Key terminology in Islamic banking

A man and woman transferring money between their Islamic banking

We’ve covered the differences between Shariah-compliant, Islamic banking, and conventional banking you find across the globe. We will cover a few key terms that will aid you in understanding how this form of banking works.

Here are a few key types:

A form of sale where the cost of the goods sold and the profit on the sale is known to both parties.

  • The purchase, selling price, and profit margin must be clearly stated at the time of the sale agreement.
  • Payment of the Muabaha price may be:
    • Firstly, paid on the spot.
    • Secondly, paid in installments.
    • Lastly, in a lump sum after a certain period of time.

A technique used to finance the construction or manufacture of assets on terms compliant with Sharia.

  • A lender agrees to buy an asset to be delivered once the construction or manufacturing of that asset is complete.

Similar to mudarabah with a small difference in that in the case of musharaka both parties are the capital owners and the manager can participate in management as well as profit and loss.

  • Profits will distribute on a pre-determined ratio.
    • But the losses have to be borne in the capital investment ratio only.

This is a financing arrangement where the customer will be receiving cash at the end of it for their needs through a series of sale transactions.

  • The bank will purchase commodities from a supplier (first sale) and sell them to the customer (second sale).

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