الحياري الإقتصادي اقتصاد سهل يفهمه الجميع
This is part 2 of 2, in which we continue to discuss 2 more common permissible financing methods, further to the 3 discussed in part 1. The first 3 were Cost-Plus Sales (Murabahah), Credit Sales (Bay’ bi-thaman ‘Ajil), and Leasing (Ijarah or Ijar). Remember that Islamic finance adheres to principles derived from Sharia’ah, which prohibits riba (interest), and gharar (uncertainty). So here are numbers 4 and 5 of the most common permissible financing methods:
4. Partnerships (mushārakah and muḍārabah)
Various forms of partnership can be direct financing methods. In the early days of Islamic banking and finance, those forms were commonly grouped under the banner “profit and loss sharing”, to be contrasted with any debt-based forms of financing.
The 2 main types of partnerships are a silent partnership (muḍārabah) or full partnership (mushārakah). There are a number of rules in Sharia’ regarding the language of the various partnership contracts, the rights and obligations of various parties, and the sharing rules for profits and losses. Most of the users of such partnership contracts will require the services of legal experts, and therefore should also consult Islamic legal experts on the legitimacy of any specific contract.
As an illustration of a specific contract, one model of financing which has been used is based on a form of mushārakah, where the financing agency and the customer share the ownership of real estate. This contract is known by many names; most prominent among them is the name mushārakah mutanāqiṣah (diminishing partnership).
In contrast to the leasing model, where ownership of the financed item remains with the lessor for the entire lease period, ownership in a diminishing partnership is explicitly shared between the customer and the Islamic financial institution (legally, what is established is an Islamic sharikatal-mulk). The periodic payments of the customer in this model contain two parts: (i) a rental payment for the part of the property owned by the Islamic financial institution, and (ii) a buy-out of part of that ownership. Over time, the portion of the asset which is owned by the customer increases, until he owns the entire asset and needs to pay no more rent. At that time, the contract is terminated.
Examining the periodic payments, the customer will find that they look very much like a conventional mortgage schedule. Early-on, a large portion of the payment is “rent” (corresponding to “interest payment” in conventional mortgage), and a small part is “buy-out” (corresponding to the “principal payment” in a conventional mortgage). As time progresses, the first component gets smaller, and the latter component gets bigger, until the rent becomes zero when the customer owns 100% of the asset. Given this one-to- one correspondence between the two components of the payments, it is again trivial to calculate the equivalent interest rate which would make the conventional mortgage payments identical with the diminishing partnership payments.
Again, this should not be cause for concern, as long as the partnership contract is written in full accordance with the rules of Sharia’. For instance, there is a fundamental difference between a mortgage company which holds a lien on a financed house, and the actual joint ownership of the house between the client and the Islamic financial institution. There are a variety of issues which such institutions need to resolve to operate in compliance with Sharia’ as well as government regulations. As far as compliance with the Islamic Sharia’ is concerned, the form of the contract is what matters.
5. Islamic forwards (salam and ’istisnā‘)
Those forms of financing are less common, and hence will be mentioned only in passing. In general, the sale of non-existent objects is forbidden due to Gharar. However, to facilitate certain types of business, exceptions were given through these 2 contracts.
Most jurists reasoned by analogy (qiyās) and preference (’istihsān) from the permissibility of salam to the permissibility of ’istsnā‘, which may be translated as “commission to manufacture”. In the latter contract, the price is paid in installments as the work progresses in manufacturing or building an otherwise non-existent object. The price pre-paid in installments in this case will often be lower than the cost of purchasing the finished product (if it were to exist).
These 2 contracts are permitted as exceptions to the general rules of sale. As such, there are many conditions which must be met for salam or ’istsnā‘ contracts to be valid. Those considering the use of such contracts are advised to consult an Islamic Legal expert along with their other lawyers to ensure that they abide by Sharī‘a as well as government regulations.
As noted above, the principle of Gharar prevents one from selling something that one does not own. The technique of ’istsnā‘ has been developed as an exception to this. As defined by the Islamic Development Bank, ’istsnā‘ is ‘a contract whereby a party undertakes to produce a specific thing that is possible to be made according to certain agreed specifications at a determined price and for a fixed date of delivery’.
In an ’istsnā‘ transaction, a financier may undertake to manufacture an asset and sell it on receipt of monetary installments. As banks do not normally carry out manufacturing, a parallel contract structure will typically be used. The ultimate buyer of the asset will commission it from the bank, which will institute a parallel contract under which the bank commissions the asset from the manufacturer. The bank charges the buyer the price it pays the manufacturer plus a reasonable profit. The bank therefore takes the risk of manufacture of the asset.
Key Takeaways:
Mushārakah and Muḍārabah: These partnership models offer alternatives to debt-based financing, emphasizing profit and loss sharing. Diminishing partnership (mushārakah mutanāqiṣah) is a popular form for real estate financing.
Salam and ’Istisnā‘: These contracts are exceptions to the rule against selling non-existent goods, designed to facilitate specific business transactions like manufacturing and agriculture.
Importance of Sharia’ Compliance: Regardless of the financing method, adherence to Sharia’ principles is paramount. Legal experts in Islamic finance are essential for ensuring contract validity.
Gharar: The prohibition of excessive uncertainty (Gharar) plays a key role in structuring Islamic financial transactions.
