Classification of Islamic Modes of Contract

UAE Laws and Islamic Finance

Beirut Street Scene

Thoughts from Iraj Toutounchian’s Islamic Money & Banking, Integrating Money in Capital Theory

Islamic contracts can be classified into two broad categories: (1) those with variable returns (such as Musharakah and Mudarabah contracts) and (2) those with fixed returns (Installment Sales, Hire Purchase, Jo’aalah, and the like).  The second category may be defined as auxiliary contracts, which can be used in conjunction with the first category or after such has been utilized.  While the first category involves risk, the second type is riskless, which might be more appealing to Islamic banks.  However, there is an urgent need for a government institution to shoulder the burden of risk produced by the public sector and beyond the control of the private sector.  Reducing or eliminating risk for investors requires that the banks pay compensation from their own share of profit by changing the value of Alpha (The ratio of a…

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