Shariah Concepts in Islamic Banking
Contract of exchange of currency for another currency.
A rental agreement between the lessor and lessee whereby the lessee obtained the right to the usufruct on the asset owned by the lessor in consideration of rental payment. The lessor retains the ownership of the asset until the maturity of the rental period where the ownership is transferred to lessee through sale or gift.
A sale by order where the Customer who has a contract to deliver the asset/project in future, request the financier to undertake the construction, complete and deliver the asset/project according to the specication. The financier will appoint a thirt party or the customer to construct the project on its behalf.
A Shariah principle governing guarantee. It applies to a debt or other business contracts in which the bank guarantees the beneficiary on the execution of the performance.
A profit sharing agreement between two parties, an investor and the entrepreneur. The investor will supply the entrepreneur with funds for his business venture and gets a return on the funds he puts into the business based on a profit sharing ratio that has been agreed earlier.
A trust sale in which the seller sells the goods to the buyer at cost plus markup payable on spot or deferred. Detail of cost and profit shall be disclosed to the buyer.
A partnership or a joint business venture to make profit. Profits will be shared by the partners based on an agreed ratio which may not be in the same proportion as the amount of investment made by the partners. However, losses incurred will be shared based on the ratio of funds invested by each partner.
Wakalah is an agency contract in which a party mandates another party as his agent to perform a particular task. In the current context of Islamic finance, the customer normally appoints a financial institution as the agent to conduct a particular mu'amalah transaction and in return, the financial institution will receive a fee for the service. Alternatively, the bank may also appoint the customer to perform a transaction on behalf of the bank.
Tawarruq refers to the purcahse and sale with two stages of transaction. In the first stage, the Bank purchases the asset and sells to Customer on deferred payment terms. In the second stage, the Customer will then sell the asset at cost and on cash basis to a third party.