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KembaraXtra-Islamic Finance- Islamic Capital Market-Major Contracts Used in Islamic Finance
1. Mudarabah (Trust Financing)
• A trust-based partnership contract between a capital provider (Rabb al-Mal) and an entrepreneur/manager (Mudarib).
• Depositors place funds with the bank as investments rather than loans.
• The bank uses deposited funds for trading and financing activities.
• Profits are shared between parties based on a pre-agreed ratio.
• Losses are borne financially by the capital provider, while the Mudarib loses time and effort.
• Widely used in investment accounts, mutual funds, Sukuk structures, and business financing.
2. Musharakah (Profit and Loss Sharing Joint Venture)
• A partnership contract where all parties contribute capital to a joint venture.
• Profits are shared according to an agreed ratio.
• Losses are shared strictly in proportion to capital contribution.
• Encourages joint ownership, shared risk, and shared management.
• Commonly used in project finance and joint ventures.
3. Diminishing Musharakah
• A form of Musharakah commonly used in property and home financing.
• The bank and customer jointly purchase an asset.
• The customer gradually purchases the bank’s share over time.
• The bank’s ownership decreases while the customer’s ownership increases.
• Often combined with rental payments during the shared ownership period.
4. Permanent Musharakah
• A long-term partnership arrangement with no fixed termination date.
• Continues until partners mutually agree to dissolve the venture.
• Profits are shared as agreed; losses are shared based on capital contribution.
• Commonly used in industrial projects and long-term business ventures.
5. Murabahah (Cost Plus Financing)
• A sale-based financing contract, not a loan.
• The bank purchases an asset from a supplier upon the customer’s request.
• The bank sells the asset to the customer at cost plus an agreed mark-up.
• The mark-up is fixed and disclosed upfront.
• Payment is usually deferred over a fixed credit period.
• Widely used for asset financing, trade finance, and consumer goods.
6. Ijarah (Leasing)
• A leasing contract where the bank acts as lessor and the customer as lessee.
• The bank purchases and owns the asset.
• The asset is leased to the customer in exchange for rental payments.
• Ownership remains with the bank during the lease period.
• Ownership is transferred only if the asset is later purchased through a separate sale agreement.
• Commonly used for equipment, vehicles, real estate, and infrastructure financing.
7. Istisna (Manufacturing an Asset)
• A long-term contract for manufacturing, construction, or building assets.
• The manufacturer or contractor undertakes to deliver the asset as per agreed specifications.
• Payment can be made in instalments, at delivery, or after completion.
• Suitable for large-scale and infrastructure projects.
• Common applications include power plants, factories, roads, schools, hospitals, and housing projects.
• Involves three parties: manufacturer, bank (financier), and customer.
8. Salam (Advance Payment Sale)
• A forward sale contract where full payment is made in advance.
• Delivery of goods is deferred to a future date.
• Used when the commodity is expected to increase in price.
• Requires detailed specification of quantity, quality, and delivery date to avoid Gharar.
• The bank pays the seller or producer upfront and receives goods later.
• Commonly used in agriculture and commodity financing.
9. Parallel Salam
• A structure involving two separate Salam contracts.
• The bank first buys goods under Salam from a producer.
• The bank then sells the goods under another Salam contract to a third party.
• The two contracts must remain independent.
• The bank earns profit from the price difference between the two contracts.
• Useful for financing producers where the bank is neither producer nor end user.
10. Wadiah (Safekeeping)
• A custodial contract based on trust and safekeeping.
• Depositors place funds or assets with the bank for safekeeping.
• The bank may charge a maintenance or custody fee.
• No profit-and-loss sharing is involved.
11. Wadiah Yad Amanah
• Deposits are made purely on the basis of trust.
• The bank is responsible for safekeeping but does not guarantee value unless negligent.
• Commonly used for asset safekeeping.
12. Wadiah Yad Dhamanah
• Deposits are guaranteed by the bank.
• The bank guarantees full repayment of deposited funds.
• Any return to depositors is voluntary and not guaranteed.
• Commonly used for savings and current accounts.
13. Wakalah (Agency)
• An agency contract between a principal and an agent.
• The principal authorises the agent to act on their behalf.
• The agent is paid a fixed fee (Ujrah) for services rendered.
• The agent does not share in profits or losses.
• Commonly used for letters of credit, investment agency, fund management, and Takaful operations.
1. Mudarabah (Trust Financing)
• A trust-based partnership contract between a capital provider (Rabb al-Mal) and an entrepreneur/manager (Mudarib).
• Depositors place funds with the bank as investments rather than loans.
• The bank uses deposited funds for trading and financing activities.
• Profits are shared between parties based on a pre-agreed ratio.
• Losses are borne financially by the capital provider, while the Mudarib loses time and effort.
• Widely used in investment accounts, mutual funds, Sukuk structures, and business financing.
2. Musharakah (Profit and Loss Sharing Joint Venture)
• A partnership contract where all parties contribute capital to a joint venture.
• Profits are shared according to an agreed ratio.
• Losses are shared strictly in proportion to capital contribution.
• Encourages joint ownership, shared risk, and shared management.
• Commonly used in project finance and joint ventures.
3. Diminishing Musharakah
• A form of Musharakah commonly used in property and home financing.
• The bank and customer jointly purchase an asset.
• The customer gradually purchases the bank’s share over time.
• The bank’s ownership decreases while the customer’s ownership increases.
• Often combined with rental payments during the shared ownership period.
4. Permanent Musharakah
• A long-term partnership arrangement with no fixed termination date.
• Continues until partners mutually agree to dissolve the venture.
• Profits are shared as agreed; losses are shared based on capital contribution.
• Commonly used in industrial projects and long-term business ventures.
5. Murabahah (Cost Plus Financing)
• A sale-based financing contract, not a loan.
• The bank purchases an asset from a supplier upon the customer’s request.
• The bank sells the asset to the customer at cost plus an agreed mark-up.
• The mark-up is fixed and disclosed upfront.
• Payment is usually deferred over a fixed credit period.
• Widely used for asset financing, trade finance, and consumer goods.
6. Ijarah (Leasing)
• A leasing contract where the bank acts as lessor and the customer as lessee.
• The bank purchases and owns the asset.
• The asset is leased to the customer in exchange for rental payments.
• Ownership remains with the bank during the lease period.
• Ownership is transferred only if the asset is later purchased through a separate sale agreement.
• Commonly used for equipment, vehicles, real estate, and infrastructure financing.
7. Istisna (Manufacturing an Asset)
• A long-term contract for manufacturing, construction, or building assets.
• The manufacturer or contractor undertakes to deliver the asset as per agreed specifications.
• Payment can be made in instalments, at delivery, or after completion.
• Suitable for large-scale and infrastructure projects.
• Common applications include power plants, factories, roads, schools, hospitals, and housing projects.
• Involves three parties: manufacturer, bank (financier), and customer.
8. Salam (Advance Payment Sale)
• A forward sale contract where full payment is made in advance.
• Delivery of goods is deferred to a future date.
• Used when the commodity is expected to increase in price.
• Requires detailed specification of quantity, quality, and delivery date to avoid Gharar.
• The bank pays the seller or producer upfront and receives goods later.
• Commonly used in agriculture and commodity financing.
9. Parallel Salam
• A structure involving two separate Salam contracts.
• The bank first buys goods under Salam from a producer.
• The bank then sells the goods under another Salam contract to a third party.
• The two contracts must remain independent.
• The bank earns profit from the price difference between the two contracts.
• Useful for financing producers where the bank is neither producer nor end user.
10. Wadiah (Safekeeping)
• A custodial contract based on trust and safekeeping.
• Depositors place funds or assets with the bank for safekeeping.
• The bank may charge a maintenance or custody fee.
• No profit-and-loss sharing is involved.
11. Wadiah Yad Amanah
• Deposits are made purely on the basis of trust.
• The bank is responsible for safekeeping but does not guarantee value unless negligent.
• Commonly used for asset safekeeping.
12. Wadiah Yad Dhamanah
• Deposits are guaranteed by the bank.
• The bank guarantees full repayment of deposited funds.
• Any return to depositors is voluntary and not guaranteed.
• Commonly used for savings and current accounts.
13. Wakalah (Agency)
• An agency contract between a principal and an agent.
• The principal authorises the agent to act on their behalf.
• The agent is paid a fixed fee (Ujrah) for services rendered.
• The agent does not share in profits or losses.
• Commonly used for letters of credit, investment agency, fund management, and Takaful operations.
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