What are the major modes of Islamic banking and finance? | ahli islamic


What are the major modes of Islamic banking and finance?

Following are the most commonly used modes of Islamic banking and finance:

  • Mudaraba: It is a form of partnership where one party provides the funds while the other provides management services against a pre-agreed share in the profit of the investment.  However, if there is any loss, it is borne solely by the capital provider.
  • Musharaka: It is a partnership with all the parties contributing to the capital of the Musharaka on the basis of profit and loss sharing. The profit shall be shared as per the agreement but the loss will be borne pro rata.
  • Murabaha: It is a sale contract in which an individual/entity sells an asset at cost plus an agreed profit. The sale price could be paid on spot or deferred.
  • Musawama: It is a general kind of sale in which price of the commodity to be traded is bargained between seller and buyer without any reference to the price paid or cost incurred by the former.
  • Ijara: It is a leasing contract in which the owner of an asset or its usufruct sells the usufruct of the underlying asset to the lessee for an agreed rental.
  • Salam: It is a kind of sale in which payment is made on the spot while the delivery of the goods is deferred.
  • Istisna’: It refers to a sale in which the buyer orders to a manufacturer to produce and deliver fully described commodity from raw materials of its own. It is basically an order to manufacture.