Islamic Modes of Finance
Theory and Key Shariah Principles
Modes Of Finance
• Two are ideal modes which provide an alternative to interest banking and if implemented on a national level will result in much fairer distribution of wealth in society 1. Mushaarakah – رآ (equity finance) 2. Mudhaarabah - ر (equity finance - sleeping partner) • Two are not ideal as they replicate the effects of conventional banking but nevertheless are tolerated in Shariah 3. Ijaarah - ( إ رةleasing) 4. Muraabahah - ( اcost plus pricing) We will also briefly analyse Salam - , Istisnaa‘ – ع Tawarruq – رق اand
• “Mushaarakah” literally means sharing • “Mushaarakah” is derived ...view middle of the document...
• • • As a proportion of the actual profit earned by the enterprise, Not as percentage of partner’s investment, and Not in lump sum amount, otherwise, for the latter two, it can only considered to be an on account payment subject to final settlement.
Ratio of profit:
Must be equal to ratio of investment - Imam Malik & Imam Shaafi‘ee Does not have to be equal – Imam Ahmad May differ, except that a sleeping partner cannot share the profit more than the percentage of his capital – Imam Abu Hanifah Profit is based on the agreement of the parties, but loss [by • • • general consensus]
is always subject to the ratio of investment. ]
Rules of Mushaarakah
Management of Mushaarakah
• • • • Each partner has a right to take part in Mushaarakah management. The partners may appoint a managing partner by mutual consent. One or more of the partners may decide not to work for the Mushaarakah and work as a sleeping partner. If one or more partners choose to become nonworking or sleeping partners, the ratio of their profit cannot exceed the ratio of their capital investment.
Application of Mushaarakah
• Investment accounts – depositors are sleeping partners, bank also invests its own funds • Stock companies • Mutual funds • Project financing • Import/export finance – bank invests its funds with an importer/exporter
اDiminishing Mushaarakah -
A contract wherein a financier, after participation in ownership of a property/business/project, can liquidate his investment from the asset or the ongoing business. DM in House Financing:
1. 2. 3. 4. 5. Joint ownership – shirkat-ul-milk is created in the desired property: usually c. 70% financier - 30% client [allowed by consensus] Financier’s share is leased to the client by a separate contract [allowed by consensus] Separate unilateral promise from client to purchase financier’s undivided share ( ) in units. Some Maliki and Hanbali agree to the enforceability of promise. Hanafi have allowed it in the case of bai‘ bil-wafaa. Actual periodic purchase of units of the financier’s undivided share by exchange of offer and acceptance – preferably at market price, but can also be at the price promised by the client. Adjustment of the rental to reflect the decreased ownership of the financier.
Used to finance purchase of fixed assets – house and commercial buildings, automobiles, plant and machinery, etc
• Partnership wherein one partner provides the funds for another to invest in a commercial enterprise. • The investment comes from the “Rabb-ul-Maal” (Investor). • The management and work is an exclusive responsibility of the “Mudhaarib” (Working Partner). • The capital may be either cash or in kind and in the latter case must be valued. • Profit is shared as per agreed ratio of actual profit. • Loss of capital is borne by Rabb-ul-Maal [unless Mudhaarib is negligent], Mudhaarib looses his efforts.
Capacities of Mudhaarib