Islamic Financing Techniques

Here are few of the commonly used investment techniques of leading Islamic banks.
1. Mudaraba: It is a partnership agreement where one partner provides the funds while the other manages it.
2. Musharaka: It is similar to the previous technique with the only difference being that the managing partner also provides with a part of the capital required. Hence there is a greater incentive to investing wisely.
3. Murabaha: Here the bank buys out the inventory/goods/assets and then later on resells it back to the firm at a pre-defined mark-up. Although the mark-up is very similar to the interest rate payable to conventional instruments, the bank bears the risk of obsolesce of the goods/services.
4. Ijara: This is a leasing agreement where the bank buys the assets and leases it back to its clients.
5. Salam: It is a forward buying agreement used for agricultural produce.
6. Istisna: It is used to finance construction or commission manufacturing projects. Here one party buys the goods and other party undertakes to manufacture them.

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