Islamic Finance

Question 1

Equity finance

Answer 1

Mudaraba

Question 2

Debt finance

Answer 2

Sukuk

Question 3

Venture capital

Answer 3

Musharaka

Question 4

Trade credit

Answer 4

Murabaha

Question 5

What is Trade Credit (Murabaha)

Answer 5

Involves a bank buying an asset and then selling onto a business for a marked up price (agreed when purchase is made).

The business will then pay the amount due in installments.

The overall idea here is that goods can be bought and then sold at a higher price to make a profit. These goods are then paid for with the mark-up element being paid for out of the profits.

Question 6

What is Lease finance (Ijara)

Answer 6

An Ijara transaction is the Islamic equivalent of a lease and works in exactly the same way as conventional leases except if it is a finance lease the lessor remains responsible for major maintenance and insurance costs. The use of the asset will be specified in the contract.

The reason such leases are allowed is because the payments being made by lessee, are rental payments not interest payments i.e. the asset is being rented from its owner.

Question 7

What is Debt Finance (Sukuk)

Answer 7

A Sukuk transaction is where a business asset with a life of three to five years is bought and paid for by a third party or parties. The business then uses this asset to earn profits which it then shares with the third party or parties (i.e. there is no interest).

If the asset makes a loss, this is also shared with the third party or parties.

Question 8

What is Equity finance (Mudaraba)

Answer 8

A Mudaraba transaction is a partnership between a partner who provides the capital and another partner who provides the time, skill and expertise required by the business.

The partners share in any profits made by the business and the capital provider suffers any losses.

Interest cannot be charged for the capital invested.

Question 9

What is Venture capital (Musharaka)

Answer 9

A Musharaka transaction is where two or more partners provide both the capital and the time, skill and expertise required by the business.

These partners all share in the profits in a ratio agreed in their original contract.
Losses are always shared in proportion to the capital contributions.