Page 42 - CMA Journal (Mar-Apr 2025)

Focus Section

Long-distance caravan journeys—such as the winter and In Islamic finance, interest is expressly forbidden and any
summer trade expeditions of the Quraysh—required excessive amount in a bilateral agreement is regarded as
significant investment in camels, goods, food, security riba while islamic trade financing is shari'ah-compliant
and travel time. Most individual merchants couldn’t contracts like: Murabahah (cost-plus financing),
afford to finance these ventures alone, which led to the Musharakah (partnership), Wakalah (agency), Kafalah
need for shared financing arrangements that could pool (guarantee) and Tawarruq (commodity murabahah) serve
resources and spread the burden. as the foundation for Islamic trade finance instruments. In
accordance with Islamic principles, these products
Another reason for trade financing was the divide between
enable the financing of global trade.
capital and labor. Some individuals had wealth but lacked
the time or business expertise, while others had the skills “And they say: Trade is like usury, but Allah has
and energy but no money. To overcome this, Islamic permitted trade and forbidden usury.”
financial structures like Mudarabah emerged, where one Surah Baqarah – Al Quran
party provided capital and the other managed the trade.
Let’s explore how each Modern Islamic Finance Mode
Profits were shared based on agreement and losses were
has its roots in the Era of Prophet Muhammad ﷺ:
borne only by the capital provider unless negligence was
involved, establishing fairness in risk and reward. 1) Murabaha – Cost + Profit with Transparency: In
Makkah and Madinah, it was common for traders to
Islamic finance also promoted ethical principles by
buy goods and sell them at a markup. What made it
ensuring that trade risks—such as theft, loss, or market
Islamic was disclosure.
failure—were shared equitably, rather than unfairly
passed on. This nurtured trust and integrity within the Example in the Prophet ﷺ Era: A merchant would
marketplace. These values reflected the core teachings of say, “I bought this cloth for 10 dirhams and I am
Islam, where honesty and fairness were emphasized in selling it for 12.” This clear disclosure of cost and profit
every transaction, strengthening the moral fabric of the is what we now call Murabaha.
commercial system.
Lesson: Even then, fair pricing and transparency-built
Financing also made trade more inclusive, enabling trust—and such transactions were blessed.
participation from those who lacked personal wealth. It
2) Musawamah: Negotiated Sale Without Disclosing
allowed young and skilled entrepreneurs to engage in
Cost - Sometimes, sellers would not reveal how much
commerce using someone else’s capital, provided they
they paid. Instead, the buyer and seller would
operated with trust and transparency—just as the
bargain over the final price.
Prophet Muhammad ﷺ did when managing the business
of Lady Khadijah (RA). In this way, trade financing became Example: A trader might say, “This camel is 100
a means of both livelihood and character development. dinars.” He doesn’t say whether he got it for 80 or 90.
This was accepted, if there was no deception or fraud.
Moreover, in the absence of formal banks or institutions,
This is Musawamah—still Shariah-compliant, if
trust, written contracts and personal reputation served as
honesty is maintained.
the pillars of trade finance. As Islam expanded, ethical
trade practices became a vehicle for spreading the faith. 3) Ijarah – Leasing Without Riba: People in that era
Muslim merchants, through their fairness and reliability, also rented camels, land and even homes.
built relationships across regions, helping to introduce
Example: Someone might say, “You can use my
Islamic values peacefully and powerfully into new
camel to transport your goods to Ta’if for 5 dinars.”
communities.
This is Ijarah—a lease agreement. It was not based on
“Even today, up to 80% of global trade is supported lending money for interest, but rather on the rental
by some sort of financing or credit insurance." of an asset or service. Prophet Muhammad (S.A.W.W)
Roberto Azevedo (Director General-WTO). allowed and even practiced such rentals.
In conventional trade finance the transactions are solely 4) Mudarabah: The Prophet’s Own Business Model -
financed through credit and most traditional trade Before receiving Prophethood, Hazrat Muhammad
finance instruments are non-shari'ah compliant. These ﷺ worked under Sayyida Khadijah (R.A) in a
consist of repurchase agreements (repos), Mudarabah arrangement. She provided the capital
commercialization of guarantees, interest (riba), debt and He managed the trade caravan. The profits were
sales (Bay Al-Dayn) and unnecessary fees. shared as per mutual agreement.

40 ICMA’s Chartered Management Accountant, Mar-Apr 2025