INCEIF

The Global University in Islamic finance

Kuala Lumpur, Malaysia
CI FP


The framework of Islamic financial products based on various
Shariah principles and their classifications.

Semester January, 2012

FASHOLA OLAYINKA NURUDEEN
Student ID: 1100275







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Abstract.
ALLAH has created man as a social being by nature. Thus, he needs others
whom will deal with him in all matters of his life such as trading and marriage
in order to benefit each other, individually or collectively. Due to the negative
side of man, such as having a soul which always command him to do bad
things, the Lawgiver has enacted the law for financial transactions and He has
ordained regulations for disposition of man.
Therefore, it is necessary for everyone to have an adequate knowledge of these
financial laws, their nature and varieties; their essential requirements and
conditions; their rules and legal effects, etc. This write up seeks to explore the
Islamic financial products, their classifications base on the Shariah principles
and how they can be applied to the Islamic banking and general financial
transactions towards ensuring that the limits and laws of ALLAH are
protected.










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Objectives of the research.
To identify the various Shariah principles in Islamic financial transactions
To identify the classifications of the Shariah principles in Islamic financial
transactions
To discuss the framework of the Shariah principles and its classification in the design
and development of Islamic financial products.
To discuss how Shariah principles are applied to modern Islamic banking and finance.

Key terms of the research
* Shariah Principles *Islamic Banking *Islamic Financial Products *Ijarah * Musharakah















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Table of Content
1.0 Introduction. .................................................................................................................... 5
2.0 Shariah Principles in Islamic Finance. ............................................................................ 7
3.0 Classification of Shariah Principles in Financial Transaction. ............................................ 9
3.1 Sales Base Principles. ..................................................................................................... 11
3.2 Profit-sharing principle. ................................................................................................. 13
3.3 Lease-based Principles ................................................................................................... 14
3.4 Benevolent-loan Principles. ........................................................................................... 14
3.5 Fee-based Principles ....................................................................................................... 14
3.6 Supporting Principles. .................................................................................................... 15
4.0 Application of Sharia Principles. ....................................................................................... 17
4.1 Islamic Deposits/ Investment Accounts. ........................................................................ 17
4.2 Islamic Financial Products. ............................................................................................ 18
4.3 Takaful products. ............................................................................................................ 20
4.4 Equity based products. ................................................................................................... 21
5.0 Lease Based Principles Ijarah. ........................................................................................ 22
5.1 Definition ....................................................................................................................... 22
5.2 Ruling on Ijarah. ............................................................................................................. 22
5.3 Types of Ijarah. .............................................................................................................. 22
5.4 Application of Ijarah. ..................................................................................................... 23
5.4.1 Financial lease to obtain desired asset......................................................................... 23
5.4.2 Financial lease to get cash. .......................................................................................... 25
6.0 Profit Sharing Base Principles Musharakah ................................................................... 27
6.1 Asset finance via Musharakah........................................................................................ 27
7.0 Conclusion ......................................................................................................................... 29
8.0 References .......................................................................................................................... 30

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1.0 Introduction.

Islamic finance is finance under Islamic law (or Shariah) principles. The basic sources of
Shariah are the Quran and the Sunna, which are followed by the consensus of the jurists
and interpreters of Islamic law. The central feature of the Islamic finance system is the
prohibition in the Quran of the payment and receipt of interest (or riba). The strong
disapproval of interest by Islam and the vital role of interest in modern commercial banking
systems led Muslim thinkers to explore ways and means by which commercial banking could
be organised on an interest-free basis.
Islamic financial institutions are relatively recent creations: one of the first Islamic banks was
set up in Egypt in 1963. Although the origin of modern Islamic banking was in Egypt, it
probably would not have developed as an important financial force without the strong support
of Saudi investors. The Islamic Development Bank (IDB) was established in 1975 and gave
momentum to the Islamic banking movement. It was the first time in modern Muslim history
that an international financial institution committed itself to conduct its activities in
conformity with the Shariah. Instead of working on the basis of interest, the bank was
authorised to levy a service fee to cover its administrative expenses.
Since the creation of the IDB, a number of Islamic banking institutions have been established
all over the world and some countries have taken the necessary steps to organise their
banking systems along Islamic lines. The first private Islamic commercial bank, the Dubai
Islamic Bank, was founded in 1975.

Because of the restriction on interest-earning investments, Islamic banks must obtain their
earnings through profit-sharing investments or fee-based returns. When loans are given for
business purposes, the lender, if he wants to make a legitimate gain under the Shariah,
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should take part in the risk. If a lender does not take part in the risk, his receipt of any gain
over the amount loaned is classed as interest. Islamic financial institutions also have the
flexibility to engage in leasing transactions, including leasing transactions with purchase
options.
Traditionally an Islamic bank offers two kinds of services:
Those for a fee or a fixed charge, such as safe deposits, fund transfer, trade financing,
property sales and purchases or handling investments
Those that involve partnerships in investments and the sharing of profits and losses.


















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2.0 Shariah Principles in Islamic Finance.

The basic framework for an Islamic financial system is a set of rules and laws, collectively
referred to as Shariah, governing economic, social, political and cultural aspects of Islamic
societies. Shariah originates from the rules dictated by the Quran and its practices, and
explanations rendered (more commonly known as Sunnah) by the Prophet Muhammad.
Further elaboration of the rules is provided by scholars in Islamic jurisprudence within the
framework of the Quran and Sunnah. The basic principles of an Islamic financial system can
be summarized as follows:
1. Prohibition of interest :
Prohibition of Riba, a term literally meaning "an excess" and interpreted as "any unjustifiable
increase of capital whether in loans or sales" is the central tenet of the system. More
precisely, any positive, fixed, predetermined rate tied to the maturity and the amount of
principal (i.e.) guaranteed regardless of the performance of the investment) is considered
Riba and is prohibited.

The general consensus among Islamic scholars is that Riba covers not only usury but also the
charging of "interest" as widely practiced. This prohibition is based on arguments of social
justice, equality, and property rights. Islam encourages the earning of profits but forbids the
charging of interest because profits, determined ex post, symbolize successful
entrepreneurship and creation of additional wealth whereas interest, determined ex ante, is a
cost that is accrued irrespective off the outcome of business operations and may not create
wealth if there are business losses. Social justice demands that borrowers and lenders share
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rewards as well as losses in an equitable fashion and that the process of wealth accumulation
and distribution in the economy be fair and representative of true productivity.
2. Risk sharing :
Because interest is prohibited, suppliers of funds become investors instead of creditors. The
provider of financial capital and the entrepreneur share business risks in return for shares of
the profits.

3. Money as Potential" Capital :
Money is treated as "Potential" capital -that is, it becomes actual capital only when it joins
hands with other resources to undertake a productive activity. Islam recognizes the time value
of money, but only when it acts as capital, not when it is "Potential" capital.

4. Prohibition of speculative behavior :
An Islamic financial system discourages hoarding and prohibits transactions featuring
extreme uncertainties, gambling, and risks.

5. Sanctity of contracts :
Islam upholds contractual obligations and the disclosure of information as a sacred duty. This
feature is intended to reduce the risk of asymmetric information and moral hazard.





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3.0 Classification of Shariah Principles in Financial Transaction.

The shariah has established the basic foundation and principles upon which any financial
transactions can be valid under the Islamic law. These principles have been highlighted in the
section above. Furthermore, the development of financial products in Islam must also key
into these principles.

There are various ways of classifying Islamic financial product and this is largely based on
the perspective the jurist or the individual is looking at it from. A transaction can be valid
(Sahih), voidable (Fasid) and void (batil). Below are the other classification base on different
perspectives:
Transaction pertaining to transfer of property
o Bay and its sort
o Hadiyyah, Hibah/Minhah
o Wasiyyah
o Ihya al-Mawat
o Shufah
Transaction pertaining to the utilisation of Usufruct
o Ijarah
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o Qard/ Salaf /Ariyah
o Waqf / Habs
Transaction pertaining to do a job
o Wikalah
o Jualah
o Musaqah, Muzaraah, Mugharasah
o Istisna
Transaction pertaining to Investment
o Wadiah
o Sharikah and its sort
Transaction pertaining to Authentication
o Rahn
o Kafalah
o Hawalah
Transaction pertaining to Protection of Rights
o Taaddi, Ghasb and Ihtikar
o Hajr and Taflis
o Isa
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o Luqtah
Transaction Pertaining to Settlement of rights and disputation
o Tahkim
o Sulh and Iqalah
o Qismah
One of the well known approaches in classifying financial transaction in Islam is from the
view point of the practice of modern banking and finance. Base on this method, classification
is made base on funding as practiced by modern Islamic banks. Thus Islamic financial
transaction can be classified base on the following:
Sales-based Principles
Profit-sharing Principles
Lease-based Principles
Benevolent-loan Principles
Fee-based Principles
Supporting Principles

3.1 Sales Base Principles.

The sales base principle is considered as the fundamental shariah principle in financial
transition in Islam. The sales base principles can be further classified as shown below:
Base on legitimacy of the transaction
o Sahih transaction: this is a lawful and valid transaction.
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o Batil transactions: this is a form of sales that are unlawful and not valid
examples are bai al-mulamasah sale is concluded by touching an article.
bai al-hasat a transaction determined by throwing stones
Base on Exchange of Items
o Bayal-Muqayadah (Barter Trading): This is a sales where one commodity
is exchange with another. However, if the commodity falls within the class of
ribawi items then both commodities must be of the same genus.
o Bayal-Mutlaq (General Sale): This is a sale of goods for money and its the
most preferable mode of sales.
o Bayal-Sarf: This type of sale involves the exchange of any common currency
for another.
Base on deferment of payment or subject matter.
o Normal Sale: This is a normal sale in which no deferment is effected on either
the payment or subject matter.
o Sale with deferred payment (Bay bithaman ajil): This is a sale where the
payment is deferred to a latter time but the subject matter is exchanged in the
session.
o Forward Sale (Bay al-salam): This is a sale where the purchaser pays the
price in advance and the subject matter is delivered at a specified future date.
Base on disclosure of cost price and profit.
o Normal bargaining sale (bay al-musawamah): This sale is where both
parties agrees on the price and thereafter exchange the subject matter.
o Fiduciary sales (buyu al-amanh): This is a type of sales where the buyer
depends and relies totally on the integrity of the seller as regards the cost and
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profit/loss that he discloses to the buyer. This can be further categories as
below:
Cost-plus sale (bay al-murabaha): This is a sale where the subject
matter is sold at a price covering the purchase price plus the profit
margin agreed upon between the contracting parties.
Tawliyyah: This is a sale at the original cost price with no profit or
loss to the seller.
Wadiah: This is a sale at a discount from the original cost.
3.2 Profit-sharing principle.
The profit- sharing principle is often used by the Islamic bank for most of their transactions.
There are basically two types of profit sharing principles as detailed below
Mudarabah: It is a type of trading partnership in which capital is contributed by the
capital provider (rabb al-mal) and labour from the entrepreneur (mudarib). The profit
is shared between them. In case of loss, it is born by the capital provider. The
entrepreneur only suffers from the fruitless efforts.
Shirkah: It is a profit and loss sharing partnership and takes three major forms.
o Shirkat al-Amwal: It is a partnership in which participation is based on the
contribution of capital by all partners.
o Shirkat al-Abdan: It is a partnership in which participation by the partners is
based on labour or skill.
o Shirkat al-Wujuh: It is a partnership based on the credit- worthiness of the
partners. The ratio of loss is based on theliability borne whereby the ratio of
profit could be based on either the liability borne by each partner or mutual
agreement between them.
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3.3 Lease-based Principles
The lease-based principle uses the concept of Ijrah. Ijarah means lease, rent or wage.
Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage.
Under this concept, the Bank makes available to the customer the use of service of assets /
equipments such as plant, office automation, motor vehicle for a fixed period and price.

3.4 Benevolent-loan Principles.
This principle is based on the concept of Qard Hassan. A virtuous loan. Loan in the meaning
of a virtuous loan that is interest-free and extended on goodwill basis, mainly for welfare
purposes, the borrower is only required to pay back the borrowed amount. The loan is
payable on demand and repayment is obligatory. But if a debtor is in difficulty, the
lender/creditor is expected to extend time or even to voluntarily waive repayment of the
whole or a part of the loan amount. Islam allows loan as a form of social service among the
rich to help the poor and those who are in need of financial assistance. Qard Hasan may be
viewed as something between giving charity or gift and giving a loan (qard). A debtor may
voluntarily choose to pay an extra amount to the lender/creditor over the principal amount
borrowed (without promising it) as a token of appreciation. This type of loan does not violate
the prohibition on Riba, since it is the only type of loan that does not compensate the creditor
for the time value of money. Such loans have not been uncommon in human history among
peers, friends, family and relatives.

3.5 Fee-based Principles
The fee-based principle is used by the Islamic bank to generate legitimate income. Among
the most important concept used are detailed below:
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Wakalah Agency: This is a contract of agency in which one party appoints another
party to perform a certain task on its behalf, usually for payment a fee or commission.
An agency arrangement without provision for payment of a fee cannot be considered
irrevocable, thus allowing an agent the right to terminate the agency at any time. Can
be commutative or non-commutative. A bank may charge fees or providing certain
services to its customers; the bank can also pay a fee to perform an activity on behalf
of the bank, such as an agent to take delivery of goods or investing the banks funds.
Kafalah: Surety, An obligation in addition to an existing obligation in respect of a
demand for something. Lit: responsibility or suretyship. It is a covenant or pledge
given. Legally, a third party becomes surety for the payment of a debt of another.
Suretyship in Shariah is the creation of an additional liability with regard to a claim,
not to the debt or the assumption only of a liability and not of the debt. A person
providing surety or a guarantor is known as Kafil. Islamic banks use Kafalah to issue
guarantees for their business customers, for example, the bank may guarantee the
customers standing to facilitate any business endeavours that may require such
guarantees, or the bank may give a surety to the owner of a ship or the shipping agent,
to discharge goods imported by a customer on arrival of the carrying ship, pending
receipt of the original shipping documents before the customer can take delivery of
the imported goods.
3.6 Supporting Principles.
The supporting principles are based on the concept highlighted below:
Hawalah: Literally, it means transfer; legally, it is an agreement by which a debtor is
freed from a debt by another becoming responsible for a debt or the transfer of a claim
of a debt by shifting the liability for payment from one person to another, such as a
contract for assignment of debt. Thus the responsibility for payment shifts to another
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party. It also refers to the document by which the transfer or assignment takes place,
such as a bill of exchange, promissory note, cheque or draft.The mechanism of
Hawalah is used for settling accounts by book transfers without the need for physical
transfer of cash.
Rahn: This is a pledge. Collateral; technically and legally, it means to pledge or
lodge a real or tangible property of material value as security for a debt or pecuniary
obligation so as to make it possible for the creditor to recover the debt, in case of non-
payment or default, by selling the pledged property. A security given for the payment
of a debt.
Wadiah: Literally it means safekeeping. In Islamic banking, wadiah refers to the
deposited property, the acceptance of sums of money for safe-keeping in a Shari'ah-
compliant framework, under which it will be repaid. Islamic banks use the concept of
Wadiah (and Amanah) to accept deposits from customers. A bank is deemed as a
keeper and trustee of funds and becomes wholly responsible and liable for its
safekeeping with a guarantee refund of the entire amount of the deposit, or any part of
the outstanding amount, when the depositor demands repayment. The bank may at its
discretion and in certain circumstances reward the customer with a payment in the
form of Hibah as appreciation for keeping the funds with the bank







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4.0 Application of Sharia Principles.

The Islamic banks and the Islamic financial institutions develops products base on customers
request towards the satisfaction of the customers requirement. However, these product must
at every time and all times be shariah compliant. Thus in the development of Islamic financial
product the principles of shariah is applied.

This sections looks at the various products offered by the modern Islamic bank and financial
institutions and how they have applied the various concepts of the shariah principles. Detailed
below are the various Islamic financial products and the shariah principles applied.
4.1 Islamic Deposits/ Investment Accounts.

For the Islamic banking products and service, their products are broadly categorized into two:
deposit and financing. In the case of deposit there are two main category which are
transactional accounts comprising both saving and current account as well as investment
accounts represented by Mudarabah. The table below shows a summary of the banking
products and the shariah principle applied.
Account Types Shariah Principles Notes
Savings Account Wadiah yad dhamanah Liability to the bank
Qard Liability to the bank
Mudarabah No Liability to the bank
Current Account Wadiah yad dhamanah Liability to the bank
Qard Liability to the bank
Hybrid of Qard and Mudarabah Liability to the bank and profit sharing
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4.2 Islamic Financial Products.
The Islamic financial products are meant for many different purposes which are broadly
categorized into two main categories, retail and corporate. However, looking from the
perspective of the purpose of the product, these products could be classified as either asset
financing, cash or personal financing, or project financing, trade financing, or SME
financing. The table below depicts these products and the shariah principle applied.
Products Shariah Principles Notes
Housing Financing
Murabahah This is a mark-up sale
Istisna (Parallel Istisna) A form of progressive
payment for house under
construction
Ijarah muntahiya bittamleek Lease with an option to
purchase at the end of the
lease period
Forward Ijarah Financing house under
construction base on advance
rental payment
Musharakah mutanaqisah A form of decreasing
partnership ended up with
ultimate ownership by the
customer
Vehicle Financing Murabahah A form of mark-up sale
Ijarah muntahiya bittamleek /
Ijarah thumma al-bay
Lease with an option to
purchase at the end of the
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lease period
Working Capital Financing Murabahah A form of mark-up sale
Ijarah muntahiya bittamleek /
Ijarah thumma al-bay
Lease with an option to
purchase at the end of the
Tawarruq A form of cash financing
Salam A form of forward sales
Sales and Leas Back Refinancing
Project Financing Murabahah Profit sharing with the banks
and client
Musharakah Profit and loss sharing with
the bank and the client
Istisna and Parallel Istisna Progressive payment
Sales and Leas Back Refinancing
Murabahah Working capital
Tawarruq A form of cash financing
Trade Financing LC based on Wakalah A fee-based transaction
LC based Murabahah A mark-up sales
LC based Musharakah Profit and loss sharing with
the bank and the client
Debit Card Set-off (muqasah) No Liability
Charge Card Tawarruq / Inah Cash facility
Kafalah A fee-based transaction
Overdraft Tawarruq / Inah Cash facility
Factoring Bay al-dayn A sales of debt to another
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party
Letter of guarantee Kafalah A fee-based transaction
Personal Financing Tawarruq / Inah Cash facility
Service Financing Ijarah (sub-lease) Based on sub-leas

4.3 Takaful products.
Another important segment of the Islamic financial landscape is Takaful Islamic Finance.
Products within this space are for the purpose of providing indemnity and compensation for
the participants. The table below shows the two major takaful products and the shariah
principles used for its applications.
Products Shariah Principles Notes
General Takaful Tabarru (Donation) A contract of Wakala is signed
between the participants and the
takaful operator.
Waqf (Endowment) A contract of Mudarabah is signed
between the participants and the
takaful operator.
Family Takaful Tabarru and Mudarabah A contract of Wakalah and
Mudarabah is signed between the
participants and the takaful
operator.
Tabrru A contract of Wakala is signed
between the participants and the
takaful operator.
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4.4 Equity based products.
Equity is an ownership position in an organisation or project or venture taken through an
investment. Returns on the investment are dependent on the profitability of the organisation
or project. These types of products are for Islamic capital market a summary of these
products and the underlining shariah principles are detailed below:
Products Shariah Principles Notes
Share/ Equity Musharakah The company must have been
screened using the shariah
criteria before investing in the
company can be valid.
Mutual Funds/ Unit Trust Musharakah and Wakalah An agreement of musharakah is
signed amongst the investors and
a wakalah agreement between
the investors and fund managers.
Private Equity Funds Musharakah and Wakalah This can be used during the
acquisition and management of
companies
REITs Musharakah and Wakalah A form of investment in real
estate related assets
Specific funds e.g aircraft
leasing fund
Musharakah and Wakalah Investment in specified
underlying assets



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5.0 Lease Based Principles Ijarah.
5.1 Definition
Jurists have defined Ijarah as A contract pertaining to usufruct transfer, with compensation.
The important points from the definitions are :
It differs with sales and purchase of goods concept. Lease is selling and purchasing of
usfruts of goods. However, the goods are still subjected to the ownership of the lessor.
The right to use the usufructs of the asset has switched from owner to the lessee. For
consideration, the lessee has to pay am amount of rental payment to the owner of the
asset.
5.2 Ruling on Ijarah.

The Quranic proof is derived from the verses And if they sukle your offspring, gic=ve them
their recompense (At-Tahrim:6).
The proff from the Sunnah is derived from the hadith: Pay the hired worker his wage before
his sweat dries off (Ibn Maja, no 1980)
It is also known that the Muslim nation during the time of the prophet (SAW) reached a
consensus on the permissibility of leasing. In this regards, the observable usufruct of goods is
clear benefit to the people, thus rending leasing such usufruct, valid based on the validity of
selling the objects themselves.
5.3 Types of Ijarah.
The majority of the jurists have classified lease according to various perspective, the flowing
are the two main perspectives:
Subject Matter of the leased asset: From this perspective of item that is the subject
matter of the lease contract. Leasing can be further classified into three as listed
below:
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o Ijarah Ain: To lease the usufruct from the specific goods or assets.
o Ijarah Amal: To lease out workers or self skills
o Ijarah Muswsufah Fi Az-Zimmah: this is a form of Ijarah where the assets
needs to be described in details in advance but not is not available at the time
of contract.
Usage and its new structure: if Ijarah is to be viewed from the perspective of its
utilization and its new structure, it can be divided into two new types of lease as
flows:
o Operating Lease: this is the original form of Ijarahain thus the contents and
terms of the contract are similar to a normal lease, especially in the view point
of asset ownership and the responsibility to maintain the asset.
o Financial Lease: It is a type of lease which is normally used by the banks in
order to help their customer to obtain desired asset or obtain cash for various
purpose.

5.4 Application of Ijarah.
The Islamic banks use the concept of Ijarah to help finance asset for their clients. Two
example of the application of Ijarah will be looked at as detailed below:
5.4.1 Financial lease to obtain desired asset.
In order for the customer to purchase the desired assets, he will approach the bank asking for
a financing product, then the flowing process will take place:


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Bank
Customer
Asset Seller
2
1
3
4
Buy Asset
Lease
Promise Undertaking
Sell @ ownership
transfer

Figure 1: Financial Lease to obtain asset

Base on the illustrations above the following applies:
Promise to undertake: the customer undertakes to lease the asset from the bank. This
process will take place after the customer has identified the desired asset.
Purchase the assets; the bank will purchase the from the seller for cash.
Leasing Contract: after having the beneficial ownership on the asset, the bank will
lease it out to the customer.
Full transfer of ownership; it is done after the end of the last period of the lease, the
bank will transfer its full ownership to the customer, either in the form of gift (then it
is called Ijarah wal iqtina or Ijarah muntahiyah bit tamleek) or selling at the
minimum price (then it is called as Ijarah thumma al-bai)
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5.4.2 Financial lease to get cash.
In certain situations, the customer might be in need of cash in order to extend its business.
For example a company which posses its own high valuable assets, it can use financial lease
product to obtain cash. The illustration below explains how Ijarah can be used to raise funds.


Bank
Customer
1
2
3
Lease
Sell
Sell @ ownership transfer

Figure 2: Financial Lease to get cash.
Base on the illustrations above the following applies:
The customer, who posses its asset for example machineries, sell it to the bank for the
cash needed by it. The cost of the asset should be valued at market price for example
the machineries cost 1 Million Dollars. Subsequently the bank pays the money to the
customer.
After having ownership of the asset the bank lease it to the customer for the value of
rent, including the profit for example 1.2 Million dollars as a total accumulated rents
for a period of 2 years.
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After the 2 years period ends and the customer successfully settles out his rental
payment as per agreed, the bank will give its beneficial ownership as a gift to the
customer or sell it at a minimum price.
The outcome of this is that the customer obtains the cash, that is, 1 Million Dollars.
The bank make a profit of 200,000 Dollars from the rent payment
Both parties are able to stay away from riba based loan and their business is
permissible and valid.















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6.0 Profit Sharing Base Principles Musharakah
Musharakah is a word of Arabic origin which literally means sharing. In the context of
business and trade it means a joint enterprise in which all the partners share the profit or loss
of the joint venture. It is an ideal alternative for the interest based financing.

6.1 Asset finance via Musharakah.
One of the ways in which Islamic Banks finance assets is the use of Musharakah, the flow
belows shows a practical application of how this concept is used to finance a house.

Islamic Bank
Customer 2
Musharakah contract
4
Assets Seller
3
1
Purchase a
house and
pay 10% as
deposit
Lease shares
Pay 90% of the price
5
Sell by installment

Figure 3: Musharakah contract for Asset purchase

Base on the illustrations above the following applies:
A customer wishes to buy a house identify the property and executes a sale and
purchase agreement, follow by a 10% payment. If the house cost 1 Million dollars, he
pays 100,000 Dollars.
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In order to obtain the balance of 90% of the house price, the customer applies for a
Musharakah financing from an Islamic Bank. The bank will agree to enter into a
Musharakah contract with the customer to co-join in having ownership of the house.
Subsequently a Musharakah contract is executed.
The bank pays the remaining 90% of the price, that is, 900,000 dollars and agrees to
be a partner in the ownership of the house. Thus the bank owns 90% and the customer
owns 10% of the house.
Since the house is owned by the bank and the customer the bank concludes a lease
agreement with the customer whereby the bank will lease its portion of the ownership
to the customer monthly for a period of 20 years. The rent payment is calculated base
on the target for the total sum of profit by the bank in this finance. For example if the
bank is expected to make a profit 200,000 dollars on this transaction. The customer is
expected to pay back 1.2 Million dollars within 20 years that will translate to 60,000
Dollars yearly which means 5,000 dollars monthly.
At the end of the 20 years the customer would have completely owned the house
100% and it now fully and solely belongs to the customer.






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7.0 Conclusion

The importance of the Shariah principles in the design, development, implementation and
management of Islamic financial products cannot be over emphasized. Thus every Islamic
financial product must be certified base on the principles of the Shariah. Furthermore in the
evolution of these products to meet the demands of modern times the Islamic banks must also
ensure that they are not driven by profit or wanting to compete with their conventional banks,
Muslims must ensure that at all times the principle of the Shariah is guided jealously.

There is need for an internationally recognized product development and certification body
for the Muslim world that will set the direction for certified Islamic financial products, what
we have today is that in different regions of the world people have different interpretation and
implementation of the Shariah as regards the permissibility or otherwise of some certain
financial products. The objectives of the Shariah are to serve man, make life easy and prevent
any harm to be inflicted upon them. Having this at the back of our mind if the Shariah
principles are well coordinated and implemented the world will be a better place for all.
Hence every Muslim must strive for the implementation of the Shariah financial principles in
the discharge of their economic and financial detailing.







30

8.0 References

Freshfields Bruckhaus Deringer, S and P - IF Outlook, 2006. HSBC Amanah, IF Basic
principles and structures - IF relevance & growth, IBS journal.

INCEIF (2012), CIFP Manual: Shariah Rules in Financial Transaction. INCEIF, Kuala
Lumpur, Malaysia.

INCEIF (2011), CIFP Manual: Shariah Aspects of Business and Finance. INCEIF, Kuala
Lumpur, Malaysia.

Razali HJ. Nawawi (2009). Islamic law on commercial transactions. CERT Publications
Malaysia.

Zaharuddin Abd.Rahman (2010). Contract and the products of Islamic Banking. CERT
Publications Malaysia.