Last week I posted a basic overview of the tenets and principles governing the functioning of Islamic Finance in the MENA region (here). Apart from explaining and laying out some of these tenets, I also questioned the utility of this system going forward and posed the same question to the WSO community. The response was significant enough that I have decided to expand upon the previous post and touch on some of the comments made by users with more experience in these matters.
Below I shall outline a few financial instruments used in the aforementioned system and then, do my level best to explain their purpose in the system as well:
- Murabaha
- Ijara
- Musharaka
- Mudaraba
- A contract wherein a bank or some other intermediary purchases a tangible asset and then sells it to a buyer for an agreed upon price. The selling price is usually a premium to give the bank or intermediary a profit.
- A contract wherein an owner provides products or services to another entity on a leasing basis. As you might expect, this is usually for a period of time and in almost all cases, the owner retains the rights of ownership to the product or service in question.
- A partnership structure wherein two or more entities will finance a project and share profits/losses based on a predetermined ratio or based upon their respective share in the financing.
- A partnership structure wherein one party is simply the investor and the other party manages the former's investment through entrepreneurial ventures or other economic activities. Usually, the profits and losses are distributed based on a predetermined ratio.
As mentioned in the previous post, there are other instruments such as Sukuk and Takaful or re-Takaful but due to my lack of exposure to these topics, I'll let others who have more direct experience with these instruments, speak about their use and relevance.
As always, I'd be interested in hearing any feedback, opinions, criticisms and ideas regarding the aforementioned instruments and their use in the world of Islamic Finance. If I incorrectly explained one of these instruments, feel free to correct me in the comments or shoot me a PM and I'll edit the post to reflect the necessary changes.
To see my first post on this topic, click here
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