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Presented
by: Farhan Mohamed Eggeh- Part 2
We have
seen in our previous article how Islamic banking system works, also we
pointed out the most various types of transactions, which is the most
important the bank operates the first we already seen, the second one
is as follows:
2.
Financing contracts
1. Mark-Up Sale {murabaha}
It comes from the Arabic word 'ribh' which means profit (short –term
trade financing). Murabaha is selling a commodity as per the purchasing
price with a defined and agreed profit mark-up.
This
mark-up may be a percentage of the selling price or a lump sum. Murabaha
financing differs from a conventional financing, as it involves the
financing of physical assets. The bank shares in the risk of ownership.
Rather than simply advancing money to a client, the bank itself buys the
goods from a third party on request of a customer. The bank then sells
it to the customer for a pre-agreed price through a deferred payment
scheme, usually in the form of installments.
2. profits and loss sharing system {shuraako}
This is a
system of sharing profits and losses as agreed before, this is known as
in arbic Musharaka and in somli is shuraako.
It is an
agreement between two persons or more (bank and customer) sharing both
profits and losses. It is joint enterprises where all the partners
contribute capital and the client bring in know how. Profit and losses
are shared on agreed ratios.
Types of
profits and loss sharing system {shuraako} partnerships
There are many types of Musharaka ranging from traditional types of
partnerships to modern corporations. Musharaka could either be the
following:
Permanent musharaka: An Islamic bank participates in the equity
of a project and receives a share of the profit on a prorate basis. The
time length of the contract is specified, making it suitable for
financing projects where funds are committed over a long period.
Diminishing musharaka: This allows equity participation and
sharing of profits on a prorate basis, and provides a method through
which the bank keeps on reducing its equity in the project, ultimately
transferring ownership of the asset to the customer. The contract
provides for payment over and above the bank's share in the profit for
the equity held by the bank. Simultaneously the entrepreneur purchases
some of the banks equity, progressively reducing it until the bank has
no equity and thus ceases to be a partner.
3. Mudharaba: It is a partnership in profit whereby one party
provides capital (rab al-maal-the bank) and the other party provides the
know how/labour (Mudharib).
The bank
contributes 100% of the capital. Profits are shared on an agreed ratio.
If there is any loss the bank takes 100% responsibility unless there was
a case of misconduct, negligence or breech of contract on the part of
Mudharib.
4.Ijara contract (leasing) or Ijara Muntahia bi at-tamleek (lease
ending in property ownership
Ijara is the same as leasing thus leasing practised in interest – free
banks is similar to its conventional practice. During the life of the
asset, the risk of ownership remains with the bank, while the lessee is
liable for misuse of the asset.
Ijara Muntahia bi at-tamleek (lease ending in property ownership)
This is a form of leasing contract, which includes a promise by the
lesser to transfer the ownership of the leased property to the lessee.
Example, the bank purchases the asset say a house. The client rents it
from the bank, as he enters into an agreement to buy the shares from the
bank over an agreed time frame. He then buys out small shares from the
bank from time to time ending up with 100% ownership.
5. Bay'us-Salam (Advance purchase)
Advance payment for goods which are to be delivered at a specified
future date. Under normal circumstances, a sale cannot be effected
unless the goods are in existence at the time of the bargain. However,
this type of sale is an exception, provided the goods are defined and
the date of delivery is fixed. The objects of sale must be tangible
goods that can be defined as to the quantity, quality and workmanship.
CONCLUSION
Islamic
banking and finance are a part of Islamic economic system, the basis of
which revolves around justice and morality. It is a very young concept
in modern times yet it is emerging as one of the fastest growing areas
of international finance. It facilitates the uplifting of economic
standards of its clients by providing various types of lending
contracts. Above all it is Shari'ah compliant, hence protects a Muslim
from dealing with Riba, thus avoiding Allah's wrath and war. Let us all
support Islamic banking venture, which is being provided by the
establishment of Gulf African Bank. We now compare the similarties and
differences of Islamic banks and the Conventional bank which are
interest based. Thes are below
Difference between Islamic and conventional banks
There are a number of key differences between the products and services
offered by a conventional bank in comparison to an Islamic financial
institution.
1. Islam is
the back bone of interest free banking,
2. moral
principles and objectives play a more important role in its operations
3.
it is organized on the basis of cooperation
with each other
4.
no gain is accepted without either effort or
liability
5.
Islam forbids receiving a monetary advantage
without giving a counter value, but is not opposed to profit or
financial gain as long as an effort is performed or (partial) liability
is accepted for the financial result of a venture.
6.
general conditions of a debtor should be
evaluated genuinely.
7.
certain business transactions are considered
unlawful in Islam and cannot be carried out in an Islamic bank. For
example trading in alcohol, intoxicating drugs, gambling or producing
pornography are contrary to Islam.
8.
Islamic banks offer no interest-bearing
products or services, and in its organizational structure and corporate
governance,
9.
Islamic banks have Shariah board, to ensure
that the bank practices are in conformity with the Shariah and do not
oppress the disadvantaged client
Wa
billahi tawfiiq Ramadan karim
Presented by: Farhan Mohamed Eggeh
Bachelor
in BBA
farxaan42@hotmail.com
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