T2_FINANCIAL SYSTEM

Principles Used In Islamic
Finance

Mudarabah

Sukuk Musharakah

Takaful Murabahah

Ijarah Bai’ al-Salam

Istisna

MUDARABAH

“a contract between a capital provider (rabbul mal) and an
entrepreneur (mudarib) under which the rabbul mal provides capital

to be managed by the mudarib and any profit generated from the
capital is shared between the rabbul mal and the mudarib according to
a mutually agreed profit sharing ratio (PSR) whilst financial losses are
borne by the rabbul mal provided that such losses are not due to the

mudarib’s misconduct (ta`addi), negligence (taqsir) or breach of
specified terms (mukhalafah al-shurut).”

(1) Depositors or investors deposit money to (2) Mudarabah financing contract between
the Islamic bank. In such a situation, the the Islamic bank and the Entrepreneur. In
such a case, the Islamic bank is the Rabbul
Rabbul Mal would be the depositor and the mal and the Mudarib is the Entrepreneur.
Islamic bank is the Mudarib. The policy
The financing part represents an asset
document on Mudarabah spells out clearly (investment) to the Islamic bank. This is the
the roles of the Mudarib, one of which is to focus of this section. It must be noted that in
ensure that there is proper management of both cases, the Islamic bank (whether as a
the Mudarabah venture and that the Mudarib
must always act in the best interest of the Mudarib or a Rabbul mal) is expected to
perform to the best of its ability so as to
Rabbul mal
ensure that the business is protable.

MUSHARAKAH

Musyarakah refers to a partnership between two or more
parties, where all contracting parties contribute capital to

the Musyarakah venture and profit and losses from the
partnership are shared according to the agreed profit
sharing ratio. Some examples where Musyarakah can be
used include project financing, working capital financing,

import & export financing

SHIRKAH AL-MILK (PARTNERSHIP IN SHIRKAH AL-`AQD (CONTRACTUAL
JOINT OWNERSHIP) PARTNERSHIP)

Refers to the possession of an asset by A contract executed between two or
two or more persons with or without more partners to venture into a business
prior arrangement to enter into a joint
with a view to generating profit. A
ownership. Each partner’s ownership is partner is an agent for the other
mutually exclusive. Thus, one partner partners. Accordingly, the conduct of any
partner in the ordinary course of
cannot deal with the other partner’s asset business is deemed to represent the
without the latter’s consent.
partnership

MURABAHAH

A sale and An asset to be The specific The common
purchase of an traded in a inherent nature inherent nature
Murabahah of the contract
asset where of Murabahah of a sale
the acquisition contract shall contract is the
be one that is is the sale
cost and the recognized by contract which transfer of
mark-up are the Shariah as is based on the ownership of
disclosed to the asset from
the purchaser. valuable, element of the seller to
Usually, the identifiable and trust in the purchaser.
sale price is deliverable and
payable by the that the asset disclosing the
purchaser on cost and mark-
deferred terms. is already in
existence and up.
owned by the

seller.

BAI’ AL- ISTISNA IJARAH
SALAM
Refers to a contract to sell to a Derived from the noun ‘al-ajr’
A contract whereby payment is purchaser a non-existent asset which means compensation,
made in cash at point of that is to be constructed, built reward, consideration, return or
or manufactured according to counter value (Al-‘Iwad) against
contract but delivery of asset the agreed specifications and
purchased is deferred to a delivered on a specified future the use of an object
predetermined date. date at a pre-determined price. Notably, while many Ijarah
In this forward contract, the transactions relate to leasing, it
can also be used for contracts
buyer (or an Islamic financial of employment or hire of
institution on behalf of the
services.
buyer) pays for goods in full in Typically, there are two parties
advance, and the goods are to an Ijarah contract: the lessor
delivered in the future. (the party who owns the asset)
and the lessee (the party who is
given the right to use the asset)

TAKAFUL SUKUK

Arabic word that means mutual help & Plural of Sakk or participation
co-operation. securities, investment certificates.

This is the principle under which Islamic It is known as Islamic equivalent of
insurance companies are structured. bonds or tradable certificates.
Unlike insurance, the money from
They are structured as per the various
premium cannot be invested in interest- principles.
bearing instruments and organizations

that are not HALAL.
In a takaful arrangement, the various

policy holders are participants in a
scheme as opposed to being a client

under conventional insurance.







ETHICAL ASPECTS IN ISLAMIC FINANCE

• Trade is considered to be Freedom from
permissible and legal, but Al-Riba
contracts are not valid if it
involves an element of • Aside from loans, all forms of
coercion or force. contracts and transactions
Further exchange, trade must be free from riba.
and investment is As riba means ‘excess’, the
permitted only when prohibition of riba implies that
undertaken in permissible there is no reward for time
commodities or property preference alone
or activities.
• Rewards, returns or benefits
Freedom to Contract must always accompany
within Permitted liability or risk.

Commodities/Activities

ETHICAL ASPECTS IN ISLAMIC FINANCE

• Must be free from Freedom from
excessive gharar (or Price Manipulation
uncertainty).
One of the implications is • Islam approves of a free
that one cannot trade in market where prices are
objects that are not in determined by forces of
possession (i.e. selling demand and supply.
things one has not bought, There should be no
or pay-offs upon interference in the price
happening of some events formation process.
that is difficult to predict.

Freedom from
Al-Gharar

ISLAMIC FINANCE INDUSTRY

BANKING TAKAFUL ISLAMIC
CAPITAL
Conventional banks Takaful industry MARKETS
are opening up Islamic premiums
Organizations whose
windows. representing a operations are free
Multinational banks growing segment for from dealing with
are coming up with Islamic investment certain commodities
divisions that deal with like alcohol, gambling
opportunities. etc are considered
Islamic banking. SHARIAH COMPLIANT.
The Sukuk (Islamic
bond) market is also Fund management in
Islamic finance is
growing rapidly.
Islamic banks are focusing on investing
expected to be buyers in Shariah compliant
& active issuers of
companies.
Sukuk