| S.No | Islamic Finance |
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| 1 | Trade Finance | |
| 2 | Investment Finance | |
| 3 | Lending | |
| 4 | Services | |
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| •Musharaka | Finance by way of partnershipartnership - Joint Venture |
| •Mudarabah | Profit Loss Sharing |
| •Murabahah | cost-plus financing |
| •Bai'salam | Prepaid purchase |
| •Bai' muajjal | deferred payment |
| •Istisnaa | manufacturing |
| •ijara | Leasing |
| Islamic Banking and Finance | |
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| Musharaka : | |
| It means partnership. It involves you placing your capital with another person and both |
| sharing the risk and reward. The difference between 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. |
| Types of Musharaka : | |
| • Declining-Balance Shared Equity: Commonly used to finance a home purchase, |
| the declining balance method calls for the bank and the investor to purchase |
| the home jointly, with the institutional investor gradually transferring its |
| portion of the equity in the home to the individual homeowner, whose |
| payments constitute the homeowner's equity. |
| • Permanent Musharaka:In this form of Musharaka an Islamic bank |
| participates in the equity of a project and receives a share of profit on a |
| pro rata basis. The period of contract is not specified. So it can continue |
| so long as the parties concerned wish it to continue. |
| Islamic Banking and Finance | |
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| Mudaraba : | |
| Refers to an investment on your behalf by a more skilled person. It takes the form of a |
| contract between two parties, one who provides the funds and the other who provides |
| the expertise and who agree to the division of any profits made in advance. In other |
| words, Islamic Bank would make Sharia’a compliant investments and share the profits |
| with the customer, in effect charging for the time and effort. If no profit is made, the loss |
| is borne by the customer and Islamic Bank. |
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| (MurabahaMurabahah (cost-plus financing) : |
| Murabaha is a contract for purchase and resale and allows the customer to make |
| purchases without having to take out a loan and pay interest. Islamic Bank purchases the |
| goods for the customer, and re-sells them to the customer on a deferred basis, adding an |
| agreed profit margin. The customer then pays the sale price for the goods over |
| instalments, effectively obtaining credit without paying interest. |
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| Islamic Leasing | |
| Leasing or ijara is also frequently practiced by Islamic banks. Under this mode, the banks |
| would buy the equipment or machinery and lease it out to their clients who may opt to buy |
| the items eventually,(HirHire Purchase) in which case the monthly payments will consist of two |
| components, i.e., rental for the use of the equipment and installment towards the purchase |
| price. | |
| The description given above, contains the following essential ingredients for |
| outlining the basic rules under Shari'ah: | |
| That there has to be a valuable use of the asset and transferability of that usufruct. |
| That the ownership of the asset is retained by the transferor or lessor throughout the |
| lease period. Consumable cannot be leased. |
| That the risk and liabilities of ownership lie with the lessor. The leased asset shall |
| remain the risk of the lessor throughout the lease period. Any loss or harm caused by |
| factors beyond the control of the lessee shall be borne by the lessor |
| That the risk and liabilities associated with the use of the asset shall be borne by |
| the lessee | |
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| •Istisnaa (manufacturing) | |
| Is a contract to acquire goods on behalf of a third party where the price is paid to the |
| manufacturer in advance and the goods produced and delivered at a later date . |
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| Bai'salam ( prepaid purchase) | |
| A contract in which advance payment is made for goods to be delivered later on. The seller |
| undertakes 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 leaving no ambiguity leading to |
| dispute. | |
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| SUMMARY: | |
| An Islamic bank is a deposit-taking banking institution whose scope of activities |
| includes all currently known banking activities, excluding borrowing and lending |
| on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a |
| Mudarabah or Wakalah (agent) contract. It can also accept demand deposits which |
| are treated as interest-free loans from the clients to the bank. and which are |
| guaranteed. On the assets side, it advances funds on a profit-and–loss sharing or a |
| debt-creating basis, in accordance with the principles of the Sharīah. It plays the |
| role of an investment manager for the owners of time deposits, usually called |
| investment deposits. In addition, equity holding as well as commodity and asset |
| trading constitute an integral part of Islamic banking operations. An Islamic bank |
| shares its net earnings with its depositors in a way that depends on the size and |
| date-to-maturity of each deposit. Depositors must be informed beforehand of the |
| formula used for sharing the net earnings with the bank. |
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| Difference between Islamic & Conventional Banking |
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