal between Takaful companies and participants is called as al-Mudarabah v Takaful companies- Mudarib, Takaful participants- Sahib-ul-mal v Members would be acknowledged about their rights

ISLAMIC BUSINESS MANAGEMENT TAKAFUL GENERAL TAKAFUL v Aimed to be protection scheme for certain goods like Fire Takaful, Motor Takaful, Accident Takaful, etc v Done through the collection of money (contributed by Takaful participants) v This collection of money will be used to pay compensation v It can also be used to invest

ISLAMIC BUSINESS MANAGEMENT TAKAFUL FAMILY/ LIFE TAKAFUL v Amount of contributed money will be used to help any participants who are dealing with deaths, accidents v Remaining money can be used for investment v Participants of family takaful have the right to gain the profit from the investment

ISLAMIC BUSINESS MANAGEMENT SYARIAH-COMPLIANT ASSETS v Contributions must be invested purely in Shariah-compliant assets v Sukuk market offers access to an asset class which shares some properties with conventional bonds and others with equity stock v Investors the receive a regular income based on a target rate of return v But, income is not guaranteed

ISLAMIC BUSINESS MANAGEMENT RETAKAFUL v Provides the same facilities as conventional insurance companies but within a structure that remains Shariah-compliant and specifically tailored to the particulars of Takaful market v Allows Takaful funds to share risk among multiple Takaful pools v Fund receives contributions from each participating Takaful fund and distributes back surplus arising from investment v When fund goes into deficit then operator is required to make an interest-free loan to the fund to eliminate this shortfall

ISLAMIC BUSINESS MANAGEMENT SALAM v Sale whereby seller undertakes to supply some specific goods to buyer at a future date in exchange of an advanced price fully paid at a spot v Beneficial to seller as he receives the price in advance and it is beneficial to buyer as well (as price in Salam is lower than price in spot sales)

ISLAMIC BUSINESS MANAGEMENT RULES OF SALAM v Buyers pays the price in full to the seller at the time of effecting the sale v Can be affected in those commodities only the quality and quantity of which can be specified exactly v Cannot be affected on a particular commodity or on a product of a particular field/farm (delivery becomes uncertain) v Quality and quantity of commodity are fully specified

ISLAMIC BUSINESS MANAGEMENT ISTISNA’A v A contract of exchange with deferred delivery (specified to made-to-order items) v Manufacturer must obtain his own raw materials v Delivery date need not to be fixed in advance v Full advance payment is not required v Contract can be cancelled

ISLAMIC BUSINESS MANAGEMENT RULES OF ISTISNA’A v Nature and quality of item must be specified v Manufacturer must make a commitment to produce the item as described v Payment can be made in one lump sum or in instalments and at any time up to after the time of delivery v Manufacturer is responsible for the sourcing of inputs to the production process

ISLAMIC BUSINESS MANAGEMENT MUSWAMA (negotiated –price sale) v Selling of commodity at an agreed upon price irrespective of the original purchase price v Seller is not required to disclose to buyer what the cost price was v Both seller and buyer try to transact at the best price possible v Usually occurs when it is difficult to determine what the cost of a particular good/service was

ISLAMIC BUSINESS MANAGEMENT RULES OF MUSWAMA v Assets must be in existence and in the seller’s possession at the time of sale v Sales must be immediate v Assets must be of value and usable