What Is Contract in Islamic Banking

Istisna (also Bia Istisna or Bai` Al-Istisna) and Bia-Salam are „futures contracts“[108] (tailor-made contracts between two parties to buy or sell an asset at a certain price at a future date). [109] These are also contracts concluded prior to the conclusion of the purchase goods[110],[111] and should be as detailed as possible to avoid uncertainty. [112] [113] The item sold and purchased by the parties under an Islamic contract is „the subject matter“ of that contract. As for the object of an Islamic treaty, it must be: Wa`d (literally „promise“) is a principle that underpins or structures Hedging instruments or derivatives that comply with Sharia law. Conventional hedging products such as currency futures and cross-currency swaps are prohibited in Islamic finance. [256] [257] [258] Wa`d has been described as „controversial“[258] or as an imitation of conventional and `Islamic` products in form alone.“ [259] According to Mohammad O. Farooq, the „demand deposits“ of Islamic financial institutions that do not yield returns are structured with Qard al-Hasana contracts (also known as Qard, see above in Charitable Lending) or less often in the form of Wadiah or Amanah contracts. [153] The sources disagree on the definition of these two treaties. „Often the same words are used by different banks and have different meanings,“[193] and sometimes wadiah and amanah are used interchangeably.

[194] Mudaraba`s structure is very similar to that of venture capital, where venture capital finances the entrepreneur who does management and work, so that profits and risks are shared. [72] Such participatory agreements between capital, on the one hand, and workers and management, on the other, reflect the view of Islamic banking supporters that, under Islam, the user of capital would not bear all the risks/costs of failure. And that this would lead to a balanced distribution of income and prevent financiers from dominating the economy. [73] [74] [75] Takaful (literally joint guarantee) Takaful is a form of mutual insurance in which members jointly agree to guarantee themselves a defined benefit against loss or damage caused by the fund. European transport insurance is derived from traditional Islamic practice. All commercial contracts in Takaful must comply with Sharia law, so there is no role for interest. Contracts are usually based on the mudarabah profit-sharing agreement. At least in a Muslim country with a strong Islamic banking sector (Malaysia), there are two main types of investment accounts offered by Islamic banks to those who invest specifically in profit-sharing schemes [179][180] – limited or unrestricted. A musawamah contract (literally „bargaining“) is used when the exact cost of items sold to the bank/financier cannot be determined or cannot be determined. [90] Musawamah differs from Murabahah in that „the seller is not required to disclose its costs or purchase price“[106], even if it knows so.

Musawamah is the „most common“ type of „trade negotiation“ in Islamic trade. [107] Murabaha is an Islamic purchase agreement in which the buyer and seller agree on the mark-up (profit) or „cost-plus“ price[87][88] for items sold. [89] In Islamic banking, it has become a financing term, in which the bank buys certain goods (house, car, business supplies, etc.) at the request of a customer and adds the price of these goods for resale to the customer (with the difference clearly communicated to the customer)[89] in exchange for the possibility for the customer/buyer to be able to postpone payment. (A deferred payment contract is known in Islamic jurisprudence as bai-muajjal.) From the point of view of Sharia, it is very important that Ijarah and Bai are not combined, but are two separate treaties. [129] An example would be a car finance facility, where a customer enters into the first contract and leases the car to the owner (bank) for an agreed amount over a certain period of time. At the end of the rental period, the second contract is concluded, which allows the customer to buy the car at an agreed price. (This type of transaction is similar to the contractum trinius, a legal maneuver used by European bankers and merchants in the Middle Ages to circumvent the Church`s ban on interest-bearing loans. In a contract, two parties would conclude three simultaneous legal contracts (trinius) simultaneous and interconnected, with the net effect of paying a royalty for the use of the money during the term of the loan. The use of simultaneous interconnected contracts is also prohibited by Sharia law.) [126] A Murabaha Letter of Credit is issued in the name of an applicant (importer). The bank issuing the letter of credit undertakes to pay a sum of money in accordance with the conditions described in the letter of credit.

Since the solvency of the bank replaces the solvency of the applicant, a payment guarantee is granted to the beneficiary (exporter). The exporter benefits because the bank assumes the payment risk. According to the provisions of the Murabaha contract, the importer is obliged to reimburse the bank for the cost of the goods plus an additional profit. Today, banking is a very influential and ubiquitous sector of modern society. It offers households with excess capital the opportunity to choose the best mix of investments in terms of return, maturities and security, as well as opportunities to do business, and governments to finance their respective activities by raising surplus funds. A „mudarabah“ (profit-sharing agreement) is a type of partnership in which one partner (rabb-ul-mal) gives money to another (mudarib) to invest in a trading company. The „sleeping“ Rabb-ul-Mal party provides 100% of the capital. The mudarib Party brings its expertise and management. [71] Others (such as convert Umar Ibrahim Vadillo) agree that the Islamic banking movement has not followed the principles of Sharia law, but call for greater rigour and separation from the non-Muslim world. [Note 3] Wakalah is a contract in which the Customer designates the Agent to replace it or to perform on behalf of the Customer. The director is called „Aseel / Muwakkil“ and the agent is called „Wakeel“. The result achieved/suffered comes exclusively from the client and the agent can take a fixed remuneration for his services.

Wakala is often used by Islamic banks for interbank lending. Asset-backed or debt-type instruments (also known as swaps) are purchase contracts that allow the transfer of one commodity for another commodity, the transfer of a commodity for money, or the transfer of money for money. [53] These include Murabaha, Musawamah, Salam, Istisna`a, and Tawarruq. [86] I. Profit and Loss Sharing (Mudarabah): is a contract between two parties; One provides the capital and the other provides the work to form a partnership to share the profits through certain agreed shares. In order to comply with the principles of Islamic law (Sharia) and move towards islamic economics, the contemporary Islamic banking and finance movement prohibits a variety of activities: Al-bai bithaman ajil (abba): Abba is the most widely used contract for Islamic finance in Malaysia and is the preferred choice for long-term projects. However, it is not recognized by many Islamic authorities outside Malaysia. Abba is similar to Murabaha, except that ownership is transferred at the beginning of the funding period. The bank arranges the purchase of an asset and then transfers ownership to the customer, who reimburses the purchase price to the bank plus an agreed profit margin.

The bond can then be securitized into negotiable bonds called Shahadah al-Dayn. Ijarah (leasing): In an Ijarah contract, the bank buys capital goods or real estate and rents them to the customer. The bank leases the asset to the customer or takes a share of the profits generated by its use. Ijarah can be structured in such a way as to transmit the title to the client or to be kept by the bank. Yousef and other observers note that funding for Musharakah and Mudarabah „has fallen into almost negligible proportions.“ [66] [67] [68] [69] In the asset portfolios of many Islamic banks, short-term financing, especially murabaha and other debt-based contracts, accounts for the majority of their investments. [70] With respect to Wadiah, there is a difference as to whether these deposits should be kept unused with a 100% reserve or simply guaranteed by the bank. Financialislam.com[195] and Islamic banking.com[196] talk about Wadiah deposits guaranteed for repayment, but nothing about the deposit that remains intact/uninvested….

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