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Most common Islamic financial products and transactions

Published: 28/04/2014 04:26:29 PM GMT
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- Bay': The sale or trading of a specific asset at a fixed price. Most of these are finance contracts.- Istithmar: An equity i (more)

- Bay': The sale or trading of a specific asset at a fixed price. Most of these are finance contracts.

- Istithmar: An equity investment in an enterprise that generates a return based on the performance of the business. These are either mutual investment contracts or accessory contracts on a fee-earning basis.

These products can be used instead of conventional financial products to finance your business and trade operations:All your corporate needs can therefore be met with Islamic financial products, for a sharia-compliant SME.

Below are definitions for the Bay' and Istithmar transactions listed in the table. The most common ones feature in bold characters.

Bay' contracts

- Ajr: Commission, fees or wages charged for services rendered or work done. - Bay' bi thaman ajil: A transaction in which goods are requested by a client, purchased by the bank and then sold to the client at an agreed upon price that includes the bank's mark-up. This is essentially identical to murabaha financing.- Bay' al 'ina: A sale in which a purchaser buys merchandise from a seller for a stipulated price on a deferred payment basis and then sells the same merchandise back to the original seller for a price lower than the original purchase price on cash basis, the net effect of which is a loan with interest.- Bay' ad Dayn: sale of debt or receivables.- Istijrar: A sale contract between a client and a supplier, whereby the supplier agrees to supply a particular product on an ongoing basis, for an agreed price and payment mode. - Murabaha: 'Cost plus' transactions. The purchaser knows the cost incurred by the vendor and agrees to a profit margin on top of this.o Tawarruq or Murabaha 'aksiya: Cash financing mechanism where one party purchases an asset from a second party on deferred payment basis to sell it consecutively for cash to a third party, thereby receiving instant cash. - Salam: This is for the sale of specified goods (generally agricultural) to be delivered at a future date. The price must be agreed and the quality and quantity of goods specified at the start of the transaction.- Istisna': A sum is paid in advance for goods that have not yet been produced. This contract can only be applied to manufactured goods.- Ijarah: One counterparty rents an asset he owns to another counterparty. o Ijara mawsoofa bi al dhimma: In contemporary Islamic finance, refers to a form of forward or future lease.o Ijarah wa iktina: Payments contain an element of capital repayment so that at the end of the agreed lease period the capital amount is fully repaid and ownership transfers to the client.

Istithmar contracts

- Mudaraba: An investor provides capital to an entrepreneur to carry out a project. Any profits are shared between the two counterparties at a pre-agreed ratio. Any losses are borne by the investor alone.- Musharaka: Two or more partners make an equity investment in an enterprise, usually all sharing in profits and losses in relation to their investment.- Wakala: A common form of agency agreement in which one party carries out the business of another for a fee.- Amanah: Trust agreement whereby one party takes on a duty of care for a fee.- Kafalah: Trust agreement whereby one party provides a guarantee, a third party offering surety for the payment of debt if unpaid by the person originally liable

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