Islam, and by extension Islamic Finance, has come to the forefront of geopolitics in recent years. There are a variety of Islamic financial instruments and products which have become popular in countries throughout the world that have tried to establish bases of Islamic finance. Many of these instruments look to avoid two major prohibitions that directly impact Islamic Finance: the impermissibility of gharaar and riba. Riba is often described as interest or usury. Gharaar refers to excessive risk and speculation. Given these two primary restriction, a variety of Islamic financial products have been devised that claim to avoid riba and gharaar. Among these products are Murabaha, Musharaka, Mudaraba, Ijara, Sukuk, and Takaful. The key thing to keep in mind when looking into Islamic finance and or investing one’s money is that the each of these instruments is often based on Sunni, not Shia fiqh, and many of them may not be permissible. As with all Islamic issues, one should check with their marja for actual clarification as to what is allowed and what isn’t. However, it is helpful to understand some of the financial instruments currently popular in the world markets. A brief description of each is given below:

A murabaha involves a contract for a sale of goods whereby a third party buys a property or good and then sells it to a buyer at the cost of their purchase plus a markup. This third party, often a bank, must take free and clear title of the property such that the property spends a period of time in its hands. This period of time can vary, with some third parties only possessing the good or property for a matter of seconds. This investment structure is particularly useful in asset-financing, because it allows the third party to get a guaranteed and steady stream of income, unlike in true profit-sharing arrangements. While murabaha is simply understood as a sale in its original Islamic connotation, it is currently used much more as a method of financing with deferred payments built in.

A musharaka is a joint enterprise wherein partners share both the profit and the loss of the enterprise. The proportion of the profits to be distributed among partners is to be determined at the time the musharaka agreement is reached, often with each partner receiving a share equal to the proportion of their investment. A mudaraba, by contrast, is a profit sharing arrangement where one side provides the capital. In this arrangement one party, provides the capital, while the other party, performs much of the management and work.

Two other key Islamic products are sukuk and takaful. A sukuk can be generally understood as an Islamic Bond. Unlike a bond where the issuer is contractually obligated to pay the bondholder interest and principal on specified dates, a sukuk holder claims an ownership share in the underlying asset. A takaful is a system of insurance where each participant in the takaful contributes to a fund that is then used to support those who need help in covering expected claims. Within this system every policyholder agrees to cooperate with the others to achieve a common good. These two financial instruments play a large role in the global Islamic Finance sphere.

In addition to the financial products mentioned above, ijara also plays a large role in the Islamic Financial world. An ijara is in effect a lease. During the period of the ijara the owner of the ijara transfers the right to use the leased good to the musta’jir, or lessee. Within this structure the lessee will make rental payments and then purchase the asset when the payments are completed.

Again, the above are meant to describe financial instruments that currently exist in the Islamic Finance, world, not those that are appropriate or ideal. As with all investment issues one should consult with the a lawyer and financial consultant, and for all issues related to the specific permissibility of financial instruments with their marja.

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