Ijarah– Leases that are Shariah compliant, it is an exchange transaction in which a usufruct of an asset is transferred to lessee in return for a payment, but where ownership of the asset itself is not transferred. However, the lessee can agree at the outset to buy the asset at the end of the lease period.
Musharaka- is an Islamic mode of financing in the form of a partnership between the modaraba and its client whereby each party contributes to the capital of the partnership in equal or varying degrees either to establish a new project or share in an existing project. The accruing profit is divided between the partners pre-agreed formula, while losses are shared on pro rata basis.
The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic jurists point out that the legality and permissibility of Musharaka is based on the injunctions of the Qur’an, Sunnah, and Ijma (consensus) of the scholars. Profits are shared in accordance with the Musharaka agreement. Losses are normally shared in proportion to the capital contributed by each Musharik.
Constant Musharaka – Musharaka agreement may be entered into for a short-term or long-term period. The capital contributed by the modaraba in a Musharaka may remain constant throughout the contracted period.This is referred to as constant Musharaka.
Diminishing Musharaka – is a Musharaka where, the modaraba gradually transfers its share in the Musharaka to the Musharik so as to decrease its share in order to transfer the ownership of the venture to the other party. This is a Diminishing Musharaka.
Murabaha- Murabaha is a non-participatory mode of Islamic financing where the Modaraba sells the asset required by its client to the client on cost-plus profit basis. The asset is purchased by the Modaraba and carries the risk of any loss or damage to the asset as long as the asset remains under its ownership. Upon sale of the asset, the Modaraba is obligated to inform the client of the exact cost incurred in the purchase of the asset and the margin of profit incorporated in the sale price. Payment against the purchase of assets by the client may be deferred in which case it would become Muajjal. The selling price once agreed cannot be changed even when the client fails to pay on the agreed date.
Basic Rules and Principles
- Murabaha is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit or mark-up thereon.
- The profit in Murabaha can be determined by mutual consent, either in lump sum or through an agreed ratio of profit to be charged over the cost.
- All the expenses incurred by the seller in acquiring the commodity like freight, custom duty etc. shall be included in the cost price and the mark-up can be applied on the aggregate cost. However, recurring expenses of the business like salaries of the staff, the rent of the premises etc. cannot be included in the cost of an individual transaction. In fact, the profit claimed over the cost takes care of these expenses.
- Murabaha is valid only where the exact cost of a commodity can be ascertained. If the exact cost cannot be ascertained, the commodity cannot be sold on murabaha basis.
- Murabaha financing may not be allowed in case when the asset(s) have already been purchased by the client.