Islamic financing is different from conventional banking as its design is not meant for providing commercial loans . To meet this requirement of modern banking supply of assets to customers by following trading rules of Shari’a is being used by Islamic finance industry. Under these modes of operations, Islamic banks are more of trading houses/supplier of goods than financial institutions.
Bai Salam is a sales transaction whereby a specified asset is purchased by making spot payment of the price with delivery asset at a foreseeable future date. This mode of financing is designed for agricultural financing, where by farmers get cash in advance for delivery of goods at the time of harvesting. Banks dispose of salam goods in the market after receipt from farmers. Differences in prices of sale and purchase make their profits.
Mudaraba is a type of partnership whereby skill and money brought together to conduct business. Profit is shared according to agreement while loss is born by capital provider only. Under this scheme of financing IFIs provide capital to financially weak but skilful people to do the business and share outcome with IFIs. This scheme is also used in deposit collection. Mudaraba contract can be restricted or unrestricted.