8lba

1he word 8lba means excess lncrease or addlLlon whlch accordlng Lo Sharlah Lermlnology lmplles
any excess compensaLlon wlLhouL due conslderaLlon (conslderaLlon does noL lnclude Llme value of
money) 1he deflnlLlon of rlba ln classlcal lslamlc [urlsprudence was surplus value wlLhouL counLerparL
or Lo ensure equlvalency ln real value and LhaL numerlcal value was lmmaLerlal

Applylng lnLeresL was accepLable under some clrcumsLances Currencles LhaL were based on guaranLees
by a governmenL Lo honor Lhe sLaLed value (le flaL currency) or based on oLher maLerlals such as paper
or base meLals were allowed Lo have lnLeresL applled Lo Lhem10 When base meLal currencles were
flrsL lnLroduced ln Lhe lslamlc world Lhe quesLlon of paylng a debL ln a hlgher number of unlLs of Lhls
flaL money belng rlba was noL relevanL as Lhe [urlsLs only needed Lo be concerned wlLh Lhe real value of
money (deLermlned by welghL only) raLher Lhan Lhe numerlcal value lor example lL was accepLable for
a loan of 1000 gold dlnars Lo be pald back as 1030 dlnars of equal aggregaLe welghL (le Lhe value ln
Lerms of welghL had Lo be same because all makes of colns dld noL carry exacLly slmllar welghL)
edlL
Modern lslamlc banklng

lnLeresLfree banklng seems Lo be of very recenL orlgln 1he earllesL references Lo Lhe reorganlsaLlon of
banklng on Lhe basls of proflL sharlng raLher Lhan lnLeresL are found ln Anwar Cureshl (1946) nalem
Slddlql (1948) and Mahmud Ahmad (1932) ln Lhe laLe forLles followed by a more elaboraLe exposlLlon
by Mawdudl ln 1930clLaLlon needed 1he wrlLlngs of Muhammad Pamldullah 1944 1933 1937 and
1962 should be lncluded ln Lhls caLegoryclLaLlon needed 1hey have all recognlsed Lhe need for
commerclal banks and Lhelr percelved necessary evll have proposed a banklng sysLem based on Lhe
concepL of Mudarabha proflL and loss sharlngclLaLlon needed

ln Lhe nexL Lwo decades lnLeresLfree banklng aLLracLed more aLLenLlon parLly because of Lhe pollLlcal
lnLeresL lL creaLed ln aklsLan and parLly because of Lhe emergence of young Musllm economlsLs Works
speclflcally devoLed Lo Lhls sub[ecL began Lo appear ln Lhls perlod 1he flrsL such work ls LhaL of
Muhammad uzalr (1933)clLaLlon needed AnoLher seL of works emerged ln Lhe laLe slxLles and early
sevenLles Abdullah alAraby (1967) ne[aLullah Slddlql (1961 1969) alna[[ar (1971) and 8aqlr alSadr
(1961 1974) were Lhe maln conLrlbuLorsclLaLlon needed

1he early 1970s saw lnsLlLuLlonal lnvolvemenL 1he Conference of Lhe llnance MlnlsLers of Lhe lslamlc
CounLrles held ln karachl ln 1970 Lhe LgypLlan sLudy ln 1972 Lhe llrsL lnLernaLlonal Conference on
lslamlc Lconomlcs ln Mecca ln 1976 and Lhe lnLernaLlonal Lconomlc Conference ln London ln 1977 were
Lhe resulL of such lnvolvemenL 1he lnvolvemenL of lnsLlLuLlons and governmenLs led Lo Lhe appllcaLlon
of Lheory Lo pracLlce and resulLed ln Lhe esLabllshmenL of Lhe flrsL lnLeresLfree banks 1he lslamlc
uevelopmenL 8ank an lnLergovernmenLal bank esLabllshed ln 1973 was born of Lhls process11

1he flrsL modern experlmenL wlLh lslamlc banklng was underLaken ln LgypL under cover wlLhouL
pro[ecLlng an lslamlc lmagefor fear of belng seen as a manlfesLaLlon of lslamlc fundamenLallsm LhaL
was anaLhema Lo Lhe pollLlcal reglmeclLaLlon needed 1he ploneerlng efforL led by Ahmad Llnaggar
Look Lhe form of a savlngs bank based on proflLsharlng ln Lhe LgypLlan Lown of MlL Chamr ln 1963 1hls
experlmenL lasLed unLll 1967 (8eady 1981) by whlch Llme Lhere were nlne such banks ln counLry12
1hls secLlon requlres expanslon


ln 1972 Lhe MlL Chamr Savlngs pro[ecL became parL of nasr Soclal 8ank whlch currenLly ls sLlll ln
buslness ln LgypL ln 1973 Lhe lslamlc uevelopmenL 8ank was seL up wlLh Lhe mlsslon Lo provlde fundlng
Lo pro[ecLs ln Lhe member counLrles13 1he flrsL modern commerclal lslamlc bank uubal lslamlc 8ank
opened lLs doors ln 1973 ln Lhe early years Lhe producLs offered were baslc and sLrongly founded on
convenLlonal banklng producLs buL ln Lhe lasL few years Lhe lndusLry ls sLarLlng Lo see sLrong
developmenL ln new producLs and servlces

lslamlc 8anklng ls growlng aL a raLe of 1013 per year and wlLh slgns of conslsLenL fuLure growLh14
lslamlc banks have more Lhan 300 lnsLlLuLlons spread over 31 counLrles lncludlng Lhe unlLed SLaLes
Lhrough companles such as Lhe Mlchlganbased unlverslLy 8ank as well as an addlLlonal 230 muLual
funds LhaL comply wlLh lslamlc prlnclples lL ls esLlmaLed LhaL over uS$822 bllllon worldwlde sharla
compllanL asseLs are managed accordlng Lo 1he LconomlsL13 1hls represenLs approxlmaLely 03 of
LoLal world esLlmaLed asseLs as of 200316 Accordlng Lo ClM8 Croup Poldlngs lslamlc flnance ls Lhe
fasLesLgrowlng segmenL of Lhe global flnanclal sysLem and sales of lslamlc bonds may rlse by 24 percenL
Lo $23 bllllon ln 201017

Addresslng Lhe Cman lnvesLmenL lorum ln CcLober 2011 all convenLlonal banks ln Cman can offer
Sharlabased flnanclal servlces upon approval from Lhe CenLral 8ank of Cman (C8C)18

1he vaLlcan has puL forward Lhe ldea LhaL Lhe prlnclples of lslamlc flnance may represenL a posslble
cure for alllng markeLs19
edlL
LargesL lslamlc banks
See also lslamlc uevelopmenL 8ank

SharlahcompllanL asseLs reached abouL $400 bllllon LhroughouL Lhe world ln 2009 accordlng Lo
SLandard oor's 8aLlngs Servlces and Lhe poLenLlal markeL ls $4 Lrllllon2021 lran Saudl Arabla and
Malaysla have Lhe blggesL sharlacompllanL asseLs22

ln 2009 lranlan banks accounLed for abouL 40 percenL of LoLal asseLs of Lhe worlds Lop 100 lslamlc
banks 8ank Melll lran wlLh asseLs of $433 bllllon came flrsL followed by Saudl Arablas Al 8a[hl 8ank
8ank MellaL wlLh $397 bllllon and 8ank SaderaL lran wlLh $393 bllllon2324 lran holds Lhe worlds
largesL level of lslamlc flnance asseLs valued aL $2333bn whlch ls more Lhan double Lhe nexL counLry ln
Lhe ranklng wlLh $92bn Slx ouL of Len Lop lslamlc banks ln Lhe world are lranlan232627 ln
november 2010 1he 8anker publlshed lLs laLesL auLhorlLaLlve llsL of Lhe 1op 300 lslamlc llnance
lnsLlLuLlons wlLh lran Lopplng Lhe llsL Seven ouL of Len Lop lslamlc banks ln Lhe world are lranlan
accordlng Lo Lhe llsL28
edlL
rlnclples

lslamlc banklng has Lhe same purpose as convenLlonal banklng Lo make money for Lhe banklng lnsLlLuLe
by lendlng ouL caplLal 8ecause lslam forblds slmply lendlng ouL money aL lnLeresL (see rlba) lslamlc
rules on LransacLlons (known as llqh alMuamalaL) have been creaLed Lo avold Lhls problem 1he baslc
Lechnlque Lo avold Lhe prohlblLlon ls Lhe sharlng of proflL and loss vla Lerms such as proflL sharlng
(Mudharabah) safekeeplng (Wadlah) [olnL venLure (Musharakah) cosL plus (Murabahah) and leaslng
(l[ar)

ln an lslamlc morLgage LransacLlon lnsLead of loanlng Lhe buyer money Lo purchase Lhe lLem a bank
mlghL buy Lhe lLem lLself from Lhe seller and resell lL Lo Lhe buyer aL a proflL whlle allowlng Lhe buyer
Lo pay Lhe bank ln lnsLallmenLs Powever Lhe banks proflL cannoL be made expllclL and Lherefore Lhere
are no addlLlonal penalLles for laLe paymenL ln order Lo proLecL lLself agalnsL defaulL Lhe bank asks for
sLrlcL collaLeral 1he goods or land ls reglsLered Lo Lhe name of Lhe buyer from Lhe sLarL of Lhe
LransacLlon 1hls arrangemenL ls called Murabahah AnoLher approach ls Ll[ara wa LlqLlna whlch ls
slmllar Lo real esLaLe leaslng lslamlc banks handle loans for vehlcles ln a slmllar way (selllng Lhe vehlcle
aL a hlgherLhanmarkeL prlce Lo Lhe debLor and Lhen reLalnlng ownershlp of Lhe vehlcle unLll Lhe loan ls
pald)

An lnnovaLlve approach applled by some banks for home loans called Musharaka alMuLanaqlsa allows
for a floaLlng raLe ln Lhe form of renLal 1he bank and borrower form a parLnershlp enLlLy boLh provldlng
caplLal aL an agreed percenLage Lo purchase Lhe properLy 1he parLnershlp enLlLy Lhen renLs ouL Lhe
properLy Lo Lhe borrower and charges renL 1he bank and Lhe borrower wlll Lhen share Lhe proceeds
from Lhls renL based on Lhe currenL equlLy share of Lhe parLnershlp AL Lhe same Llme Lhe borrower ln
Lhe parLnershlp enLlLy also buys Lhe banks share of Lhe properLy aL agreed lnsLallmenLs unLll Lhe full
equlLy ls Lransferred Lo Lhe borrower and Lhe parLnershlp ls ended lf defaulL occurs boLh Lhe bank and
Lhe borrower recelve a proporLlon of Lhe proceeds from Lhe sale of Lhe properLy based on each parLys
currenL equlLy 1hls meLhod allows for floaLlng raLes accordlng Lo Lhe currenL markeL raLe such as Lhe
8L8 (base lendlng raLe) especlally ln a dualbanklng sysLem llke ln Malaysla

1here are several oLher approaches used ln buslness LransacLlons lslamlc banks lend Lhelr money Lo
companles by lssulng floaLlng raLe lnLeresL loans 1he floaLlng raLe of lnLeresL ls pegged Lo Lhe companys
lndlvldual raLe of reLurn 1hus Lhe banks proflL on Lhe loan ls equal Lo a cerLaln percenLage of Lhe
companys proflLs Cnce Lhe prlnclpal amounL of Lhe loan ls repald Lhe proflLsharlng arrangemenL ls
concluded 1hls pracLlce ls called Musharaka lurLher Mudaraba ls venLure caplLal fundlng of an
enLrepreneur who provldes labor whlle flnanclng ls provlded by Lhe bank so LhaL boLh proflL and rlsk are
shared Such parLlclpaLory arrangemenLs beLween caplLal and labor reflecL Lhe lslamlc vlew LhaL Lhe
borrower musL noL bear all Lhe rlsk/cosL of a fallure resulLlng ln a balanced dlsLrlbuLlon of lncome and
noL allowlng Lhe lender Lo monopollze Lhe economy

lslamlc banklng ls resLrlcLed Lo lslamlcally accepLable LransacLlons whlch exclude Lhose lnvolvlng
alcohol pork gambllng eLc 1he alm of Lhls ls Lo engage ln only eLhlcal lnvesLlng and moral purchaslng
lslamlc 8anklng and llnance uaLabase provldes more lnformaLlon on Lhe sub[ecL

ln Lheory lslamlc banklng ls an example of fullreserve banklng wlLh banks achlevlng a 100 reserve
raLlo29 Powever ln pracLlce Lhls ls noL Lhe case and no examples of 100 per cenL reserve banklng are
observed30

lslamlc banks have grown recenLly ln Lhe Musllm world buL are a very small share of Lhe global banklng
sysLem Mlcrolendlng lnsLlLuLlons founded by Musllms noLably Crameen 8ank use convenLlonal
lendlng pracLlces and are popular ln some Musllm naLlons especlally 8angladesh buL some do noL
conslder Lhem Lrue lslamlc banklng Powever Muhammad ?unus Lhe founder of Crameen 8ank and
mlcroflnance banklng and oLher supporLers of mlcroflnance argue LhaL Lhe lack of collaLeral and lack of
excesslve lnLeresL ln mlcrolendlng ls conslsLenL wlLh Lhe lslamlc prohlblLlon of usury (rlba)3132
edlL
Sharlah Advlsory Councll/ConsulLanL

lslamlc banks and banklng lnsLlLuLlons LhaL offer lslamlc banklng producLs and servlces (l8S banks) are
requlred Lo esLabllsh a Sharlah Supervlsory 8oard (SS8) Lo advlse Lhem and Lo ensure LhaL Lhe
operaLlons and acLlvlLles of Lhe banklng lnsLlLuLlons comply wlLh Sharlah prlnclples Cn Lhe oLher hand
Lhere are also Lhose who belleve LhaL no form of banklng LhaL lnvolves lnLeresL paymenLs can ever
comply wlLh Lhe Sharlah33

ln Malaysla Lhe naLlonal Sharlah Advlsory Councll whlch has been seL up aL 8ank negara Malaysla
(8nM) advlses 8nM on Lhe Sharlah aspecLs of Lhe operaLlons of Lhese lnsLlLuLlons and on Lhelr producLs
and servlces (See lslamlc banklng ln Malaysla) ln lndonesla Lhe ulama Councll serves a slmllar purpose

A number of Sharlah advlsory flrms have now emerged Lo offer Sharlah advlsory servlces Lo Lhe
lnsLlLuLlons offerlng lslamlc flnanclal servlces lssue of lndependence lmparLlallLy and confllcLs of
lnLeresL have also been recenLly volced 1he Wul8l World uaLabase for lslamlc 8anklng and llnance has
been developed Lo provlde lnformaLlon abouL all Lhe webslLes relaLed Lo Lhls Lype of banklng34
edlL
lslamlc llnanclal AccounLlng SLandards

1he lnsLlLuLe of CharLered AccounLanLs of aklsLan lssues lslamlc llnanclal AccounLlng SLandards (llAS)
for lslamlc Mode of flnanclng llAS 1 (lssued ln 2003) concerns Musharakah and Mudarabah Whlle llAS
2 (lssued ln 2007) relaLes Lo l[arah
edlL
lundamenLals of lslamlc flnance

1he Lerm lslamlc banklng" refers Lo a sysLem of banklng or banklng acLlvlLy LhaL ls conslsLenL wlLh
lslamlc law (Sharlah) prlnclples and gulded by lslamlc economlcs ln parLlcular lslamlc law prohlblLs
usury Lhe collecLlon and paymenL of lnLeresL also commonly called rlba ln lslamlc dlscourse ln addlLlon
lslamlc law prohlblLs lnvesLlng ln buslnesses LhaL are consldered unlawful or haraam (such as buslnesses
LhaL sell alcohol or pork or buslnesses LhaL produce medla such as gosslp columns or pornography
whlch are conLrary Lo lslamlc values) lurLhermore Lhe Sharlah prohlblLs whaL ls called Mayslr and
Charar Mayslr ls lnvolved ln conLracLs where Lhe ownershlp of a good depends on Lhe occurrence of a
predeLermlned uncerLaln evenL ln Lhe fuLure whereas Charar descrlbes speculaLlve LransacLlons 8oLh
concepLs lnvolve excesslve rlsk and are supposed Lo fosLer uncerLalnLy and fraudlenL behavlour
1herefore Lhe use of all convenLlonal derlvaLe lnsLrumenLs ls lmposslble ln lslamlc banklng33 ln Lhe
laLe 20Lh cenLury a number of lslamlc banks were creaLed Lo caLer Lo Lhls parLlcular banklng markeL
edlL
usury ln lslam

1he crlLlclsm of usury ln lslam was well esLabllshed durlng Lhe llfeLlme of Lhe lslamlc propheL
Muhammad and relnforced by several of verses ln Lhe Curan daLlng back Lo around 600 Au 1he orlglnal
word used for usury ln Lhls LexL was 8lba whlch llLerally means excess or addlLlon" 1hls was accepLed
Lo refer dlrecLly Lo lnLeresL on loans so LhaL accordlng Lo lslamlc economlsLs Choudhury and Mallk
(1992) by Lhe Llme of Callph umar Lhe prohlblLlon of lnLeresL was a wellesLabllshed worklng prlnclple
lnLegraLed lnLo Lhe lslamlc economlc sysLem 1hls lnLerpreLaLlon of usury has noL been unlversally
accepLed or applled ln Lhe lslamlc world A school of lslamlc LhoughL whlch emerged ln Lhe 19Lh CenLury
led by Slr Sayyed argues for an lnLerpreLaLlve dlfferenLlaLlon beLween usury or consumpLlonal lendlng
and lnLeresL or lendlng for commerclal lnvesLmenL (Ahmed 1938) neverLheless Choudhury and Mallk
provlde evldence for a gradual evoluLlon of Lhe lnsLlLuLlons of lnLeresLfree flnanclal enLerprlses across
Lhe world" (1992 104) 1hey clLe for lnsLance Lhe currenL exlsLence of flnanclal lnsLlLuLlons ln lran
aklsLan and Saudl Arabla Lhe uaralMalallslaml ln Ceneva and lslamlc LrusL companles ln norLh
Amerlca
Is|am|c f|nanc|a| transact|on term|no|ogy
8al al lnah (sale and buyback agreemenL)

8al al lnah ls a flnanclng faclllLy wlLh Lhe underlylng buy and sell LransacLlons beLween Lhe
flnancler and Lhe cusLomer 1he flnancler buys an asseL from Lhe cusLomer on spoL basls 1he
prlce pald by Lhe flnancler consLlLuLes Lhe dlsbursemenL under Lhe faclllLy SubsequenLly Lhe
asseL ls sold Lo Lhe cusLomer on a deferredpaymenL basls and Lhe prlce ls payable ln
lnsLallmenLs 1he second sale serves Lo creaLe Lhe obllgaLlon on Lhe parL of Lhe cusLomer under
Lhe faclllLy 1here are dlfferences of oplnlon amongsL Lhe scholars on Lhe permlsslblllLy of 8al al
lnah however Lhls ls pracLlsed ln Malaysla (A seL of sLrlcL condlLlons musL be complled) and Lhe
llke [urlsdlcLlons3637
edlL
8al blLhaman a[ll (deferred paymenL sale)

1hls concepL refers Lo Lhe sale of goods on a deferred paymenL basls aL a prlce whlch lncludes a
proflL margln agreed Lo by boLh parLles Llke 8al al lnah Lhls concepL ls also used under an
lslamlc flnanclng faclllLy lnLeresL paymenL can be avolded as Lhe cusLomer ls paylng Lhe sale
prlce whlch ls noL Lhe same as lnLeresL charged on a loan 1he problem here ls LhaL Lhls lncludes
llnklng Lwo LransacLlons ln one whlch ls forbldden ln lslam 1he common percepLlon ls LhaL Lhls
ls slmply sLralghLforward charglng of lnLeresL dlsgulsed as a sale
edlL
8al mua[[al (credlL sale)

LlLerally bal mua[[al means a credlL sale 1echnlcally lL ls a flnanclng Lechnlque adopLed by
lslamlc banks LhaL Lakes Lhe form of murabahah mua[[al lL ls a conLracL ln whlch Lhe bank earns
a proflL margln on Lhe purchase prlce and allows Lhe buyer Lo pay Lhe prlce of Lhe commodlLy aL
a fuLure daLe ln a lump sum or ln lnsLallmenLs lL has Lo expressly menLlon cosL of Lhe
commodlLy and Lhe margln of proflL ls muLually agreed 1he prlce flxed for Lhe commodlLy ln
such a LransacLlon can be Lhe same as Lhe spoL prlce or hlgher or lower Lhan Lhe spoL prlce 8al
mua[[al ls also called a deferredpaymenL sale Powever one of Lhe essenLlal descrlpLlons of
rlba ls an un[usLlfled delay ln paymenL or elLher lncreaslng or decreaslng Lhe prlce lf Lhe
paymenL ls lmmedlaLe or delayed
edlL
Musharakah

Musharakah ([olnL venLure) ls an agreemenL beLween Lwo or more parLners whereby each
parLner provldes funds Lo be used ln a venLure roflLs made are shared beLween Lhe parLners
accordlng Lo Lhe lnvesLed caplLal ln case of loss no parLner loses caplLal ln Lhe same raLlo lf
Lhe 8ank provldes caplLal Lhe same condlLlons apply lL ls Lhls flnanclal rlsk accordlng Lo Lhe
Sharlah LhaL [usLlfles Lhe banks clalm Lo parL of Lhe proflL Lach parLner may or may noL
parLlclpaLe ln carrylng ouL Lhe buslness A worklng parLner geLs a greaLer proflL share compared
Lo a sleeplng (nonworklng) parLner 1he dlfference beLween Musharaka and Madharaba ls
LhaL ln Musharaka each parLner conLrlbuLes some caplLal whereas ln Madharaba one
parLner eg A flnanclal lnsLlLuLlon provldes all Lhe caplLal and Lhe oLher parLner Lhe
enLrepreneur provldes no caplLal noLe LhaL Musharaka and Madharaba commonly
overlap38
edlL
Mudarabah

Mudarabah ls a speclal klnd of parLnershlp where one parLner glves money Lo anoLher for
lnvesLlng lL ln a commerclal enLerprlse 1he lnvesLmenL comes from Lhe flrsL parLner who ls
called rabbulmal whlle Lhe managemenL and work ls an excluslve responslblllLy of Lhe
oLher who ls called mudarlb

1he Mudarabah (roflL Sharlng) ls a conLracL wlLh one parLy provldlng 100 percenL of Lhe
caplLal and Lhe oLher parLy provldlng lLs speclallsL knowledge Lo lnvesL Lhe caplLal and manage
Lhe lnvesLmenL pro[ecL roflLs generaLed are shared beLween Lhe parLles accordlng Lo a pre
agreed raLlo Compared Lo Musharaka ln a Mudaraba only Lhe lender of Lhe money has Lo Lake
losses ln Lhls only rabbul malsuffered from loss mudarlb do noL suffered wlLh lossroflL
dlsLrlbuLed beLween boLh rabbulmal and mudarlb
edlL
Murabahah
Maln arLlcle Murabahah

1hls concepL refers Lo Lhe sale of goods aL a prlce whlch lncludes a proflL margln agreed Lo by
boLh parLles 1he purchase and selllng prlce oLher cosLs and Lhe proflL margln musL be clearly
sLaLed aL Lhe Llme of Lhe sale agreemenL 1he bank ls compensaLed for Lhe Llme value of lLs
money ln Lhe form of Lhe proflL margln 1hls ls a flxedlncome loan for Lhe purchase of a real
asseL (such as real esLaLe or a vehlcle) wlLh a flxed raLe of proflL deLermlned by Lhe proflL
margln 1he bank ls noL compensaLed for Lhe Llme value of money ouLslde of Lhe conLracLed
Lerm (le Lhe bank cannoL charge addlLlonal proflL on laLe paymenLs) however Lhe asseL
remalns as a morLgage wlLh Lhe bank unLll Lhe defaulL ls seLLled

1hls Lype of LransacLlon ls slmllar Lo renLLoown arrangemenLs for furnlLure or appllances LhaL
are common ln norLh Amerlcan sLores
edlL
Musawamah

Musawamah ls Lhe negoLlaLlon of a selllng prlce beLween Lwo parLles wlLhouL reference by Lhe
seller Lo elLher cosLs or asklng prlce Whlle Lhe seller may or may noL have full knowledge of Lhe
cosL of Lhe lLem belng negoLlaLed Lhey are under no obllgaLlon Lo reveal Lhese cosLs as parL of
Lhe negoLlaLlon process 1hls dlfference ln obllgaLlon by Lhe seller ls Lhe key dlsLlncLlon beLween
Murabahah and Musawamah wlLh all oLher rules as descrlbed ln Murabahah remalnlng Lhe
same Musawamah ls Lhe mosL common Lype of Lradlng negoLlaLlon seen ln lslamlc commerce
edlL
8al Salam

8al salam means a conLracL ln whlch advance paymenL ls made for goods Lo be dellvered laLer
on 1he seller underLakes Lo supply some speclflc goods Lo Lhe buyer aL a fuLure daLe ln
exchange of an advance prlce fully pald aL Lhe Llme of conLracL lL ls necessary LhaL Lhe quallLy
of Lhe commodlLy lnLended Lo be purchased ls fully speclfled leavlng no amblgulLy leadlng Lo
dlspuLe 1he ob[ecLs of Lhls sale are goods and cannoL be gold sllver or currencles based on
Lhese meLals 8arrlng Lhls 8al Salam covers almosL everyLhlng LhaL ls capable of belng deflnlLely
descrlbed as Lo quanLlLy quallLy and workmanshlp
edlL
8aslc feaLures and condlLlons of Salam
1he LransacLlon ls consldered Salam lf Lhe buyer has pald Lhe purchase prlce Lo Lhe seller ln full
aL Lhe Llme of sale 1hls ls necessary so LhaL Lhe buyer can show LhaL Lhey are noL enLerlng lnLo
debL wlLh a second parLy ln order Lo ellmlnaLe Lhe debL wlLh Lhe flrsL parLy an acL prohlblLed
under Sharla 1he ldea of Salam ls normally dlfferenL from Lhe oLher elLher ln lLs quallLy or ln lLs
slze or welghL and Lhelr exacL speclflcaLlon ls noL generally posslble
Salam cannoL be effecLed on a parLlcular commodlLy or on a producL of a parLlcular fleld or
farm lor example lf Lhe seller underLakes Lo supply Lhe wheaL of a parLlcular fleld or Lhe frulL
of a parLlcular Lree Lhe salam wlll noL be valld because Lhere ls a posslblllLy LhaL Lhe crop of
LhaL parLlcular fleld or Lhe frulL of LhaL Lree ls desLroyed before dellvery and glven such
posslblllLy Lhe dellvery remalns uncerLaln 1he same rule ls appllcable Lo every commodlLy Lhe
supply of whlch ls noL cerLaln
lL ls necessary LhaL Lhe quallLy of Lhe commodlLy (lnLended Lo be purchased Lhrough salam) ls
fully speclfled leavlng no amblgulLy whlch may lead Lo a dlspuLe All Lhe posslble deLalls ln Lhls
respecL musL be expressly menLloned
lL ls also necessary LhaL Lhe quanLlLy of Lhe commodlLy ls agreed upon ln unequlvocal Lerms lf
Lhe commodlLy ls quanLlfled ln welghLs accordlng Lo Lhe usage of lLs Lraders lLs welghL musL be
deLermlned and lf lL ls quanLlfled Lhrough measures lLs exacL measure should be known WhaL
ls normally welghed cannoL be quanLlfled ln measures and vlce versa
1he exacL daLe and place of dellvery musL be speclfled ln Lhe conLracL
Salam cannoL be effecLed ln respecL of Lhlngs whlch musL be dellvered aL spoL lor example lf
gold ls purchased ln exchange of sllver lL ls necessary accordlng Lo Sharlah LhaL Lhe dellvery of
boLh be slmulLaneous Pere salam cannoL work Slmllarly lf wheaL ls barLered for barley Lhe
slmulLaneous dellvery of boLh ls necessary for Lhe valldlLy of sale 1herefore Lhe conLracL of
salam ln Lhls case ls noL allowed
1hls ls Lhe mosL preferred flnanclng sLrucLure and carrles hlgher order Sharlah compllance
edlL
Plbah (glfL)

1hls ls a Loken glven volunLarlly by a debLor Lo a deblLor ln reLurn for a loan Plbah usually arlses
ln pracLlce when lslamlc banks volunLarlly pay Lhelr cusLomers a glfL on savlngs accounL
balances represenLlng a porLlon of Lhe proflL made by uslng Lhose savlngs accounL balances ln
oLher acLlvlLles

lL ls lmporLanL Lo noLe LhaL whlle lL appears slmllar Lo lnLeresL and may ln effecL have Lhe
same ouLcome Plbah ls a volunLary paymenL made (or noL made) aL Lhe banks dlscreLlon and
cannoL be guaranLeed Powever Lhe opporLunlLy of recelvlng hlgh Plbah wlll draw ln
cusLomers savlngs provldlng Lhe bank wlLh caplLal necessary Lo creaLe lLs proflLs lf Lhe
venLures are proflLable Lhen some of Lhose proflLs may be glfLed back Lo lLs cusLomers as
Plbah39
edlL
l[arah

l[arah means lease renL or wage Cenerally l[arah concepL means selllng Lhe beneflL of use or
servlce for a flxed prlce or wage under Lhls concepL Lhe 8ank makes avallable Lo Lhe cusLomer
Lhe use of servlce of asseLs / equlpmenLs such as planL offlce auLomaLlon moLor vehlcle for a
flxed perlod and prlce
edlL
l[arah Lhumma al bal (hlre purchase)

arLles enLer lnLo conLracLs LhaL come lnLo effecL serlally Lo form a compleLe lease/ buyback
LransacLlon 1he flrsL conLracL ls an l[arah LhaL ouLllnes Lhe Lerms for leaslng or renLlng over a
flxed perlod and Lhe second conLracL ls a 8al LhaL Lrlggers a sale or purchase once Lhe Lerm of
Lhe l[arah ls compleLe lor example ln a car flnanclng faclllLy a cusLomer enLers lnLo Lhe flrsL
conLracL and leases Lhe car from Lhe owner (bank) aL an agreed amounL over a speclflc perlod
When Lhe lease perlod explres Lhe second conLracL comes lnLo effecL whlch enables Lhe
cusLomer Lo purchase Lhe car aL an agreed Lo prlce

1he bank generaLes a proflL by deLermlnlng ln advance Lhe cosL of Lhe lLem lLs resldual value aL
Lhe end of Lhe Lerm and Lhe Llme value or proflL margln for Lhe money belng lnvesLed ln
purchaslng Lhe producL Lo be leased for Lhe lnLended Lerm 1he comblnlng of Lhese Lhree
flgures becomes Lhe basls for Lhe conLracL beLween Lhe 8ank and Lhe cllenL for Lhe lnlLlal lease
conLracL

1hls Lype of LransacLlon ls slmllar Lo Lhe conLracLum Lrlnlus a legal maneuver used by Luropean
bankers and merchanLs durlng Lhe Mlddle Ages Lo sldesLep Lhe Churchs prohlblLlon on lnLeresL
bearlng loans ln a conLracLum Lwo parLles would enLer lnLo Lhree concurrenL and lnLerrelaLed
legal conLracLs Lhe neL effecL belng Lhe paylng of a fee for Lhe use of money for Lhe Lerm of Lhe
loan 1he use of concurrenL lnLerrelaLed conLracLs ls also prohlblLed under Sharlah Law
edlL
l[arahwallqLlna

A conLracL under whlch an lslamlc bank provldes equlpmenL bulldlng or oLher asseLs Lo Lhe
cllenL agalnsL an agreed renLal LogeLher wlLh a unllaLeral underLaklng by Lhe bank or Lhe cllenL
LhaL aL Lhe end of Lhe lease perlod Lhe ownershlp ln Lhe asseL would be Lransferred Lo Lhe
lessee 1he underLaklng or Lhe promlse does noL become an lnLegral parL of Lhe lease conLracL
Lo make lL condlLlonal 1he renLals as well as Lhe purchase prlce are flxed ln such manner LhaL
Lhe bank geLs back lLs prlnclpal sum along wlLh proflL over Lhe perlod of lease
edlL
Musharakah ([olnL venLure)

Musharakah ls a relaLlonshlp beLween Lwo parLles or more of whom conLrlbuLe caplLal Lo a
buslness and dlvlde Lhe neL proflL and loss pro raLa 1hls ls ofLen used ln lnvesLmenL pro[ecLs
leLLers of credlL and Lhe purchase or real esLaLe or properLy ln Lhe case of real esLaLe or
properLy Lhe bank assess an lmpuLed renL and wlll share lL as agreed ln advance38 All
provlders of caplLal are enLlLled Lo parLlclpaLe ln managemenL buL noL necessarlly requlred Lo
do so 1he proflL ls dlsLrlbuLed among Lhe parLners ln preagreed raLlos whlle Lhe loss ls borne
by each parLner sLrlcLly ln proporLlon Lo respecLlve caplLal conLrlbuLlons 1hls concepL ls dlsLlncL
from flxedlncome lnvesLlng (le lssuance of loans)clLaLlon needed
edlL
Card hassan/ Cardul hassan (good loan/benevolenL loan)

1hls ls a loan exLended on a goodwlll basls and Lhe debLor ls only requlred Lo repay Lhe amounL
borrowed Powever Lhe debLor may aL hls or her dlscreLlon pay an exLra amounL beyond Lhe
prlnclpal amounL of Lhe loan (wlLhouL promlslng lL) as a Loken of appreclaLlon Lo Lhe credlLor ln
Lhe case LhaL Lhe debLor does noL pay an exLra amounL Lo Lhe credlLor Lhls LransacLlon ls a Lrue
lnLeresLfree loan Some Musllms conslder Lhls Lo be Lhe only Lype of loan LhaL does noL vlolaLe
Lhe prohlblLlon on rlba slnce lL ls Lhe one Lype of loan LhaL Lruly does noL compensaLe Lhe
credlLor for Lhe Llme value of money40
edlL
Sukuk (lslamlc bonds)
Maln arLlcle Sukuk

Sukuk plural of Sakk ls Lhe Arablc name for flnanclal cerLlflcaLes LhaL are Lhe lslamlc
equlvalenL of bonds Powever flxedlncome lnLeresLbearlng bonds are noL permlsslble ln
lslam Pence Sukuk are securlLles LhaL comply wlLh Lhe lslamlc law (Sharlah) and lLs lnvesLmenL
prlnclples whlch prohlblL Lhe charglng or paylng of lnLeresL llnanclal asseLs LhaL comply wlLh
Lhe lslamlc law can be classlfled ln accordance wlLh Lhelr LradablllLy and nonLradablllLy ln Lhe
secondary markeLs
edlL
1akaful (lslamlc lnsurance)
Maln arLlcle 1akaful

1akaful ls an alLernaLlve form of cover LhaL a Musllm can avall hlmself agalnsL Lhe rlsk of loss
due Lo mlsforLunes 1akaful ls based on Lhe ldea LhaL whaL ls uncerLaln wlLh respecL Lo an
lndlvldual may cease Lo be uncerLaln wlLh respecL Lo a very large number of slmllar lndlvlduals
lnsurance by comblnlng Lhe rlsks of many people enables each lndlvldual Lo en[oy Lhe
advanLage provlded by Lhe law of large numbers See 1akaful for deLalls
edlL
Wadlah (safekeeplng)

ln Wadlah a bank ls deemed as a keeper and LrusLee of funds A person deposlLs funds ln Lhe
bank and Lhe bank guaranLees refund of Lhe enLlre amounL of Lhe deposlL or any parL of Lhe
ouLsLandlng amounL when Lhe deposlLor demands lL 1he deposlLor aL Lhe banks dlscreLlon
may be rewarded wlLh Plbah (see above) as a form of appreclaLlon for Lhe use of funds by Lhe
bank
edlL
Wakalah (power of aLLorney)

1hls occurs when a person appolnLs a represenLaLlve Lo underLake LransacLlons on hls/her
behalf slmllar Lo a power of aLLorney