Because a fixed or variable rate of interest on a loan is not allowed, Islamic financial institutions support companies and individuals in need of financing either through selling them the required equipment or property on a deferred installment basis, or by entering into some form of profit and loss sharing partnership. We define some of the key products used by Islamic banks below:
Expansion of business enterprise: When a company wants to expand its business (without necessarily purchasing a specified asset or inventory), Islamic banks help it grow by partnering with it on a profit and loss sharing basis. Two principle contracts are used, both of which are derivatives of a core partnership principles. In the musharaka financing approach, both the Islamic bank and the customer provide some contribution (cash or in kind) to the project. They then share profits according to whatever formula they agree upon and share losses according to their contribution. The mudaraba contract is similar, only that the bank is the sole contributor of capital, while the customer manages the investment project to receive a profit share as investment manager.
(Zawya / 06 March 2013)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com