A system of finance that is bound by religious laws that prevent the taking of interest payments (see halal; haraam). Joint ventures in which the funder and the borrower share profits and risks are, however, acceptable. There are a number of different techniques by which this takes place. Murabaha is a good vehicle for temporary idle funds, which are used to purchase goods from a supplier for immediate sale and delivery to the buyer, who pays a predetermined margin over cost on a deferred payment date. The term can be as short as seven days. Musharaka transactions involve participation with other parties in trade financing, leasing, real estate, and industrial projects. Net profits are shared in proportions agreed at the outset. Shirkah is a partnership between a bank and a customer to share the risks and gains of a project. Muqarada is a joint venture by finance providers. Ijarah involves profit from rental income on real estate. Ijarawa-iktina is leasing of large capital items, such as property or plant and machinery. Leasing is achieved by the equivalent of monthly rental payments, and at the expiry the lessee purchases the equipment. See also alternative finance arrangements.
Subjects: Financial Institutions and Services — Accounting.