Financial Instruments 77
through various phases of economic activity, right from the purchase or sale
of goods, to arrangements for collateral and guarantees, to arrangements for
credit or fi nance and fi nally to the creation of opportunities for investment.
Transactional contracts deal with the real - sector economic transactions
that facilitate the exchange, sale and trade of goods and services. The core
transactional contracts are based on trade - or exchange - based activities.
Exchange could be on the spot or on a deferred basis and could be of goods
for goods, or of goods for price, or goods for promise to pay. These contracts
create assets, which further become the basis of fi nancing and investment
opportunities; thus they form the very core of an extended economic and
fi nancial system.
Financing contracts offer ways to create and extend credit, facilitate
fi nancing of transactional contracts, and provide channels for capital forma-
tion and resource mobilization between investors and entrepreneurs. The
distinguishing feature of such fi nancing contracts is the absence of a debt
contract. Financing contracts are meant either for the fi nancing of transac-
tional contracts in the form of trade fi nance or asset - backed securities, or
for providing capital through equity partnerships, which can take several
forms, such as partnership, co - ownership, or diminishing partnership.
The role of intermediation contracts is to facilitate an effi cient and trans-
parent execution of transactional and fi nancial contracts. Intermediation
contracts provide the economic agents with a set of tools to perform fi nan-
cial intermediation as well as to offer fee - based services for economic
activities. These contracts include mudarabah (a trustee fi nance contract),
musharakah (equity partnership), kifala (guarantee), amanah (trust), takaful
(insurance), wakalah (agency) and jo’alah (fee - based service). In a muda-
rabah contract, an economic agent with capital (rabbal - mal) can form a part-
nership with another agent with skills (mudarib), with an agreement to share
the profi ts. Although losses are borne by the capital owner only, the mudarib
may be liable for a loss resulting from any misconduct or negligence on his
part. Intermediation contracts are discussed in detail in the next chapter on
fi nancial intermediation.
Finally, social - welfare contracts are contracts between individuals
and the society to promote the well - being and welfare of the less privi-
leged. Although facilitation of such contracts is beyond the scope of
intermediation, an intermediary can certainly offer community services
by institutionalizing social - welfare contracts.
TRANSACTIONAL CONTRACTS
Islam lays great emphasis on promoting trade and gives preference to trad-
ing over other forms of business. Trade incorporates not only the trading of
physical assets but also of the rights to use those assets. The basic contracts
are therefore the contracts of exchange, sale of an asset or sale of rights to
utilize an asset. Whereas contracts of exchange and sale result in the transfer