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Islamic Financing

The document discusses Islamic financing and its differences from conventional banking. It defines Islamic financing as raising capital in accordance with Sharia or Islamic law, which prohibits riba (usury) and investing in haram businesses. Islamic financing is based on risk-sharing between investors and profit-loss sharing, while conventional banking guarantees predetermined interest rates. The key modes of Islamic financing discussed are partnership-based models like musharakah and mudarabah, and trade-based models like salam and istisna which involve advance payment for specified goods or manufacturing.

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Micheal Worth
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103 views1 page

Islamic Financing

The document discusses Islamic financing and its differences from conventional banking. It defines Islamic financing as raising capital in accordance with Sharia or Islamic law, which prohibits riba (usury) and investing in haram businesses. Islamic financing is based on risk-sharing between investors and profit-loss sharing, while conventional banking guarantees predetermined interest rates. The key modes of Islamic financing discussed are partnership-based models like musharakah and mudarabah, and trade-based models like salam and istisna which involve advance payment for specified goods or manufacturing.

Uploaded by

Micheal Worth
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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INSTRUCTOR:

Madam Shumaila Zeb


COURSE:
Financial Management
SLAMIC FINANCING?

TOPIC:

Presented By:

ISLAMIC
FINANCING

Ammar Ikram
Abdul

Islamic financing refers to the means by which corporations in the Muslim world, including banks and other lending institutions,
raise capital in accordance with Sharia, or Islamic law. Sharia law prohibits- Riba and Investment in Haram businesses.

BASIC DIFFERENCE BETWEEN ISLAMIC FINANCING AND CONVENTIONAL BANKING


ISLAMIC FINANCING
The functions and operating modes of Islamic
banks are based on the principles of Islamic
Shariah.
In the modern Islamic banking system, it has
become one of the service oriented functions
of the Islamic banks to be a zakat collection
centre.
It provides risk sharing between provider of
MODES OF ISLAMIC FINANCING

CONVENTIONAL BANKING
The functions and operating modes of
conventional banks are based on fully
manmade principles.
It does not deal with zakat.
The investor /lender is guaranteed of a
predetermined rate of interest or returns.

A). PARTNERSHIP BASED MODES:


1.

Musharakah is a joint enterprise or partnership structure


with profit/loss sharing implications that is used in Islamic
finance instead of interest-bearing loans. It allows each party
involved in a business to share in the profits and risks
(losses)
Characteristics:
All parties share in capital.
All Parties share profit as well as losses
Profits are distributed as per agreed ratio
Loss is borne by parties as per capital ratio

2.

Mudarabah is a kind of partnership where one partner


(Rab al Mal) contributes capital and the other (Mudarib)
contributes his skills and services to the venture.

Characteristics:
Both share profit in pre-agreed ratio.
Loss is borne by Rab al Mal only, Mudarib loses
his services.

B). TRADE BASED MODES:


1.

Salam is a forward financing transaction, where the financial


institution pays in advance for buying specified assets, which the
seller will supply on a pre-agreed date.
Characteristics
Buyer pays 100 % amount in advance
Purchased product must be quantified, identified and measured
with quality.
Date of delivery, Time, place must be clearly mentioned in
advance.
This mode of financing can be used by the modern banks and
financial institutions, especially to finance the agricultural
sector.

2.

Istisna means asking someone to construct, build or


manufacture an asset. In Islamic finance, istisna' is
generally a long-term contract whereby a party
undertakes to manufacture, build or construct assets,
with an obligation from the manufacturer or producer to
deliver them to the customer upon completion
Characteristics
Not necessary for buyer to pay 100 % amount in
advance.
Price must be decided at the beginning of contract.
Qualities, features of product must be clearly
identified.

DIFFERENCE BETWEEN SALAM AND ISTISNA:

Salam is ideal for agricultural sector


Advance payment is necessary
Date and time of delivery is important
Salam can be cancelled by one party

Istisna deal with manufacturing items


Advance payment is not necessary
Date and time of delivery is not important
Istisna cannot be cancelled if the production has not started yet

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