Islamic Finance: Contracts, Prohibitions and Practical Reasoning
What you must understand
Islamic finance rests on prohibitions of riba (interest), gharar (excessive uncertainty), and maysir (gambling), plus the requirement that returns derive from real economic activity and shared risk. Candidates must know the main contracts: murabaha (cost-plus sale), ijara (lease), musharaka (profit-and-loss partnership), mudaraba (capital provider and manager), sukuk (asset-backed certificates), takaful (cooperative insurance), and wakala (agency). Understand why a murabaha profit is fixed at inception and is not interest, and why sukuk holders hold beneficial ownership in underlying assets rather than a debt claim.
Traps that appear in questions
- Murabaha versus conventional loan. The profit is earned on a sale of goods, so the bank must own or control the asset before selling it. A question that describes a pure cash advance dressed as murabaha is testing this.
- Musharaka versus mudaraba. In musharaka both parties contribute capital; in mudaraba only one party provides capital and the other provides management.
- Sukuk versus bonds. Sukuk must be linked to tangible assets or usufruct; pure receivables are not tradable at other than par.
- Takaful versus conventional insurance. Takaful is based on mutual contribution (tabarru) and surplus sharing, not a risk transfer for premium.
- Penalties and late payment. Any late charge should go to charity, not to the institution's income.
Worked example
A client needs 50,000 of working capital. Under murabaha, the bank buys goods for 50,000 and sells them to the client for 55,000 payable in 12 monthly instalments of 4,583.33. The 5,000 is a disclosed profit on sale, fixed at contract date. If the client pays late, any charge is donated to charity, not added to profit.
Rule of thumb
For any structure, ask three questions: is there a real asset or service, is uncertainty material, and is risk shared rather than transferred for a guaranteed return?