Islamic Financing Modes and Contracts
This domain is the contracts engine of the exam: murabaha, ijarah, musharakah, mudarabah, salam, istisna and the ancillary contracts. You must know each mode's Shariah conditions, who bears which risk, and what invalidates it.
Core conditions
- Murabaha: the bank must own the asset, bear ownership risk, and disclose cost and markup; markup is fixed and cannot be increased on rescheduling.
- Ijarah: the bank owns the asset and bears major maintenance and ownership-related risk; rent is for usufruct; in ijarah muntahia bittamleek ownership transfers at the end.
- Musharakah: capital, profit ratio and loss share (pro rata to capital) must be agreed; a guaranteed profit to one partner is void. Diminishing musharakah is the standard home-finance structure.
- Mudarabah: rabb-ul-maal supplies capital, the mudarib manages; loss falls on capital unless the mudarib is negligent.
- Salam: full price paid at inception for a precisely specified fungible commodity delivered later; parallel salam is separate.
- Istisna: manufacturing or construction to specification, with staged payment permitted.
Worked example
A bank buys machinery for PKR 1,000,000 and sells it to the client for 1,100,000 payable in twelve months. The 100,000 markup is profit from a real sale, and the bank bore ownership risk between purchase and sale. If the client defaults, the bank may charge a late-payment penalty but must donate it to charity; it cannot roll the 1,100,000 into a new murabaha at 1,200,000.
Traps
Treating ijarah rent as adjustable at the bank's will; charging penalties as income; salam without full upfront payment; istisna without specification; musharakah with a guaranteed return. Confusing modaraba (a SECP-regulated entity) with mudarabah (a contract) also costs marks.