National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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b) Salam: The Salam sale is an advance purchase or product-deferred sale of a generic good.
In a salam contract, the buyer of a product pays in advance for a good that is produced and
delivered later. The contract applies mainly to agricultural goods.
c) Istisna: The Istisna contract is similar to the salam contract with the difference that the
goods are produced according to the specifications given by the buyer. This applies mainly to
manufactured goods and real estate. In istisna, the client asks the financier to provide an asset
(like real estate) and the payments are made over a period of time in the future. In this case,
the financier may need to have a parallel istisna and sub-contract the project to a third party
for its completion. In istisna the payments can be made in installments over time with the
progression of the production.
d) Ijarah: Ijarah is a lease contract in which the lessee pays rent to the lessor for use of
usufruct. In ijarah the ownership and right to use an asset (usufruct) are separated. It falls
under a sale-based contract as it involves the sale of usufructs. A lease contract that results in
the transfer of an asset to the lessee at the end of the contract is called ijarah wa iqtina or
ijarah muntahia bittamleek. Ijarah wa iqtina combines sale and leasing contracts and uses hire-
purchase or rent-sharing principles. The ownership of the asset is transferred to the lessee as
payments for the asset are also made along with the rent. After the contract period is over, the
lessee assumes the ownership of the asset. Note that in a simple ijarah, the rental payments
made are captured in the current liabilities in the balance sheet. In case of ijarah wa iqtinah,
however, the leased item would be in the form of a debt during the period of lease.
e) Musharakah: Sharikah is a partnership between parties in which financial capital and/or
labor act as shared inputs and profit is distributed according to the capital share of the
partners or in some agreed upon ratio. The loss, however, is distributed according to the share
of the capital. Though there can be different kinds of partnerships based on money, labor, and
reputation, one case of sharikah is participation financing or musharakah in which partners
share both in capital and management of the business enterprise. Thus partners in musharakah
have both control rights and claims to the profit.
f) Mudarabah (or qirad or muqadarah): Mudarabah is similar to the concept of silent
partnership in which financial capital is provided by one or more partner(s) (rab ul mal) and
the work is carried out by the other partner(s) mudarib . The financiers and the managers of
the project share the profit in an agreed upon ratio. The loss, however, is borne by the
financiers according to their share in the capital. The manager’s loss is not getting any reward
for his services. As the rab ul mal is the sleeping partner, he/she has a claim on profit without
any say in the management of the firm.
2.4. Islamic Finance: Evolution and International Infrastructure Institutions
2.4.1. Evolution of the Islamic Financial Sector
The first experiments of contemporary Islamic finance began in the countryside of Mit Ghamar
in Lower Egypt in 1963. Under the leadership of Ahmed al-Najjar, savings/investment houses
operated in small towns in Northern Egypt, providing financing on a profit-loss sharing basis to
small entrepreneurs and poor farmers. In the same year, the Pilgrims’ Management and Fund
Board (Tabung Haji) was established in Malaysia to help people save money to go for the hajj
(pilgrimage). The funds were used to invest in industrial and agricultural projects. Islamic