Islamic Banking Products
Some of the Islamic Banking products are as below:
An Islamic finance technique used to finance the acquisition of assets on terms compliant with Sharia. In an ijara transaction, the financing party (“Bank”) purchases the property, equipment, or other asset desired by its client and then leases it to the client for a rental fee. Some ijara transactions (ijara wa-iktina'a) give the client/lessee the right (but not the obligation) to purchase the asset at or before the end of the lease term.
An ijara transaction differs from a conventional lease transaction in that certain obligations (for example, the obligation to maintain and insure the asset) cannot be shifted to the client/lessee. To mitigate the risks associated with ownership of the asset, the lender typically enters into a service agreement with the client/lessee under which the client/lessee agrees to maintain the asset (including obtaining insurance and conducting repairs).
An Islamic finance technique in which a lender or investor (rab al maal) and a borrower or investment manager (mudareb) establish a profit-sharing partnership to undertake a business or investment activity. Under this structure, the rab al maal provides the financing or funds and the mudareb provides the professional, managerial, and technical know-how to carry out the business or manage the investment. The mudareb must invest the funds on a sharia-compliant basis (for example, the funds cannot be invested in prohibited (haram) products or activities such as tobacco, alcohol, or gambling).
The mudareb earns a fee that is deducted from any profits for managing the funds or business, and the parties share in any profits according to a pre-agreed ratio. In a mudaraba, the mudareb:
Puts only its time and effort at risk and does not contribute any capital.
Is not responsible for any losses of the venture. Losses, however, are borne entirely by the rab al maal.
Mudaraba structure is used in:
Bank is the rab al maal and the borrower is the mudareb. The borrower manages the funds in exchange for a fee and is not liable for losses that may occur (other than for breaches of the agreement and negligence). The borrower is obligated to return the capital to the bank minus losses and fees.
2.Manage investment accounts:
Bank is the mudareb and the depositor is the rab al maal. The bank manages the funds on deposit in exchange for a fee and is not liable for any losses that may occur (other than for negligence). At the end of the contract, the bank is obligated to return the capital (plus the depositor's share of any profits) to the depositor minus any losses (if any) and fees.
An Islamic finance technique is used to provide working capital, trade financing, and acquisition financing on terms compliant with Sharia. In a murabaha transaction, a financing party buys an asset that has been identified by its client (borrower) from a third-party and then sells that asset to the borrower for the original purchase price plus a profit element (generally calculated based on a benchmark figure such as LIBOR). The borrower pays the new higher purchase price in installments.
In Murabaha, the:
Financing party does not make a loan but rather sells an asset at a mark-up.
Profit element is specified and known in advance and is the difference between the price charged by the third-party supplier and the price the financing party charges for the asset.
Borrower may pay the purchase in full, or more commonly, in installments.
Murabaha transactions are in compliance with Sharia because until the asset is sold (however immediately) to the buyer, the financing party bears the risks associated with the ownership of the asset.
An investment partnership or joint venture compliant with Sharia. In a Musharaka, the financing party and its client (borrower) contribute assets (cash or property) to a joint venture and share in the profits of the joint venture in agreed percentages. The joint venture is structured so that the financing party receives its initial investment plus a return that is usually calculated by a reference to a benchmark such as LIBOR plus a margin. Losses, however, are shared in accordance with the parties' initial investment. All musharaka parties have the right to exercise control over the joint venture but it is typically managed by the client or borrower. Musharaka is widely regarded as the purest form of Islamic financing because it is based on the principles of sharing in and benefiting from risk.
There are three types:
Permanent musharaka: The financing party's interest remains unchanged and it is entitled to receive its share of the profits as long as the partnership or joint venture continues to exist. This formulation is used for an ongoing equity investment.
Diminishing musharaka: Sometimes used in residential mortgages, the financing party's interest in the partnership or joint venture is reduced over time as the borrower buys out the financing party's share.
Temporary musharaka: Used to provide working capital, the financing party is a partner for a specified period and receives its share of profits and the rest of its principal contribution at the end of the agreement.
Musharaka is similar to Mudaraba except that in a Mudaraba only the financing party bears the losses associated with the joint venture or partnership.
An Islamic finance technique used to finance the construction or manufacture of assets on terms compliant with Sharia. In an istisna'a transaction, a lender agrees to buy an asset to be delivered once construction or manufacturing of that asset is complete. The lender pays the purchase price of the asset in accordance with the progress of the asset's construction or manufacture that gives the contractor or manufacturer the liquidity it needs to construct or manufacture the asset. Once manufacture or construction is complete, the lender acquires the asset that it can then sell or lease to the contractor, manufacturer, or a third party for a profit.
An istisna'a transaction differs from a bai al salam transaction in that:
The purchase price does not have to be paid in advance.
The delivery date does not have to be fixed at the outset.
The purchase price is paid in installments in accordance with the manufacture or construction of the asset.
Sharia-compliant certificates that represent an undivided ownership interest in an underlying Sukuk asset proportionate to the value of the holder's investment. The certificates entitle the holders to receive a pro-rata share of the cash flows or revenues generated by and from the underlying tangible asset.
Sukuk have economic similarities to bonds, but there are fundamental differences:
Sukuk are not debt obligations. Rather, they represent the Sukuk holders' ownership interests in a particular pool of assets.
In compliance with Sharia principles, sukuk holders are not entitled to receive interest. Instead, they receive a portion of the revenues generated by the assets they own. If no revenues are generated, the Sukuk holders are not entitled to any returns.