Sharia Compliant Financial Instruments

Detailed below are some of the common financial instruments used by Islamic banks. Most of the home purchase plans offered in the UK use the Musharaka, Murabaha and Ijarah instruments and in some cases the plan may use a combination of two methods of finance.


Musharaka is a partnership or co-ownership with profit and loss sharing. It allows each party involved to share risk and reward to achieve a return in the form of a share of the actual profits earned according to a predetermined ratio.


A Mudaraba transaction is an investment partnership. In a Mudaraba arrangement, the contract is between an investor (or financier) and an entrepreneur or investment manager known as the mudarib. Risk and rewards are shared. In the case of a profit, both parties receive their agreed-upon share of the profit. In the case of a loss, the investor bears any loss of capital while the mudarib loses his time and effort.


A Murabaha transaction is a sale at a stated profit. In a Murabaha transaction, the bank purchases something from a third party and sells it to the client at a stated profit on a deferred payment basis. In this way, the client can buy something without taking an interest-based loan.


Wakala refers to an agency appointment to act on behalf of the principal. In Wakala, the bank acts as an agent to the client to buy the asset according to the specific terms and conditions.


An Ijarah is an Islamic lease. The bank purchases an asset and leases it to a client for fixed monthly payments. An Ijarah may include an option for the lessee to buy the asset at the end of the lease, though such a provision is not required.

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