Islamic finance products, services and contracts

Islamic finance products, services and contracts are financial products and services and related contracts that conform with Sharia. Islamic banking and finance has its own products and services that differ from conventional banking. These include Mudharabah, Wadiah, Musharakah, Murabahah, Ijar, Hawala, Takaful, and Sukuk.
Sharia prohibits riba, or usury, defined as interest paid on all loans of money. Investment in businesses that provide goods or services considered contrary to Islamic principles is also haraam .
, around $2 trillion in financial assets, or 1 percent of total world assets, was Sharia-compliant, concentrated in the Gulf Cooperation Council countries, Iran, and Malaysia.

Principles

To be consistent with the principles of Islamic law and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities:

Paying or charging interest. "All forms of interest are riba and hence prohibited". Islamic rules on transactions have been created to prevent use of interest.
Investing in businesses involved in activities that are forbidden. These include things such as selling alcohol or pork, or producing media such as gossip columns or pornography.
Charging extra for late payment. This applies to murâbaḥah or other fixed payment financing transactions, although some authors believe late fees may be charged if they are donated to charity, or if the buyer has "deliberately refused" to make a payment.Maisir. This is usually translated as "gambling" but used to mean "speculation" in Islamic finance. Involvement in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future is maisir and forbidden in Islamic finance.Gharar. Gharar is usually translated as "uncertainty" or "ambiguity". Bans on both maisir and gharar tend to rule out derivatives, options and futures. Islamic finance supporters believe these involve excessive risk and may foster uncertainty and fraudulent behaviour such as are found in derivative instruments used by conventional banking.
Engaging in transactions lacking "'material finality'. All transactions must be "directly linked to a real underlying economic transaction", which generally excludes "options and most other derivatives".

Money earned from the most common type of Islamic financing—debt-based contracts—"must" come "from a tangible asset that one owns and thus has the right to sell—and in financial transactions it demands that risk be shared." Money cannot be made from money, as "it is only a medium of exchange." Risk and return on distribution to participants should be symmetrical so that no one benefits disproportionately from the transaction.
Other restrictions include

A board of shariah experts is to supervise and advise each Islamic bank on the propriety of transactions to "ensure that all activities are in line with Islamic principles".

Islamic banking and finance has been described as having the "same purpose", or having the same "basic objective", as conventional banking but operating in accordance with the rules of shariah law.
Benefits that will follow from banning interest and obeying "divine injunctions" include an Islamic economy free of "imbalances" —concentration of "wealth in the hands of the few", or monopolies which paralyze or hinder market forces, etc.—a "move towards economic development, creation of the value added factor, increased exports, less imports, job creation, rehabilitation of the incapacitated and training of capable elements".
Other describe these benefits as "principals" or "objectives" of Islamic finance. Nizam Yaquby, for example declares that the "guiding principles" for Islamic finance include: "fairness, justice, equality, transparency, and the pursuit of social harmony".
Some distinguish between sharia-compliant finance and a more holistic, pure and exacting sharia-based finance. "Ethical finance" has been called necessary, or at least desirable, for Islamic finance, as has a "gold-based currency". Zubair Hasan argues that the objectives of Islamic finance as envisaged by its pioneers were "promotion of growth with equity... the alleviation of poverty ... a long run vision to improve the condition of the Muslim communities across the world."
;Criticism
Modernist/Minimalist critic Feisal Khan argues that in many ways Islamic finance has not lived up to its defining characteristics. Risk-sharing is lacking because profit and loss sharing modes are so infrequently used. Underlying material transactions are also missing in such transactions as "tawarruq, commodity murabahas, Malaysian Islamic private debt securities, and Islamic short-sales". Exploitation is involved when high fees are charged for "doing nothing more substantial than mimicking conventional banking /finance products". Haram activities are not avoided when banks simply take the word of clients/financees/borrowers that they will not use funds for unIslamic activities.
Others agree that the Islamic banking movement has failed to follow the principles of shariah law, but call for greater strictness and greater separation from the non-Muslim world.

Overview of products, contracts, etc.

Banking makes up most of the Islamic finance industry. Banking products are often classified in one of three broad categories, two of which are "investment accounts":

Profit and loss sharing modes—musharakah and mudarabah—where financier and the user of finance share profits and losses, are based on "contracts of partnership".
"Asset-backed financing",, "debt-like instruments" which are based on "debt-based contracts" or "contracts of exchange". They are structured as sales and allow for "the transfer of a commodity for another commodity, the transfer of a commodity for money, or the transfer of money for money". They involve the financing "purchase and hire of goods or assets and services", and like conventional loans repayment is deferred, increased, and made on a "fixed-return basis". Unlike conventional loans, the fixed return is called "profit" or "markup", not "interest". According to Feisal Khan, "virtually every" Islamic banking advocate argues that these "non-non-participatory" forms of finance are acceptable only as "an interim measure" as Islamic banking develops, or for situations such as small and personal loans where participatory financing is not practical. Faleel Jamaldeen states that debt-based contracts are often used to finance not-so-minor purchases for bank customers. These instruments include mark-up, leasing, cash advances for the purchase of agricultural produce, and cash advances for the manufacture of assets.

the third category consists of

Modes based on contracts of safety and security, include safe-keeping contracts for current deposits, and agency contracts. Current account deposits are regarded as trusts or safe-keeping and offer the depositors safety of their money against the bank's guarantee to return their funds on demand.

;Non-banking finance
Islamic non-banking finance has grown to encompass a wide range of services, but as of 2013, banking still dominates and represented about four-fifths of total assets in Islamic finance. The sukuk market is also a fast-growing segment with assets equivalent to about 15 percent of the industry. Other services include leasing, equity markets, investment funds, insurance, and microfinance.
These products—and Islamic finance in general—are based on Islamic commercial contracts and contract law, with products generally named after contracts though they may be combinations of more than one type of contract.

Profit and loss sharing

While the original Islamic banking proponents hoped profit-loss sharing would be the primary mode of finance replacing interest-based loans,
long-term financing with profit-and-loss-sharing mechanisms is "far riskier and costlier" than the long term or medium-term lending of the conventional banks, according to critics such as economist Tarik M. Yousef.
Yousef and other observers note that musharakah and mudarabah financing have "declined to almost negligible proportions".
In many Islamic banks asset portfolios, short term financing, notably murabaha and other debt-based contracts account for the great bulk of their investments.

Mudarabah

A "mudarabah" contract is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The "sleeping" rabb-ul-mal party provides 100 percent of the capital. The mudarib party provides its expertise and management.
Profits generated are shared between the parties according to a pre-agreed ratio—usually either 50%-50%, or 60% for the mudariband 40% for rabb-ul-mal. If there is a loss, the first partner "rabb-ul-mal" will lose his capital, and the other party "mudarib" will lose the time and effort invested in the project.
The structure of mudaraba is very similar to that of venture capital where the venture capitalist finances the entrepreneur who provides management and labor, so that both profit and risk are shared. Such participatory arrangements between capital on one hand and labor and management on the other, reflect the view of Islamic banking proponents that under Islam the user of capital would not bear all the risk/cost of a failure. And that this would result in a balanced distribution of income and prevent financiers from dominating the economy.

Musharakah (joint venture)

Musharakah is a relationship between two or more parties that contribute capital to a business and divide the net profit and loss pro rata. Unlike mudarabah, there may be more than two partners and all the providers of capital are entitled to participate in management. Like mudarabah, the profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner in proportion to respective capital contributions.
This mode is often used in investment projects, letters of credit, and the purchase or real estate or property. Musharakah may be "permanent" or "diminishing".
In Musharaka business transactions, Islamic banks may lend their money to companies by issuing "floating rate interest" loans, where the floating rate is pegged to the company's individual rate of return, so that the bank's profit on the loan is equal to a certain percentage of the company's profits.
Use of musharaka is not great. In Malaysia, for example, the share of musharaka financing declined from 1.4 percent in 2000 to 0.2 percent in 2006

Diminishing Musharaka

A popular type of financing for rydamajor purchases—particularly housing—is Musharaka al-Mutanaqisa. A musharaka al-mutanaqisa agreement actually also involves two other Islamic contracts besides partnership—ijarah and bay'.
In this mode of finance the bank and the purchaser/customer start with joint ownership of the purchased asset—the customer's sharing being their down-payment, the banks share usually being much larger. The customer leases/rents the asset from the bank—bank assessing an imputed rent for use of the asset—while gradually paying off the cost of the asset while the bank's share diminishes to nothing.
If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity.
This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia. However, at least one critic complains that this violates the sharia principle that banks must charge 'rent' based on comparable rents for the asset being paid off, not "benchmarked to commercial interest rate".

Asset-backed financing

Asset-backed or debt-type instruments are sales contracts that allow for the transfer of a commodity for another commodity, the transfer of a commodity for money, or the transfer of money for money. They include Murabaha, Musawamah, Salam, Istisna’a, and Tawarruq.

Murâbaḥah

Murabaha is an Islamic contract for a sale where the buyer and seller agree on the markup or "cost-plus" price for the item being sold.
In Islamic banking it has become a term for financing where the bank buys some good at the request of a customer and marks up the price of that good for resale to the customer in exchange for allowing the customer/buyer to defer payment.
Murabaha has also come to be "the most prevalent" or "default" type of Islamic finance. Most of the financing operations of Islamic banks and financial institutions use murabahah, according to Islamic finance scholar Taqi Uthmani, This is despite the fact that "Shari‘ah supervisory Boards are unanimous on the point that are not ideal modes of financing", and should be used when more preferable means of finance—"musharakah, mudarabah, salam or istisna'—are not workable for some reasons".
Murabahah is somewhat similar to a conventional mortgage transaction or hire purchase/"installment plan" arrangements, in that instead of lending a buyer money to purchase an item and having the buyer pay the lender back, the financier buys the item itself and re-sells it to the customer who pays the financier in installments. Unlike conventional financing, the bank is compensated for the time value of its money in the form of "profit" not interest, and any penalties for late payment go to charity, not to the financier.
Economists have questioned whether Murabahah is "economically indistinguishable from traditional, debt- and interest-based finance." Since "there is principal and a payment plan, there is an implied interest rate", based on conventional banking interest rates such as LIBOR. Others complain that in practice most "murabaḥah" transactions are merely cash-flows between banks, brokers and borrowers, with no actual buying or selling of commodities.
;Bai' muajjal, also called bai'-bithaman ajil, or BBA,
In Bai' muajjal, the financier buys the equipment or goods requested by the client, then sells the goods to the client for an agreed price, which includes a mark-up for the bank and is paid either in installments over a pre-agreed period or in a lump sum at a future date. The contract must expressly mention cost of the commodity and the margin of profit is mutually agreed.
Bia'muajjal was introduced in 1983 by Bank Islam Malaysia Berhad.
Because in Islamic finance the markup in murabahah is charged in exchange for deferred payment, bai' muajjal and murabahah are often used interchangeably,, or "in practice... used together".
However, according to another source, Bai' muajjal differs from Murabahah in that the client, not the bank, is in possession of and bear the risk for the goods being purchased before completion of payment. And according to a Malaysian source, the main difference between BBA and murabaha—at least as practiced in Malaysia—is that murabaha is used for medium and short term financing and BBA for longer term.
;Bai' al 'inah
Bai' al inah,
is a financing arrangement where the financier buys some asset from the customer on spot basis, with the price paid by the financier constituting the "loan". Subsequently, the asset is sold back to the customer who pays in installments over time, essentially "paying back the loan". Since loaning of cash for profit is forbidden in Islamic Finance, there are differences of opinion amongst the scholars on the permissibility of Bai' al 'inah. According to the Institute of Islamic Banking and Insurance, it "serves as a ruse for lending on interest", but Bai' al inah is practised in Malaysia and similar jurisdictions.
Bai al inah is not accepted in the Middle East and North Africa but in 2009 the Malaysian Court of Appeals upheld it as a shariah-compliant technique. This was a demonstration of "the philosophical differences" in Shariah between these "two centers of Islamic finance", according to Thomson Reuters Practical Law.

Musawamah

A Musawamah contract is used if the exact cost of the item sold to the bank/financier either cannot be or is not ascertained. Musawamah differs from Murabahah in that the "seller is not under the obligation to reveal his cost or purchase price", even if they do know it. Musawamah is the "most common" type of "trading negotiation" seen in Islamic commerce.

Istisna

Istisna and Bia-Salam are "forward contracts". They are also contracts made before the objects of sale comes into existence, and should be as detailed as possible to avoid uncertainty.
Istisna is a "forward contract on a project" and unlike Bia-Salam can only be a contract for something manufactured, processed, or constructed, which would never exist were it not for the contract to make it. Also unlike bia salam,

The price need not be paid in full in advance. Financing payments may be made in stages to purchase raw materials for manufacturing, construction materials for construction of a building. When the product/structure is finished and sold, the bank can be repaid.
The contract may be canceled unilaterally before the manufacturer or builder starts work.
It is not necessary that the time of delivery be fixed.

Examples of istisna in the Islamic finance world include:

projects and residential properties financed by the Kuwait Finance House under construction as of 2012.
the Barzan project, the "biggest financing operation in the energy sector" carried out by QatarEnergy uses Istisna and Ijara and as of 2013, had US$500M "earmarked" for it.

Bai Salam

Like istisna, Bai Salam is a forward contract in which advance payment is made for goods in the future, with the contract spelling out the nature, price, quantity, quality, and date and place of delivery of the good in precise enough detail "to dismiss any possible conflict".
Salam contracts predate istisna and were designed to fulfill the needs of small farmers and traders.
The objects of the sale maybe of any type—except gold, silver, or currencies based on these metals. Islamic banks often use "parallel" salam contracts and acting as a middleman. One contract is made with a seller and another with a purchaser to sell the good for a higher price. Examples of banks using these contracts are ADCB Islamic Banking and Dubai Islamic Bank.
;Basic features and conditions of a proper salam contract

A salam transaction must have the buyer paying the purchase price to the seller in full at the time of sale.
Salam cannot specify that a particular commodity or a product come from a particular place—wheat from a particular field, or fruit from a particular tree as this would introduce excessive uncertainty to the contract.
To avoid dispute, the quality and quantity of the commodity purchased must be fully specified leaving no ambiguity.
The exact date and place of delivery must be specified.
Any exchange of gold, silver, wheat, barley, date, or salt on a deferred basis in salam is a violation of riba al-fadl and forbidden.
Salam is a preferred financing structure and carries higher order of shariah compliance than contracts such as Murahabah or Musawamah.

Ijarah

Ijarah,
is a term of Islamic jurisprudence, and a product in Islamic banking and finance resembling rent-to-own. In traditional fiqh, it means a contract for the hiring of persons or services or "usufruct" of a property generally for a fixed period and price.
In Islamic finance, al Ijarah usually refers to a leasing contract of property, which is leased to a client for stream of rental and purchase payments, ends with a transfer of ownership to the lessee, and otherwise follows Islamic regulations. Unlike a conventional lease, the financing party of a sharia-compliant Ijara must buy the asset customer wants to lease and take on "some of the commercial risks more usually associated with operating leases".
There are several types of ijarah:
;Ijarah thumma al bai'
Ijarah thumma al bai' involves the customer renting/hiring/leasing a good and agreeing to purchase it, paying both the lease/rental fee and the purchase price in installments so that by the end of the lease it owns the good free and clear. This involves two Islamic contracts :

an Ijarah that outlines the terms for leasing or renting over a fixed period;
a Bai that outlines the terms for a sale to be completed by the end of the term of the Ijarah.

It is very important from the standpoint of shariah law for the Ijarah and Bai ''not to be combined, but to be two separate contracts.
An example would be in an automobile financing facility, a customer enters into the first contract and leases the car from the owner at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed price.
;Ijarah wa-iqtina
Ijarah wa-iqtina also involves a ijarah followed by sale of leased asset to the lessee, but in an ijara wa iqtina contract the transfer of ownership occurs as soon as the lessee pays the purchase price of the asset—anytime during the leasing period. An Islamically correct ijara wa iqtina contract "rests" on three conditions:
The lease and the transfer of ownership of the asset or the property should be recorded in separate documents.
The agreement to transfer of ownership should not be a pre-condition to the signing of the leasing contract.
The "promise" to transfer the ownership should be unilateral and should be binding only on the lessor.
;ijara mawsoofa bi al dhimma
In a "forward ijarah" or ijara mawsoofa bi al dhimma Islamic contract, the service or benefit being leased is well-defined, but the particular unit providing that service or benefit is not identified. Thus, if a unit providing the service or benefit is destroyed, the contract is not void.
In contemporary Islamic finance, ijara mawsoofa bi al dhimma is the leasing of something not yet produced or constructed. This means the ijara mawsoofa bi al dhimma contract is combined with a Istisna contract for construction of whatever it is that will provide the service or benefit. The financier finances its making, while the party begins leasing the asset after "taking delivery" of it. While forward sales normally do not comply with sharia, it is allowed using ijarah provided rent/lease payment do not begin until after the customer takes delivery. Also required by sharia is that the asset be clearly specified, its rental rate be clearly set.
;Ijarah challenges
Among the complaints made against ijara'' are that in the practice some rules are overlooked, such as ones making the lessor/financier liable in the event the property rented is destroyed because of unforeseeable circumstance ; that ijara provides weaker legal standing and consumer protection for foreclosure than conventional mortgage ; and less flexibility for customers who wanting to sell property and repay the loan before its completion .

Tawarruq

A Tawarruq
contract/product is one where a client customer can raise immediate cash to be paid back later by buying an asset that is easily saleable, paying a marked up price with deferred payment and then quickly selling the asset to raise cash.
An example of this would be a customer wishing to borrow $900 in cash having their bank buy $1000 worth of some commodity from a supplier, and then buying the iron from the bank with an agreement that they will be given 12 months to pay the $1000 back. The customer then immediately sells the metal back to the bank for $900 cash to be paid on the spot, and the bank then resells the iron.
While tawarruq strongly resembles a cash loan—something forbidden under orthodox Islamic law—and its greater complexity mean higher costs than a conventional bank loan, proponents argue the tangible assets that underlie the transactions give it sharia compliance.
However, the contract is controversial with some. Because the buying and selling of the commodities in Tawarruq served no functional purpose, banks/financiers are strongly tempted to forgo it. Islamic scholars have noticed that while there have been "billions of dollars of commodity-based tawarruq transactions" there have not been a matching value of commodity being traded.
In December 2003, the Fiqh Academy of the Muslim World League forbade tawarruq "as practiced by Islamic banks today". In 2009 another prominent juristic council, the Fiqh Academy of the OIC, ruled that "organized Tawarruq" is impermissible. Noted clerics who have ruled against it include Ibn Qayyim Al-Jawziyya and Ibn Taymiyya. On the other hand, Faleel Jamaldeen notes that Islamic banks using Tawarruq as of 2012 include the United Arab Bank, QNB Al Islamic, Standard Chartered of United Arab Emirates, and Bank Muamalat Malaysia.

Charitable lending

Taqi Usmani insists that "role of loans" in a truly Islamic society is "very limited", and that Shariah law permits loans not as an ordinary occurrence", but only in cases of dire need".
;Qardh-ul Hasan
A shariah-compliant loan is known as Qardh-ul Hasan,. It is often described as an interest-free loan extended to needy people.
Such loans are often made by private parties, social service agencies, or by a firm as a benefit to employees, rather than Islamic banks.
Quoting hadith, some sources insist that in addition to not "charg interest or any premium above the actual loan amount", the lender may also not gain "any advantage or benefits" from the loan, even "riding the borrower’s mule, eating at his table, or even taking advantage of the shade of his wall'".
However, other sources state that the borrower is allowed pay an extra if the extra is optional and not stipulated by contract. Some financial institutions offer products called qardh-ul hasan to lenders which charge no interest but do charge an additional management fee.
There are also savings account products called qardh-ul hasan, where the debtor may pay an extra amount beyond the principal amount of the loan as a token of appreciation to the creditor. These also do not violate orthodox sharia if the extra was not promised or pre-arranged with the account/loan agreement.

Contracts of safety, security, service

These contracts are intended to help individual and business customers keep their funds safe.

Hawala

Hawala is a widely used, informal "value transfer system" for transferring funds from one geographical area to another, based not on movement of cash, or on telegraph or computer network wire transfers between banks, but on a huge network of money brokers located throughout the Muslim world.
According to the IMF, a hawala transaction typically transfers the value of money but not corresponding cash, from one country to another.
The hawala network operates outside of, or parallel to, traditional banking, financial channels, and remittance systems, but predates it by many centuries. In the first half of the 20th century it was gradually replaced by the instruments of the conventional banking system, but became a "substitute for many banking products", as Muslim workers began to migrate to wealthier countries to seek employment in the late 20th century, and sought ways to send money to or secure a loan taken out by their family back home. Dubai has traditionally served as a hub.

Each hawala transaction takes place entirely on the honour system, and since the system does not depend on the legal enforceability of claims, it can operate even in the absence of a legal and juridical environment.
Hawaladars networks are often based on membership in the same family, village, clan, or ethnic group, and cheating is punished by effective ex-communication and "loss of honour"—leading to severe economic hardship. Hawaladars are often small traders who work at Hawala as a sideline or moonlighting operation.
Hawala is based on a short term, discountable, negotiable, promissory note called "Hundi". The Hawala debt is transferred from one debtor to another. After the debt is transferred to the second debtor, the first debtor is free from his/her obligation.
As illustrated in the box to the right, a customer approaches a hawala broker in one city and gives a sum of money that is to be transferred to a recipient in another, usually foreign, city. Along with the money, he usually specifies something like a password that will lead to the money being paid out. The hawala broker X calls another hawala broker M in the recipient's city, and informs M about the agreed password, or gives other disposition instructions of the funds. Then, the intended recipient, who also has been informed by A about the password, now approaches M and tells him the agreed password. If the password is correct, then M releases the transferred sum to B, usually minus a small commission. X now basically owes M the money that M had paid out to B; thus M has to trust X's promise to settle the debt at a later date. Transactions may completed in as little as 15 minutes.

Kafala

Kafala is called "surety" or "guaranty" in conventional finance. A third party accepts an existing obligation and becomes responsible for fulfilling someone's liability. At least sometimes used interchangeably with himalah and za’amah. There are five "Conditions Of Kafala": Conditions of the Guaranteed, of the Guarantor, of the Object of Guarantee, of the Creditor, and of Sigah For Constituting the Contract. There are different kinds of Kafala: Kafalah Bi Al-Nafs and Kafalah Bi Al-Mal, with three types of financial guarantee: kafalah bi al-dayn, kafalah bi al-taslim, and kafalah bi al-dark.

Rahn

Rahn is property pledged against an obligation. It is also used to refer to the contract that secures a financial liability, with the actual physical collateral given another name—marhoon. According to Mecelle, rahn is "to make a property a security in respect of a right of claim, the payment in full of which from the property is permitted." Hadith tradition states that the Islamic prophet Muhammad purchased food grains on credit pledging his armor as rahn.

Types of rahn can be described in terms of who possesses them: Al-rahn al-heyazi ; Al-rahn ghair al-heyazi ; Al-rahn al-musta'ar.
They can also be described by subject type: Rahn al-manqul, Rahn ghair al-manqul.

Wakalah

A Wakalah is a contract where a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney. It is used when the principal does not have the time, knowledge or expertise to perform the task himself. Wakalah is a non-binding contract for a fixed fee and the agent or the principal may terminate this agency contract at any time "by mutual agreement, unilateral termination, discharging the obligation, destruction of the subject matter and the death or loss of legal capacity of the contracting parties". The agent's services may include selling and buying, lending and borrowing, debt assignment, guarantee, gifting, litigation and making payments, and are involved in numerous Islamic products like Musharakah, Mudarabah, Murabaha, Salam and Ijarah.
Types of wakalh include: general agency, specific agency, limited or restricted agency, absolute or unrestricted agency , binding wakalah, non-binding wakalah, paid agency, non-paid agency, etc.
An example of the concept of wakalah is in a mudarabah profit and loss sharing contract where the mudarib serves as a wakil for the rabb-ul-mal'' .

Deposit side of Islamic banking

From the point of view of depositors, "Investment accounts" of Islamic banks—based on profit and loss sharing and asset-backed finance—resemble "time deposits" of conventional banks.. In both these Islamic and conventional accounts the depositor agrees to hold the deposit at the bank for a fixed amount of time. In Islamic banking return is measured as "expected profit rate" rather than interest.
"Demand deposits" of Islamic financial institutions, which provide no return, are structured with qard al-hasana contracts, or less commonly as wadiah or amanah contracts, according to Mohammad O. Farooq.

Restricted and unrestricted investment accounts

At least in one Muslim country with a strong Islamic banking sector, there are two main types of investment accounts offered by Islamic banks for those investing specifically in profit and loss sharing modes—restricted or unrestricted.

Restricted investment accounts enable customers to specify the investment mandate and the underlying assets that their funds may be invested in,
unrestricted investment accounts do not, leaving the bank or investing institution full authority to invest funds as "it deems fit", with no restrictions as to the purpose, geographical distribution or way of investing the account's funds. In exchange for more flexible withdrawal conditions, a UIA fund may combine/commingle pools of funds that invest in diversified portfolios of underlying assets. While investment accounts can be tailored to meet a diverse range of customer needs and preferences, funds in the account are not guaranteed by Perbadanan Insurans Deposit Malaysia or also known as Malaysia Deposit Insurance Corporation internationally.

Some have complained that UIA accounts lack transparency, fail to follow Islamic banking standards, and lack of customer representation on the board of governors. Some institutions have hid poor performance of their UIAs behind "profit equalization funds" or "investment risk reserves",. "It is only when an Islamic financial institution approaches insolvency that the UIAs come to know that their deposits have eroded over the period."

Demand deposits

Islamic banks also offer "demand deposits," i.e. accounts which promise the convenience of returning funds to depositors on demand, but in return usually pay little if any return on investment and/or charge more fees.

Qard

Because demand deposits pay little if any return and Qard al-hasana loans may not have any "stipulated benefit", the Qard mode is a popular Islamic finance structure for demand deposits. In this design, qard al-hasan is defined as "deposits whose repayment in full on demand is guaranteed by the bank," with customer deposits constitute "loans" and the Islamic bank a "borrower" who pays no return —in accordance with orthodox Islamic law. However, according to Islamic jurisprudence, Qard al-hasana are loans to be extended as charity to the needy who will be required to replay the loan only "if and when... able".
This puts account holders in the curious position—according to one skeptic —of making charitable loans with their deposits to multi-million or billion dollar profit-making banks, who are obliged by jurisprudence to "repay" only if and when able.
A further complication is that at least some conventional banks do pay a modest interest on their demand/savings deposits. In order to compete with them, Islamic banks sometimes provide an incentive of a Hibah on the balance of the customers' savings accounts.
In Iran, qard al-hasanah deposit accounts are permitted to provide a number of incentives in lieu of interest, including:

"grant of prizes in cash of kind,
reductions in or exemptions from service charges or agents' fees payable to banks, and
according priority in the use of banking finances."

Like dividends on shares of stock, hibah cannot be stipulated or legally guaranteed in Islam, and is not time bound. Nonetheless, one scholar has complained:

"If Islamic banks routinely announce a return as a 'gift' for the account holder or offer other advantages in the form of services for attracting deposits, this would clearly permit entry of riba through the back door. Unfortunately, many Islamic banks seem to be doing precisely the same as part of their marketing strategy to attract deposits."

Wadiah and Amanah

Two other contracts sometimes used by Islamic finance institutions for pay-back-on-demand accounts instead of qard al-hasanah,
are Wadi'ah and Amanah.
Sources disagree over the definition of these two contracts. "Often the same words are used by different banks and have different meanings," and sometimes wadiah and amanah are used interchangeably.
Regarding Wadiah, there is a difference over whether these deposits must be kept unused with 100 percent reserve or simply guaranteed by the bank. Financialislam.com and Islamic-banking.com talk about wadiah deposits being guaranteed for repayment but nothing about the deposit being left the untouched/uninvested. Reuters Guide to Islamic finance glossary, on the other hand, states that in wadia "... the trustee does not have rights of disposal." But according to Reuters there is a contract called Wadia yadd ad daman which is used by Islamic Banks "to accept current account deposit", and whereby the bank "guarantees repayment of the whole or part of the deposit outstanding in the account when repayment is due", and nothing about not having rights of disposal..
Sources also differ on Amanah. Financialislam.com says it is a trust and an Islamic bank cannot use these funds for its operations, but Islamic-banking.com says a bank can if it "obtains authority" of depositor. Reuters talks about amanah needing to be "guarded and preserved". Abdullah and Chee, refer to amanah as a type of wadiah—''Wadiah yad amanah''—that is property deposited on the basis of trust or guaranteeing safe custody and must be kept in the banks vaults., "resulting from circumstances beyond its control", or unless the trustee has been in "breach of duty" .

Other sharia-compliant financial instruments

Sukuk (Islamic bonds)

Sukuk,, is the Arabic name for financial certificates developed as an alternative to conventional bonds. They are often referred to as "Islamic" or "sharia-compliant" bonds. Different types of sukuk are based on different structures of Islamic contracts mentioned above, depending on the project the sukuk is financing.
Instead of receiving interest payments on lent money as in a conventional bond, a sukuk holder is given " part-ownership of an asset" from which he/she receives income "either from profits generated by that asset or from rental payments made by the issuer".
A sukuk security, for example, may have partial ownership of a property built by the investment company seeking to raise money from the sukuk issuance, so that sukuk holders can collect the property's profit as rent. Because they represent ownership of real assets and do not guarantee repayment of initial investment, sukuk resemble equity instruments, but like a bond regular payments cease upon their expiration. However, in practice, most sukuk are "asset-based" rather than "asset-backed"—their assets are not truly owned by their Special Purpose Vehicle, and, their holders have recourse to the originator if there is a shortfall in payments.
The sukuk market began to take off around 2000 and as of 2013, sukuk represent 0.25 percent of global bond markets. The value of the total outstanding sukuk as of the end of 2014 was $294 billion, with $188 billion from Asia, and $95.5 billion from the countries of the Gulf Cooperation Council
According to a paper published by the IMF, as of 2015 the supply of sukuk, fell "short of demand and, except in a few jurisdictions, issuance took place without a comprehensive strategy to develop the domestic market."

Takaful (Islamic insurance)

Takaful, sometimes called "Islamic insurance", differs from conventional insurance in that it is based on mutuality so that the risk is borne by all the insured rather than by the insurance company. Rather than paying premiums to a company, the insured contribute to a pooled fund overseen by a manager, and they receive any profits from the fund's investments.
Any surplus in the common pool of accumulated premiums should be redistributed to the insured.
Like other Islamic finance operations, the takaful industry has been praised by some for providing "superior alternatives" to conventional equivalents and criticized by others for not being significantly different from them. Omar Fisher and Dawood Y. Taylor state that takaful has "reinvigorate human capital, emphasize personal dignity, community self-help, and economic self-development".
On the other hand, according to Muhammad Akram Khan, Mahmud El-Gamal, the cooperative ideal has not been followed in practice by most takaful companies—who do not give their holders a voice in appointing and dismissing managers, or in setting "rates of premium, risk strategy, asset management and allocation of surpluses and profits". In a different critique, Mohammad Najatuallah Siddiqui argues that cooperation/mutuality does not change the essence of insurance—namely using the "law of large numbers" to protect customers.
As of the end of 2014 "gross takaful contributions" were estimated to be US$26 billion according to INCIEF.
BusinessInsurance.com estimates the industry will reach $25 billion in size by the end of 2017.

Islamic credit cards

Sources dispute whether a truly shariah-compliant credit card has been developed. According to scholar Manzur Ahmad, despite their efforts,, Muslim scholars have not been able to find a legal basis in classical jurisprudence for an Islamic parallel of the credit card.
Other scholars also agree that, attempts to devise "some sort of 'Islamic credit cards'" have found "no instrument that is compatible with shariah that can offer the same service as the conventional credit card". Among other complaints, critics note that credit cards encourage people to go into debt and to buy luxuries – both unIslamic activities.
Despite this, there are credit cards claiming to be shariah-compliant, generally following one of three arrangements, according to Lisa Rogak:

A bank provides a line of credit to the cardholder and charges a monthly or yearly usage fee tied to the outstanding balance of the line of credit.
A customer is allowed to buy an item with a card, but in the instant that the card goes through, the bank purchases the item before selling it to the cardholder at a higher price.
A lease-purchase agreement where the bank holds title to the purchased item until the cardholder makes the final payment.

Another source finds Islamic credit cards based not one of three but one of five structures:

ujra
ijara
kafala for the transactions of the card holder. For its services, the card holder is obligated to pay kafala bi ujra ).
qard.
bai al-ina/wadiah

According to yet another source,, Islamic "credit cards" are much like debit cards, with any transaction "directly debited" from the holder's bank account. According to Maryam Nasuha Binti Hasan Basri, et al., Islamic credit cards have played an important role in "the development and success of Islamic banking in Malaysia". Banks in that country offering Islamic credit cards as of sometime after 2012 include Bank Islam Malaysia Berhad, CIMB Islamic Bank Berhad, HSBC Amanah Malaysia Berhad, Maybank Islamic Berhad, RHB Islamic Bank Berhad, Standard Chartered Berhad, Am Islamic Bank Berhad.

Islamic funds

Islamic mutual funds—i.e. professionally managed investment funds that pools money from many investors to purchase securities that have been screened for sharia compliance—have been compared with "socially responsible" mutual funds—both seeking some combination of high returns/low risk like conventional funds, but also screening their holdings according to a non-profit seeking criteria. Islamic funds may also be unit trusts which are slightly different from mutual funds. The funds may hold equity and/or sukuk securities and/or own real estate.
Before a company's shares or other holdings can be purchased by a fund, the firm must be screened according to the sharia

to filter out any company whose business involves industries or types of transactions that are prohibited by Islamic law but also
to make sure the company isn't "engaged in prohibited speculative transactions, which are likely leveraged with debt", the company's "financial ratios" must be examined to meet "certain financial benchmarks".

Islamic equity funds were launched in the early 1990s, and began growing fairly rapidly in about 2004.
As of 2014 there were 943 Islamic mutual funds worldwide and as of May 2015, they held $53.2 billion of assets under management. Malaysia and Saudi Arabia dominate the sector with about 69% of total assets under management.
According to a 2015 study by Thomson Reuters, the market for Islamic funds has much room to grow as there is a "latent demand" for Islamic investment funds of $126 billion which "could rise to $185.1 billion by 2019". That survey of fund managers and investment firms found "an estimated 28 percent" of investors wanted to invest in sukuk-owning mutual funds, 21% in equity-owning funds and 15% in funds owning real estate.
Benchmarks to gauge the funds' performance have been established by Dow Jones and the FTSE Global Islamic Index Series.
At least in the earlier part of the 2000s, equity fund performance was not impressive. According to a study by Raphie Hayat and Roman Kraeuss of 145 Islamic equity funds from 2000 to 2009, the funds under-performed both Islamic and conventional equity benchmarks, particularly as the 2008 financial crisis set in. The study also found fund managers unsuccessful in their attempts to time the market.
A disadvantage Islamic funds have compared to conventional ones is that since they must "exclude companies with debt-to-market capitalization" above a certain ratio, and since a fall in the price of the stock raises its debt-to-market capitalization ratio, falling stock prices may force a fund to sell stocks, "whether or not that was the best investment
strategy". This puts the fund at risk of being forced into "buying high and selling low".

Sharia indices

Credit Suisse HS50 Sharia Index
Dow Jones Islamic Market Index
Dubai Shariah Hedge Fund Index
FTSE Sharia Global Equity Index
Jakarta Islamic Index, Indonesia
MSCI Barra Islamic Index
S&P BSE 500 Shariah Index

Islamic derivatives

While "almost all conservative Sharia scholars" believe derivatives are in violation of Islamic prohibitions on gharar, global standards for Islamic derivatives were set in 2010, with help of Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association.
This Tahawwut/"Hedging Master Agreement" provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps. Attempts to unify various swap documentation and has "strong parallels" to the 2002 ISDA Master and Schedule of the conventional banking industry. Tahawwut has not being widely used as of 2015, according to Harris Irfan, as the market is "awash" with "unique, bespoke... contracts documenting the profit rate swap", all using "roughly the same structure", but differing in details and preventing the cost saving of standardization.
According to critic of Islamic finance El-Gamal, the Islamic finance industry has "synthesized" Islamic versions of "short and long sales as well as put and call options",.
The Islamic finance equivalent of a conventional call option are known as an urbun sale where the buyer has the right to cancel the sale by forfeiting her down-payment. The Islamic equivalent of the "premium" in a conventional call option is known as a "down-payment", and the equivalent of the "strike price" is called the "preset price". A put option is called a 'reverse urbun` in Islamic finance.
Short-selling is also forbidden by conservative scholars because the investor is selling an item for which he never became the owner. However "some Shariah-compliant hedge funds have created an Islamic-short sale that is Shariah-certified". Some critics complain it uses a work-around that is no different than "margin" regulations for short-selling used in at least one major country, but entails "substantially higher fees" than conventional funds.

Wa'd

Wa'd, is a principle that has come to underpin or to structure shariah-compliant hedging instruments or derivatives. Conventional hedging products such as forward currency contracts and currency swaps are prohibited in Islamic Finance. Wa'd has been called "controversial" or a mimicry of conventional products and "'Islamic' in form alone".
A "Double Wa'd" is a derivative that allows an investor to invest in and receive a return linked to some benchmark, sometimes ones that would normally be against shariah—such as an index of interest-bearing US corporate bonds. The investor's cash goes to a "special purpose entity" and they receive a certificate to execute the derivative. It involves a promise that on an agreed day in the future the investor will receive a return linked to whatever benchmark is chosen.
Several features of the double wa'd make the derivative sharia-compliant:

a special purpose entity where the investor's cash goes to avoid commingling,
a shariah-compliant asset that is liquid and tradable—such as shares in a big company that has low levels of interest bearing debt —purchased with the investor's cash.
a contract involving two mutually exclusive promises :

that on an agreed day in the future the investor will receive a return linked to a given benchmark;
that the bank will purchase the investor's asset "for a price equal to the benchmark"

So despite the fact that benchmark involves non-compliant investments, the contract is not "bilateral", because "the two undertaking promised are mutually exclusive", and this makes it in compliance with shariah.
In 2007, Yusuf DeLorenzo issued a fatwa disapproving of the double wa'd in these situations, but this has not curtailed its use.

Put and call options

Like the Islamic equivalent for short sales, a number of Islamic finance institutions have been using the down-payment sale or urbun as an sharia-compliant alternative to the conventional call option.
In this mode the Islamic equivalent of the option "premium" is known as a "down-payment", and the equivalent of the "strike price" is called the "preset price".
With a conventional call option the investor pays a premium for an "option" to buy shares of stock in the hope that the stock's market price will rise above the strike price before the option expires. If it does, their profit is the difference between the two prices minus the premium. If it does not, their loss is the cost of the premium. When the Islamic investor uses an urbun they make a down-payment on shares or asset sale in hope the price will rise above the "preset price". If it does not their loss is the down-payment which they have the right to forfeit.
A put option is called a 'reverse urbun` in Islamic finance.
;Criticism
The urbun and reverse urbun has been criticized by Sherif Ayoub, and according to El-Gamal and Feisal Khan, the procedure has many critics among scholars and analysts.

Microfinance

Microfinance seeks to help the poor and spur economic development by providing small loans to entrepreneurs too small and poor to interest non-microfinance banks. Its strategy meshes with the "guiding principles" or objectives of Islamic finance, and with the needs of Muslim-majority countries where a large fraction of the world's poor live, many of them small entrepreneurs in need of capital..
According to the Islamic Microfinance Network website, there are more than 300 Islamic microfinance institutions in 32 countries, The products used in Islamic microfinance may include some of those mentioned above—qard al hassan, musharaka, mudaraba, salam, etc.
Unfortunately, a number of studies have found Islamic microfinance reaching relatively few Muslims and lagging behind conventional microfinance in Muslim countries. Chiara Segrado writing in 2005 found "very few examples of actual MFIs operating in the field of Islamic finance and Islamic banks involved in microfinance".
One 2012 report found that Islamic microfinance made up less than one percent of the global microfinance outreach, "despite the fact that almost half of the clients of microfinance live in Muslim countries and the demand for Islamic microfinance is very strong."
An earlier 2008 study of 126 microfinance institutions in 14 Muslim countries found similarly weak outreach—only 380,000 members out of an estimated total population of 77 million there were "22 million active borrowers" of non-sharia-compliant microfinance institutions as of 2011 in Bangladesh, the largest sharia-compliant MFI or bank in that country had only 100,000 active borrowers.