Islamic Swap Free Accounts - Part 2
The system of Islamic Banking forges a partnership between the bank and the patron, referred to as Mudarib. These partnerships facilitate the sharing of profits and allow for a number of different types of transactions including, but not limited to:
In profit sharing, or Mudharabah, the financial institution provides capital to a patron who will use it to finance a business idea. The gains made on this transaction are shared between the patron and the institution, by way of a prearranged ratio. However, only the institution, not the patron, will be affected by capital losses.
Murabahah is a contract between the financial institution and the patron in which the institution purchases goods for the patron, who in turn purchases shares of the goods on a pre-agreed schedule from the bank at cost, plus a predetermined profit percentage. As this is not a loan but rather the patron is purchasing the good from the financial institution, penalties such as late fees are not assessed, and the patron is not responsible for losses.
Bai" Bithaman Ajil
Bai" Bithaman Ajil is a system of deferred payment that features a predetermined profit percentage, but with the difference that payments are not made in installments but rather as one lump sum when the term of the transaction is at its end.
Hibah is a gift, which can be given by either patron or financial institution, in appreciation for services received. It is completely voluntary.
Qard is a loan that is offered to the patron without any interest. The patron is only responsible for the initial amount of money given by the financial institution. He may then in turn offer a voluntary gift, or hibah, to the bank as a form of thanks.
Deposit accounts also exist in the form of a patron"s interest-free loan offered to the bank. The bank must repay the loan, keep the patron"s money safe, and share bank profits with the patron, who becomes a Musharik, or partner, after he opens such a deposit account for purposes of investment.
Another type of deposit account, or Wadiah, is a safekeeping service in which the bank holds and cares for the finances deposited at the institution, which in turn agrees to refund the deposit, in part or in whole, upon request of the client. As this is a service, the patron may be assessed a fee for safekeeping by the financial institution. The patron may also receive a gift, or hibah, from the bank as a sign of both gratitude for his business and appreciation for the use of his money.
In joint ventures, or Musyarakah, profits and losses are both shared by the parties involved. These profits and losses are not shared evenly, however, but are determined by the ratio of equity contribution. This differs from banking that is based on the collection of interest in three ways. First, the Islamic Banking institution, as well as the patron, both face risk. Second, the return rates of the transaction are fixed, and finally, the bank possesses a stake in the business ownership.
Salam is the sale of goods, completely paid for in advance, with an agreed-upon delivery date in the future. The goods are usually agricultural commodities, which are not yet available, but will mature at a future date. The sale, however, can be conducted with any commodity that can be clearly depicted in a contract, barring gold, silver and currency.
This is the purchase of a good before it is available. For instance, a pre-construction house may be purchased in advance on land already in the possession of the patron. The transaction amount is fixed and must be agreed upon by both patron and financial institution in advance of the sale. The amount may be repaid to the financial institution either at once, at the end of the term of the transaction, or through installments.
Wakalah functions similarly to power of attorney, when the patron arranges for a representative to have the power to conduct financial transactions under his name. Financial institutions may assess a fee, as this is a service provided to the patron by the bank.
Ijara is a form of leasing or rental. The bank finances the purchase of an item, such as a house or car, yet the patron and the financial institution share ownership. The patron purchases the good from the institution over time, in installments, until he owns the item completely. The client also pays fees that are assessed by the bank. These fees may change with the evolving ratio of ownership between the financial institution and patron, and with the change in value of the item.