Islamic Modes of Financing

Abstract

The operations of markets based on Riba or unfair contracts and the risk of speculation (Gharar) are inapplicable as the basic principle of the Shariah. The Commission for Transformation of Financial System gave approval for the Islamic modes of financing on the basis of Musharaka, Mudaraba, Murabaha, Musawama, Leasing, Salam and Istisna. Murabaha is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit. Ijara means to transfer the usufruct of a particular property to another person in exchange for rent claimed from him. Salam is a sale where the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. Istisna is a kind of sale where a commodity is transacted before it comes into existence.

Musharka can be separated into two kinds. Sharikat ul Mulk, it refers to combined ownership of the property by two or more parties and Sharikat ul Aqd, it means partnership by mutual contract. Mudaraba is a special kind of partnership, where one partner gives money to another for investing it in a commercial enterprise. Islamic Scholars have consensus that Sharikah and Mudarabah are the real modes of Islamic finance. Murabaha, Ijarah, Salam and Istisna were adopted modes of finance temporarily for interim periods. When Sharikah and Mudarabah are established, others will be withdrawn. Until we do not adopt Sharikah and Mudarabah as major modes of finance, we shall not be able to change prevailing economic system into Riba-free Islamic economic system in its true sense.