Islamic mode of Financing
Various modes of Islamic Financing are listed below:
- Bai Muajjal
- Bai Salam
Now we will discuss each mode in detail.
It literally indicates sale on mutually agreed profit and technically, it is a sale contract where the seller declares profit and also cost. This mode of financing is followed by Islamic banks wherein the bank purchases the things that are requested by the client by taking some profit over the cost, that is demanded in advance.
It is a contract of a familiar and recommended usufruct against a particular and lawful return or concern for the service or the return for the advantage proposed to be taken, or for the work suggested to be expended.
In this contract, Islamic ban offers building; equipment and various other assets to the customer against a granted rental together with a independent undertaking by the client or bank, by the end of the lease period, the ownership in the asset will be reassigned to the leaseholder.
Musharakah is a relationship formed under a contract by the mutual approval of parties for sharing of both profits and losses in the combined business. It is basically an agreement under which the Islamic bank offers funds that are mixed with business enterprise funds and others. The profit is which is achieved is distributed among the partners same as in pre-agreed ratios, whereas the loss is borne by every partner firmly in proportion to individual capital contributions.
This is a type of regular sale wherein the commodity’s price is bargained between the buyer and seller without any reference to the price paid by the former. This is completely different from
Murabaha with reference to pricing formula as the seller in Musawamah is not required to disclose his cost.
It is a conventional agreement for commodities and manufacturing goods, letting cash payment in advance and the future delivery, future delivery and or a future payment. Istisna can also be used to offer financing for manufacture or construction of plants, houses, projects, roads and building of bridges and highways.
It is a credit sale literally and technically it is a financing technique taken up by Islamic banks. It is a mutual contract in which the bank receives a profit margin on their purchase price and lets the buyer to pay the commodity price at a future date in installments or lump sum.
It is a kind of partnership in which one party offers the funds whereas the other gives management and expertise. The final is referred as Mudarib. Profits are shared equally where as the losses are borne by the capital provider alone.
Salam is a contract in which some advance payment is paid goods that need to be delivered afterwards. The seller agrees to supply a few specific goods to the purchaser at a future date in the exchange of an advance price completely paid during the contract.