“Dealing in interest has been banned and prohibited by Islam in the strongest and harshest words possible. Christianity and Judaism, indeed, have also prohibited the dealing in interest,” added Essajee.
He explains that in Islamic financial products and services are based on contracts with the methods of availing funds as Equity Based financing and Trade/Debt based financing.
“Debt based financing appears to be dominant in the asset portfolios of Islamic banks,” noted Essajee.
Equity Based financing contracts has two sections dubbed Mudhaaraba (Profit-sharing System) and Mushaaraka (Partnership/Joint Venture-Profit Business).
“Mudhaaraba is a business partnership between the bank and its customer where the bank provides the capital while the customer, as the active partner, provides the effort, expertise and professionalism; Profits are shared according to pre-agreed formulae. In case no profit is realized, the active partner would receive nothing for his efforts while the provider of capital would recover only his capital,” he explained.
In case of loss resulting from normal business conditions, the active partner (customer) receives nothing for his efforts while the provider of capital (the bank) suffers the entire loss.
The active partner is, however, held responsible for the loss of capital should this be the result of his negligence, wilful act or non-compliance with the conditions of the contract.
The provider of capital (the bank) takes the financial risks of the transaction and it is this finance risk which justifies his claim to a share in any profits even though he is a dormant partner.
On the other hand Mushaaraka, the Bank enters into partnership with a customer normally for a limited duration for a specific project.
The partners’ share of profit is stated in terms of percentage or ratio or fraction of anticipated profits and not as an absolute fixed amount.
The partners’ share of profit may or may not be determined on pro-rata basis to the capital contributed by each partner.
An active partner is also compensated for his entrepreneurship and management. The compensation is deducted from the profits prior to distribution.
Losses resulting from normal business conditions are borne by the partners on pro-rata basis according to each partner’s contribution in the capital.
The active partner will, however, bear responsibility for any loss should this be the result of his negligence or wilful act or breach of the Mushaaraka agreement.
