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We apply a variety of instruments of finance to serve our clients. We summarize here below some of the Instruments of Finance approved by our Sharia Advisory Board for our business:
- Mudaraba: A Mudaraba is a type of partnership contract, whereby the investor (the Rab ul Mal) provides capital to another party/entrepreneur (the Mudarib) in order to undertake a business/investment activity. While profits are shared on a pre-agreed ratio, loss of investment is born by the investor only. The mudarib loses its effort as well as share of the expected income.
Transaction Process -A simplified Mudaraba process takes the following basic form:
- Step 1: FCB (as investor) and the mudarib agree on the nature of the venture and the terms of profit sharing.
- Step 2: FCB provides capital to the mudarib.
- Step 3: The mudarib undertakes the venture as agreed upon.
- Step 4: Profits from the investment are shared between the Bank and the mudarib.
- Murabaha: Instead of lending out money to the client, the Bank purchases from owner/supplier the desired asset or commodity (for which the loan would have been taken out) and sells it at a predetermined higher price to the client. By paying this higher price over installments, the client effectively obtains credit without paying interest.
Transaction Process - A generic murabaha process could take the following basic form:
- Step 1: The client expresses intent to engage in a murabaha transaction facilitated by the bank and, subject to bank approval, signs a "Promise to Buy".
- Step 2: The bank purchases the item from the seller.
- Step 3: The Bank sells the asset to the client, at the purchase price plus a stated profit.
- Step 4: The client makes repayment of the sale price through installments over an agreed period of time.
- Diminishing Musharaka: This is a type of partnership finance through which the Bank would, for instance, finance a house for a client. Although the client would have a certain amount of contribution into the value of the asset but the bigger share of the ownership would be by the Bank. The Agreement would be such that the Bank sells its ownership stake to the client over an agreed period of time.
Transaction Process - A generic Musharaka process could take the following basic form:
- Step 1: The Bank and the client agree on the terms of the joint ownership (Musharaka).
- Step 2: The Bank and the client jointly purchase the asset from the seller (with the Bank owning the bigger share).
- Step 3: Through regular installments the client purchases the Bank's ownership stake.
- Step 4: Upon full purchase of the Bank's ownership share, the Bank transfer's the ownership of the Asset to the Client.
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