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Islamic Finance creating wealth through trading in real assets, investments and partnership

Overview of Islamic Contracts

Understanding Sukuk Types/Contracts

Ijara

is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period.

Ijara-wa-Iqtina

is a similar arrangement as Ijara, except that the customer is able to buy the item at the end of the contract.

Murabaha

is a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer at a higher price on a deferred basis.

Mudaraba

is where the investor provides the funds and the entrepreneur undertakes the business activity. Investors risks losing their money if the investment is unsuccessful, and the bank risks earning the fees unless it turns a profit (the customer/investor is a sleeping partner).

Musharaka

is a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested

Salem

is forward sale of commodities with spot payment and price agreed for future delivery.

 

Istisna

is progressive financing of goods (e.g. manufacturing) before it comes into existence.

Sarf

is used for currency exchange contracts.

Others: Wakala, Hawala, Kafala & Rahn

Qard

Wakala is an agency type contract. For example in a murabaha contract the bank my appoint an agent to purchase the item for resale to customer.  Hawala is transfer of debt for a fee but the cost is not proportionate to the duration of the contract, otherwise this would amount to riba.   Kafala is adding a guarantor to an existing contract who may charge a fee.  Rahn (mortgage) is a contract where the creditor prefers to mitigate the risk of default by taking a collateral.

As an interest free loan, a loan without benefit out of personal goodness.

Takaful

Islamic insurance not based on interest.

Arbun

Is a contract where a buyer makes a non refundable deposit against the price. The buyer can later confirm or rescind the sale in which case the buyer losses the deposit.

Tawaruq       

Is a reverse Murabaha used in currency and commodity transactions.

It is used to raise cash with by structuring another commodity murabaha contract. See example handled by a bank.