Eoif

Islamic Modes of Finance

Theory and Key Shariah Principles

Modes Of Finance

• Two are ideal modes which provide an alternative to interest banking and if implemented on a national level will result in much fairer distribution of wealth in society 1. Mushaarakah – ‫رآ‬ (equity finance) 2. Mudhaarabah - ‫ر‬ (equity finance - sleeping partner) • Two are not ideal as they replicate the effects of conventional banking but nevertheless are tolerated in Shariah 3. Ijaarah - ‫( إ رة‬leasing) 4. Muraabahah - ‫( ا‬cost plus pricing) We will also briefly analyse Salam - , Istisnaa‘ – ‫ع‬ Tawarruq – ‫رق‬ ‫ ا‬and

1 Mushaarakah

• “Mushaarakah” literally means sharing • “Mushaarakah” is derived from “shirkah” which means “being a partner”. • Mushaarakah is “a joint enterprises formed for conducting business in which all partners share the profit according to an agreed ratio while the loss is shared according to the ratio of investment” • It is an ideal alternative for interest based financing with far reaching effects on the economy.

Types of Shirkah

SHIRKAH

SHIRKAT-UL-MILK joint ownership

SHIRKAT-UL-‘AQD

joint enterprise

OPTIONAL via joint purchase

NON OPTIONAL inheritance

SHIRKATUL-AMWAAL

SHIRKATUL-‘AMAL

SHIRKATUL-WUJOOH

mushaarakah

Mushaarakah

• The term Mushaarakah has been introduced recently by those who have written on the subject of Islamic modes of financing • It is normally restricted to a particular type of “Shirkah”, i.e. Shirkat-ul-amwaal, where two or more persons invest some of their capital in a joint commercial venture. • However, sometimes it includes Shirkat-ul’amal also where partnership takes place in the business of services.

Rules of Musharakah

• • Assets of Mushaarakah are jointly owned in proportion to the capital of each partner. Ratio of profit distribution must be agreed at the time of the execution of the contract.

• • • As a proportion of the actual profit earned by the enterprise, Not as percentage...