Principles of Islamic banking and finance/PIBF201/Variable income Islamic modes of finance/Overview

In the last section you learnt about the most commonly used modes of Islamic financial transactions that can generate fixed levels of income. While ijarah or operating lease is non-controversial, there are issues with other fixed income modes of modes of financing with regard to their proximity with interest, in particular with murabaha.

Islamic economists and many other Islamic scholars are of the view that the real benefit of Islamic banking could not be realized unless Islamic banks and other financial institutions minimize the use of fixed-income modes of financing and rely more and more on profit and loss sharing modes. They recognize the fact that even with fixed-incomes modes, Islamic banks are relative more stable because their transactions are mainly asset based and hence less vulnerable to any downside economic trend.

In this section you will learn the important risk sharing Islamic modes of finance in some detail.

The goals of this chapter are:


 * To define musharakah and mudarabah as the equity-based Islamic financing products.
 * To examine the terms and conditions of musharakah and mudarabah.
 * To discuss musharakah mutanaqisah, a relatively updated form of musharakah mode of Islamic finance.

Chapter Outcomes

By the end of this chapter, you should be able to:


 * Develop an understanding of the concept of musharakah and mudarabah as the equity-based Islamic financing products.


 * Know the relevant conditions of musharakah and mudaraba to be fulfilled to become the valid Islamic financial products.


 * To discuss how the mode of musharakah mutanaqisah works as an updated form of musharakah.