Islamic Banking

A Guide for Small and Medium-Sized Enterprises

image of Islamic Banking

This guide is part of International Trade Centre’s (ITC) Trade Finance programme, which provides assistance to help small firms in developing countries develop their capacities to link to global markets through exports. It is intended primarily for trade support institutions of developing countries, and owners or finance managers of small firms. The aim is to help these firms decide whether Islamic banking options are feasible for them, and how to use them. This guide intends to help the non-specialist reader understand and use Islamic finance. Part I – Understanding Islamic Finance – covers the key principles and perspectives of Islamic banking relevant to small firms. Part II – Using Islamic Finance – consists of a “how to” guide to use Islamic banking instruments for specific transactions.

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Key products and how they compare

The common methods used in Islamic financing include sales contracts such as Murabahah (cost-plus sale), leasing (Ijarah), Salam (forward sale) and Istisna (construction or manufacturing sale). They also include Wakalah (agency), Musharakah (joint venture or partnership), and Mudarabah (managed partnership). These contracts are used to manage credit and investment processes. They are frequently joined with some form of undertaking or promise to synthesize a bias towards credit risk as compared to asset risk. This chapter examines each of these methods by way of concrete examples, presented both textually and in illustrations, and shows how they fit in an Islamic bank. All the methods have been tested in micro-enterprise and SME markets and all may be used to support trade finance activities.

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