Question

1. Explain each of the following terms:
   1. Murabahah as trade-like instrument
   2. Musharakah as equity-like instrument
   3. Mudaraba as equity like instrument
   4. Ijarah as lease-like instrument

Answer 1

(a) Murabahah is an Islamic form of contract wherein a cost plus markup contract is executed between a buyer and a seller. Here, markup is in terms of a profit % and not interest as charging interest on loans is prohibited under Islamic Law. Under this arrangement, both the seller and buyer agree to the cost and the markup (profit %) and then the payment takes place in instalments. This is a trade like instrument as the terms of the contract are decided well in advance between the parties.

(b) Musharakah is a join partnership contract between parties who agree to share the profits and losses arising from the contract. Under Islamic law, earning profits from Interest in lending is not permitted, and hence the need for Musharakah arises. Under this contract, a company can actually earn returns from the contract as per a pre-determined ratio. This contract is mostly used for purchasing long term assets, real estate, giving loans and other investment projects. This is an equity like agreement as the owner or financier gets an opportunity to earn returns on their investment.

(c) Mudaraba is a widely used contract used in the Islamic Banking sector wherein there are two parties i.e, financier who invests his money and the other partner is a manager who mamanes the financier's investment in an economic activity. The manager has an expertise in efficient allocation of funds to an economic activity. Both partners agree to a profit sharing ratio which is mentioned in the contract. In Arabic, the financier is called ''rab al mal'' and the manager is called the ''mudarib''. This is an equity like agreement as the financier gets an opportunity to earn returns on his investment.

(d) Ijarah is an Islamic Lease like agreement which means owning a right to using or letting someone use an asset for a period in return for a specific consideration. It is a binding contract on both the parties and is valid only if the asset being leased is owned by the lessor. Two types of Ijarah- Operating ijarah wherein the title to the asset isn't transferred by the end of the period and Ijarah muntahia bittamleek wherein the title is transferred by the end of period.