by Muhammad Ayub
Islamic banking and finance is different from conventional banking in that it follows the principles of Shari'ah or Islamic Law, and is in consonance with the value system of Islam. The basic precepts of Islamic Banking are the avoidance of Riba, or Usury in any form. Both the giving and taking of Riba are to be avoided. Islamic banking also strives to avoid all unethical practices and participate actively in achieving the goals and objectives of an Islamic economy.
Towards achieving this end, the Islamic Banking system has structured a number of banking instruments or operations which serve to fulfill the customer's requirements while keeping their religious sentiments intact. The foremost and most popular Islamic Banking transaction is Murabahah, which is commonly used to finance purchase of vehicles, real estate, goods, equipments, furniture or any tangible thing of value from a third party. In a Murabahah transaction, goods are sold at a price which includes a profit (or mark-up over the cost price) that is mutually agreed upon by both parties.
Musharakah, another commonly used Islamic financing tool, is a joint enterprise or partnership structure with profit and loss sharing implications that is used instead of interest-bearing loans. It is also known as Joint Venture facility, or a Partnership financing. Musharakah allows each party involved in a business to share in the profits and risks.
Tawarruq is a means of generating cash by way of trading. The commodity is being traded only for the purpose of raising funds, and not as an end in itself. It combines two separate sale and purchase transactions. It is a financing product that gives you liquidity in accordance with Shari'ah principles.
A Qard-al-hasan is a gratuitous loan extended on a goodwill basis to the needy. The debtor is only required to repay the amount borrowed. In this type of a loan the time-value of money is not compensated, and hence some Muslims consider this to be the only loan that is truly interest-free.
An Ijarah is defined as a lease, rent or wage where the Islamic bank leases the use of equipment, building, machinery or other facility against an agreed rental amount for a fixed period. Most modern financial leases usually have an implicit feature that the corpus of the leased asset is transferred to the lessee at the end of the lease period. The rentals and the purchase price are fixed so that the bank gets back its principal amount along with profit over the period of lease.
A Mudarabah is an agreement between the bank, or a capital provider- called the rabb-ul-mal and an entrepreneur, called the mudarib, whereby the entrepreneur can use the funds of the former for his business activity. The entrepreneur or mudarib provides expertise, labour and management. Profits made are shared between the bank and the entrepreneur according to a predetermined ratio. Losses if any are borne entirely by the rabb-ul-mal. The Mudarib's loss is that his hard work and effort goes unrewarded.
All these Islamic Banking products are in strict compliance with Shari'ah laws, and are finding wider acceptance in more banking practices around the world. Today, even non-Muslims are drawn to the ethical nature of these unique financial products and this has sparked a keen interest in Islamic Banking and Finance outside the Islamic world as well.
http://goarticles.com/article/Islamic-Banking-Products/5233729/
Islamic banking and finance is different from conventional banking in that it follows the principles of Shari'ah or Islamic Law, and is in consonance with the value system of Islam. The basic precepts of Islamic Banking are the avoidance of Riba, or Usury in any form. Both the giving and taking of Riba are to be avoided. Islamic banking also strives to avoid all unethical practices and participate actively in achieving the goals and objectives of an Islamic economy.
Towards achieving this end, the Islamic Banking system has structured a number of banking instruments or operations which serve to fulfill the customer's requirements while keeping their religious sentiments intact. The foremost and most popular Islamic Banking transaction is Murabahah, which is commonly used to finance purchase of vehicles, real estate, goods, equipments, furniture or any tangible thing of value from a third party. In a Murabahah transaction, goods are sold at a price which includes a profit (or mark-up over the cost price) that is mutually agreed upon by both parties.
Musharakah, another commonly used Islamic financing tool, is a joint enterprise or partnership structure with profit and loss sharing implications that is used instead of interest-bearing loans. It is also known as Joint Venture facility, or a Partnership financing. Musharakah allows each party involved in a business to share in the profits and risks.
Tawarruq is a means of generating cash by way of trading. The commodity is being traded only for the purpose of raising funds, and not as an end in itself. It combines two separate sale and purchase transactions. It is a financing product that gives you liquidity in accordance with Shari'ah principles.
A Qard-al-hasan is a gratuitous loan extended on a goodwill basis to the needy. The debtor is only required to repay the amount borrowed. In this type of a loan the time-value of money is not compensated, and hence some Muslims consider this to be the only loan that is truly interest-free.
An Ijarah is defined as a lease, rent or wage where the Islamic bank leases the use of equipment, building, machinery or other facility against an agreed rental amount for a fixed period. Most modern financial leases usually have an implicit feature that the corpus of the leased asset is transferred to the lessee at the end of the lease period. The rentals and the purchase price are fixed so that the bank gets back its principal amount along with profit over the period of lease.
A Mudarabah is an agreement between the bank, or a capital provider- called the rabb-ul-mal and an entrepreneur, called the mudarib, whereby the entrepreneur can use the funds of the former for his business activity. The entrepreneur or mudarib provides expertise, labour and management. Profits made are shared between the bank and the entrepreneur according to a predetermined ratio. Losses if any are borne entirely by the rabb-ul-mal. The Mudarib's loss is that his hard work and effort goes unrewarded.
All these Islamic Banking products are in strict compliance with Shari'ah laws, and are finding wider acceptance in more banking practices around the world. Today, even non-Muslims are drawn to the ethical nature of these unique financial products and this has sparked a keen interest in Islamic Banking and Finance outside the Islamic world as well.
http://goarticles.com/article/Islamic-Banking-Products/5233729/
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