Friday, 4 September 2009


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Presented By: Farhan Mohamed Eggeh

We have seen in our previous article how Islamic banking system works, also we pointed out the most various types of transactions, which is the most important the bank operates the first we already seen, the second one is as follows:

2. Financing contracts

1.Mark-Up Sale {murabaha}

It comes from the Arabic word 'ribh' which means profit (short –term trade financing). Murabaha is selling a commodity as per the purchasing price with a defined and agreed profit mark-up.

This mark-up may be a percentage of the selling price or a lump sum. Murabaha financing differs from a conventional financing, as it involves the financing of physical assets. The bank shares in the risk of ownership. Rather than simply advancing money to a client, the bank itself buys the goods from a third party on request of a customer. The bank then sells it to the customer for a pre-agreed price through a deferred payment scheme, usually in the form of installments.

2.Profits and loss sharing system {Shuraako}

This is a system of sharing profits and losses as agreed before, this is known as in arbic Musharaka and in somli is shuraako.

It is an agreement between two persons or more (bank and customer) sharing both profits and losses. It is joint enterprises where all the partners contribute capital and the client bring in know how. Profit and losses are shared on agreed ratios.

Types of profits and loss sharing system {shuraako} partnerships

There are many types of Musharaka ranging from traditional types of partnerships to modern corporations. Musharaka could either be the following:

Permanent Musharaka: An Islamic bank participates in the equity of a project and receives a share of the profit on a prorate basis. The time length of the contract is specified, making it suitable for financing projects where funds are committed over a long period.

Diminishing Musharaka: This allows equity participation and sharing of profits on a prorate basis, and provides a method through which the bank keeps on reducing its equity in the project, ultimately transferring ownership of the asset to the customer. The contract provides for payment over and above the bank's share in the profit for the equity held by the bank. Simultaneously the entrepreneur purchases some of the banks equity, progressively reducing it until the bank has no equity and thus ceases to be a partner.

3. Mudharaba: It is a partnership in profit whereby one party provides capital (rab al-maal-the bank) and the other party provides the know how/labour (Mudharib).

The bank contributes 100% of the capital. Profits are shared on an agreed ratio. If there is any loss the bank takes 100% responsibility unless there was a case of misconduct, negligence or breech of contract on the part of Mudharib.

4.Ijara contract (leasing) or Ijara Muntahia bi at-tamleek (lease ending in property ownership

Ijara is the same as leasing thus leasing practised in interest – free banks is similar to its conventional practice. During the life of the asset, the risk of ownership remains with the bank, while the lessee is liable for misuse of the asset.

Ijara Muntahia bi at-tamleek (lease ending in property ownership)

This is a form of leasing contract, which includes a promise by the lesser to transfer the ownership of the leased property to the lessee. Example, the bank purchases the asset say a house. The client rents it from the bank, as he enters into an agreement to buy the shares from the bank over an agreed time frame. He then buys out small shares from the bank from time to time ending up with 100% ownership.

5. Bay'us-Salam (Advance purchase)

Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be effected unless the goods are in existence at the time of the bargain. However, this type of sale is an exception, provided the goods are defined and the date of delivery is fixed. The objects of sale must be tangible goods that can be defined as to the quantity, quality and workmanship.


Islamic banking and finance are a part of Islamic economic system, the basis of which revolves around justice and morality. It is a very young concept in modern times yet it is emerging as one of the fastest growing areas of international finance. It facilitates the uplifting of economic standards of its clients by providing various types of lending contracts. Above all it is Shari'ah compliant, hence protects a Muslim from dealing with Riba, thus avoiding Allah's wrath and war. Let us all support Islamic banking venture, which is being provided by the establishment of Gulf African Bank. We now compare the similarties and differences of Islamic banks and the Conventional bank which are interest based. Thes are below

Difference between Islamic and conventional banks

There are a number of key differences between the products and services offered by a conventional bank in comparison to an Islamic financial institution.

1. Islam is the back bone of interest free banking.

2. moral principles and objectives play a more important role in its operations.

3. it is organized on the basis of cooperation with each other.

4. no gain is accepted without either effort or liability

5. Islam forbids receiving a monetary advantage without giving a counter value, but is not opposed to profit or financial gain as long as an effort is performed or (partial) liability is accepted for the financial result of a venture.

6. general conditions of a debtor should be evaluated genuinely.

7. certain business transactions are considered unlawful in Islam and cannot be carried out in an Islamic bank. For example trading in alcohol, intoxicating drugs, gambling or producing pornography are contrary to Islam.

8.Islamic banks offer no interest-bearing products or services, and in its organizational structure and corporate governance.

9. Islamic banks have Shariah board, to ensure that the bank practices are in conformity with the Shariah and do not oppress the disadvantaged client

Wa billahi tawfiiq Ramadan karim

Presented by: Farhan Mohamed Eggeh

Bachelor in BBA

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