Islamic Financing for the Masses

The phenomenon of charging interest or markup is as old as it can get. The advent of capitalism in the Renaissance Age only gave rise to it. The ancient Athenian philosopher of the Classical period, Aristotle, denounced the charging of surplus money upon lending.

Woven into our daily lives is the fabric of charging interest, perhaps. The author is unaware of the number of times you might have applied for a phone credit ‘advance’ and paid it back with excessive credit. From an economic standpoint, interest gains favor. Creditors, financiers, and lenders argue that the money loses its ‘real value’ over time. Hence, charging interest is a wise thing to do. They also provide the argument for opportunity cost. However, from an ethical standpoint, charging interest equates to taking advantage of one’s situation. Hence, markup and the charging of it are deemed unethical. Both the proponents and opponents provide valid reasons as per their rationale.

Deemed by many as a ‘gunjaish’ and a trick to woo religious believers into banking and insurance, at least by fellow Pakistanis, one cannot blame them. After all, the consumer market has witnessed several marketing gimmicks over the years, such as beverage companies producing mineral water to capture the market that hates their beverages and a tobacco company manufacturing nicotine pouches to turn non-smokers into addicts. The same could be valid for Islamic financing.

Islamic financing finds its foundation in the most fundamental characteristic of the Islamic economic system: interest-free. Furthermore, investments are into halal assets and ventures. The Shariah-compliant modes of financing include both banking and non-banking activities. Several usual ones are listed and explained below, with Takaful being the only non-banking mode of finance discussed here:

  1. Modaraba
  2. Musharakah
  3. Ijarah and Diminishing Musharakah
  4. Murabaha
  5. Tawarruq
  6. Takaful.


In Modaraba, the depositor or the investor (Rabb-ul-Maal) provides the bank or the asset manager (Modarib) with the investment money. Contrary to traditional financing, where no loss-sharing occurs, Modaraba bases itself on profit-and-loss sharing (PLS) at an explicitly stated percentage rate. The deposits in a savings bank account get acceptance under Modaraba. Think of Modaraba as follows:

Karim possesses the capital but lacks the insight to invest in assets. He goes to the bank and asks them to provide an ROI against his investment. He also asserts that he can bear a loss if the investment yields poorly. Both parties agree upon a profit-and-loss sharing percentage ratio, say 50–50. Karim is the sleeping partner here who only offers the capital.


Both Modaraba and Musharakah are forms of profit-and-loss partnership. However, they differ in several ways. While Modaraba is strictly limited to a unified role of both the parties involved, Musharakah may include both only offering capital or managing the business alongside. Furthermore, Modarabah is on the consumer’s side, while in Musharakah, the bank partners with enterprises to gain profits for itself and the depositor. Think of Musharakah as follows:

A hypothetical company, Helal Inc., lacks both financial capital and management expertise to expand its territory. The company enters into a partnership with the bank, wherein the latter offers both finance and management expertise, thus filling the gap. Both parties act as active partners in this case. However, the bank may also act as a silent partner, offering only the capital.

Ijarah and Diminishing Musharakah

Ijarah is a form of leasing. Leasing refers to providing a usage fee or rental payments by the lessee upon using an asset offered by the lessor. The leased asset remains in possession of the lessee, but the transfer of ownership does not occur.

The Ijarah mode finds its wide usage in mortgage financing. Consider the following example:

Rehan cannot afford to own a house owing to the rising prices. He contacts a bank for a lease contract. The bank (lessor) arranges the housing asset for him and asks for rental payments as long as the property remains in Rehan’s (lessee) possession.

What if Rehan later saves enough money to buy the asset from the bank? He can enter into the diminishing Musharakah with the bank. Shares of ownership will transfer to Rehan as he continues the rental payment.

A form similar to diminishing Musharakah is Istisna-cum-Wakala. It is a form of hire-purchase financing, wherein the intention right from the beginning is to own an asset in progression through rental payments.


Consider the following example:

A hypothetical business, Helal Inc., cannot source a product required by its highly lucrative clients. A sole proprietor named Irfan extends the help. In return, Irfan desires a profit.

In the Murabaha mode, Irfan is obliged to disclose the original cost of the product and the profit he desires to make, say the product costs PKR 30,000 and Irfan’s profit share is PKR 2,000. The transaction will occur when both parties reach a consensus. Helal Inc. will make a deferred (future) payment to Irfan.

A form similar to Murabaha is Musawamah. Herein the original cost does not require disclosure, and the parties should only agree upon the selling price, say PKR 32,000, and pay the deferred amount.


Widely applicable on credit card transactions, Tawarruq is a form of Murabaha or Musawamah. Tawarruq-based credit cards are a recent phenomenon in Pakistan. Faysal Bank has launched the first and, by far, the only ‘Islamic credit card’ here in early 2021 (Noor Card).

Like a conventional credit card, a Tawarruq-based credit card offers instant liquidity from the bank. Here’s how Tawarruq works:

Suppose Zohaib wants to spend PKR 20,000 but lacks the required amount. The bank will purchase an asset worth PKR 20,000 and transfer its ownership to Zohaib. However, Zohaib is obliged to pay a surplus amount he agreed upon as a deferred payment.

One of the inherent characteristics of Islamic credit cards is that one cannot perform haraam transactions. Such transactions include but are not limited to gambling, purchasing liquor, and pork meat.


Takaful is a form of Islamic insurance. It bears similarity to mutual funds, wherein a pool of investors allocate their money as premiums. This investment money covers insurable risks in case of a claim.

‘Takaful’ stems from the Arabic term ‘Kafalah,’ meaning ‘to guarantee.’ Hence, it bases itself on indemnity, a form of third-party guarantee.

Parties to a Takaful

Takaful Islamic Insurance — Finesse by Rafey Iqbal Rahman
Image by the author. All rights reserved.
  • The Insured: The party desiring risk coverage.
  • Indemnifiers: The pool of investors who offer funds for risk mitigation.
  • The Insurer: The party channeling funds from indemnifiers to the insured.

Originally published on Substack. If you liked this or learned something new, please consider subscribing to Finesse for more financial literacy posts. This is the first post. More to come soon.



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Rafey Iqbal Rahman

Rafey Iqbal Rahman

Published Writer @swlh. Writing focused on technology, business and entrepreneurship.