Islamic Modes of Finance

Submitted by:
Khuzaima Irfan
Reg No:
B22F0073AI033
Submitted to:
M. Umar Farooq
Subject:
Islamic studies
Department: Artificial Intelligence
Semester: 1st
“Pak-Austria Fachhochschule”
Date:
26-Dec-2022
 Islamic Modes of Finance
Definition
Islamic finance is the means through which organisations and people raise money in conformity
with Sharia, or Islamic law. It also describes the kinds of investments that fall under the purview
of this system of law. Islamic finance is a distinct type of socially conscious investing.
Modes of Islamic Finance
 Partnership
 Mudaribart/Qiradh
 Ijarah
 Mubarabahah
 Salam and Istisna
Partnership
While officially speaking it is a connection between/among people who have agreed to operate a
company and share the Profit and Loss, Partnership (Shirakah) denotes Sharing.
As long as it is permitted by the Holy Quran and the Prophet's (PBUH) Sunnah, a
partnership is a legal transaction. Except for those who believe and carry out good activities, the
majority of partners commit wrongdoing against one another, according to the Holy Quran.
Kinds of Partnership:
Basically there are three kinds of Partnership
 Shirakat al Ibahah
 Shirakat Milk
 Shirakat Aqd
1: Sharakat Ibahah
In a partnership known as shatakat Ibahah, everyone has the same access to resources like mosques
and roads.
2. Sharakat Al Milk
It denotes joint ownership of two or more people in a particular piece of property.
3: Shirkat Aqd
This partnership was formed by the parties' mutual agreement and is a cooperative business
venture. (Aqd) The word "contract"
Mudaribart/Qiradh
In Islamic law, a specific type of partnership known as a Mudaribart or Qiradh occurs when one
partner invests money in a firm while the other partner manages and does the job.
 "Rabb-ul-mall" is the name for the individual who contributes money, whereas "mudarib"
is the name for the person who supervises and works.
While losses in partnerships are distributed in proportion to each partner's investment, in
mudarabah the investor bears the loss and mudharib's losses are limited to his effort that has been
wasted.
The sharing of the profit is left up to their mutual agreement under Shariah. However, it's
against the law to divide up a partner's profits in one big payment.
Mubarabahah
The term ribh, which implies profit, is the root of the word murabahah.
In murabahah, it is the seller's obligation to disclose to the buyer both the true cost and the
profit.
The murabahah transaction can be completed on the spot, with the buyer delivering the
good and the buyer providing the payment. Although it is also acceptable for the buyer to supply
the good on a different payment arrangement. This is referred to as Bai'Mujjal in Islamic law.
Here, it is acceptable for the price of the product to be paid on a different schedule, either all at
once or in instalments.
Ijarah
Ijarah, which meaning "to provide anything on rental," is an Arabic term. Although Ijarah is a
phrase that properly refers to two distinct circumstances.
 In the first category, when a person's services are contracted for pay. It's known as
employment.
 The second category is the use of an asset's usufructs on a rental basis. Leasing is the term
used for this in banking.
Following are the main components of Ijarah.
1: Lesser: the institution or the person to whom gives something on lease. This is called Mu’jir.
2: Lessee: the person or the institution whom the thing is given on lease this is called Musta’jir.
3: Subject of lease.
4: Rent
5: Lease period.
Ijarah, like murabahah, is a straightforward transfer of the right to use an asset for a specific
length of time in exchange for an agreed-upon fee rather than being an original kind of financing.
However, if specific guidelines are followed, it can also be utilised as a form of funding in the
banking industry.
 In reality, the bank or institution seeks satisfaction through the evaluation of the client's
business to determine whether or not he would be a suitable party for entering into a leasing
transaction with him. As a result, when a customer applies for a leasing facility, the bank or
institution often takes the following into account before accepting or rejecting the application. (Ibid
2002)

 Sources of income of the client.

 Whether the client would be able to pay the payable amount or not.
 Whether or not the client has a history of defaulting. Following this evaluation, if the bank
or institution determines that the client's position is suitable, his application is accepted,
and the limit is established.
A general agreement is formed in this respect based on the client's financial situation. The
customer is able to use the facility as a result of this arrangement. When an agreement is reached,
the bank or other organisation buys the leased asset on behalf of the client. It is essential that all
shariah-mandated terms of sale and purchase be scrupulously followed at this stage, failing which
the entire transaction will be invalid. 46 The final step is to calculate the rent after this.
The bank or institution has the right to keep the leased asset in its possession once the
lease's term has expired. However, the institution or bank often has no interest in the leased object,
so the customer either buys it or receives it as a gift. If it is acquired, a separate contract is
necessary.
Salam and Istisna’
Salam and Istiana are exempt from the aforementioned prohibition on selling goods that
are not in their actual or constructive ownership under Shariah.
In the modern world, banks and other financial institutions can use salam as a form of
financing, particularly in the agricultural sector. They can do this by lending money to farmers to
meet their financial needs for farming, and in exchange, the farmers will supply the crop for which
they have entered into the salam with the bank or financial institution.
Similar to Salam, Istisna' is a type of sale in which an issue is dealt with before it actually
exists. In this type of transaction, the customer gives the manufacturer an order to produce a good
for them.
Similar to salam, istisna' may be employed in the banking industry by giving money to the
customer who wishes to complete an istisna' transaction for financing. He can get money from the
bank either through a musharakah transaction or a mudharabah transaction, and he can utilise it in
istisna for business objectives.
Similar to this, the housing finance industry can employ istisna as a kind of financing. For
instance, if someone wishes to build a home on their property, the bank can do it in accordance
with their requirements and in accordance with the laws of Pakistan. Additionally, it may be used
to finance projects and to construct a bridge or a roadway.
Conclusion
In a summary, we can say that Islam has a highly complete economic system, and there is no
exploitation since everyone gets rewarded to the degree of what they deserve. The economic
situation of the nation will significantly improve if Islamic financial practises are implemented and
embraced. The work is not simple, but if consistent efforts are made, it would be feasible to
complete this enormous task.
References

References
Abu Daud, Sulaiman b ash,hath al Sajistani, Al Sunan(Lahore, Islami Academy),Kitab al Buyoo,Bab fi
alsharikah. Dec 2013. intro to modes of finance. Ata Ur Rehman.

Al Hindi, Alauddin Ali al Muttaqi, Kanz al Ummal (Beirut, Muassat al Risalah) 15:482. 1987. Al Atasi
Muhammad Khalid, Sharh Majjalatul Ahkam (Quetta, Maktaba al Islamiyah ,1987. Dr Rashid.

Ibn Rushd, Bidayat al Mujtahid( Lahore, Faran Acedmy 1992). 1992. Ibn al hummam,Fath al
qadeer,(Beirut, dar Ihya al Turath al Arabi 1986), 5:205. Dr Rashid.

Ijaz Ahmad Samadani, Islamic Banko mey raij murabahah ka Tariq Kar,( Lahore, Idarah, islamyat 2008).
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Rashid.

Maududi, S.Abul ala ,The meaning of the Quran (Islamic publication, Lahore, 2005. 2009. Mansoori,
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