6 Major Modes Of Islamic Banking & Finance


There are many modes of Islamic banking and finance. However, in this blog, we’ve discussed the most-used modes of Islamic banking and financing. These are:

MUDARABAH

It is a type of partnership where one party has the right to invest in the business i.e; Rabbul-maal and the other has the right to manage it i.e; Modarib. Any profits earned are shared between the two parties as per the profit ratio agreed during the agreement, while the financial loss is only suffered by the investor.

MURABAHA

In its literary context, it means profit. In fact, it is an agreement of offer wherein the seller reveals his cost and profit. It is an Islamic method of financing used by Islamic banks. In this financing mode, the customer requests the bank to buy certain products for him. The bank does that for a distinct profit over the cost, which is specified at the time of the agreement.

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MUSHARAKAH

Its literary context, it means sharing or partnership. Musharakah implies a relationship set up under a mutual agreement of the parties for the sharing of profit and loss in the joint business. It is an arrangement under which the Islamic bank gives funds, which are blended in with the assets of the business undertaking and others. Profit is shared amongst the partners on a pre-agreed basis. However, the loss is borne by the partners equivalent to their respective capital investment ratios.

IJARAH

In its literary context, it means “to provide something on rent”. Ijarah is an agreement of a known and suggested usufruct against a predetermined and legal return or thought for the administration or return for the advantage proposed to be taken, or for the exertion or work proposed to be consumed. In layman words, Ijarah or renting is the exchange of usufruct against some lawful consideration. If a fixed asset is provided then consideration is rent and if it’s hiring of a person then consideration is a wage.

ISTISNA

In Islamic financing, Istisna is generally a long-term contractual agreement for constructing, building, or manufacturing an asset, permitting advance money payment and delivery of commodities at a predetermined future time at an agreed price. It is generally used for giving an opportunity of financing the production or development of houses, buildings, plants, heavy machinery, and infrastructures like roads, bridges, railways, and more.

BAI SALAM

It is one of the most famous modes of Islamic financing. Salam implies an agreement where advance payment is made for products to be conveyed later on. The seller or dealer delivers some particular merchandise to the purchaser at a future date in return for a development cost completely paid at the time of the agreement. It is important that the nature of the product proposed to be bought is completely known and determined leaving no space for uncertainty which can further lead to conflict. The objects of this deal are various goods but can’t be gold, silver, or any currency. Even so, Bai Salam covers nearly everything, which can be measured in terms of quality, quantity and craftsmanship, and more.

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