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).