Islamic Finance Contracts Explained: Murabaha, Ijara, Mudaraba, Musharaka and More

The foundation of Islamic finance is the prohibition of riba (a predetermined rate of interest). Under Islamic law, taking a fixed return on money itself is forbidden; income must arise from real economic activity — trade, leasing, or partnership. Gharar (excessive uncertainty) and maysir (gambling) are also forbidden. So an Islamic bank does not simply lend and charge interest; instead it uses specific contracts in which money is tied to a real asset or service (Source: IMF — An Overview of Islamic Finance, WP/15/120; IslamicMarkets — Five Main Contracts).

Murabaha — cost-plus sale

Murabaha is the most common contract. The bank first buys the goods the client wants (for example a car or equipment), then sells them to the client at the purchase price plus an agreed, disclosed profit. The client pays this in instalments or later, as agreed. There is no interest here but a clear, transparent trading profit; the price does not change once the contract is signed (Source: IslamicMarkets — Five Main Contracts; Funding Souq — Islamic Financing Structures).

Ijara — leasing

Ijara is a leasing contract: the bank buys an asset (a house, building, machinery, vehicle) and lets the client use it for a set period in return for an agreed rent, while ownership stays with the bank. Often an 'ijara muntahia bittamleek' version is used — ownership transfers to the client at the end of the term. This model is widely used in home financing (Source: Wikipedia — Ijarah; Guidance Residential — Islamic Home Finance Models).

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Mudaraba — capital-and-labor partnership

Mudaraba is a partnership between two parties: one (rabb-ul-mal) provides the capital, the other (mudarib) contributes labor and expertise to run the venture. Profit is split in a pre-agreed ratio. Any loss is borne — unless the mudarib was negligent or in breach — by the capital provider alone; the mudarib loses their effort. Islamic banks often raise deposits on this basis (Source: Wikipedia — Profit and loss sharing; IMF — Islamic Finance).

Musharaka — joint investment

Musharaka is a joint-venture contract: all partners contribute capital and share profit in an agreed ratio and loss in proportion to each one's contribution. Unlike mudaraba, here everyone may take part in both labor and capital. 'Diminishing musharaka' is used to buy a home: the bank and client co-own the property, the client gradually buys out the bank's share, and eventually becomes the full owner (Source: IslamicMarkets — Five Main Contracts; Guidance Residential).

Salam and istisna — goods delivered in the future

Salam is a sale with advance payment: the buyer pays the full price now, and the seller delivers clearly specified goods (quality and quantity agreed in advance) in the future. It is typically used to finance agricultural produce. Istisna is a contract to manufacture or construct to order: the buyer commissions the seller to build an asset (a building, plant, equipment) to set specifications. Unlike salam, in istisna the price may be paid in stages as the work progresses (Source: AlBalagh — Salam and Istisna; Funding Souq — Guide to Istisna).

Qard hasan — the benevolent, interest-free loan

Qard hasan (qard al-hasan) is a benevolent, interest-free loan: the lender recovers only the amount lent and earns no extra return. Islam regards this as a meritorious act. Banks may offer it as a limited social service; only a small charge covering genuine administrative costs is allowed, and it must not become a way to profit from the loan (Source: IMF — An Overview of Islamic Finance; IFN Investor — Glossary).

The Shariah board and standards

Every Islamic finance product must be approved by a Shariah board, which checks that the contract structure complies with Islamic requirements. Globally, the main rulebooks are set by AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions) in Bahrain and the IFSB (Islamic Financial Services Board) in Malaysia. These boards and standards serve to prevent structures that are 'halal in form but riba in substance' (Source: AAOIFI; IFSB; IMF — Islamic Finance).

Why it matters for Uzbekistan

Uzbekistan is opening the door to this field: on 27 March 2026 President Shavkat Mirziyoyev signed the law on Islamic banking. The law explicitly permits Shariah-compliant models such as murabaha, musharaka, and sukuk, and provides for a five-member Council for Islamic Finance under the Central Bank. The Central Bank joined the IFSB in 2025 and AAOIFI in 2026. Thus the contracts above are gaining practical relevance in the Uzbek market too (Source: SpecialEurasia — Uzbekistan Islamic Finance Law; UNDP Uzbekistan).