Ju'alal
Stipulated
price for performing any service. Technically applied in the model of Islamic
banking by some. Bank charges and commission have been interpreted to be ju'ala
by the jurists and thus considered lawful.
Mudaraba
/ Modaraba (Trust Financing).
The
term refers to a form of business contract in which one party brings capital
and the other personal effort. The proportionate share in profit is determined
by mutual agreement. But the loss, if any, is borne only by the owner of the
capital, in which case the entrepreneur gets nothing for his labour. The
financier is known as 'rab-al-maal' and the entrepreneur as 'mudarib'. Mudarib
In a mudaraba contract, the person or party who acts as entrepreneur.
Sale
on profit. Technically a contract of sale in which the seller declares his cost
and profit. This has been adopted as a mode of financing by a number of Islamic
banks. As a financing technique, it involves a request by the client to the
bank to purchase a certain item for him. The bank does that for a definite
profit over the cost which is agreed in advance. It has been estimated that 80
to 90 percent of financial operations of some Islamic banks belong to this category.
There are a number of requirements for this transaction to meet the Islamic
standards of a legal sale. The entire transaction is to be completed in two
stages and as two separate contracts. In the first stage, the client requests
the bank to undertake a Murabaha transaction and promises to buy the commodity
specified by him, if the bank acquires the same commodity. In the second stage,
the client purchases the good acquired by the bank on a deferred payments basis
and agrees to a payment schedule. The Murabaha form of financing is being
widely used by the Islamic banks to satisfy various kinds of financing
requirements. It is used to provide finance in various and diverse sectors e.
g. in consumer finance for purchase of consumer durable such as cars and
household appliances, in real estate to provide housing finance, in the
production sector to finance the purchase of machinery, equipment and raw
material etc.
Musharaka
(Venture Capital)
Musharaka
is a technique of financing used as a partnership. It is where two or more
financiers provide finance for a project. All partners are entitled to a share
in the profits resulting from the project in a ratio which is mutually agreed
upon. However, the losses, if any, are to be shared exactly in the proportion
of capital proportion. All partners have a right to participate in the
management of the project. However, they can waive the right of participation
in favour of any specific partner or person. There are two main forms of
Musharaka: Permanent Musharaka and Diminishing Musharaka. These are briefly
explained below: Permanent Musharaka In this form of Musharaka an Islamic bank
participates in the equity of a project and receives a share of profit on a pro
rata basis. The period of contract is not specified. So it can continue so long
as the parties concerned wish it to continue. This technique is suitable for
financing projects on a longer term where funds are committed over a long
period and gestation period of the project may also be protracted.
Diminishing Musharaka: Diminishing
Musharaka allows equity participation and sharing of profit on a pro rata basis
but also provides a method through which the equity of the bank keeps on
reducing its equity in the project and ultimately transfers the ownership of the
asset on of the participants. The contract provides for a payment over and
above the bank share in the profit for the equity of the project held by the
bank. That is the bank gets a dividend on its equity. At the same time the
entrepreneur purchases some of its equity. Thus, the equity held by the bank is
progressively reduced. After a certain time the equity held by the bank shall
come to zero and it shall cease to be a partner. Musharaka form of financing is
being increasingly used by the Islamic banks to finance domestic trade, imports
and to issue letters of credit.
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