6 Types of Islamic Finance Contracts In Business

Islamic Finance Contracts.Islamic finance is a system of finance that is based on the principles of Islamic law (Shariah).The main principle of Islamic finance is that all financial transactions should be conducted in a way that is compliant with Shariah law, which prohibits charging or paying interest (riba), engaging in speculation (gharar), and investing in businesses that are considered haram (forbidden).

Types of Islamic Finance Contracts In Business.

According to Muslim Jurists there are four forms of partnership business.

  1. Shirkat al Mufavadha
  2. Shirkat al Anana
  3. Shirkat al Sanai
  4. Shirkat al Wajooh

Shirkat al Mufavadha

In this form of partnership the amount and type of capital contributed by each partners is equal. The profit or losses are also distributed equally along the partners. Each partner here Is an agent as well as helper of the other partner. .

Islamic mode of business

  1. One of the important conditions of Shirkat al Mufavadha Is that the partners who carry on the business shall be of equal status. This partnership cannot be formed between or among the free and slave persons.
  2. There is a written agreement among the partners for the quality in sharing of profit or loss.

Rights and duties of patterns

Each partner is an agent as well as a helper of the other partner. Each partner in this form of organization has the right to enter Into contract of purchase, sell goods in the market. Since a partner has represented the from so any purchase or sale or any other business contract signed by one partner will be binding on all the partners of the firm.

Shirkat al Anan

In this type of partnership the capital contributed by the partners is not equal. One of the partners is the major contributor of financial resources. The profit or loss divided on the basis of capital invested in the business. ‘

There is also no compulsion for the partners to be equal status. This type of partnership can he formed between or among the free and slave, persons. Muslims and non-Muslims masters and servants men women and children. Here the liability of each partner is limited to the amount he has paid in the business. No partner has the right to lend any thing out of the join assets of the firm.

Shirkat al Sanai

This form of partnership is also called Shirkat al Taqqabal. It is an association of different skills involved in the operation of business. The technicians the artisan, the laborer the capitalists etc. join together in the carrying out of business. The profit is distributed among the partner according to the terms of agreement amongst them. It is not necessary the at all the partners are paid equally. A. person with a better skill will share higher profit than of a non technical persons. The profit in fact is distributed according to the amount and quality of work put into the business.

Shirkat al Wajooh

In this form of partnership the persons with high integrity, honesty and reputation join together for carrying on a business on loan capital alone. They on the basis of high credit rating get loss and start the business. The profit or loss is shared among the partners on equal basis.

These are just a few examples of the many Islamic finance contracts that are available. Each contract is designed to meet the specific needs of a particular transaction, while ensuring that the transaction is compliant with Shariah law.

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