Sample Essay

Mudarabah is closely related to Musharakah but is another form of partnership wherein one partner provides the capital to invest and the other utilizes the capital in business. This is somewhat like the sleeping partner and the working partner concept in conventional banking and financial partnerships. The profit and loss sharing under this mode of finance is left upon the mutual consent of the two partners i.e. bank and client. However, a fixed lump sum amount irrespective of profits or losses is not allowed. Diminishing musharaka is referred to the mode in which the financer and client have joint ownership of an asset. The financer has a majority stake and the minority stake is with the bank’s client. As the client keeps paying off the parts of payment of the original capital investment his ownership of the asset keeps increasing and the bank’s ownership keeps decreasing.

Apart from that the client is supposed to pay a rent on asset to the bank on basis of percentage ownership in the asset. M. I. Usmani defines murabaha as “a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred and sells it to another person by adding some profit there on” (125). Salam is generally used for Islamic banks to finance agricultural ventures where in a seller agrees to supply particular goods or services to a buyer at a future date of delivery (i.e. mutually consented upon), however, the buyer the price of the transaction is completely paid at spot. (M. I. Usmani 133). In Istisnah, it is a sale transaction where a commodity is transacted before it comes into existence.

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