Financial Investment Instruments in Islamic Jurisprudence
The term “financial investment instruments in Islamic jurisprudence” refers to the contracts permitted by Islamic law for the purpose of legally and ethically increasing capital. Islamic jurisprudence encourages investment and outlines several financial tools, including:
Ijara (Leasing)
Ijara can be defined as a contract for a permissible and specified benefit under Islamic law, involving a known benefit in exchange for a defined compensation. Scholars have provided various definitions of the ijara contract, indicating that it is a contract for a permissible and identifiable benefit, either readily available or described as a liability, in exchange for stated remuneration.
A lease contract that meets all the criteria established in Islamic law is considered permissible and lawful. Importantly, Islam advocates for the investment and growth of wealth through lawful means, discouraging the hoarding or circulation of money among select individuals. Therefore, ijara serves as an effective investment tool for capital growth.
Mudarabah (Profit-Sharing)
Mudarabah derives from the concept of “traveling the earth” in search of profit. This contract involves one party providing capital to another to engage in trade, with profits shared between them. In a mudarabah arrangement, one party supplies the capital while the other contributes labor, aiming to achieve a predetermined profit percentage for both sides. Mudarabah is recognized as a significant financial mechanism within Islamic law.
Istisna (Manufacturing Contract)
Istisna refers to a request by one person to another to manufacture an item or product that meets specified requirements and has not yet been produced, utilizing materials provided by the manufacturer, in exchange for monetary compensation.
The istisna contract is universally accepted as a valid transaction according to scholars. It is an independent agreement, distinct from sales, leasing, or forward contracts. The rationale behind its establishment is to facilitate ease for both the manufacturer and the buyer by enabling the procurement of goods according to the buyer’s specifications while providing financial compensation for the manufacturer. Enhancing convenience is a fundamental goal of Islamic law, and scholars have outlined certain conditions for the validity of istisna contracts.
Murabaha (Cost-Plus Financing)
In Islamic terminology, murabaha refers to a transaction in which the seller informs the buyer of the purchase price of an item while adding an agreed-upon profit margin. For instance, the seller might say, “I bought this item for 100 dinars and will sell it to you for 110 dinars.” Scholars have provided various definitions of murabaha contracts, all emphasizing the necessity of stating the profit in the agreement.
It is also essential to note that every financial contract in Islamic jurisprudence has specific conditions and regulations, including murabaha, which is considered a pivotal investment tool accounting for a significant portion of contemporary financial transactions, particularly in Islamic banks.
Musharakah (Partnership)
Musharakah serves as an important financing tool in Islamic banking, embodying the goals and principles of Islamic economics. This partnership contract is an agreement between two or more parties where both the capital and the profits are shared among them.
Should there be any losses, these are distributed among the partners based on their respective contributions. Scholars have identified various types of musharakah contracts, each with its own set of conditions and regulations, including partnerships based on capital, business cooperation, and joint ventures.