Islamic banking is already gaining ground in the financial sector as there is widespread knowledge of how it works. Islamic finance applies a different approach from conventional banks when it comes to financing and investment options. There are different products developed by these Islamic financial institutions to meet customers’ needs.
For a financial institution to qualify to offer Islamic financial services, its products must be Sharia-compliant. Bringing sanity to the financial sector is among the many goals of Islamic banking. There are some products that satisfy social justice demands while others provide alternatives to conventional financial products. The following are some of the common Islamic financial products in the market today.
1. Profit and loss sharing products
Islamic finance seeks to ensure that there is social justice. The financial institution and the customer/entrepreneur share involvement in investments or economic activities that can either result in profit or loss. There are two subdivisions in this product as well
Mudaraba products. The financial institution provides funds or capital to an entrepreneur. The entrepreneur manages an economic activity which can be a property, joint venture or any other type of business. The two will share proceeds when there are profits. If the venture incurs losses, the financial institution bears the burden as long it was not out of negligence from the entrepreneur.
Musharaka. Both the entrepreneur and financial institution raise capital to run a joint venture. Everyone will have shares which will vary depending on the amount raised and management fees. The two parties will share both profits and losses based on the agreement and shares.
2. Islamic Funds
These are alternative investment options to conventional products such as unit trusts and mutual funds. Islamic funds are filtered and screened to ensure that they are Sharia-complaint. Screening ensures that every entity within the equity fund is compliant with the Sharia laws. Screening also filters out businesses that conduct transactions that are not allowed by Islamic laws.
3. Investment financing products
Debt-financing is very common in the modern world. Islamic finance prohibits interest-based borrowing and lending. This does not mean that you have to buy everything on a cash basis because the money might not be there always. Islamic banking deals with real assets and you can thus not trade a debt because it creates room for speculation. An Islamic bank buys a property for a customer and can then sell it on an installment basis. The financial institution will remain the owner of the home until the customer pays all the installments.
4. Asset-based securities
Sukuk is the overall name that refers to these kinds of investments. They are the Islamic version of bonds but their approach is somehow different. Being asset-based means an Islamic bank sells a certificate that represents ownership of a tangible asset, service, property, joint venture or anything else that has value. However, the asset or property should be Sharia-compliant for it to secure a Sukuk.
Even though there might crop up new products in future, the above are the main ones at the moment. The terms and conditions of these products may vary from one institution to the other depending on situation and customer needs.