2. • Islamic finance is based on Islamic principles(Principles
of Shariah)
Prohibition of Interest(Riba)
Risk Sharing
Prohibition of speculative behavior(Gharar)
Sanctity of contracts
Investing in unlawful contracts.(Haraam).
3. Differences between Conventional
financing and Islamic financing
• In conventional financing ,BFIs deal with money and
monetary papers only.
Islam does not recognize money as a subject matter of
trade. Money has no intrinsic utility, only a medium of exchange.
• Islamic financing always based on illiquid assets which
creates real and inventories. while conventional finance deals
with liquid assets.
4. • In conventional financing financier gives money to his
client as an interest-bearing loan, no concern about the
usability of money after lending.
But in Islamic financing(murabahah),no money is
advanced by financier. Financier purchases the commodity by
himself and lend to the clients.so financing is always backed
by assets.
• In conventional finance ,loans may be advanced for any
profitable business or purpose e.g. gambling casinos. But
not allowed in Islamic law.
• In murabahah ,before selling the assets to customer, the
financier purchase the commodity itself.so financier bears
the risks himself before selling. So profit claim by
financier is reward for risk .But no risk assumed in interest
based loan.
5. • In interest bearing loan, amount to be repaid by borrower
keeps on changing with the passage of time. But in Islamic
financing(murabahah),selling price once agreed becomes and
remains fixed. No concept of time due of money.
• Lending money and getting it back with compounded interest
is fundamental function of banks in conventional finance.
While compounded calculation is strictly prohibited under
Islamic banking system.
• Banks can charge additional money in case of defaulters in
conventional banking while Islamic banks have no provision
to charge any extra money from the defaulters.
6. • In Islamic finance ,financing is done on the basis of
‘musharakh’ and ‘mudarabah’.
• Similarly instruments like murabahah, ijarah, salam or
istisna are also used for financing.
Musharakh
• Alternate to conventional financing.
• Means sharing i.e. a joint enterprise in which all the
partners share the profits /losses of the joint venture.
• Musharakh doesn't envisages a fixed rate of return , the
return is based on actual profit earned by the joint venture.
7. • Financier in an interest-bearing loan doesn’t suffer loss
while financier in musharakh can bear loss, if joint venture
fails to earn profits.
• According to Islamic principles , a financier must determine
whether he is financing to assist a debtor on humanitarian
grounds or he desires to share his profits and losses. So
return of financier in musharakh is tied up with actual profit
accrued through the enterprise .higher the profit earned by
the enterprises, higher the rate of return to financier.
8. Types of Musharakh
• Musharakh is divided into two types:
Shirkat-ul-milk: joint ownership of two or more
persons in a particular property.
Shirkat-ul-Aqds: partnership on a mutual contract i.e.
joint commercial enterprises.
9. 2. Mudarabah
• A special kind of partnership where one partner gives money
to another for investing it in a commercial enterprise.
• Investment from the first partner called ‘rabb-ul-mal’ while
second called ‘mudarib ’whose sole responsibility is to
manage and work for mudarabah.
• Rabb-ul-mal may specify a particular business for mudarib in
which case he shall invest the money in that particular
business only(restricted mudarabah)
10. • If Rabb-ul-mal left it to mudarib to decide about the business he
wishes , mudarib can invest in business(unrestricted mudarabah).
• Rabb-ul-mal can contract with more than one person in a single
transaction. Capital of mudarabah can be utilized by both mudarib
jointly and share of mudarib shall be distributed between them
according to agreed proportion.
• Distribution of profit is based on the mutual consent or in equal
proportions.
• Can lay conditions for conducting business to mudarib but mudarib
cannot claim periodical salary or fee or other remuneration for work
done by him.
11. Musharakh Vs. Mudarabah
Musharakh Mudarabah
1. Investment comes from all the
partners.
1. Investment is the sole
responsibility of rabb-ul-mal.
2.All the partners can participate in
the management of business and can
work for it.
2. The rabb-ul-mal has no right to
participate in the management
which is carried out by mudarib
only.
3. The partners share the loss to the
extent of the ratio of their
investment .
3. The loss, if any, is suffered by
rabb-ul-mal only because mudarib
doesn't invest anything.
4.The liability of the partners is
normally unlimited .If liabilities>
assets, business goes on liquidation.
4. Liability of rabb-ul-mal is limited
to his investment ,unless he has
permitted the mudarib to incur debts
on his behalf.
12. Murabahah
• Particular kind of sale having nothing to do with
financing in its original sense.
• Seller agrees with the purchaser to provide him a specific
commodity on certain profit added to cost which are
disclosed to purchaser.
• Payment may be spot & may be on subsequent date
agreed upon the parties .
13. Ijarah
• Give something on rent(leasing)
To employ services of person on wages given to him as a
consideration for his hired services.(mustajir-employer and ajir-employee)
Usufructs of assets and properties and not to the services of
human beings. Transfer of property to another in exchange for a
rent claimed by him.
(lessor-mujir, lessee-mustajir and rent payable amount- ujrah)
14. Salam or Istisna
• Salam is a sale whereby seller undertake to supply some
specific goods to the buyer at a future date in exchange of
an advanced price fully paid at spot.
• Istisna is a kind of sale where a commodity is transacted
before it comes into existence. price is fixed with the
consent of the parties and necessary specification of
commodity is fully settled between them.
