Page 56 - CMA Journal (Mar-Apr 2025)

Focus Section

Funds in Islamic finance cannot be involved
in or invested in businesses such as alcohol,
gambling, and other prohibited activities.
Such activities are considered harmful to
society.

All Islamic finance transactions are backed
by tangible assets, thereby promoting real
economic activities and reducing
speculation.

Islamic financial institutions are
increasingly developing innovative
financial products that cater to diverse
demographic needs. These include Islamic
microfinance, asset-based financing, and
other Shariah-compliant investment vehicles that
encourage participation from all segments of society. b) Mudarabah Finance: The bank provides the full
capital, while the customer contributes
Islamic finance provides access to financial services for expertise and management. Profits are shared
low-income individuals, women, and marginalized according to a pre-agreed ratio, and losses are
communities who may be excluded from the borne entirely by the bank, provided there is no
conventional banking system. Microfinance initiatives negligence or misconduct by the customer. This
following Islamic principles often offer interest-free loans mode offers opportunities in Islamic finance for
or equity-based financing to enable entrepreneurship individuals with limited financial resources but
and self-employment. relevant skills and expertise to operate a
business diligently. It allows access to financing
Women can also benefit from various financial products
without the burden of interest payments and
tailored to their needs, such as microloans for female
offers the satisfaction of Shariah-compliant
entrepreneurs, savings accounts, and investment
profit-sharing arrangements that incentivize
opportunities. Programs specifically designed for women
active involvement.
aim to address gender disparities in financial access.
2) Short-Term and Long-Term Period Modes of
Islamic modes of finance can be broadly divided into
Finance - These products are designed to fulfill
different categories based on their suitability to cater to
working capital requirements or to acquire capital
customer-specific requirements. For the convenience of
assets, as outlined below:
readers, these modes of finance can be classified as:
a) Murabaha Finance: A short-term transaction
a) Equity participation basis
suitable for meeting raw material requirements.
b) Term period basis (i.e., short- and long-term facilities) The bank purchases goods from suppliers as the
sole owner and sells them to the customer at a
c) Repayment terms basis (i.e., balloon payment in
disclosed cost-plus profit, on a deferred
trade-based transactions and installment repayment
repayment basis.
in rental-based transactions).
b) Musawamah Finance: It is a short-term
Let’s briefly explain such modes of transactions: transaction similar to Murabaha, but the bank
does not disclose the cost or profit margin when
1) Participatory Mode of Finance - These products are
selling the goods to the customer.
designed on the principle of profit-sharing:
c) Istisna Finance: A short-term transaction suited
a) Musharakah Finance: Both parties — the bank
to customers manufacturing goods. The bank
and the customer — jointly contribute the
makes advance payments (either partially or in
required capital to the business or assets and
installments) for the goods, and the customer
hold ownership according to their respective
agrees to sell the manufactured goods to the
equity share. Profits are shared as per the agreed
bank on a future date. The bank becomes the
ratio, while losses are borne in proportion to
sole owner of the goods and may sign an agency
each party’s equity participation. This allows
agreement authorizing the customer to sell the
businesses to access financing without bearing
goods on behalf of the bank and remit the sale
the entire risk.
proceeds back to the bank.
54 ICMA’s Chartered Management Accountant, Mar-Apr 2025