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    The Shari’ah Contracts

    The Bank - Customer relationship is contractual in nature and all banking transactions are based on the law of contract and the law that govern specific transactions. The relationship varies depending on the underlying contract of a transaction.

    Financing Contracts

    1. Tawarruq

    It implies a mean of obtaining liquidity through purchasing of a commodity on deferred basis from the bank and selling it to a person other than the initial seller for a lower price in cash.

    The Application

    Tawarruq is applicable in various Islamic banking products such as deposits facility and placement, personal financing, asset financing, working capital financing and project financing facilities. It is also used in liquidity management, risk management and hedging purposes.

    Tawarruq Process


    2. Murabaha

    It is a contract where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding profit margin. It requires a real sale of commodity and not merely advancing facility.

    The Application

    It is used in various financing such as personal financing, trade finacing and asset financing.

    Murabaha Process


    3. Diminishing Musharakah

    It is a financing structure where a customer and the bank enter into a partnership to purchase an asset and thereafter the customer undertakes to gradually purchase the bank’s share of the asset until all the bank’s share is purchased by the customer.
    This financing structure combines partnership contract with two other contracts and they are leasing and sale


    This contract is used in asset financing.

    Diminishing Musharakah


    Deposit Taking Contracts

    1. Qardh

    The depositor is deemed as a lender and the bank acts as a borrower. The bank guarantees return of amount deposited even if there is negligence or loss of wealth. The aim is to provide the depositors with a guaranteed safe - keeping of the amount deposited and at the same time allow the bank to utilize it for its banking activities. Example of Qardh Contracts are Personal Current Accounts and Lulu Plus Account.



    2. Mudarabah

    It is a form of investment account where the depositor provides funds and the bank act as fund manager to use the money for investment. The distribution of profit between the bank and the depositor is in accordance to a mutually pre–agreed profit sharing ratio. Example of Mudarabah Contracts are Busara Account and Student Account.