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In: Finance

Explain the modus operandi of musharakah, mudharabah, wakalah, wadhiah, murabahah, istisna, tawarruq

Explain the modus operandi of musharakah, mudharabah, wakalah, wadhiah, murabahah, istisna, tawarruq

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Expert Solution

1. MUSHARAKAH:-

Musharakah is a joint enterprise or partnership structure in Islamic finance in which partners share in the profits and losses of an enterprise.

Since Islamic law (or Sharia) does not permit the concept of interest in lending, musharakah allows for the financier of a project or company to achieve a return in the form of a portion of the actual profits earned according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses should they occur, also on a pro rata basis. Musharakah is a type of Shirkah al-Amwal (or partnership), which in Arabic means "sharing."

2. MUDHARABAH:-

Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise.

The mudarabah contract can be terminated by either of the two parties at any time as long as a notice, per the contract terms, is given to the other party.

Furthermore, Hanafi and Hanbali jurists are of the opinion that a maximum term of the mudarabah contract can be set, whereafter the contract is terminated automatically. The Shafe'i and Maleki jurists are of the opinion that no term restriction can be added to the mudarabah contract. All jurists agree that one may not specify a minimum term of the mudarabah contract.

3. WADIAH:-

Wadiah corresponds to safekeeping, custody, deposit and trust. In Islamic finance, wadiah refers to the deposit of funds or assets by a person with an Islamic bank. In this arrangement, the depositor deposits his funds or assets with the bank for safekeeping and in most of the agreements the bank charges a fee for the safe custody of the depositor’s funds.

Some features of Wadiah Bank Accounts

(a)This is a non profit and loss bearing product.

(b)Bank gives the guarantee to return the full amount on demand / maturity at its own risk (depositor will not share the risk).

(c)Bank can invest this deposited fund with the permission of the depositor. Bank may share the profit with the depositors as per management’s decision.

(d)Accounts maintenance fees apply.

4. MURABAHAH:-

Murabaha is an Islamic financing structure in which an intermediary buys a property with free and clear title. Murabaha is not an interest-bearing loan, which is considered riba (or excess), and is an acceptable form of credit sale under Sharia (Islamic religious law).

Similar in structure to a rent-to-own arrangement, the intermediary retains ownership of the property until the loan is paid in full.

5. ISTISNA:-

Istisna is a contract of exchange, whereby the funding party agrees to deliver a commodity or an asset at a pre-determined future time at an agreed price.

Istisna is widely used by Islamic banks and financial institutions to finance the construction of real estate related activity like buildings, warehouses, showrooms, shopping malls, residential towers and villas, as well as manufacturing activity like aircrafts, ships, machines and equipment.

6. TAWARRUQ:-

A tawarruq is an Islamic financial product which allows clients to raise money quickly and easily, in theory without breaking Muslim bans on interest. A customer buys an easily saleable asset from an Islamic bank at a marked up price, to be paid at a later date, and quickly sells the asset to raise cash. Tawarruq means "turns into silver".


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