Islamic Finance

66 Islamic Finance in Practice

At the outset then, we may identify WCF needs as belonging to three

categories:

1. Finance required to fulfil a specific asset-based^1 need may be defined as
   WCF-1;


2. Finance needed to pay either certain defined monetary costs or other
   miscellaneous costs, which sometimes may include paying back previous
   debts, may be defined as WCF-2; and


3. A third category may be defined as WCF-3,which is naturally designed
   to meet both WCF-1 and WCF-2 needs, and as such may be regarded as
   a unique category.

A number of Shari’a-compliant product options may be used to address

the WCF needs of businesses. Before explaining those, however, a few points

should be observed. Firstly, it is useful to note that since products designed

to solve WCF-2 needs effectively provide the customer “cash-in-hand”, such

products can in theory be used to purchase assets and address other WCF-1

needs as well.^2 However, in principle, most banks ascertain at the outset

from the client the purpose for which the finance is needed. If it is for a

specific asset-based need (as WCF-1 was defined above), the bank generally

seeks to offer only WCF-1 solutions. Of particular interest, a product (to be

considered later) has been developed very recently, which is somewhat

unique in that it naturally solves both needs.

Shari’a-compliant solutions

Finance for specific needs−WCF-1

Murabaha

One option for the financing of specific needs ismurabaha. The client

informs the bank on the exact specification (type and quality) and quantity

of goods required. The bank purchases the requisite goods and sells them to

the client onmurabaha, earning an added profit mark-up over the price of

the goods. The client then usually pays themurabahaprice in instalments,

although on occasion a lump-sum deferred settlement may be preferred.^3

(^1) This could also be a service-based need. Service-based needs can only be satisfied through a sale of usufruct
contract, in which the usufruct is first acquired (ie. owned) by the bank, and then sold on to the client.
However, this product (in particular for business needs) is not widely used at present.
(^2) However, clearly, WCF-1 solutions cannot directly be used to solve WCF-2 needs.
(^3) For instance, in the case of where the client holds a receivable bill due to mature after a short duration (eg.
two or three months) for goods exported earlier. In this case, especially if the face value of the bill is equal
to themurabahaprice, it may make sense to have a full deferred settlement of themurabahaprice upon
maturity of the bill.