chapter 3

• Islamic banking and finance

  Sharī'ah financial instruments based on the popular forms of contract in Islamic law
• Types of contracts in Islamic finance

  • Exchange-based contracts
  • Service-based contracts
  • Partnership contracts
  • Supporting or accessory contracts
  • Unilateral supporting contracts
• Most banks with dual banking businesses manage their Islamic funds separately from their conventional counterparts in what are typically referred to as "Islamic finance windows"
• Sources of funds in Islamic financial institutions

  • Deposits (savings, current, and general investment accounts)
  • Fees and commissions or fixed charges for banking services
• Types of deposits


  • Transaction deposits (risk-free, no returns)
  • Investment deposits (profit/loss depending on bank's investments)
• Islamic banks employ their funds to raise profits by either deploying its own funds in a particular business or by entering into a joint venture agreement with customer
• Main conduits for outflow of funds

  • Musharakah
  • Mudarabah
  • Murabahah
  • Ijarah
  • Istisna'
  • Bay al-salam
  • Bay al-muajjal
• Qatar Central Bank issued a circular stipulating that conventional banks must close their Islamic windows by the end of the year
• Exchange-based contracts


  • Murabahah
  • Istisna'
  • Salam
  • Bay Dayn
  • Bay Inah
  • Tawriq
  • Sarf
  • Tawarruq
• Murabahah


  Sale of a lawful and commercially valued commodity at the cost price that it was purchased plus an additional profit, which has already been mutually agreed upon by the parties
• Istisna'


  Transaction on a commodity before it exists, with an obligation on the manufacturer to produce the commodity for the buyer at the agreed time and in accordance with certain specifications
• Salam


  Contract of sale whereby the seller agrees to supply specific goods to the buyer on a deferred basis in exchange for an advance price paid in full on the spot
• Bay Dayn


  Sale and purchase transaction involving a quality debt
• Bay al-inah


  Contract where a seller sells a commodity to a buyer on a cash basis and immediately repurchases the same commodity on a deferred payment basis at a price higher than the initial cash price
• Tawriq


  Securitization process involving an originator, special purpose vehicle, investment banks, and subscribers/investors
• Sarf


  Foreign exchange contract involving the exchange of currencies, which may be either the same kind or of a different kind
• Tawarruq


  Hybrid sale contract where a customer approaches a bank to purchase a commodity with payment in installments and then sells the commodity to a third party for cash
• Service-based contracts


  • Ijarah (leasing)
  • Ijarah muntahia bi al-tamlik (financial lease)
  • Ijarah thumma al-bay (leasing and subsequent purchase)
  • Ujrah (fees)
  • Ju'alah (commission)
• Ijarah


  Hiring or employing another person or renting premises for a specific purpose in line with the payment of certain wages, rental fee, or commission
• Ijarah Muntahia Bi al-tamlik

  Lease contract which culminates in a transfer of legal title and confers ownership on the lessee
• Ijarah Thumma al-Bay


  Lease contract followed by a sale contract
• Ijarah mawsufah fi dhimmah

  Lease of specified future usufruct of an asset that does not practically exist at the time of concluding the contract
• Ijarah Muntahia Bi al-tamlik

  A typical lease contract, which culminates in a transfer of legal title and confers ownership on the lessee
• Al-ijarah muntahia bi al-tamlik

  Contains two main words: ijarah, which means lease, and tamlik, which is ownership
• Al-ijarah muntahia bi al-tamlik


  Ownership of the usufruct in an identifiable asset or property within a specified period followed by the granting of the ownership of such property at the maturity of the lease contract
• Ijarah Thumma al-Bay


  A lease contract that is followed by a sale contract
• Ijarah Thumma al-Bay


  Two separate contracts are concluded, they are, the ijarah contract and the purchase contract
• Ijarah mawsufah fi dhimmah


  A lease of specified future usufruct of an asset that does not practically exist at the time of concluding the contract
• The lessor may demand some advanced payment of the agreed rental as a forward lease
• Once the leased asset is successfully constructed or manufactured, the contract becomes an ordinary lease
• Ujrah


  A payment for usufruct in the use of another person's property or payment for service in an ijarah contract
• Fixed service fees are allowed in Islamic law and as such, the ujrah concept has been adapted and utilized in many modern Islamic-based transactions
• Ju'alah


  The act of doing any job or rendering a certain service for a specific purpose that is uncertain will be accomplished
• Ju'alah (in Islamic finance)


  A unilateral contract whereby a reward or commission is promised for the accomplishment of a specific task
• Mudarabah


  A form of partnership where one party provides the funds while the other party plays the entrepreneur through effective management
• Restricted mudarabah partnership


  A contract in which the capital provider restricts the actions of the mudarib to a particular location or to a particular type of investment
• Unrestricted mudarabah transaction


  The rab al-mal does not specify the type of business in which the mudarib can invest and no timeframe is specified
• Musharakah


  A form of trade with joint capital contributed by several partners, where return is based on the actual profit of the venture and losses are shared proportionately with the capital investment of each of the partners
• Musharakah Mutanaqisah


  A form of participatory partnership made up of a chain of three different contracts: a contract of joint ownership, a lease contract, and the client partner gradually purchasing the financier's remaining units of ownership
• Hawalah


  A contract where the debtor transfers the responsibility of payment of their debt to a third party who owes the creditor a similar debt of about the same value