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Islamic finance has emerged as an effective tool for financing development worldwide, including in non-Muslim countries. Major financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system and that it has the potential to help address the challenges of ending extreme poverty and boosting shared prosperity.
The Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion, covering bank and non-bank financial institutions, capital markets, money markets and insurance.
What Is Islamic Finance?
The term Islamic finance is used to refer to financial activities conforming to Islamic Law (Sharia). One of the main principles of the Islamic finance system is the prohibition of the payment and the receipt of riba (interest) in a financial transaction. The term riba covers all forms of interest and is not limited to usury or excessive interest only. The most critical and significant implication of banning interest is the indirect prohibition of “pure” debt security. The key point to bear in mind is that Islamic law doesn’t recognize money and money instruments as a commodity but merely as a medium of exchange. Hence any return must be tied to an asset, or participation and risk-taking in a joint enterprise
The various types of Islamic finance are as follows:
Trade with markup or cost-plus sale. The purchase of an asset is financed for a profit margin, with the asset purchased on behalf of the client and resold at a pre-determined price. Payment could be in a lump sum or in instalments and ownership of the asset remains with the bank till full payments are made.
Operational or financial leasing contracts. Bank purchases assets on behalf of the client and allows usage of an asset for a fixed rental payment. Ownership of the asset remains with the financier but may gradually transfer to the client who eventually becomes the owner.
Trustee financing contract. One party contributes capital while the other contributes effort or expertise. Profits are shared according to a predetermined ratio and the investor is not guaranteed a return and bears any financial loss.
Equity participation contract. Different parties contribute capital and profits are shared according to a pre-determined ratio, not necessarily in relation to contributions, but losses are shared in proportion to capital contributions. The equity partners share and control how the investment is managed and each partner is liable for the actions of the others.
Tawarruq is an arrangement that involves a purchase of a commodity or asset based on a deferred payment basis by way of Murabahah. In this case, the Customer is purchasing the commodity as the underlying asset from the Bank. The commodity or asset is then sold for cash to a party other than the original seller.
At Ensure Mortgage, we understand the historical and cultural significance of Islamic finance. If you are looking for financial help, and want to follow an Islamic finance path, we can help you find the lenders that are willing to share that path with you.