Financial Instruments 83
is also suitable for use in the construction industry for building infrastruc-
ture such as roads, dams, housing, hospitals, and schools.
FINANCING CONTRACTS
At one end of the risk continuum, the system offers low - risk asset - based
securities, while at the other extreme it promotes risky equity fi nancing,
including venture capital and private equity. In between, there are other
collateralized securities originating from the ijarah or istisna’ contracts
attached to real assets which can cater to the needs of investors looking for
short - to medium - term maturity.
Murabahah (cost - plus sales)
The murabahah is one of the most popular contracts of sale used for pur-
chasing commodities and other products on credit. The concept is that a
fi nancier purchases a product — a commodity, raw material, etcetera — on
behalf of an entrepreneur who does not have the capital to do so. The
fi nancier and the entrepreneur agree on a profi t margin, often referred to
as “mark - up,” which is added to the cost of the product. The payment is
delayed for a specifi ed period of time, during which the entrepreneur pro-
duces the fi nal product and sells it in the market. To be a valid contract,
Shari’ah requires that a murabahah should be the result of an original sale
and should not be used as a means of fi nancing any existing inventory. In
addition, the fi nancier must take ownership of the item on sale.
The murabahah was originally a sales transaction in which a trader
purchased a product required by an end - user and sold it to the end - user
at a price that was calculated using an agreed profi t margin over the costs
incurred by the trader. With the emergence of fi nancial intermediaries such
as banks, the trader’s role as fi nancier has been superseded.
The mechanics of murabahah A typical murabahah transaction as practiced
today involves three players — the fi nancier or the Islamic bank, the ven-
dor or the original seller of the product, and the user of the product who
requires the bank to purchase and fi nance on their behalf. The transaction
is explained in detail in the following steps:
Step 1: The potential purchaser asks the vendor to quote a price for the
goods required.
Client Trader/VendorPrice InquiryPrice QuoteStep 2: With this quotation, the purchaser contacts the bank, promising
to buy the goods from the bank if the bank buys the same from the vendor