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| The common Shariah concepts used in Islamic banking include: |
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Mudharabah (Profit-sharing) |
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| Mudharabah is an arrangement or agreement between a capital provider
and an entrepreneur, whereby the entrepreneur can mobilise funds for its
business activity. Any profits made will be shared between the two
according to an agreed ratio while losses are borne solely by the capital
provider. |
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| The selling of goods at a price, which includes a profit margin agreed by both parties. The purchase and selling price, profit margin and all other costs must be clearly stated at the time of the sale agreement. |
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| Simliar to a conventional savings account, Wadiah allows the safekeeping of deposits in the bank with guaranteed refund when the depositor demands for it. The depositor, with the bank’s discretion, may be rewarded with ‘hibah’ (gift) as a form of appreciation for the use of funds by the bank. |
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Musyarakah (Joint Venture) |
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| Applied usually for business partnerships, profits made on the basis of Musyarakah are shared on an agreed ratio while losses will be divided based on the equity participation ratio. |
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Bai’ Bithaman Ajil (Deferred Payment Sale) |
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| The selling of goods on a deferred payment basis at a price which includes a profit margin agreed by both parties. |
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| When a person appoints a representative to undertake transactions on his/her behalf. |
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Qardhul Hassan (Benevolent Loan) |
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| A loan extended on a goodwill basis, whereby the borrower is only required the repay the amount borrowed. However, the borrower may, at his discretion, pay extra (without promising it) as a token of appreciation. |
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Ijarah Thumma Al Bai’ (Hire Purchase) |
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| Divided into two contracts, the Ijarah contract is the first of two contracts under this agreement whereby the customer leases the car from the owner (bank) at an agreed rental over a specific period. The second contract, Bai’ enables the customer to purchase the car at an agreed price after the leasing period ends. |
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Bai’ al-Inah (Sell and Buy Back Agreement) |
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| The financier sells an asset to the customer on a deferred payment and then the asset is immediately repurchased by the financier for cash at a discount. |
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| A token given voluntarily in return for loan given or benefit obtained. |
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