For running any business or for buying home, finance is most important factor. We can arrange for finance either from our own resources or take loan from banks or any other financial institutions. Once we take the loan we need to pay them back along with the interest that might sometime create problem for people. In the world of finance Islamic financing is something different as compared to the other financing system. Islamic finance as the name indicates is the system based on Islamic rules and regulation due to this it is becoming popular among Muslims. In Islam, Muslims are not allowed to take or give interest for any purpose. Even investment in any business or doing any service, which is against the Islamic principles is called Haram. But Islamic finance has solved the problem of millions of Muslims who avoid taking loan for any purpose from any financial institutions due to the interest, which is haram in Islam. Islamic financing is basically related with the banking and its other services that is offered by other institutions. Islamic financing system is one of the old style financing system, which is not only becoming popular in eastern countries as well as in European countries too. The old style of Islamic financing system has been adopted by the Islamic banks which you can easy figure out such as profit sharing (mudharabah), safekeeping (wadiah), joint venture (musharakah), cost plus (murabahah) and leasing (ijarah).

The Islamic financing only allow to accept those dealing, which is according to the Islamic principle, in other words it does not deal with the haram activities. The Islamic banking doesn’t deal with the business such as gambling, alcohol and pork.

In Islamic financing the most prominent feature is sharing profit, which is known as mudharabah. According to the mudharabah the bank gives finance to any entrepreneur for running a business. On the other hand the responsibility of the entrepreneur is to provide labor, expertise and management. Now the basic point is that when it gains profit then it is shared between bank and entrepreneur according to predetermined ratio. When it comes to losses then bank bear lose of capital and the entrepreneur loses his control over the labor.

One of the principles of the Islamic financing is the sharing of profit and loss in a joint venture, which is prominently used for business dealing. For business dealing the banks give loans to the companies along with the floating rate loan interest. The floating rate loan interest means that bank’s profit on loan is the certain percentage of the company profit that the business had to pay. Once the company pays its loan in such a manner it become good example of sharing profit and loss and such practice is called Musharakah. Islamic financing is interest free but for modern capitalist economy interest is must for running every type of business and musharakah is an alternate of interest-base financing. For musharakah financing contract is important between parties because profit and loss sharing is mentioned in it and due to this no complication will take place. Above we have discussed few features of musharakah but for more details you can search on internet where you can find more information related to it.

The other most prominent type of Islamic financing is ijarah it means “ to give something on rent” which is commonly known as leasing. For leasing the basic rules is that the thing to be leased must have some valuable use. The rules of sale and leasing are almost same because something of value is being transferred. For leasing the lessor and lesses make an agreement in which the amount of rent is mentioned, which is accepted by both parties. Beside this the period of the leasing or use of the asset is also defined in it.

For instance if you are planning to take loan for mortgage in this case Islamic financing system is different as compared to the other financing system. In Islamic mortgage the bank buy item for you from the seller instead of paying you loan but they will sell you at higher price then you will pay the bank in installment and such type of Islamic financing is known as murabahah or cost plus. Murabahah is basically asset base form of finance, which is useful for those who want funds for buying any commodity. For this bank demands strict collateral, which in case of default will give protection to the bank. Even if you planning to purchase the car in that case you will find the same rules in Islamic banking. These are certain categories of investment, which are allowed under the Islamic rules and regulation or in other words shri’ah.