Each contract has its own rules, conditions, and legal effects.
Using a term such as murabahah, ijarah, or musharakah is not enough to make a transaction automatically compliant. The economic reality, the contractual documents, the ownership of the assets, the sharing of risks, and the organisation of cash flows must also be examined.
An Islamic finance transaction must, in particular, comply with the following principles:
Making an asset available in return for rent
Ijarah is a lease contract covering the use of an asset or the provision of a service.
The owner retains ownership of the asset while the lessee enjoys its use in return for a defined rent.
The responsibilities attached to ownership of the asset must remain with the owner, while the lessee is answerable for the use made of it and for any damage resulting from the lessee’s fault.
Leasing an asset before becoming its owner
Ijarah wa iqtina makes it possible to combine a lease period with a mechanism for the subsequent transfer of ownership.
The transfer may take place, in particular, through a separate sale or gift at the end of the agreed period.
The undertakings relating to the lease and to the transfer of ownership must be clearly organised so as to avoid any confusion between the different stages of the transaction.
A partnership founded on capital participation
Musharakah is a partnership contract in which several parties contribute capital to a joint activity or project.
Profits are distributed in a proportion agreed between the partners. Financial losses are, as a rule, borne in proportion to each partner’s contribution.
Each partner thus assumes a real share of the risk attached to the project.
A gradual acquisition of shares
Diminishing musharakah is used in particular in property financing.
The financier and the client acquire an asset together. The client then gradually buys back the financier’s shares until becoming the sole owner.
During this period, the client may pay a sum corresponding to the use of the share of the asset still held by the financier.
The compliance of the structure depends, in particular, on the reality of the co-ownership, the sharing of risks, the method used to value the shares, and the distinction between the different contracts.
Bringing together a capital provider and a manager
Mudarabah is a partnership in which one party provides the capital while the other contributes labour and expertise and manages the project.
Profits are distributed in a proportion agreed in advance.
In the absence of fault, negligence, or breach of undertakings by the manager, the financial loss is borne by the capital provider, while the manager loses the time and labour invested.
Entrusting a task to an agent
Wakalah is an agency contract by which one person entrusts another with the authority to carry out a defined task on their behalf.
The agent must respect the scope and conditions of the mandate. The agent’s remuneration, where there is one, must be clearly defined.
Wakalah is used in many fields: investment, asset management, takaful insurance, collection, or the execution of a specific transaction.
Paying today for a future delivery
Salam is a sale in which the price is paid in full when the contract is concluded, while delivery of the goods takes place at a later date.
The nature, quantity, quality, date, and place of delivery must be precisely determined.
This contract has historically been suited to financing agricultural production or standardisable goods.
Financing the manufacture or construction of an asset
Istisna’a is a contract for the future manufacture, construction, or completion of an asset meeting agreed specifications.
The price may be paid immediately, in instalments, or according to a defined schedule.
This contract may be used, in particular, for property, industrial, or infrastructure projects.
Certificates representing assets or projects
Sukuk are certificates representing rights over assets, usufructs, projects, or specified economic activities.
Unlike a conventional bond based on an interest-bearing debt, the return to sukuk holders must be linked to the income or results generated by the underlying assets or transaction.
Compliance depends on the structure adopted, the effective ownership of the assets, the distribution of risks, and the repurchase undertakings.
Insurance founded on solidarity
Takaful is a cooperative insurance model founded on the participants’ contributions to a common fund intended to cover certain risks.
The participants thus organise a form of solidarity and risk pooling.
The management of the fund, the operator’s remuneration, the treatment of surpluses, and the investments made must comply with the principles of Islamic finance.
A structure may appear compliant on its face while containing clauses or cash flows incompatible with the principles it claims to follow.
The analysis must, in particular, cover: