Sales-Based Modes of Financing
Due to a number of historical circumstances, the Muslim world lost its technological and economic vitality.53 Hence a number of Islamic institutions, including the Islamic system of financial intermediation, became displaced by Western institutions. However, the independence of Muslim countries, has led to the revival of Islam and there is a longing to gradually reinstate most of the lost institutions, the Islamic financial system being one of them.
This has brought into focus the question of whether these methods can once again play the same invigorating role in accelerating investments and promoting healthy growth as they did in the past. There is no rationale to believe otherwise. The technological advancements that have taken place since then – faster means of transport and communications, better accounting and auditing techniques, and the information technology – can only make the use of these methods relatively easier as compared with the past. They can help in maintaining proper records, calculating costs and profits more accurately, and ensuring greater transparency, checks and control.
It is not however possible for the mudaraha and the mushârakah forms of financing to be amenable to all kinds of financial needs. Since the Shariah is realistic and wishes to fulfill all essential financial needs without compromising and the realization of socio-economic goals, it has also allowed a number of debt-creating sales-based modes of financing. These are all linked to trade in real goods and services and are intended to enable a person to have access to the goods and services needs without getting involved in interest. They are all less risky than the profit-and –loss-sharing modes. The most well-known of these are murabahah54, ijârah (leasing), salam55, and itisna’56. These techniques, along with mudârabah and mushârakah, have together the ability to fulfill all the necessary financial needs of both the public and the private sectors.
Since the rate of return in all sales-based modes of financing is determined in advance, unlike that in mudârabah and mushârakah, the Shariah has laid down certain conditions for their permissibility. These conditions are intended to ensure that the financiers bear at least some risk and that the borrowers interest is also protected. The proper observation of these conditions may not allow any of these techniques to degenerate into a purely financing device resorted to with the intention of circumventing the prohibition of interest.