1.
MURABAHA
This
refers to the sales of goods at a price which includes the actual cost of the
good and a profit margin agreed to by both parties. It involves acquiring goods
upon the customer’s request and selling them at a profit. The bank purchases
and takes title to the goods and then sells the equipment to its customer at a
cost plus a profit. The purchases are undertaken upon request of the customer.
Deferred payment terms are agreed by both parties and bank is allowed to secure
the arrangement.
Murabaha
can be said to be a form of loan arrangement as the transaction dynamics is the
same as the conventional banking financing method. The bank appoints the
customer has an agent to purchase the goods at a mark-up.
This is
not significantly different from giving the customer funds to purchase the goods
and then charging interest because the profit margin attached to the total amount of the sale is
tantamount to riba; “it is interest in disguise”. If the customer has his funds
handy, he’ll never have come to the bank in the first place. The customer is paying
the bank more than he is being given and it can be argued that the “profit” is
the cost of financing (otherwise known as interest).
2.
SALAM
Salam is
a sale whereby the seller undertakes to supply some specific goods to the buyer
at a future date in exchange for an advanced price fully paid on the spot. It
is necessary for the validity of Salam that the buyer pays the price in full to
the seller at the time of effecting the sale.
The price
in Salam may be fixed at a lower rate than the price of those commodities
delivered at the spot. In this way, the difference between the two prices may
be a valid profit for the banks or financial institutions. In order to ensure
that the seller shall deliver the commodity on the agreed date, they also can
ask him to furnish a security.
After
purchasing a commodity by way of Salam, the financial institutions may sell
them through a parallel contract of Salam for the same date of delivery. The
period of Salam in the second (parallel) transaction being shorter, the price
may be a little higher than the price of the first transaction and the
difference between the two prices shall be the profit earned by the
institution. The shorter the period of Salam, the higher the price, and the
greater the profit.
The basis
of profit in islamic mode of financing should be sharing of profit and/or any
associated loss. In this transaction, the financial institution is not sharing
the loss with the customer as it as a fixed return rate that has been preset
and this negates the principle of PLS.
3.
IJARA
This is
similar to leasing. A bank buys an asset for a customer and then leases it to
the customer for a certain period at a fixed rental charge. Shariah (Islamic
law) permits rental charges on property services, on the precondition that the
lessor (bank) retain the risk of asset ownership.
The bank
generates a profit by determining in advance the cost of the item, its residual
value at the end of the term and the profit margin for the product to be leased
for the intended term. The combining of these three figures becomes the basis
for the contract between the Bank and the client for the initial lease
contract.
The
profit element of this transaction type can be argued to be the cost of
financing (interest) charged by conventional banks in carrying out this type of
transaction.
4.
ISTISNA’A (CONSTRUCTION FINANCING)
Istisna'
is a sale transaction where a commodity is transacted before it comes into
existence. It is an order to a manufacturer to manufacture a specific commodity
for the purchaser. The manufacturer uses its own material to manufacture the
required goods.
Istisna'
may be used to provide financing for house financing for example. If the client
owns a land and seeks financing for the construction of a house, the bank may
undertake to construct the house on the basis of an Istisna'. The bank does not
have to construct the house himself. He can either enter into a parallel
Istisna' with a third party or hire the services of a contractor (other than
the client). He must calculate his cost and fix the price of Istisna' with his
client that allows him to make a reasonable profit over his cost. The payment
of installments by the customer may start right from the day when the contract
of Istisna' is signed by the parties. In order to secure the payment of
installments, the title deeds of the house or land, or any other property of
the customer may be kept by the bank as a security until the last installment
is paid by the client. In Istisna', price must be fixed with consent of all
parties involved. All other necessary specifications of the commodity must also
be fully settled and conformed with.
The
profit element of this transaction type can be argued to be the cost of
financing (interest) charged by conventional banks in carrying out this type of
transaction.
5.
MUDARABAH (PLS)
This is a
kind of partnership where one partner (the bank) gives money to another (the
entrepreneur) for investing in a commercial enterprise. The investment comes
from the first partner who is called "Rab-ul-Maal" while the
management and work is an exclusive responsibility of the other, who is called
"Mudarib" and the profits generated are shared in a predetermined
ratio. Any loss is borne by the financier i.e. the bank.
This
arrangement of partnering only in profits is very different from interest based
financing. When a partner in a Mudarabah contract opts for partnering only in
profits, he will only get a profit if the borrower gets a profit. Therefore,
this does not result in any exploitation of the borrower and does not
contradict with any of the Islamic laws
6.
MUSHARAKAH(EQUITY OR VENTURE CAPITAL FINANCING)
The
literal meaning of Musharakah is sharing. The root of the word
"Musharakah" in Arabic is Shirkah, which means being a partner. It is
used in the same context as the term "shirk" meaning partner to
Allah. Under Islamic jurisprudence, Musharakah means a joint enterprise formed
for conducting some business in which all partners share the profit according
to a specific ratio while the loss is shared according to the ratio of the
contribution. It is an ideal alternative for the interest based financing with
far reaching effects on both production and distribution. It may take the
form of either:
1. permanent equity investment or
2. a diminishing partnership where the banks share is redeemed over time by
the customer.
It is
mostly used to finance the acquisition of housing and other fixed asset.
This
product is not significantly different from the conventional long term asset
financing methods in that rates are both benchmarked. Also, the nature of
installment; principal plus rent can be compared to the conventional principal
plus interest. Lastly, cost to borrower and profit to bank are basically the
same in both Islamic and conventional financing.
Conclusively,
this product can be argued to contain elements of the prohibited riba.
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