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or toward value creation and closing all the uses of finance that unnecessarily inflate the quantity financing in a society relative to production and exchange.

 

Finally, it should be noted that the prohibition of Riba (interest) never meant to be a prohibition of rewarding financing in general and debt-creating financing in specific.

 

Hybrid Islamic financing contracts

 

The industry of financial intermediation is new to the Islamic Shari’ah. It has been developed in the Western countries over the past four centuries or so. Recognition of financial intermediation as an independent industry is vital to understanding the hybrid financial contract and those scholars and researchers who fail to recognize this industry still argue for preferences of sharing over other modes of financing instead of taking such preference to be decided by the basis of market circumstances and forces. When a merchant sells at deferred price or lease an asset she is providing financing to the purchaser or the lessee. But if a corporation specializes in getting the savings of those who have them and channeling them to businesses that need them for investment, that is a specialized industry of financial intermediation. In other words, financial intermediation is a specialty of those who recruit deposits and provide funding while merchants and producers provide commercial credit from their own

 

resources while dealing with the daily decisions of a production line or buying and selling of goods and services.

 

The role of Islamic financial engineering over the last four decades has been to develop contracts that fit this new industry and its success/failure can be assessed on the basis of the extent to which new contracts maintain the main characteristics implied by the prohibition of Riba and preserve the objectives of this prohibition.

 

There are numerous Islamic financial products in the market and they are increasing by the day. New products are always developed through a process of combining existing contracts and arrangements. We have essentially nine main hybrid Islamic financing contracts practiced in Islamic banks today: Murabahah to the purchase orderer, installment sale, Mudarabah investment deposit, current account deposit, three-party Istisna’, leasing to the purchase orderer, compound Salam, Buy Back and Tawarruq. Although assessing how close/far each of these contract to be consistent with the objectives of the prohibition of interest is outside the limit of the present paper, it must be said that some of the applications of new hybrids amounts to pure interest-based rescheduling of debts an are consequently in violation of the basic objectives of the prohibition of Riba.

 

Risk profile of classical financial Contracts

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