Financial Management · Sources of, and raising, business finance

Islamic Finance for ACCA FM: Murabaha, Ijara, Mudaraba, Musharaka and Sukuk

Updated 11 October 2026 · Fact-checked

Islamic finance is Sharia-compliant finance. It bans riba (interest), excessive uncertainty (gharar) and gambling, and funds only permitted activities. Instead of lending money for interest, it uses trade, leasing, profit sharing and asset-backed certificates: Murabaha, Ijara, Mudaraba, Musharaka and Sukuk. Match each contract to its structure and who bears risk.

Understand Islamic Finance

Conventional finance lends money and charges interest. Islamic law (Sharia) treats interest, called riba, as unacceptable. Money is not seen as something that earns a return by itself. A return must come from a real asset, a trade or a share in business risk.

Sharia also bans gharar (excessive uncertainty in a contract) and maysir (gambling or speculation). Finance cannot support prohibited activities such as alcohol, pork products or gambling. So the finance provider must usually own or share in a real asset or venture.

The contracts fall into two groups. Debt-like (trade-based) contracts: Murabaha is a sale where the bank buys an asset and sells it to the customer at cost plus an agreed mark-up, paid in instalments or later. Ijara is leasing: the bank owns the asset and leases it for rentals. A lease ending in transfer of ownership is often called Ijara wa Iqtina. Equity-like (partnership) contracts: Mudaraba is a partnership where one party (the investor, rabb-ul-mal) provides all the capital and the other (the mudarib) provides management skill. Profits are shared in an agreed ratio. Financial losses fall on the capital provider, and the manager loses their effort. Musharaka is a joint venture where both parties provide capital and usually share in management. Profits are shared as agreed; losses are shared in proportion to capital contributed.

Sukuk are certificates giving the holder an ownership interest in an underlying asset or venture. They are often called Islamic bonds, but they differ. A bond is a debt claim paying interest. A sukuk holder owns a share of an asset and receives a share of its rental or profit. Sukuk are usually issued through a special purpose vehicle that holds the assets.

For FM, you need to explain how each contract avoids riba, how it differs from a conventional loan or lease, and who bears the risk. The mark-up in Murabaha is fixed at the start, which looks like interest. It is acceptable because it is the profit on a genuine sale, not a charge for time on money.

Key rules to remember

Murabaha price: Selling price = cost to bank + agreed mark-up; Fixed at the outset and not increased for late payment. Payment can be deferred or in instalments.
Mudaraba profit and loss: Profit shared in agreed ratio; financial loss borne by the capital provider; The mudarib loses only time and effort unless they were negligent or breached the contract.
Musharaka profit and loss: Profit shared as agreed; loss shared in proportion to capital contributed; Both parties contribute capital and may manage the venture.
Ijara rentals: Lessor owns the asset and bears ownership risks; lessee pays rentals for use; Rentals can be fixed or linked to a benchmark rate. Ownership may transfer at the end.
Sukuk return: Holder receives a share of the income or profit from the underlying asset; Return depends on the asset's performance, not a promise of interest on a loan.

How to solve Islamic Finance questions

Use this method for any Islamic finance question, whether an objective test item or a written requirement.

1Identify the requirement: explain a contract, recommend one, or compare it with conventional finance.
2Name the Sharia principles at stake: no riba, no gharar, no prohibited activities, and risk sharing tied to a real asset.
3Match the scenario to the contract: asset purchase on credit points to Murabaha; asset use points to Ijara; one party providing capital and the other managing points to Mudaraba; joint capital points to Musharaka; tradable asset-backed certificates point to Sukuk.
4Explain how the return is earned: mark-up on a sale, rental, profit share or share of asset income. Never call it interest.
5State who bears the risk, especially losses and asset ownership.
6Compare with the conventional equivalent: loan, finance lease, equity or bond.
7Add a practical point for the company, such as access to Islamic investors, lack of standardisation or higher cost.
8Check that your answer fits the scenario and the marks available.

Quickest way: Contract matching shortcut

When to use it: Use this for Section A or Section B objective questions where you must pick the right contract or the correct statement.

Look for the key phrase: cost plus mark-up means Murabaha; lease or rental means Ijara.
Look at who provides capital: one party only means Mudaraba; both parties means Musharaka.
Look for certificates or tradable ownership of assets: Sukuk.
Check losses: capital provider bears loss in Mudaraba; shared by capital contributed in Musharaka.
Reject any option saying interest is charged or that the return is guaranteed regardless of asset performance.

Common mistakes in Islamic Finance

Calling the Murabaha mark-up interest.
The mark-up is fixed and paid over time, so it looks like a loan charge.
Fix: Say it is the profit on a genuine sale of an asset the bank owned first, not a charge for lending money.
Confusing Mudaraba and Musharaka.
Both are profit-sharing partnerships.
Fix: Mudaraba: one party gives capital, the other gives management. Musharaka: both give capital and usually share management.
Saying the manager shares financial losses in a Mudaraba.
Students assume losses are shared like profits.
Fix: The capital provider bears the financial loss. The mudarib loses time and effort, unless they were negligent.
Describing Sukuk as ordinary bonds paying interest.
Sukuk are often called Islamic bonds.
Fix: Explain that holders own part of an asset and receive a share of its income, not interest on a loan.
Treating Ijara as a loan to buy the asset.
It resembles a finance lease with regular payments.
Fix: The lessor owns the asset and bears ownership risks. The lessee pays rentals for use.
Giving a general description with no link to the scenario.
Students recall the definitions but do not apply them.
Fix: Tie your answer to the company's need, such as buying equipment, and name the contract that fits.

Worked examples

Example 1

A company needs machinery costing $200,000 but wants Sharia-compliant finance. A bank offers to buy the machine and sell it to the company for $230,000, payable in 3 equal annual instalments. Identify the contract, calculate each instalment and explain why it is not interest.

Show the solution

The bank buys the asset and resells it at cost plus a mark-up, so the contract is Murabaha.
Mark-up = $230,000 − $200,000 = $30,000.
Each instalment = $230,000 ÷ 3 = $76,666.67.
The price is agreed at the outset and is the profit on a sale of an asset the bank owned, not a charge for time on borrowed money.
The price should not rise if the company pays late, which differs from a loan where interest accrues.

Answer: Murabaha; mark-up $30,000; three instalments of about $76,667. It avoids riba because the return is profit on a genuine sale at a fixed agreed price.

Example 2

An investor provides $400,000 to an entrepreneur who runs a business using her expertise, under a Mudaraba. Profits are shared 60% to the entrepreneur and 40% to the investor. The business makes a profit of $50,000 in year 1 and then a loss of $80,000 in year 2 without negligence. Calculate each party's result for each year.

Show the solution

Year 1 profit: investor 40% × $50,000 = $20,000.
Year 1 entrepreneur: 60% × $50,000 = $30,000.
Year 2: the loss of $80,000 is financial, so the investor, as capital provider, bears it.
The entrepreneur bears no financial loss but receives no reward for her effort in year 2.

Answer: Year 1: investor $20,000 profit, entrepreneur $30,000. Year 2: investor bears the $80,000 loss; entrepreneur loses only her effort.

Exam tips

Learn one clear line for each contract: who owns the asset, who provides capital, how the return arises and who bears loss.
In written answers, always say why the return is not riba, and use the words asset-backed and risk sharing.
Compare Sukuk with bonds and Murabaha with a loan. Those comparisons are easy marks.
In objective questions, an option guaranteeing a fixed interest return is almost certainly wrong.
Link your answer to the scenario. If a company wants to raise finance from Muslim investors, discuss Sukuk.

Practice questions from Sources of, and raising, business finance

Islamic Finance: frequently asked questions

What is the difference between Mudaraba and Musharaka?

In Mudaraba, one party provides all the capital and the other provides management. In Musharaka, both provide capital and usually share management. In Mudaraba the capital provider bears financial loss; in Musharaka losses follow capital contributed.

How does Islamic finance avoid interest (riba)?

It earns returns from trade, leasing or profit sharing linked to real assets. A bank sells an asset at a mark-up, leases it for rentals, or shares in business profits. Money is not lent for a charge based on time.

Is a Sukuk the same as a bond?

No. A bond is a debt claim that pays interest. A Sukuk gives the holder ownership of part of an underlying asset or venture and a share of its income. The return depends on the asset, not on a loan.

How is Ijara different from a conventional lease?

The lessor must own the asset and bear ownership risks such as damage or loss. The lessee pays rentals for use. The structure must avoid interest and uncertainty, though the economics may resemble a finance lease.