Debt Type Contracts Murabaha
|
Ijara
Istisna'a
Bei' Salam |
Murabaha Explained
Involves purchase of an asset by a bank on behalf of
a client and its resale to the latter on cost-plus-profit;
which is payable on a deferred payment basis.
Under this arrangement:
A) The Bank discloses its cost and profit margin
to the client
B) The period covering the deferred payment is
effectively the period of financing
C) The title to the asset is transferred to the customer
at the time of purchase but usually the customer
provides the same or other assets as collateral to
the bank for the period of financing
Murabaha Transaction Flow
- Client chooses property and approaches the Bank for funding
- Bank does due diligences and approves client and the property
- Bank will pay off the seller and obtain Title to property
- Bank sells property to Client on cost plus profit on deferred payment
- Bank transfers title to the Client
- Client signs a Note and grants Mortgage on the property
- Client makes monthly payments to Bank
|
Ijarah (Leasing) Explained
In leasing an owner transfers its usufruct to another person for an agreed period, at an agreed consideration on the condition that:
A) The subject of lease should be valuable, identified
and quantified
B) The period of lease must be determined
C) The lessee is liable to compensate the lesser from
all harm to the leased asset caused by any misuse
or negligence
Ijarah (Leasing) Transaction Flow
- Client chooses property and approaches the
Bank for funding
- Bank does due diligences and approves client
and the property
- Bank will pay off the seller and obtain Title to property
- Bank leases property to consumer for monthly rent
- Client promises to purchase and Bank promises
to sell house
- Client contribute monthly to buy out the lease
|
| Equity Type Contracts |
Musharakah
Mudarabah
Wakala
Istijrar |
| Musharaka Explained
Partnership between a financial institution and
an enterprise to which it provides working capital.
This working capital is:
- Executed in the form of permanent Musharaka
or diminishing value
- Widely used for joint venture investments
- Used by Banks for the purchase of real estate
- Equivalent to a conventional sinking fund
|
Mudarabah Explained
A type of partnership where one partner gives money to
another for investing on the condition that:
- The other partner’s responsibility is management and work
- The profits generated are shared in a predetermined ratio
|
| There are many consumer finance
requirements which can be structured
using Shariah principles. |
These include but are not limited to:
| Student Loans |
Medical Costs |
| Short Term Loans |
Lines of Credit |
|
