How sharia banking works
For Islamic finance to comply with sharia, or Islamic law, financiers charge no interest and do not invest in prohibited businesses such as those that trade in alcohol, pork, arms, pornography or gambling. Some widely used methods of Islamic finance are:

  • Islamic bonds, or sukuk – typically backed by physical assets that pay a dividend or rent to bond holders, rather than interest.
  • Murabaha – a financier, such as a bank, buys a commodity and sells it to the purchaser at a higher price.
  • Mudaraba – the bank provides funding to entrepreneurs, who share the profit of any venture. The entrepreneurs do not put up any capital.
  • Musharaka – the bank provides funding to entrepreneurs, who also contribute capital. Profit from the venture is shared.
  • Ijarah – Arabic for leasing. An agreement in which banks lease an asset to a client for a specific time at a specific price. At the end of the leasing period, the client may or may not own the asset.
  • Istisna – a purchaser asks the seller to create a product, which is then sold to the purchaser at a given price. Istisna allows parties to contract the sale of an item that does not exist at the time of the agreement. – Reuters

    Published on the web by Business Report on January 25, 2008.

    © Business Report 2008. All rights reserved.
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