Risk Management in
Islamic Financial Instruments
18
Figure 2.2: Islamic contracts and their linkages
Risk/contractual role of IFIs
Contract Trustee Partnership Principal/agent
Link to conventional
finance
Agency /
brokerage
Investment
banking
Conventional/
commercial banking
Liabilities —
funding sources
Demand deposits Amana (Trust) ✓
Investment
accounts
Mudarabah ✓
Special investment
accounts
Mudarabah ✓
Musharakah
(Partnership)
✓
Equity -
shareholders'
funds
Musharakah
(Partnership)
✓
Assets —
application of
funds
Transaction
contracts
Short-term trade
financing
Murabahah ✓
Bay salaam ✓
Bay mua'ajal ✓
Medium-term
investments
Ijarah, Istisna ✓ ✓
Mudarabah,
Musharakah
✓ ✓
Long-term
partnerships
Mudarabah,
Musharakah
✓
✓
Fee-based services
Joa'la, Kifala, etc. ✓ ✓ ✓
Of the two theoretical models discussed, the two-tier, mudaraba model amalgamates the
liability and asset sides of the balance sheet ( mudaraba funds the mobilization and utilization
on the basis of profit sharing). The first tier contact is between the investor and the bank,
where the bank, acting as a mudarib, invests on behalf of the investor. If profits are generated