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    slamic finance

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    Liibaan Cumar xasan

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    slamic finance

    Uploaded by

    Liibaan Cumar xasan
    1 views2 pages

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    1 views2 pages

    slamic finance

    Uploaded by

    Liibaan Cumar xasan

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Islamic finance operates based on Shariah (Islamic law), which prohibits certain activities such

    as charging interest (riba) and engaging in excessive uncertainty. Instead, Islamic finance
    emphasizes profit-sharing, risk-sharing, and ethical investments. Here are the main sources of
    finance under Islamic principles:

    1. Equity-Based Financing

    These sources focus on partnerships and sharing profits and losses:

    Mudarabah (Profit-Sharing)
    A partnership where one party provides capital, and the other manages the business. Profits are
    shared based on a pre-agreed ratio, but losses are borne solely by the provider of capital unless
    caused by negligence.

    Musharakah (Joint Venture)


    Both parties contribute capital and actively participate in managing the business. Profits and
    losses are shared according to their capital contributions or a pre-agreed ratio.

    2. Debt-Like Instruments (Asset-Based Financing)

    These are Shariah-compliant alternatives to conventional loans, involving tangible assets:

    Murabahah (Cost-Plus Financing)


    The Islamic financial institution purchases an asset and sells it to the customer at a markup
    price. Payments are made in installments, but interest is not charged.

    Ijara (Leasing)
    Similar to conventional leasing, where the financial institution buys an asset and leases it to the
    customer. Ownership remains with the institution until the end of the lease term.

    Istisna (Manufacturing Financing)


    Used for financing construction or manufacturing. The financial institution finances the
    production of a specific product, which is delivered upon completion.

    Salam (Advance Purchase)


    The buyer pays in advance for goods that will be delivered at a future date. Commonly used in
    agriculture or commodity trading.
    3. Sukuk (Islamic Bonds)

    Sukuk are asset-backed securities that represent ownership in an asset, project, or business.
    They provide returns to investors based on the performance of the underlying asset, avoiding
    interest payments.

    4. Islamic Microfinance

    Used to provide small-scale financing to low-income individuals or businesses, aligning with


    Shariah principles. It often involves Qard al-Hasan (benevolent loans).

    5. Takaful (Islamic Insurance)

    Takaful operates as a cooperative insurance model where participants pool their funds to
    support one another against specific risks. Surplus funds are shared among participants or
    reinvested ethically.

    6. Zakat and Waqf (Charitable Financing)

    Zakat: A mandatory charitable contribution (2.5% of wealth) used to support the needy and
    stimulate economic activity.

    Waqf: Endowments for social and charitable purposes, often used for public welfare projects.

    Key Principles of Islamic Finance

    Prohibition of Riba (Interest): Returns must come from trade, investments, or shared risks.

    Avoidance (Uncertainty): Transactions must have clear terms and conditions.

    Ethical Investments: Investments in industries like gambling, alcohol, or non-Halal activities are
    forbidden.

    Risk Sharing: Financial risk is distributed among all parties in a transaction.


    These principles ensure Islamic finance aligns with ethical and socially responsible practices,
    while also promoting economic justice.

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