Introduction

The Islamic financial services sector is estimated to be growing at double digit

rates, involving over 200 financial institutions with assets estimated to exceed
US$200 billion (Al-Dhahiri, Al-Khamiri, and Al-Hamli, 2003). While the growth has
been most noticeable in Arab Muslim markets, the potential has impact beyond
these fertile markets to non-Arab Muslim and non-Muslim consumers and
businesses as well. Yet, our knowledge of consumer motivations for choosing
Islamic versus conventional banking services is modest and the research to date
is limited and ambiguous on these key issues. The UAE is a dynamic and growing
market for business, particularly in financial services. Global as well as local
banks have flourished in recent years in this relatively progressive and vibrant
economy.
Islamic Banking within the UAE
The United Arab Emirates (UAE) enjoys the highest economic growth rates in the
Arab world, with emirate of Dubais 6.2 percent GDP growthin 2003 taking the
first place among the seven emirates of the UAE. The average GDP growth was
an impressive 4.6 percent over the last ten years. The countrys investment
rating index in 2002 has surpassed even Kuwait and Bahrain. The index
measures a countrys investment climate based on political, economic, and
financial risk criteria. Overall, the UAE was rated a very low risk country.
1. Qard Hasan
A Qard Hasan contract refers to a non-mark up bearing advance intended to
allow the borrower to use the advanced funds for a period with the
understanding that the same amount of the advanced funds would be repaid at
the end of the contract period.
TOP
2. Murabaha & Deferred Sales
A Murabahah contract refers to a sale contract whereby the Institutions offering
Islamic Financial Services ( IIFS) sell to a customer at an agreed profit margin
plus cost (selling price), a specified kind of asset that is already in their
possession.
TOP
3. Murabaha for the Purchase Orderer (MPO)
An MPO contract refers to a sale contract whereby the IIFS sell to a customer at
cost plus an agreed profit margin (selling price), a specified kind of asset that
has been purchased and acquired by the IIFS based on a promise to purchase
from the customer, which can be binding or non-binding.
TOP
4. Leasing ( Ijarah ) & hire purchase
An Ijarah contract refers to an agreement made by IIFS to lease to a customer
an asset specified by the customer for an agreed period against specified
installments of lease rental. An Ijarah contract commences with a promise to
lease that is binding on the part of the potential lessee prior to entering the
Ijarah contract.
TOP
5. Ijarah Muntahia Bittamleek

An Ijarah Muntahia Bittamleek (or Ijarah wa Iqtina) is a form of lease contract

that offers the lessee an option to own the asset at the end of the lease period
either by purchase of the asset through a token consideration or payment of the
market value, or by means of a gift contract.
TOP
6. Mudarabah
A Mudarabah is a contract between the capital provider and a skilled
entrepreneur whereby the capital provider would contribute capital to an
enterprise or activity, which is to be managed, by the entrepreneur as the
Mudarib (or labour provider). Profits generated by that enterprise or activity are
shared in accordance with the terms of the Mudarabah agreement whilst losses
are to be borne solely by the capital provider unless the losses are due to the
Mudaribs misconduct, negligence or breach of contract terms.
TOP
7. Musharakah
A Musharakah is a contract between the IIFS and a customer to contribute
capital to an enterprise, whether existing or new, or to ownership of a real estate
or moveable asset, either on a temporary or permanent basis. Profits generated
by that enterprise or real estate/asset are shared in accordance with the terms
of Musharakah agreement whilst losses are shared in proportion to each
partners share of capital.
TOP
8. Diminishing Musharakah
Diminishing Musharakah is a form of partnership in which one of the partner
promises to buy the equity share of the other partner gradually until the title to
the equity is completely transferred to the buying partner. The transaction starts
with the formation of a partnership, after which buying and selling of the other
partners equity take place at market value or the price agreed upon at the time
of entering into the contract. The buying and selling is independent of the
partnership contract and should not be stipulated in the partnership contract
since the buying partner is only allowed to give only a promise to buy. It is also
not permitted that one contract be entered into as a condition for concluding the
other.
TOP
9. Salam
A Salam contract refers to an agreement to purchase, at a predetermined price,
a specified kind of commodity not available with the seller, which is to be
delivered, on a specified future date in a specified quantity and quality. The IIFS
as the buyers make full payment of the purchase price upon execution of the
Salam contract. The commodity may or may not be traded over the counter or
on an exchange.
TOP
10. Parallel Salam
A Parallel Salam contract refers to a second Salam contract with a third party
acquiring, from the IIFS, a specified kind of commodity, which corresponds to
that of the commodity specified in the first Salam contract.
TOP
11. Istisnaa

An Istisnaa contract refers to an agreement to sell to a customer a non-existent

asset, which is to be manufactured or built according to the buyers
specifications and is to be delivered on a specified future date at a
predetermined selling price.
TOP
12. Parallel Istisnaa
A Parallel Istisna`a is a second Istisna`a contract where a third party will be
manufacturing for the IIFS a specified kind of asset, which corresponds to the
specification of the first Istisna`a contract.

Mudaraba: One party gives money to another party, which invests it in

a business or economic activity. Both parties share any profit made from the
investment (based on a pre-agreed ratio), but only the investor loses money
if the investment flops. The fund manager loses the value of the time and
effort it dedicated to the investment. (However, the fund manager assumes
financial responsibility if the loss results from its negligence.)

Musharaka: This contract creates a joint venture in which both parties

provide investment capital, entrepreneurial skills, and labor; both share the
profit and/or loss of the activity.

Contracts of exchange 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:
o

Murabaha: In this cost plus contract, an Islamic financial institution

sells a commodity to a buyer for its cost plus the profit margin, and both
parties know the cost and the profit in advance. The buyer makes deferred
payments.

Salam: In this forward contract, the buyer (or an Islamic financial

institution on behalf of the buyer) pays for goods in full in advance, and the
goods are delivered in the future.

Istisna: This second type of forward sale contract allows an Islamic

financial institution to buy a project (on behalf of the buyer) that is under
construction and will be completed and delivered on a future date.

Contracts of safety and security are often used by Islamic banks;

these contracts help individual and business customers keep their funds safe:
o

Wadia: A property owner gives property to another party for the

purpose of safeguarding. In Islamic banks, current (checking) accounts and
savings accounts are based on the wadia contract.

Hiwala: Debt is transferred from one debtor to another. After the debt is
transferred to the second debtor, the first debtor is free from her obligation.
This contract is used by Islamic financial institutions to remit money between
people.

Kafala: A third party accepts an existing obligation and becomes

responsible for fulfilling someones liability. In conventional finance, this
situation is called surety or guaranty.

Rahn: A property is pledged against an obligation. A customer can

offer collateral or a pledge via a rahn contract in order to secure a financial
liability.