Islamic financial products are structured in a way that adheres to the principles of Sharia law, which prohibits the payment or receipt of interest (riba) and prohibits investments in businesses that are considered haram (forbidden).
One common structure used in Islamic finance is the concept of profit-sharing, known as Mudarabah. In a Mudarabah arrangement, one party provides the capital (Rab al-Mal) while the other party provides the expertise and labor (Mudarib). Profits generated from the investment are shared between the two parties according to a pre-agreed ratio, while losses are borne solely by the capital provider.
Another common structure is Musharakah, which is a form of partnership where all parties contribute capital and share profits and losses in proportion to their investment. This structure promotes risk-sharing and encourages collaboration between investors and entrepreneurs.
Additionally, Islamic financial products often utilize the concept of Ijara, which is similar to a leasing agreement. In an Ijara contract, the financial institution purchases an asset and leases it to the customer for a fixed rental fee. At the end of the lease term, the customer may have the option to purchase the asset at an agreed-upon price.
Overall, Islamic financial products are structured in a way that promotes ethical and socially responsible investing, while also ensuring compliance with the principles of Sharia law.
| Structure | Description |
|---|---|
| Mudarabah | Profit-sharing arrangement between capital provider and entrepreneur |
| Musharakah | Partnership where all parties share profits and losses |
| Ijara | Leasing agreement for assets |