The Islamic modes of financing widely used are namely Musharakah, Mudarabah, Diminshing Mushaharakah, Murabaha, Salam, Istisna, Istijrar, Ijarah and Ijarah Wa Iqtina. Musharakah is a kind of partnership where in profits are shared according to a specified ratio decided upon by the partners in a mutual contract (M. T. Usmani 35). The profit sharing terms of the contract should be mutually agreed to by the partners but should not allocate a fixed return to either of the partners because that is classified as interest. On the other hand, losses are to be shared according to the initial capital invested in the venture. If compared to the conventional American banks a fixed rate of return is charged termed as interest or markup rate on any capital lent out.
Furthermore, American banks do not share liability or losses if the venture that borrowed money accrued losses. However, in Musharakah it is responsibility of bank to share the losses as well. The return of the bank is linked with the profits generated by the venture, if profits are more it will get more profits but the Islamic bank cannot impound these profits but has to share it justly with all the depositors of the bank. This is not applicable to conventional American banks because they allocate a fixed markup return on loans and cannot therefore also take advantage of sharing profitability of the venture they finance.
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