The Distinct Key Principles Of Islamic Banking Finance Essay

Islamic Finance is a manner of making finance. It is based on the rules of Islamic Torahs or Shariah which are derived from the Holy Quran and the Acts of the Apostless of Holy Prophet Mohammad ( P.B.U.H. ) i.e. the Sunnah and the expressions of Holy Prophet Mohammad ( P.B.U.H. ) i.e. the Hadith. The Islamic Shariah covers all the facets of life including the economic activities such as wealth creative activity and belongings dealing. It explains in item all the ethical constructs in usage of the capital and money, the relationship between net income and hazard every bit good as the societal duties of the fiscal establishments.

Islamic finance is distinguishable from the western finance system due to the cardinal rules it follows i.e.

Prohibition of Interest ( Riba )

Prohibition of Uncertainty in contractual footings and status.

Prohibition of funding of banned merchandises and services every bit good as puting in them.

In the system of Islamic Finance, alternatively of involvement, by and large a output from the deployment of capital or money arises in the signifier of sharing of net income and loss that may ensue from an investing activity. On the other manus, it may originate from the fee obtained through agencies of sale of an plus or by the rental of an plus. Interest in any signifier is prohibited in Islamic Finance. Apart from this, Uncertainty in contractual footings and conditions is besides prohibited. It clearly states that all the footings and conditions must be certain and clear. It does n’t let the investing in and funding of banned merchandises and services i.e. porc, intoxicant, erotica, chancing every bit good as a demand that all fiscal minutess are underpinned by an identifiable touchable plus.

Any bank or fiscal establishment wishing to carry on fiscal activity in conformity with the Islamic Finance will look frontward to an Islamic bookman for the counsel. Islamic bookman might hold a belonging to peculiar school of idea, on behalf of which he might construe the Islamic Torahs in changing ways, reflecting diverse Shariah regulative models. Difference in patterns might happen in Gulf states and that of South East Asia. For illustration, some bookmans in Malaysia belonging to Shaafi’i school of idea might let two party sale and buy-back dealing for hard currency funding. On the other manus, in the other part, this pattern may non be allowed.

The Institutions which carries pattern of Islamic Finance, usually set up a Shariah supervisory board or commission. The basic function of this board or commission is to find that whether the fiscal merchandises of the establishment are Shariah compliant or non. In the states, where the Muslim population is important, the Shariah-compliance is required by statute law i.e. in Sudan and Iran. While in other states, the national statute law is soundless on the affair i.e. in UK and Singapore. Islamic Finance and Banking is fundamentally designed to run into the demands and demands of the Muslim client but it is non restricted to Muslims merely. Islamic Financial minutess can be undertaken between Muslims every bit good as non-Muslims. The commercial characteristics of Islamic finance merchandises and their implicit in ethical and socially responsible character are the cardinal factors pulling non-Muslim investors. Therefore, Islamic Finance is considered to be an effectual manner to get the better of the planetary economic crisis and yet has proved itself as the fastest turning fiscal system.

The Islamic Finance Model

Importance of Islamic finance:

Islamic fiscal system has a great significance non merely for the Muslims every bit good as for all the people of the universe. The ground is because it is the lone system which provides solutions to the Global Economic Crisis due to the ongoing Conventional fiscal system. The system of Conventional fiscal system has lost the trust of the involvement, it has created a high ratio of un-employment, and it besides gives rise to poorness. As it promotes the capitalist economy all over the universe and it has caused the people major agonies. Islamic fiscal system is based on high ethical criterions. It non merely promotes trade but besides the flow of financess throughout the universe. It is a system based on hazard free elements. It unlocks values of idle assets. It helps to make new occupations which overcome the unemployment job of Conventional fiscal system. There is a sound hazard direction. It besides gives a closer support to the existent economic system and stabilizes the economic system in a systematic mode. Another of import facet of Islamic finance that benefit the people is that there is a cheque and balance over the fiscal system and its on-going patterns and activities throughout. It makes certain that fiscal system is being decently adopted in conformity with the regulations and ordinances of the Islamic Shariah which provides a system of justness and equality and moralss of the society. Islamic fiscal system is free of all the un-ethical merchandises like adult and alcoholic merchandises, which are globally considered against the jurisprudence everyplace. Islamic finance helps the Muslims to pull off their activities of concern and finance harmonizing to their faith and it saves them from things forbidden by the Islamic Shariah. The remotion of involvement and uncertainness factor in concern and fiscal activities benefits the people globally, as there is no danger of losing one ‘s personal assets. The engagement of both parties in loss sharing, this manner of Islamic finance system has reduced the agony of a individual who invests his capital. The Islamic fiscal system besides encourages the people to assist the hapless and destitute people by the debut of Zakah system based on Islamic Shariah, which non merely is a valuable title from the faith point of position but besides is helpful to function humanity by cut downing the agony of the people and to assist them at clip of demand.

Thingss forbidden in Islamic Finance:

In Islamic finance, following are the things which are purely prohibited:


Riba ” is an Arabic term for Interest. In Islam, Riba is prohibited in its any signifier. Therefore the Islamic fiscal system is Riba free.

Poetries from the Holy Quran on the topic “ Riba ” :

Following poetries in the Holy Quran on the topic “ Riba ” , as given below:

“ And whatever Riba you give so that it may increase in the wealth of the people, it does non increase with Allah ” ( Surah: Ar-Rum, Verse: 39 )

“ And because of their charging Riba, whilst they were prohibited from it ” ( Surah: An- Nisa, Verse: 161 )

“ O those who believe do non devour up Riba, doubled & A ; redoubled. ” ( Surah: Al-Imran, Verse: 130 )

“ Those who take involvement will non stand but as bases whom the devil has driven loonies by his touch. That is because they have said: ‘Trading is but like Riba ‘ . And Allah has permitted trading and prohibited Riba. So, whoever receives an advice from his Lord and Michigans, he is allowed what has passed, and his affair is up to Allah. And the 1s who revert back, those are the people of Fire. There they remain everlastingly.

Allah destroys Riba and nourishes charities. And Allah does non like any iniquitous nonbeliever. Surely those who believe and do good workss, set up Salah and pay Zakah, have their wages with their Lord, and there is no fright for them, nor shall they grieve.

O those who believe, fear Allah and give up what still remains of the Riba if you are trusters. But if you do non, so listen to the declaration of war from Allah and His Messenger. And if you repent, yours is your chief. Neither you incorrect, nor be wronged. And if at that place be one in wretchedness, so postponement boulder clay easiness. And that you leave it as alms is far better for you, if you truly cognize. And be fearful of a twenty-four hours when you shall be returned to Allah, so everybody shall be paid, in full, what he has earned. And they shall non be wronged. ” ( Surah: Al-Baqarah, Verse: 275-280 )

Ah-Hadith on the topic “ Riba ” :

When something is mentioned in Quran, there is no demand to advert any other mentions, but since it is the demand of the assignment, that ‘s why I have to advert few mentions from Ah-Hadith. For my assignment I am choosing the undermentioned five Ah-Hadiths given below:

Imam Bukhari ( R.A. ) attributes these expressions to the Holy Prophet ( P.B.U.H. ) . Harmonizing to him:

From Abu Burdah ibn Abi Musa: I came to Madinah and met ‘Abdallah ibn Salam who said, “ You live in a state where Riba is rampant ; hence if anyone owes you something and nowadayss you with a burden of hay, or a burden of barley, or a rope of straw, do non accept it for it is riba. ” [ Sahih al-Bukhari, Volume 5, Book 58, Number 159 ] .A

Another Hadith attributed to the expression of Holy Prohpet ( P.B.U.H. ) by Imam Bukhari ( R.A. ) is:

Abu Saeed Khudri said that one time comrade Bilal brought to the Prophet some good quality day of the months. The Prophet inquired as to where he got those day of the months. Bilal replied that he had some low quality day of the months which he had exchanged in 2:1 ratio for high quality 1s in order to show the latter to the Prophet. Upon hearing this, the Prophet said:

“ Oh no! Oh no! That is riba. That is precisely riba. Make non make it once more.

If you want to make such an exchange, foremost sell your day of the months ( for money or

another trade good ) and so purchase other 1s. ” ( Sahih al-Bukhari: 2145 )

Another Hadith attributed to the expressions of Holy Prophet ( P.B.U.H. ) by Imam Muslim ( R.A. ) is:

The Prophet said: “ While interchanging gold for gold, Ag for Ag, wheat for wheat, barley for barley, day of the months for day of the months and salt for salt, exchange like for like ( in equal step ) and exchange at topographic point. Whosoever paid more than what he received or demanded more than what he gave, verily he dealt in Riba. Both the payee and the receiving system are equal in go againsting the Law of God. ” ( Muslim: 2971 )

Another Hadith attributed to the expressions of Holy Prophet ( P.B.U.H. ) by Imam Tirmizee ( R.A. ) is:

The Prophet said: “ While interchanging gold for gold, Ag for Ag, wheat for wheat, barley for barley, day of the months for day of the months and salt for salt, exchange like for like ( in equal step ) . Whosoever gave more or took more, verily he made a riba trade. However, you are permitted to interchange gold for Ag, wheat for day of the months, or barley for day of the months as you wish ( in equal or unequal steps ) provided that, such an exchange is at topographic point. ” ( Tirmizee: 1161 )

Another Hadith attributed to the expressions of Holy Prophet ( P.B.U.H. ) by Imam Ibn-e -Majah ( R.A. ) is:

The Prophet said: “ Riba has 70 sections, the least serious being tantamount to the wickedness of a adult male who commits criminal conversation with his ain female parent. ” ( Ibn-e-Majah: 2265 )

Note on Prohibition of “ Riba ” in the visible radiation of above mentioned Quranic Poetries and Ah-Hadiths:

Riba is an Arabic term for Interest. The dictionary significance of Riba or Interest is a charge made for a loan or for the recognition installation. Whereas what we infer the definition of Riba or Interest from the Quranic poetries is that extra sum paid or received on the chief sum. It is clearly stated from the above mentioned Quranic poetries and Ah-Hadiths that Riba or Interest is purely prohibited in any signifier. Unlike Capitalist System, Islamic Financial System is different. Alternatively of bear downing involvement on Lent sum, it imposes the system of return of capital borrowed from a loaner without any extra sum to be paid. Therefore, if a individual lends a amount to a borrower, he can merely take back the amount he has lent to him, without taking any extra sum. If an extra sum is charged, so it is Riba or Interest, which is purely prohibited in Islam and is considered to be a wickedness of high class.


After Interest or Riba, Uncertainty or Gharar is the 2nd major thing which is prohibited in the system of Islamic finance. Uncertainty or Gharar indicates to uncertainness in the monetary value or any other capable affair which lacks lucidity. Any component which contains the component of Gharar or Uncertainty is purely prohibited. By and large, it is taken as the sale of service or a merchandise which is non present at the manus or the merchandise whose effect is unknown. However, in concern hazard and uncertainness is ever at that place, whether it is in small or inordinate ratio. For this ground, In Islamic finance, Islamic bookmans have classified the Uncertainty as normal uncertainness known as “ Gharar-Qalil ” and inordinate uncertainness known as “ Gharar-Kathir ” . The inordinate uncertainness is prohibited. Anything which involves the component of guess is prohibited by the Islamic Shariah. Therefore any contract between persons or groups which includes remunerative and major uncertainness is non allowed in Islamic finance. In order to avoid the uncertainness, it must be kept in head that some criterions shall be met. For Instance, a seller must be able to present the thing to the purchaser or buyer. With regard to an understanding, Gharar includes the down payment sale, two gross revenues in one, “ pebble, touch and toss gross revenues ” , suspended sale, future sale etc. While in the visible radiation of contract, it includes the ignorance about properties, measure of the object, clip of payment in deferred gross revenues every bit good as ignorance of species or objects. Therefore, Islamic Shariah emphasizes on the undermentioned state of affairss to avoid the bad action:

Inexistence of good of a legal contract/object/transaction.

Any object which is non in custodies of marketer or is unavailable at the clip the contract is made.

Exchange of an object based on unsure payment and bringing

Gambling, Alcohol, Pornography and other Banned Merchandises:

In Islamic Shariah, Gambling, Alcohol is purely prohibited. This can be seen in the light assorted poetries of the Holy Quran.

“ They ask you about vino and gaming. Say, “ In both there is great wickedness, and some benefits for people. And their wickedness is greater than their benefit. ”

( Surah: Al-Baqarah Poetry: 219 )

Another poetry in the Holy Quran on this affair:

O you who believe! Wine, gaming, communion tables and divining pointers are crud, made up by Satan. Therefore, chorus from it, so that you may be successful.

( Surah: Al-Ma’ida Poetry: 90 )

Apart from this Pornography and some other banned merchandises like hogs meat, are besides non allowed and are prohibited by the Islamic Shariah. Therefore, Islamic fiscal system does n’t let the pattern or concern in which elements like Gambling and Alcohol every bit good as other prohibited elements is involved. Neither has it allows or the trade with the sale, purchasing and publicity of such elements.

Manners of Islamic finance:

There are different manners of Islamic finance, among which five are discussed below:








“ Modaraba means a concern in which the endorser ( Zarib ) participates with his money and another ( Modarab ) with his attempts or accomplishment or both his attempts and accomplishment and shall include Unit Trusts and Mutual Fund by whatever name called. ”[ I ]

Analysis of Modaraba:

It is clear, from the definition of Modaraba that there is an engagement of two persons, sides or groups i.e. Zarib and Modarib. In instance there is a net income earned during the twelvemonth, it is distributed among both of them i.e. moneymans and enterprisers. This is done harmonizing to the pre-agreed ratio of sharing the net income. The loss is shared among the moneymans in proportion to the capital invested in the concern. If a loss occurs due to the carelessness of the Modarib i.e. pull offing legal guardian or it is someway mentioned in the footings of understanding among the Zarib and the Modarib, so loss is to be shared by the both of them instead than one. Modaraba is a legal manner of making concern. A Modarib is a legal individual can be sued or a individual can action the other by the jurisprudence in instance of any job.

Advantage of Modaraba:

One of the advantages from concern point of position is that Modaraba is an effectual system for raising big sum of resources which can be used for productive intents in topographic point of a joint stock company. From the prospective of Islamic Finance, the advantages of Modaraba are can besides been seen as there is equal distribution of net income or distribution of net income on in agreement footings and in instance of loss both parties portion the loss. This is good as a individual individual who invests is non the lone one left out to bear the amendss or agonies. Unlike Conventional Financial System, this manner of Islamic Finance brings justness among both parties. It besides ends the monopoly of the loaners who charge involvement on their Lent capitals which causes the other individual or party to endure.



“ A signifier of Islamic insurance based on the rule of ta’awun or common aid. It provides common protection of assets and belongings and offers joint hazard sharing in the event of loss incurred by one of its members. Takaful is similar to common insurance in that members are insurance companies every bit good as insured ”[ two ]


Frequently in our day-to-day lives, we see or hear the term Insurance. It is a world-wide known process which has a function somehow in personal, concern, fiscal or authorities sector etc. The Insurance that we largely hear or cover with is the Conventional Insurance. On the other manus there is besides an Islamic Insurance, which is used by the Islamic Finance system based organisations known as “ Takaful ” . Takaful is an Arabic term used to specify Islamic insurance. To understand the difference between the conventional insurance and Islamic insurance, we have to specify both.

Conventional Insurance can be defined as a manner to supply security and compensation of what is valuable in the event of its loss, devastation or harm based on the rule of guess and hazard pickings.

By reading the above definition, a reader might believe that it all seems to be all right. But what are the expostulations or contradictions and jobs that conventional insurance has with the Islamic Shariah based fiscal system, will be discussed below:

Problem of Uncertainty:

The Arabic term used to specify uncertainness is “ Gharar ” . The actual significance of Gharar is rip offing, uncertainness and ambiguity. Gharar are of two types, one is “ Jahalah ” which causes to challenge. An illustration of this is when the topic affair in the sale is unspecified or un-quantified. The other type is when there is uncertainness of one party ‘s net income i.e. the net income in insurance of the party which might be the policy holder.

Problem of Hazard:

Another job with Conventional Insurance is the engagement of the hazard ( khatar, an Arabic term used to specify hazard ) factor as the ownership of any sum, where both the consideration is trade good and money is demanded.

Problem of the engagement of Gambling:

Mayser is an Arabic term used for Gambling. Gambling or Mayser has two chief elements i.e. Gharar ( uncertainness ) and Khatar ( hazard ) . Both of these elements have been discussed above every bit good and are prohibited. Since the insurance involves both so it is non allowed by the Islamic Shariah. In Conventional Insurance, a little sum for the premium is contributed by the participant in the hazard / hop to derive a big amount ; this states the Risk- pickings or Khatar. The sum of money paid for the premium is lost by the participant when insured event does non happen ; this states the Uncertainty or Gharar. Another job that insurance company faces when the claims of the participant are higher than the sum contributed. It consequences in the deficit of the company ‘s assets. In this we besides see that there is an uncertainness of the sum that will be required by the Insurance participant in instance of happening of an insured event.

Problem of the engagement of Interest:

There is engagement of Riba ( Interest ) in the loaning and adoption of investings and financess. There is a fixed involvement and engagement of involvement in the investing and common related patterns of conventional insurance companies.

Now the solution to all the above stated jobs which exist with the Conventional Insurance is provided by a new mechanism of Islamic Insurance known as Takaful. Takaful means “ vouching each other. ” The system of Islamic Insurance is based on the rule of “ TA-AWUN ” which means common aid and “ Tabarru ” which means voluntarily. In this manner the hazard is jointly shared by the group voluntarily. This implies that there is a treaty between the participants or a group of members who agree to reciprocally vouch among themselves against the amendss or loss to any of them, which is clearly defined in the treaty.

Basic Principle behind Takaful:

The construct recognized by the Islam is that “ fortunate many assisting the unfortunate few ” . In the Holy Quran, it clearly stated that:

“ Help ye one another in righteousness and piousness, but help ye non one another in wickedness and resentment ” . ( Surah: Al-Maeda, Verse: 2 ) .

In Islam, the assisting of people who are confronting trouble in life or those who are in demand are greatly emphasized.

Features of Takaful:

In believe of the above mentioned construct, a Takaful fund is generated in which people participate with a great earnestness to assist those who are in demand of aid. Keeping in position of this, every policy holder would pay his subscription to help those who need aid. Any member or participant in Takaful enduring from a catastrophe or a calamity will have a certain sum of money or a fiscal benefit from the Takaful fund, as already stated in the treaty to assist him to run into the harm or loss.

Operationss of Takaful:

It should be kept in head that the transactional facet of the commercial activity of Takaful must be capable to the Islamic contractual Torahs in order to guarantee its conformity with the Islamic Shariah. The company involved in Takaful concern will move as the operator. The company will accept the payment of Takaful installments or the premium i.e. takaful parts, from the participants who wish to take part in the Takaful program or strategy. In order to extinguish the uncertainness in the Takaful contract, the construct of Tabarru i.e. to donate, lend or to give away is integrated in it. In add-on, a participant will hold to manus over certain portion of his Takaful installments as a gift. The company will bear down a fee for its direction services. To farther extinguish the riba or involvement from the Takaful fund, including the minutess paid as Tabarru, are re-invested based on the rule of Modaraba. The full participants have to portion net income and loss. Net income is shared on the agreed ratio.

Uses of Takaful:

Takaful can be used to cover amendss and losingss of belongingss like house, mill, offices, mosques, vehicles including autos, bikes etc. , goods during imports and exports, valuables, wellness, accident and life.



“ A manfaah ( usufruct ) type of contract, whereby a lease giver ( proprietor ) leases out an plus or equipment to a client, at an in agreement rental fee and pre-determined rental period upon the ‘aqd ( contract ) . The ownership of the leased equipment remains in the custodies of a lease giver. ”[ three ]

Charachteristics of Ijarah:

Following are some of the of import points sing Ijarah:


The Muajjir ( lease giver ) retains the ownership of the leased plus and the leased plus should non be a consumable merchandise.

Hazard Carrier:

The Muajjir ( lease giver ) bears all the hazard sing the leased plus except that those are beyond the control of him. If the harm caused to the plus is due to Mustajir ‘s carelessness or mistake so he will bear the loss.

Get downing Time for rental duty:

Its starts when the plus is handed over to the Mustajir ( lesse ) .

Utility of the belongings:

The leased plus should be non fungible.


If the Mustajir fails to do payment in clip so he will be charged and the sum recovered by the Muajjir ( lease giver ) will on be used for charitable intents.

Repossession of The Leased Asset:

There can non be two contracts in one contract. i.e. the Muajjir ( lease giver ) ca n’t do the Mustajir ( apt ) to buy the leased plus at the terminal of the chartered period. Harmonizing to Ijarah regulations the merely the usufruct of the plus is transferred to the Mustajir ( lesse ) non the ownership.

Valuation upon completion of chartered period:

Upon the completion of the rental period, the value of the leased plus should non be wholly devaluated.

Premature Termination of Lease:

If the Mustajir ( lesse ) violates or contravenes the footings of rental so Muajjir has a right to end the rental.

Consequence of Premature Termination:

The Mustajir ( lesse ) will non be apt to pay any sum or rent after the expiration of the rentals contract.

Sale And Lease Back As One Transaction:

Sale and leased back will be considered as two separate minutess.

Determination of Rent:

Market given forces determines the rent.

Equivalent To Sale:

It is different from sale as ownership is non transferred in it.



“ A papers or certification, documenting the undivided prorated ownership of implicit in assets. The sak ( remarkable of sukuk ) is freely traded at par, premium or price reduction. ”[ four ]


Sukuk, an Islamic security is the plural of Arabic word “ Sakk ” Which means legal instrument, workss or look into. Neither is it a fixed income nor an involvement bearing bonds. These meet the footings of the Islamic jurisprudence and its investing rules. Sukuk refers to securitization, a procedure in which big Numberss of investors attain the ownership of implicit in assets. Sukuk posses features of both equity and bonds due to the ground that all ownership benefits and put on the line together either all the ownership of implicit in assets is transferred to the holders of Sukuk certification. Normally Sukuk issued are of short term i.e. of three to five old ages. Sukuk facilitates the support of big merchandises. Sukuk holders can portion in the grosss generated by the Sukuk assets. Not merely these are listed on recognized exchanges but are besides tradable except for Sukuk Al Salam ( a type of Sukuk ) . These can be bought from the issuer or from the secondary market Sukuk may be issued on specific every bit good as bing assets that may go available at a hereafter day of the month.

Aims of Sukuk:

Following are the aims of Sukuk: –

Enabling the organisations in raising capital in a Shariah-compliant.

Expanding the investor base.

Showing the new groups with investing chances.

Types of Sukuk:

Sukuk based on partnership dealing. It includes the followers:

a. Sukuk Al Musharakah

b. Sukuk Al Modaraba

Sukuk based on predictable return dealing. It includes the followers:

a. Sukuk Al Ijarah

b. Sukuk Al Salam.

c. Sukuk Al Istisna

Generic Structure of Sukuk:

A particular purpose vehicle plays an of import function in Sukuk construction. On the behalf of Sukuk holder it purchases the assets from its original proprietors. In order to raise financess SPV is setup as portion of group of companies selling the assets.

Following are the stairss of the Generic Structure of Sukuk:

An plus is sold to the particular purpose vehicle ( SPV ) by the corporation which is divided up by the SPV in equal units of normally $ 1000 or ?1000 and is transferred on to the Sukuk holders. In the event a Modaraba or Musharaka is the implicit in dealing. A portion represents the implicit in plus in the corporation or partnership.

The financess stand foring the figure of certifications, which are bought by the Sukuk holders, are transferred to the SPV who transfers the entire returns minus any cost, to the corporation.

The financess are invested in the Shariah compliant investing stipulated in the contract by the corporation.

Either net income or losingss are generated ( for partnership type contract ) or return is paid ( for predictable return type investings ) by the Shariah-compliant investing.

Coupons ( typically quarterly ) are return and paid to the Sukuk holders by the SPV or the SPV collects net incomes or losingss.

The assets are sold to the SPV by the Sukuk holders at adulthood. The SPV sells it back to the corporation.

This is how money flows from the corporation to Sukuk holders through SPV.



Musharakah is a system of shared hazard financing where two or more parties provide labour and capital to a concern. The net income is shared between the parties in concern harmonizing to a ratio that is decided in progress by the spouses in concern whereas loss is shared in proportion to the capital invested by each spouse in the concern.


It is derived from the word “ shirkat ” which means sharing. The behavior of Musharakah is controlled by the footings and conditions of an understanding executed by the parties in concern.

Musharakah investing:

In Musharakah investing the parties from trade and finance and the bank temporarily participates in which both agrees to lend their several portions in the signifier of labour and capital. The engagement takes topographic point when the Musharakah investing understanding enters between the bank and the party.

Merely selected parties in the corporate sector will be able to utilize Musharakah investing for financing the demand of working capital.


In the Musharakah venture, the investings of financess shall be harmonizing to an agreed ratio decided by the bank and the party.


The bank shall measure, supervise and supervise the public presentation of the Musharakah venture where as the party will pull off and run the full venture.

Sharing of net income:

The bank is allowed to bask complete flexibleness in dialogue with its clients as follows to the proportion of the direction fee, sharing ratio of the leftover net income and the weightage where of all time it is applicable.

On the footing of the jutting net income prognosis, the net income sharing between the bank and the party is determined. Having been agreed to the direction fee, the ratio of the net income could be agreed h changing with the net income projections. First the net income is provided for the direction fees and so the staying net income is distributes between the Bankss and its clients on the footing of their several financess employed in the venture, calculated on day-to-day merchandise footing. Once the direction fees is paid, the sharing ratio of net income can non be changed. The bank in its ain judgement can let “ good direction fees ” at higher rates, if the net income achieved by the party is more than the net income projections given earlier. The direction fees will be reduced or in some instances even wiped off, if the net income achieved by the party is less than the jutting net income.

Sharing of loss:

The bank and the party will portion the loss purely in conformity to the ratio of financess deployed by each one of them in the business.. the existent sum financed by the bank worked out on day-to-day merchandise footing, will be the Bank ‘s portion of fund. The party ‘s portion of fund will be the entire capital deployed by them, worked out on the day-to-day production footing. The capital provided by the party shall include:

Paid up capital.

All types of militias.

All inappropriate net incomes.

Long/Short term Loan/Capital raised through engagement term certifications etc and others.

Borrowing on which involvement is non paid.

Deduct from the entire capital loses, if any brought forward.


Weightage will be applied to the Bankss or the clients financess employed in the venture. Along with the countenance advice, the method of weightage wherever necessary shall be conveyed to the subdivisions.


In its ain right and judgement, the bank shall obtain sufficient security from the party to guarantee safety of the capital invested/financed as besides for the net income that may be earned as per net income projection by the party. The security which the bank will obtain shall be kept to the full insured at the party ‘s cost and disbursal.


The bank will choose some companies and financing under Musharakah shall be restricted to such companies. The choice of parties will cover all the sectors of trade and industry. Their satisfactory track-record, concern morality and viability of the proposal will be the footing of choice for which the bank shall exert its ain judgement.

Standards of choice:

Those parties will be selected by the bank which will fulfill the undermentioned standards:

Satisfactory operated bank history.

Efficient direction.

Record of the net income during last 2/3 old ages, provided none of the manager has been defaulter to the bank.

Option to take part:

The parties from trade and industry have complete pick to either borrow money from the bank on bing involvement based system or take part in Musharakah if invited by the bank.

Centralized approving powers:

The Head Office will hold the power for the blessing of working capital funding under Musharakah system.

Footings and conditions of funding:

The Musharakah investing understanding holds the footings and conditions of funding including the manner of sharing net income or loss by the bank and the party.