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This document defines Islamic modes of finance and describes five main types: Salam and Istisna allow financing through future delivery of goods; Mudarabah/Qiradh involve profit-sharing partnerships where one partner invests capital; Mubarabahah involves the sale of goods at a marked-up price for profit; Ijarah allows financing through lease agreements; and various partnership models like Musharakah are also discussed. The conclusion states that implementing Islamic finance could improve a nation's economic situation by avoiding exploitation and rewarding people based on their contributions.

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Haroon Afzal
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60 views5 pages

Haroon Slide File

This document defines Islamic modes of finance and describes five main types: Salam and Istisna allow financing through future delivery of goods; Mudarabah/Qiradh involve profit-sharing partnerships where one partner invests capital; Mubarabahah involves the sale of goods at a marked-up price for profit; Ijarah allows financing through lease agreements; and various partnership models like Musharakah are also discussed. The conclusion states that implementing Islamic finance could improve a nation's economic situation by avoiding exploitation and rewarding people based on their contributions.

Uploaded by

Haroon Afzal
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© © All Rights Reserved
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Islamic Modes of Finance

Submitted by:
Haroon Afzal
Submitted to:
M. Umar Farooq
Subject:
Islamic studies
Department: Artificial Intelligence

Semester: 1st

“Pak-Austria Fachhochschule” Date:


26-Dec-2022
Islamic Modes of Finance
Definition:
Islamic finance means through which organizations and people raise money in conformity with
Sharia or Islamic law. Islamic finance is a distinct type of socially conscious investing. Modes
of Islamic Finance
• Salam and Istisna
• Mudaribart/Qiradh
• Partnership
• Mubarabahah
• Ijarah
1. Salam and Istisna:
• Salam and Istiana are exempt from the aforementioned prohibition on selling
goods that are not in their actual or constructive ownership under Shariah.
• In the modern world, banks and other financial institutions can use salam as a
form of financing, particularly in the agricultural sector. They can do this by lending
money to farmers to meet their financial needs for farming, and in exchange, the
farmers will supply the crop for which they have entered into the salam with the bank
or financial institution.
• Similar to Salam, Istisna' is a type of sale in which an issue is dealt with before it
actually exists. In this type of transaction, the customer gives the manufacturer an
order to produce a good for them.
• Similar to salam, istisna' may be employed in the banking industry by giving
money to the customer who wishes to complete an istisna' transaction for financing.
He can get money from the bank either through a musharakah transaction or a
mudharabah transaction, and he can utilise it in istisna for business objectives.
• Similar to this, the housing finance industry can employ istisna as a kind of
financing. For instance, if someone wishes to build a home on their property, the bank
can do it in accordance with their requirements and in accordance with the laws of
Pakistan. Additionally, it may be used to finance projects and to construct a bridge or
a roadway.

2. Mudaribart/Qiradh :
In Islamic law, a specific type of partnership known as a Mudaribart or Qiradh occurs when one
partner invests money in a firm while the other partner manages and does the job.
"Rabb-ul-mall" is the name for the individual who contributes money, whereas "mudarib"
is the name for the person who supervises and works.
While losses in partnerships are distributed in proportion to each partner's investment, in
mudarabah the investor bears the loss and mudharib's losses are limited to his effort that has been
wasted.
The sharing of the profit is left up to their mutual agreement under Shariah. However, it's
against the law to divide up a partner's profits in one big payment.
3. Partnership:
While officially speaking it is a connection between/among people who have agreed to operate a
company and share the Profit and Loss, Partnership (Shirakah) denotes Sharing.
As long as it is permitted by the Holy Quran and the Prophet's (PBUH) Sunnah, a
partnership is a legal transaction. Except for those who believe and carry out good activities, the
majority of partners commit wrongdoing against one another, according to the Holy Quran.
Kinds of Partnership:
Basically, there are three kinds of Partnership

• Shirakat al Ibahah
• Shirakat Milk
• Shirakat Aqd
1: Sharakat Ibahah
In a partnership known as shitake Ibahah, everyone has the same access to resources like
mosques and roads.
2. Sharakat Al Milk
It denotes joint ownership of two or more people in a particular piece of property.
3: Shirkat Aqd
This partnership was formed by the parties' mutual agreement and is a cooperative business
venture. (And) The word "contract"
4. Mubarabahah :
The term ribh, which implies profit, is the root of the word murabahah.
In murabahah, it is the seller's obligation to disclose to the buyer both the true cost and
the profit.
The murabahah transaction can be completed on the spot, with the buyer delivering the
good and the buyer providing the payment. Although it is also acceptable for the buyer to supply
the good on a different payment arrangement. This is referred to as Bai'Mujjal in Islamic law.
Here, it is acceptable for the price of the product to be paid on a different schedule, either all at
once or in instalments.
5. Ijarah:
Ijarah, which meaning "to provide anything on rental," is an Arabic term. Although Ijarah is a
phrase that properly refers to two distinct circumstances.
• In the first category, when a person's services are contracted for pay. It's known as
employment.
• The second category is the use of an asset's usufructs on a rental basis. Leasing is the
term used for this in banking.
Following are the main components of Ijarah.

1: Lesser: the institution or the person to whom gives something on lease. This is called Mu’jir.

2: Lessee: the person or the institution whom the thing is given on lease this is called Musta’jir.
3: Subject of lease.
4: Rent
5: Lease period.
Ijarah, like murabahah, is a straightforward transfer of the right to use an asset for a
specific length of time in exchange for an agreed-upon fee rather than being an original kind of
financing. However, if specific guidelines are followed, it can also be utilised as a form of
funding in the banking industry.
In reality, the bank or institution seeks satisfaction through the evaluation of the client's
business to determine whether or not he would be a suitable party for entering into a leasing
transaction with him. As a result, when a customer applies for a leasing facility, the bank or
institution often takes the following into account before accepting or rejecting the application.
(Ibid 2002)

• Sources of income of the client.


• Whether the client would be able to pay the payable amount or not.
• Whether or not the client has a history of defaulting. Following this evaluation, if the
bank or institution determines that the client's position is suitable, his application is
accepted, and the limit is established.
A general agreement is formed in this respect based on the client's financial situation. The
customer is able to use the facility as a result of this arrangement. When an agreement is reached,
the bank or other organisation buys the leased asset on behalf of the client. It is essential that all
shariah-mandated terms of sale and purchase be scrupulously followed at this stage, failing
which the entire transaction will be invalid. 46 The final step is to calculate the rent after this.
The bank or institution has the right to keep the leased asset in its possession once the
lease's term has expired. However, the institution or bank often has no interest in the leased
object, so the customer either buys it or receives it as a gift. If it is acquired, a separate contract is
necessary.
Conclusion
In a summary, we can say that Islam has a highly complete economic system, and there is no
exploitation since everyone gets rewarded to the degree of what they deserve. The economic
situation of the nation will significantly improve if Islamic financial practises are implemented
and embraced. The work is not simple, but if consistent efforts are made, it would be feasible to
complete this enormous task.

References :
Abu Daud, Sulaiman b ash,hath al Sajistani, Al Sunan(Lahore, Islami Academy),Kitab al Buyoo,Bab fi
alsharikah. Dec 2013. intro to modes of finance. Ata Ur Rehman.

Al Hindi, Alauddin Ali al Muttaqi, Kanz al Ummal (Beirut, Muassat al Risalah) 15:482. 1987. Al Atasi
Muhammad Khalid, Sharh Majjalatul Ahkam (Quetta, Maktaba al Islamiyah ,1987. Dr Rashid.

Ibn Rushd, Bidayat al Mujtahid( Lahore, Faran Acedmy 1992). 1992. Ibn al hummam,Fath al qadeer,
(Beirut, dar Ihya al Turath al Arabi 1986), 5:205. Dr Rashid.

Ijaz Ahmad Samadani, Islamic Banko mey raij murabahah ka Tariq Kar,( Lahore, Idarah, islamyat 2008).
2008. Samadani, Ijaz Ahmad, Islamic Banko may raij Ijara( Lahore, Idarah Islamyat):15. Dr
Rashid.

Maududi, S.Abul ala ,The meaning of the Quran (Islamic publication, Lahore, 2005. 2009. Mansoori,
Muhammad Tahir, Islamic Law of Law of Contracts and Business Transactions( Islamabad,
shariah Academy, 2009):30. Dr Rashid .

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