Bail Financial Sharing (BFS): A Financial Subsystem of Rastin PLS
Banking
Bijan Bidabad
B.A., M.Sc.,
Ph.D., Post-Doc.
Professor
Economics and Chief Islamic Banking
Advisor
Bank Melli, Iran
E-mail:[email protected]
Abstract
To cover producers and consumers
against future prices fluctuation risk, depositors can
forward-purchase raw materials or products to be delivered at a specified time in the future through Bail
Financial Sharing (BFS). Bail Financial Sharing is a subsystem of Rastin Profit
and Loss Sharing (PLS) banking system, and
in this regard, instructions, organization and application methods, and
electronic devices and contracts are similar to the context defined in the Base
System of Rastin PLS banking system. Bail Financial Sharing (BFS) enjoys from
Bail Certificate innovation, which can play an important
role in stabilizing and increasing efficiency of money and financial markets.
Depositor (financer) receives digital Bail Certificate for this kind of
participation, which is negotiable in the secondary Rastin Certificate market.
Regarding the characteristics of this certificate and its clear substantial differences with futures
derivative, it prevents unreal paper markets formation. The latest owner of the
certificate is the owner of the commodity. Moreover, the depositor can ask the bank that the entrepreneur sells the commodity and pays the money �instead of commodity- to him at the end of the contract.
Keywords:
Forward-Selling,
Forward-Purchasing, Salaf, Salam, Rastin Profit and Loss
Sharing, PLS, Bail Certificate, Islamic Banking, Rastin Certificate.
1. Introduction and Objective
When future price fluctuation is
expected, producers and consumers need risk coverage for buying future raw
materials and commodities to prevent price effect on their future operational plan or consumption pattern.
To design a solution for this, Bail Financial
Sharing (BFS) is introduced as a financial subsystem of Rastin Profit and Loss
Sharing (PLS) Banking system. Bail Financial Sharing (BFS) might also be
helpful for those who do not want to hoard cash money and desire to hold their
assets as commodities for a period and meanwhile do not want to deliver the commodity or keep it in their own warehouse and
just want to save the purchasing power of their money funds. Moreover, BFS
finance is also used for financing firms that need working capital or fund to
produce or buy commodities for future sale.
This approach can stabilize the economy
in price fluctuations in financial and political crises. This is because during
rapid price fluctuations or future expected price fluctuations the yield and
productivity of various capital markets start to change and in order to keep
their purchasing power or to obtain more
yields, the owners of financial resources try to move their funds from a market
to another market. This action itself will exacerbate the
market fluctuations.
Some new Islamic papers have been
defined in Islamic countries. Some kinds of Sukuk papers have some
similarity to Bail Certificate in Bail Financial Sharing but are completely different from supervision and
structure viewpoints of Rastin PLS banking.[1]
2. Methodology and Scope
The BFS subsystem creates the background
of risk fluctuation coverage for producers and consumers in buying commodities
and raw materials and venturing in economic activities and investment project[2] in
various fields. In this way, the depositor[3]
will buy firms products in advance (via PLS bank[4]), and in return for his funds, the entrepreneur[5]
promises to deliver the commodity or its value to the depositor at maturity. The bank's trustee unit[6]
will supervise the obligations carry out of entrepreneur on behalf of depositor
and bank receives the commission for his
financial intermediation.
BFS is a financial subsystem[7] of
Rastin PLS banking[8],
and in this regard, instructions,
organization and application methods, and electronic frameworks and contracts
are very similar to the context defined in the Base Rastin PLS banking system
and therefore, many of the necessities of this subsystem can be accessed in
detailed instructions of Rastin PLS banking[9].
In BFS financing, like other subsystems
of Rastin PLS banking, the bank can be
private or public. The bank, as financial
intermediate works as the attorney
or agent of the depositor and in addition
to providing capital management, provides the necessary conditions for sharing
his funds in investment activities, and receives the commission.
Rastin Certificates[10]
financial innovations are used in Rastin PLS banking, and by issuing these
certificates, bank activates secondary markets and efficiency of money and
financial markets increases. BFS is applicable by using Rastin PLS
infrastructure and issuance of Bail Certificate as a type of Rastin
Certificates provides new conditions for the participation of depositors in the
economic project of the entrepreneur.
3. Salaf and Salam Transactions
Terminologically, Salam means an advance payment, acceptance, and obey[11]. Salam
transaction is synonymous to Salaf transaction[12]
in which the price of the transacted is paid at the time of making the contract,
but the commodity (or service) is delivered (rendered) in future and is
regarded as a debt of seller to the buyer. In other words, Salaf or Salam
contract is a forward-purchase or forward-sell[13]
considering buyer's or seller's viewpoints[14].
In this contract, the commodity is delivered at the end of the contract (not at the time of signing contract).
In contrast to a credit transaction, in Salam
or Salaf contracts, delivery of the commodity
is done at maturity, but the price is paid in advance. In other words, they are
future commodity term-transaction with cash payment.
Religious jurisprudents consider this
contract as an allowable contract. The price of what is sold in a forward deal could be cash money or commodity.
There is a consensus that forward deals with
cash payment are allowable. But the term payment of the price of a commodity is a credit deal. Forward deal of similar
commodities is critical from Reba viewpoint. The same is the case of
transaction of term money with cash; this is because if their values are equal at the time of signing contract and the delivery time, it will not be
considered as a transaction (Baie) contract, but it is considered as a
loan, and if it has different values at
the signing of contract and delivery times, it becomes discounting, and transaction enters into Reba realm.
The two parties of the contract (seller
and the buyer) and their agreement and subject of the transaction, which should be typical and not specific are the three
main pillars of Salam/Salaf contract. The substance, kind, quality,
amount, price, time, and place of delivery should be determined in advance and
at the time of signing contract.[15]
In addition, the subject of the contract
must not cause Reba. In Salam contract, the price could be
defined as a substance or a general
commodity[16].
If only a part of the price is paid, the Salam contract is correct for
just the corresponding part. If the seller delays in delivering the commodity, the buyer has the right of
cancellation (right of excuse).
If the price at the Salam
contract is a previous debt of buyer to seller, the contract will be correct, and the seller will have no debts to him any longer.
Therefore, credit payment of the price can be correct, and the buyer can consider
his claims from the seller as the price
of the purchased commodity. The prompt
payment of the price at the beginning of Salam
contract is not mentioned in Civil Law of Iran; therefore, the prompt payment
of the price at the time of signing contract is not the necessary condition of
the deal. The Civil Law[17]
permits the two parts of the contract to define a date for payment of price and
delivery of the commodity.
Some jurisprudents critic that the selling the subject of the contract
(commodity) before maturity (end of the contract period); while others consider
it acceptable. Selling the subject of the contract
to the seller before delivery of it and after the end of the contract period is correct, but there is no
consensus about selling it to other people
before delivery. Some consider this action detestable (Makrouh) but not against the law, and some others consider it
detestable only if the subject of the contract
is edible, and some others consider it detestable only if the subject of the contract is measurable or weighable (Makil
or Mozoun).
Rules of the second chapter of
Usury-free Banking Law describe Salaf contracts[18] as Forward-purchase of produced commodities at
a defined price (by considering Shariah
principles).
4. BFS Subsystem
In BFS, the entrepreneur can be a
producer with a real or legal entity. The
entrepreneur submits his proposal[19]
to PLS bank to finance the necessary resources to purchase or import raw or
auxiliary materials for his firm working capital for production or commodities
for the transaction under the regulations
of PLS banking base system[20].
The proposal contains the present price
of the commodity, the amount and duration
of needed finance and technical, executive, economic, and financial information
of the project. The entrepreneur should prepare his proposal according to the
necessary standards and submit it to the PLS bank. After approval of the proposal by the assessment
unit[21]
of the bank, its items can be used against the entrepreneur formally. The
entrepreneur should approve his capability for implementing the project by
offering necessary documents.
In case of approval of the competence
and technical capability of the entrepreneur by the bank, the assessment unit will assess the proposal and
accepts it on behalf of the depositor.
After approval, the bank will introduce
the proposal to depositors and by selling Bail Certificates to depositors, will
provide the necessary resources for the implementation of the entrepreneur's
project under the supervision of the trustee unit of the bank. In this method, the bank
is a financial intermediate.
The entrepreneur is responsible
for the provision of preliminaries, raw,
auxiliary and construction materials and other necessary requisites of the
project. All usages of resources should be mentioned in the proposal, and
assessment unit should have approved its technical, financial, and economic
justification. The entrepreneur can spend the received funds according to the
approved proposal for items such as fixed and variable costs, working capital,
wages and salaries of his firm, raw material, auxiliary and necessary spare
parts or import of necessary items. He can buy and sell the necessary items for
several times, but he has to settle the contract according to the approved proposal
at maturity.�
In BFS, the bank enters into the contract
with entrepreneur through Joalah or Salaf/Salam contracts. The
maximum duration of BFS is restricted to one year. The contract parties are
obliged to pay commission to bank according to the Rastin PLS banking
instructions and bank receives its commission before the final settlement of the contract.
The entrepreneur is obliged to provide
necessary guarantees and collaterals according to the related instruction at
the time of signing the contract with the
bank. Also, in special cases, according
to the decision of the assessment unit of
the bank, the entrepreneur has to provide relevant insurance coverage.
According to the production cycle, the entrepreneur has to provide the
commodity of the contract in his warehouse as inventory.
The entrepreneur is also obliged
to present periodic financial reports to trustee unit of the bank according to
the standard accounting principles confirmed by auditing authorities and bank
instructions and cooperate with trustee unit or supervisory companies specified
by the bank. All activity should be carried out by the entrepreneur according to the contract and under the supervision of
the trustee unit of PLS department of the
bank. Supervisory obligations and standards for BFS projects are according to
the instructions and standards of Rastin PLS banking.
The entrepreneur has to deliver the
commodity or its price to the depositor at maturity through the bank and bank
will render it to the depositor after deduction of his commission.
The depositor can transact
his Bail Certificate in Rastin Certificate Market.[22]
The commodity will be delivered at the place of production to the latest owner
of the certificate. Two weeks before the
end of the contract, the symbol of the transaction of this contract will be closed at
the market website, and the owner of that certificate will not be
able to transfer it to another. The owner
of the certificate has the grace period to apply to producer and receive the
product during these two weeks, and in
case of finding anything in contrast to the contract, he can apply to defined
authority as cited in related instruction within one week.
The latest owner of the certificate can
ask the bank that the entrepreneur sells
the commodity of the contract under the supervision
of the trustee unit of the bank and after deducting the commission, passes the remainder to him.
The contract duration is defined
according to relevant conditions and production process based on the contract
and the approved proposal. Contract
duration of BFS cannot be extended, and
the entrepreneur�s request for the extra fund is not acceptable. New financing is possible through a new
contract with new depositor and issuance of new Rastin Certificates. Extension
of contract duration is possible only by confirmation of trustee unit of the
bank according to Rastin PLS banking instructions and related considerations.
Any delay in carrying out the contract
should be in accordance with related
Rastin PLS banking instructions. The entrepreneur has to use the allocated
funds according to the defined tasks in the project
proposal. He is not allowed to use the fund in other fields without obtaining
the bank�s acceptance.
In case of not fulfilling the
obligations at the end of the contract, the bank
can compensate losses through selling guarantees and collaterals received. The
entrepreneur has to report all his physical and financial activities to trustee
unit of the bank personally, and if the trustee unit approves
these activities, he can continue the job. In case of any delay, violation,
incapability of entrepreneur or any other difficulties, the trustee unit will
scrutinize the case and will observe entrepreneur's activities and if needed
will do necessary actions to protect the rights of depositor. Considering the nature of BFS activity, in case of a halt of activity or bankruptcy or death of
entrepreneur, the state of capital will be reported to the bank, and
the case will be followed up until settlement. Bank will settle with depositors
according to his share from the sold collaterals and guarantees and under the
supervision of the bank's trustee unit.
The entrepreneur undertakes not to withdraw from the contract before complete
settlement and through a will, advocates the bank to settle the contract after
his death by selling guarantees and drawing from his bank accounts.�
Regarding the concepts applied in Rastin
PLS banking and its processes and instructions for implementing BFS and the
functions defined in this regard for the bank,
depositor and entrepreneur, structure and organization are according to what
defined by Rastin PLS banking.
5. Derivatives
Derivatives are a kind of financial
contracts that explain a kind of value derived from a commodity or asset, which
is considered as base asset and can be
share, commodity, interest rates, foreign exchange or other assets. Derivative
today are defined in the framework of Futures, Forwards, Options, and Swaps with
particular characteristics.
Future contract: is an agreement for buying or selling a
specified asset at a specified price at a specific time in the future. Parties
in future contract commit to transact a commodity with defined qualities at a specific price and time. Both sides commit to
transact according to the contract and thereof, the buyer is not worried about
the future price increase, and the seller is not concerned about the future
price decrease. Future contracts are made in official markets or bourses, and they somehow prevent future price
fluctuations. The price of the base asset
is not paid until the maturity of the contract,
but both sides deposit certain amounts at
clearing house as a guarantee for the goodness
of promises. Those who buy Future
contracts commit to deliver the asset at the delivery
date or final settlement date, and take a
long (selling) position, and the position
of the deliverer of the asset to the
buyer is (called) short (buying) position. Some of the future contracts are negotiable in the secondary market.
Forward contract: is similar to the future contract with the exception that
the future contract can be transacted in
the bourse, but forward contracts are
transacted in over-the-counter (OTC) markets. The over-the-counter market is
formed on the neighborhood of bourse
markets, and has no specific location and is formed by cable or internet
connections of dealers. Because of the credibility of the contract parties, the
total amount of transaction is paid at
the time of delivering goods.
Option:
generally,
options contracts are divided into two
groups: �call option� and �put option�. In this contract, option holder or
option issuer or option writer has the right to transact (sell or buy) a base
asset. The call option holder has the right to buy the subject of contract at a
certain price up to a certain time but is
not obliged to do so. In addition, a put option holder has the right to sell
the subject of contract at a certain price up to a certain time but is not obliged to do so. The written
price in the contract is called �strike price� or �exercise price�. The written
date in the contract is called �expiration date� or �exercise date� or
�maturity�. The �European (call/put) options� permit the action only at
maturity, while �American (call/put) options� allows the transaction from the
beginning to maturity period. Another kind of option is called �Bermudan
option,� which can be carried out a few days before the expiration date of the contract.
Asian options, which are also called �Average options�, are settled at the
average price of the asset in the option
period. Option certificate is negotiable at the secondary
market.
In a call option, after
paying some specified amount of money to the seller of the option, the buyer will have the right to buy
the specified asset with specified quality before the expiration date but is not
obliged to buy. The seller is also obliged to sell and deliver it to him if the
buyer applies before contract time is expired. If the option holder does not apply his right within the agreed period,
his right will be taken away. In a put
option contract, the buyer of the put
option will have the right to sell the specified asset with the specified price
within the specified time to the seller of put option holder after paying him a
defined amount of money. This is just a right or privilege to sell and no obligation
to sell. When the buyer of the put option
uses his right at maturity, the seller of the put
option is obliged to carry out his commitment according to the context of the contract.
Options are applicable in any kind of
contract. For example, it is possible to give the right of extending the rental
period to one who has leased; or an issuer of a valuable paper can give the put
option of the papers at a special price
to the buyer for a period of, say, 3 years. In addition, a person can, for
example, buy an option by the condition to sell his own one hundred shares
within the future six months at a certain
price.
Forward transaction (Salaf): is a contract in which both parties
commit to transact a commodity with specific specifications and with special
price at a specific future time. The total amount of transaction money is given
to the seller at the beginning; and at
the end, the commodity is transferred to the buyer.
Forward transactions are a kind of future contracts and even though they are
often signed out of bourse, but have not
much difference with futures and their most important difference is the higher
amount of down payment.
Istisna:
is a kind of future contract in which parties commit to transact a commodity
with specific specifications and with a specific
price at the specific future time, but the payment is by installments along the contract period.
Swap contract: is a kind of contract in which, parties
commit to interchange two specified assets or their yields for a certain
period.
6. Bail Certificate in BFS
Bail Certificate is an anonymous paper
with a defined face value and duration issued by Rastin PLS bank branch. The
owner of this certificate will receive the commodity or its price (at market
price) from the entrepreneur who is obliged for this certificate.
Bail Certificate, like other Rastin certificates, is issued digitally and is
negotiable at bank�s web-based Rastin Certificate Market. The price of the certificate is determined through supply
and demand mechanism, and the bank receives a specified transaction fee. The settlement is carried out with the latest
owner of the certificate at maturity.
The financial instrument of �Bail
Certificate� is quite different from prevailing derivatives in global bourse
markets. Standard future contracts are issued in bourse transaction markets for
selling a certain amount of goods with specific characteristics in future time,
in which the buyer deposits a percent of
total price with a third party (usually bourse organization) and the seller
commits to render the good to him at a certain time, otherwise, the deposit is
given to the buyer. These contracts are negotiable in the bourse market and can be changed by an
offsetting contract, or canceled by their agreement. This is called the
�scalability� of future/forward contracts. In this contract, the buyer and seller agree on the future price of
the commodity. Arbitrage operation on buying and selling future contract will
change the transaction value of the contracts, and
future price and spot price of the commodity tend to each other. Usually, close
out of the contract or offsetting
contract in a clearinghouse can put an
end to the contract. Commodity future
contracts are different from interest rates future contracts on bonds, and to
some extent, on foreign exchanges in which interest rate is involved in the discount calculation of spot price by
considering margin money and good-faith deposited or earnest money for which
may include Reba. This is because; some of these future contracts have specific
yield and time and an increase of the duration of the contract
will change the discounted spot value equal to the interest of margin money. In
other words, it involves Reba at least equal to the amount of interest
of the deposited money. The more is the deposited money; the more Reba is involved. Future contracts with different
subjects such as grains, meat, metals, edibles and fibers, energy and wood are prevailing in nowadays bourses.
Margin money kept for future contracts
does not create any ownership right on the subject of the contract, and it just a guarantee for
undertaking the committed contract. Future contracts are negotiable in bourse
halls, and people willing to enter these
contracts can announce their wishes. Future contracts can be carried out on
real and absent commodities. Since future contracts are exchangeable, we can
see many contracts in bourses without exchanging any commodity, and they just indicate some obligations between
buyer and seller. This will increase the financial papers in circulation in the
economy, and involves them in the broad definition of money and has similar
effects on quasi-money and therefore,
affects the economy that weakens monetary policy effectiveness in these
countries, because monetary authorities do not supervise these transactions;
moreover, no physical commodity is exchanged in the real sector economy. This is one of the defects of these
transactions that can create an economic
crisis in countries.
The same problems exist for
"forward transaction (Salaf)" derivatives
because as it was mentioned forward
transactions are a kind of future contracts but with a higher amount of down payment.
Differences between Bail Certificate (in
BFS) and future contracts of nowadays bourses can be put forward as:
7. Conclusion
Paper markets have a high
debt leverage effect on the economy and are the cause
of economic fluctuations and crises. Bail Financial Sharing (BFS) introduces an
efficient substitute based on Islamic interest-free thoughts. Bail Certificate
is a good substitute for future markets papers and contracts without their
deficiencies. This new financial innovation works under the defined structure of Rastin PLS banking. This
method has just been designed and started to be executed in Bank Melli Iran.
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https://doi.org/10.32770/jbfem.vol251-66�
http://www.bidabad.com/doc/rastin-regulatory-en-III.pdf
Imami Hassan, Civil Law, Islamieh Publication, 1961,
3rd edition.
Jafari Langeroudi, Mohammad Jafar, Detailed Law
Terminology, Tehran, Ganj-e-Danesh Publication, 1999, 1st edition.
Jafari Langeroudi, Mohammad Jafar, elementology
Dictionary, Tehran, Ganj-e-Danesh Publication, 2003, 1st edition.
Katouzian Naser, Specified Contracts, Publication Co.
LTD, 2008, 10th edition.
Mohammad Kabir Hassan and Mervyn K. Lewis (Editors). Handbook of Islamic Banking. Edward
Elgar Publishing Company, UK and USA, April 2007: 443 Pages.
Regulations of the Second Chapter of Usury-free
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Taheri Habib Allah, Civil Law (6 and 7), Islamic
Publication, Qom.
Zubair Hasan, Credit creation and control: an
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Copyrights
Copyright for this article is retained by the author(s), with first
publication rights granted to the journal.
This is an open-access article distributed under the terms and
conditions of the Creative Commons Attribution��
license (http://creativecommons.org/licenses/by/4.0/)
[1] See:
� Zubair Hasan, Credit creation and control: an unresolved issue in Islamic
banking,
International Journal of Islamic and Middle Eastern
Finance and Management, Vol. 1 No. 1, 2008, pp. 69-81.
� M. Kabir Hassan and Mervyn K. Lewis (Editors). Handbook of Islamic Banking. Edward Elgar Publishing Company, UK and USA, April 2007: 443 Pages.
[2] Project is a collection of economic activities with
specified and concrete plan with defined cost and term for making profit through
Rastin PLS banking offered to PLS bank.
[3] Depositor is a real or legal person who asks PLS bank
to participate his certain amount of fund (cash) in Rastin PLS banking products
through direct contact or internet and buys Rastin Certificate of one of the PLS
banking products.
[4] In Rastin PLS banking, bank is a unit which allocates
resources from depositors to entrepreneur and according to specific contracts
the obtained profit or loss is divided between depositor, entrepreneur. By
receiving commission (Joalah fee), bank provides capital management
services to depositor, and invest his resources according to his choice and in
return, delivers Rastin Certificate to him. Bank has to protect depositors'
rights by using all his specialized potentialities.�
[5] Entrepreneur is a real or legal entity who proposes a
project to PLS bank for financing through PLS banking system and executes the
project until the end. In addition to have legal, financial, technical and
performance capabilities, the entrepreneur should have the other capabilities
and facilities/possibilities to carry out the job.
[6] The trustee unit is a unit in Rastin PLS bank for
supervision and control of Rastin PLS proposed projects on behalf of bank and
regarding good performance of projects in comparison to initial proposal
through key indicators and financial reports till final delivery of project.
[7] Financial subsystems of Rastin PLS banking refer to
different defined financing methods and services. These subsystems are governed
by Rastin PLS Base System regulations.
[8] Rastin Profit and Loss Sharing (PLS) is an activity in
Rastin Banking based on participation of depositors in investment and economic
activities of entrepreneur based on real yield of projects in order to
establish interest-free banking according to Islamic criteria and ethics.
[9] For more information and full-text documents of Rastin
PLS banking see: http://www.bidabad.com
[10] Rastin Certificates are a collection of certificates
designed and issued in the base system and subsystems of Rastin PLS banking.
Regarding the supervisory feature of the trustee unit of the bank on these
certificates, they are distinguished from other financial papers and have
prefix of "certificate". Being nameless, negotiable in secondary
virtual Rastin Certificates Market, having market price based on supply and
demand of certificates, settlement at the end of participation period by the
latest certificate holder are some characteristics of these certificates.
Settlement and replacement of these certificates are carried out under the
supervision of trustee unit of the PLS bank.��
[11] Ansari, Masood, Taheri, Mohammad, Private Law
Encyclopedia, Mehrab Fekr publication, Tehran, 2005, 1st ed., 2nd
Vol., P. 1091.
[12] Jafari Langeroudi, Mohammad Jafar, Detailed Law
Terminology, Tehran, Ganj-e-Danesh Publication, 1999, 1st ed.,
Vol.2, P. 978.
[13] Taheri Habib Allah, Civil Law (6 and 7), Islamic
Publication, Qom, Vol. 4, P. 42.
[14] Katouzian Naser, Specified Contracts, Publication Co.
LTD, 2008, 10th ed. Vol. 1, P. 174.
[15] Jafari Langeroudi, Mohammad Jafar, elementology
Dictionary, Tehran, Ganj-e-Danesh Publication, 2003, 1st ed., P.
367.
[16] Imami Hassan, Civil Law, Islamieh Publication,
1961, 3rd ed., Vol. 1, P. 455.
[17] Article 341 of Civil Law.
[18] Regulations of the Second Chapter of Usury-free
Banking Law, approved by Council of Ministers, No. 81962, 1983.
[19] Proposal is a written document covering a collection
of necessary information about the proposed project of entrepreneur and
describes analytical justification of the project from economic, technical and
financial points of view, with enclosed necessary legal licenses and documents
which is submitted to Rastin PLS bank by entrepreneur. After evaluation of bank
if be approved, the proposal will be a reference document and can be used
against entrepreneur executive operations.�
[20] Base System of
PLS banking includes the main general rules and terms of Rastin PLS banking.
[21] Assessment unit is a unit in PLS department of PLS
bank which assesses the competence and capabilities of entrepreneur and his
proposal.
[22] Rastin Certificate Market is a web-based settlement
system for transaction and transfer of Rastin Certificates and Rastin Papers of
Rastin bank.