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Profit sharing
and risk sharing Existence of an
underlying asset
The Principles of
Islamic Finance
Wealth must be generated from legitimate trade and
asset-based investment.
Investment should also have a social and an ethical
benefit to wider society beyond pure return.
Risk should be shared.
All harmful activities (haram) should be avoided.
Salient Features of Islamic
Finance
Islamic finance shall be free from all prohibited items
and practices which include:
Paying and charging interest (Riba)
Gambling (maysir)
Uncertainty in the object, price and delivery
Practices/clauses which against the Islamic law e.g.
Capital guarantee in equity-based contracts.
Buying/selling and/or leasing non-halal items e.g.
liquor, non-halal food, etc.
Contracts in Islamic
Finance
Some of the legal contracts in Islamic finance are
Mudarbah (Profit and loss sharing)
Musharakah (Partnership)
Qardh (Benevolent loan)
Salam (forward sale)
Istisna (manufacturing & construction contract)
Tawarruq (cash financing)
Bay Muajjal (deferred payment)
Ijarah (operating lease)
Wadiah (safe custody)
Wakalah (agency)
Mudarbah
A form of limited partnership where an investor (the
silent partner) gives money to an entrepreneur for
investing in a commercial enterprise. The profits
generated by the investment are shared between the
partners in a predetermined ratio. The losses are borne
only by the investor.
Musharakah:
In Musharakah must contribute capital to the
partnership. Both partners and one of them may manage
the venture or alternatively both may appoint a third
party manager to manage the investment. While profits
may be shared in a pre-determined ratio, losses are
shared in proportion to the capital contributed.
Ijarah
Similar to a hire-purchase, the bank purchases the asset
and allows the customer to use it for an agreed period
and for an agreed rent.
Sukuk
An Islamic financial certificate, similar to a bond in
Western finance, that complies with Sharia, Islamic
religious law. Because the traditional Western
interest paying bond structure is not permissible, the
issuer of a sukuk sells an investor group the
certificate, who then rents it back to the issuer for a
predetermined rental fee. The issuer also makes a
contractual promise to buy back the bonds at a
future date at par value.
Takaful
Similar to a mutual insurance arrangement, a group of
individuals pay money into a Takaful fund, which is then
used to cover payouts to members of the group when a
claim is made.
Salam and Istisna
According to Shariah no one is allowed to sell any
commodity which is not in his/her physical or
constructive possession but Salam and Istisna are
excluded from the above- mentioned rule. Salam is a kind
of sale in which a seller gives guarantee for the supply of
some particular goods to the buyer at an upcoming date
while gets in exchange the price in advance at the spot.
Types of Islamic Finance Delivery
Models
Full-fledged Islamic banks.
Islamic subsidiary.
Islamic window
Jurist view about
Islamic finance
Maulana Maududi.
Muhammad Taqi Usmani.
Conclusion
we may say that the economic system of Islam is very
comprehensive and there is no exploitation as everyone is
rewarded to the extent of how much they deserve. If
Islamic modes of finance are introduced and adopted, the
economic condition of the country will improve a lot.
However, the task is not so easy, but if coherent efforts
are made then this huge task may become possible.