Crowdfunding: Shariah Compliant Debt Financing

Islam prohibits any types of riba or interest but encourages investments and financing on the basis of PLS (Profit and Loss Sharing). But it is irony that most of the financing alternatives we have in our economy are interest based. Furthermore, Shariah based financing alternatives available in banks and NBFIs require borrowers to comply with long list of prerequisites. In fact, there are obscurities in the different debt modes offered by financial institutions, and this is one of the primary reasons behind the reluctance of small borrowers to borrow fund from the Islamic banks and NBFIs. Considering the urgency and market demand, BDcrowdfund has emerged with SCDF (Shariah Compliant Debt Financing).
Unlike traditional interested based debt, shariah compliant debt generally does not offer fixed rate of return. Typically, SCDFs are different types of sale contracts which allow to transfer of ownership of goods, commodities, equipment, machineries, or underlying products from the lenders to the borrowers. There are several forms of SCDF alternatives applicable based on the nature of the purposes and repayment options of the funds. Popular forms of SCDFs are Murabaha, Musawamah, Salam, Istisna’a, and Ijarah.
Under ijarah (leasing) contract, the lessor (who must own the property) leases the property to the lessee in exchange for a stream of rental and purchase payments, ending with the transfer of property ownership to the lessee. Murabaha, conventionally known as cost-plus financing, is an Islamic financing alternative where the seller and buyer agree to the cost and markup of an asset. Unlike interest-bearing loan, it is is an acceptable form of credit sale. As with a rent-to-own arrangement, the purchaser does not become the true owner until the loan is fully paid. Bai’ Muajjal is another type of SCDF, which is very similar to Murabaha and sometimes used interchangeably. Bai-Istisna’a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific product after having manufactured, permissible under Islamic Shariah, at an agreed price payable in advance or by instalments within a fixed period or on/within a fixed future date on the basis of the order placed by the buyer. Similar type of forward contract is Bai-Salam. There are some specific differences between these two types of contracts. Generally, former one is used for any underlying goods/ products need to be constructed or manufactured whereas later one is used for agricultural products.
Other than these types, there are some other forms of SCDFs which are used in special cases only. The appropriate form of SCDF will be finalized by the lenders and the borrowers mutually.