gif Islamic Finance
Riba (interest), Gharar (uncertainty), Maisir (gambling) and non-Halal (prohibited activi- ties). Principal Islamic financing modes used in Islamic banking are presented as follows:
Profit Sharing modes:
• Mudāraba Trustee Finance Contract: Mudāraba is an arrangement or agree- ment between the bank, or a capital provider, and an entrepreneur, where- by the entrepreneur can mobilise the funds of the former for its business ac- tivity. Three conditions need to be met:
1 The bank should not reduce credit risk .
by requesting collateral to this purpose: it bears entirely and exclusively the fi- nancial risk. Collateral may be request- ed to help reduce moral hazard, e.g. to prevent entrepreneur from running away 2. The rate of profit has to be determined strictly as an agreed percentage (be- tween the bank and the entrepreneur). 3. The entrepreneur has the absolute freedom to manage the business.
• Mushāraka: Equity Participation Con- tract: Musharaka means partnership. It involves you placing your capital with another person and both sharing the risk and reward. The difference be- tween Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested. Musharaka means partner- ship. It involves you placing your capital with another person and both sharing the risk and reward. The difference be- tween Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested.
• Muzaar’ah: Traditional counterpart of the Mudaraba contract in farming. The harvest is shared between the bank and the entrepreneur. The bank may provide funds or land.
• Musaqat: Traditional counterpart of the Musharaka contract in orchard keep- ing.
The harvest is shared among the partners based on their respective contributions.
• Musaka: Islamic Bonds is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest- bearing bonds are not permissible in Islam. Hence, Sukuk are securities that
64 Global Islamic Finance May 2012
Dr Hela Miniaoui, Faculty of finance and Accounting, University of Wollongong, Dubai
Dr. Hela Miniaoui is an Assistant
Professor in the Faculty of Finance and Accounting at the University of Wollongong in Dubai (UOWD) since January 2009, where she teaches in the undergraduate and post-
graduate programs. She is currently also the Program Director for the
Bachelor of Commerce-Finance and Accountancy.
Her areas of expertise are Money & Banking, Islamic Finance, Interna- tional Finance, and Macroeconom- ics. She is a member of The Middle East Economic Association and of Master Conference-International
Conference. Dr. Hela has been serv- ing as a member of the Organizing Committee for International confer- ences (MEEA, 2009 and ICTBM, 2012).
She is also an active researcher and has published many papers in refereed journals. She has also pre- sented frequently at international conferences.
• Qard al Hassan Good (Benevolent ben- eficience) Loan: These are zero-return loans that the Quran exhorts Muslims to make to ‘those who need them’. Banks are allowed to charge the bor- rowers a service fee to cover the admin- istrative expenses of handling the loan, provided that the fee is not related to the amount or maturity of the loan. This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promis- ing it) as a token of appreciation to the creditor.
• Bay as-salām ou Bay as-salaf Istisna’Bai salam means a contract in which ad- vance payment is made for goods to be delivered later on. The seller under- takes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leav- ing no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies. Barring this, Bai Salam covers almost everything that is capable of being defi- nitely described as to quantity, quality, and workmanship. The buyer pays the seller the full negotiated price of a prod- uct that the seller promises to deliver at a future date. This mode only applies to products whose quality and quantity can be fully specified at the time the contract is made. Usually, it applies to agricultural or manufactured products.
comply with the Islamic law and its in- vestment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.
Non Profit and Loss Sharing Modes They are used in cases where PLS modes cannot be implemented, for example for cases of small scale borrowers or for con- sumption loans.
• Ijāra ou ijāra wa iktinā Leasing Lease Purchase: A contract under which an Is- lamic bank provides equipment, build- ing, or other assets to the client against an agreed rental together with a unilat- eral undertaking by the bank that at the end of the lease period, the ownership in the asset would be transferred to the lessee pursuant to a sale or gift con- tract. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease. Banks add a certain pourcentage to the purchase price and/or additional costs associated with these transactions as a profit margin, and the purchased as- sets serves as a guarantee.
• Murābaha Cost Plus: This concept
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88