ISLAMIC BANKING

Types of Islamic lending[edit]

One of the pioneers of Islamic banking, Mohammad Najatuallah Siddiqui,
suggested a two-tier mudarabah model as the basis of a riba-free banking.
The bank would act as the capital partner in mudarabah accounts with the
depositor on one side and the entrepreneur on the other side.[52 - Curtis
(July 3, 2012). "Islamic Banking: A Brief Introduction". Oman Law Blog. Curtis, Mallet-Prevost, Colt &
Mosle LLP. Retrieved 10 August 2015.] This model would be supplemented by a number of

fixed-return modelsmark-up (murabaha), leasing (ijara), cash advances for the

purchase of agricultural produce (salam) and cash advances for the manufacture of
assets (istisna'), etc. In practice, the fixed-return models, in particular murabaha
model, were the bank's favourites, as they bear results most similar to the interestbased finance models. Assets managed under these products far exceed those in
"profit-loss-sharing modes" such as mudarabah and musharakah.
Murabahah may be called an Islamic mortgage transaction, instead of lending the
buyer money to purchase the item, a bank might buy the item itself from the seller,
and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in
installments. However, the bank's profit cannot be made explicit and therefore there
are no additional penalties for late payment. In order to protect itself against
default, the bank asks for strict collateral. The goods or land is registered to the
name of the buyer from the start of the transaction. Another approach is EIjara wa
EIqtina, which is similar to real estate leasing. Islamic banks handle loans for
vehicles in a similar way (selling the vehicle at a higher-than-market price to the
debtor and then retaining ownership of the vehicle until the loan is paid).
An innovative approach applied by some banks for home loans, called Musharaka
al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower
form a partnership entity, both providing capital at an agreed percentage to
purchase the property. The partnership entity then rents out the property to the
borrower and charges rent. The bank and the borrower will then share the proceeds
from this rent based on the current equity share of the partnership. At the same
time, the borrower in the partnership entity also buys the bank's share of the
property at agreed installments until the full equity is transferred to the borrower
and the partnership is ended. If default occurs, both the bank and the borrower
receive a proportion of the proceeds from the sale of the property based on each
party's current equity. This method allows for floating rates according to the current
market rate such as the BLR (base lending rate), especially in a dual-banking
system like in Malaysia.
There are several other approaches used in business transactions. Islamic banks
lend their money to companies by issuing floating rate interest loans. The floating
rate of interest is pegged to the company's individual rate of return. Thus, the
bank's profit on the loan is equal to a certain percentage of the company's profits.
Once the principal amount of the loan is repaid, the profit-sharing arrangement is
concluded. This practice is called Musharaka. Further, Mudaraba is venture capital
funding of an entrepreneur who provides labor while financing is provided by the
bank so that both profit and risk are shared. Such participatory arrangements
between capital and labor reflect the Islamic view that the borrower must not bear
all the risk/cost of a failure, resulting in a balanced distribution of income and not
allowing the lender to monopolize the economy.

Islamic banking is restricted to Islamically acceptable transactions, which exclude

those involving alcohol, pork, gambling, etc. The aim of this is to engage in only
ethical investing, and moral purchasing. The Islamic Banking and Finance Database
provides more information on the subject.[53]
In theory, Islamic banking is an example of full-reserve banking, with banks
achieving a 100% reserve ratio.[citation needed] However, in practice, this is not
the case, and no examples of 100 per cent reserve banking are known to exist.[54]
https://en.wikipedia.org/wiki/Islamic_banking_and_finance#Types_of_Islami
c_lending

Mudarabah is an Islamic contract in which one party supplies the money and the
other provides management expertise to undertake a specific trade. The party
supplying the capital is called owner of the capital. The other party is referred to as
an agent who actually runs the business.
Citi Private Investment Mudarabah: Mudarabah - Citibank
www.citibank.com/ciib/homepage/finance/mudaraba.htm

Musharakah is a joint enterprise or partnership structure with profit/loss sharing

implications that is used in Islamic finance instead of interest-bearing loans.
Musharakah allows each party involved in a business to share in the profits and
risks.
Musharakah Definition | Investopedia
www.investopedia.com/terms/m/musharakah.asp
One variation of the Musharakah is the Musharakah Mutanaqisah (or diminishing
partnership) that emphasizes on the joint ownership of the asset purchased
between the bank and the purchaser (customer).
http://www.islamicfinancenews.com/glossary/musharakah-mutanaqisah

Sharika
Arabic ( )for a partnership or company; an agreement between two or more
parties whereby their assets or funds are commingled or their labor, services,
obligations and liabilities are combined, with the aim of doing business and making
profit. Under sharia, sharika has its origins in sharikat al-aqd (contractual
partnership) which is mainly classified into fiqh-nominate partnerships and modern
sharia-compliant corporations. The traditional fiqh-nominate partnerships are:
sharikat al-inan (general contractual partnership), sharikat al-mufawada (agencylike partnership), sharikat al-amal (vocational partnership) and sharikat al-wojooh
or zhimam (liability partnership). Modern corporations are generally classified as:
stock companies, joint-liability companies, partnerships in commendam, companies
limited by shares, allotment partnerships, and diminishing partnerships.
The concept and modus operandi of sharika is based on musharaka mode of
financing.
http://www.investment-and-finance.net/islamic-finance/s/sharika.html