Basic techniques of Islamic finance

12 July 1996

THERE are a wide variety of Islamic financing tools, but most derive from a limited number of prototypes.

Murabaha - A bank buys goods on behalf of a customer who then buys them at a mark-up from the bank at a later date or by instalment. The bank rather than the customer has title to the goods until the money is paid, and makes its profit from the mark-up. Commonly used for shortterm trade finance.

Musharaka - Partners invest in a project and manage it jointly, having decided in advance in what proportion the profits and losses will be split. A bank may become a partner by supplying capital to a venture. Equivalent to venture capital.

Mudaraba - Two parties come together in an enterprise, one with money and another with an asset such as land, machinery or expertise. They agree the split of profits beforehand. Any losses are borne by the lender as the borrower is considered to have paid their share in work time. Fund management can come under this category, with the investor providing the capital and the fund manager the expertise.

Ijara - The bank buys an asset and leases it to someone, who pays the bank a fixed fee. The bank retains title to the asset, which must be used productively.

One version, Ijara wa'l-Iqtina', gives the asset to the leassee at the end of the lease period. This is used for leasing ships, aircraft and factory machinery.

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