Islamic and Conventional Banking
What is Shariah?
The word Shariah refers to Islamic law. Shariah provides guidance in terms of beliefs, moral conduct, practical rulings and transactions. Shariah is the Islamic legal work derived primarily from the teachings of the Quran and the Sunnah, and secondarily from the Ijtihad of Muslim jurists.
What is the difference between a Conventional and an Islamic Bank?
Conventional banks operate under conventional banking laws, whereby they receive money from depositors against a fixed interest rate and lend it to borrowers on an interest basis.
An Islamic bank is a financial institution that operates in accordance with Shariah principles and rules. Major prohibitions in Islamic banking operations include:
- Prohibition of Riba (interest)
- Prohibition of Gharar (uncertainty)
- Prohibition of Gush (cheating)
- Prohibition of Haram activities (unlawful activities)
What is the difference between Interest and Profit?
Interest is a pre-contractually stipulated increment over and above the repayment of a loan amount, which is not permissible as per Shariah.
Profit is revenue generated through various Shariah-compliant contracts. Earning profit is permissible as per Shariah principles and rules.
Islamic banks do not earn interest on financing or other activities. They generate profits through Shariah-compliant contracts such as sale and purchase, leasing, construction, agency and other approved structures.
What is Murabaha in Personal Finance?
Murabaha is a sale contract whereby an asset, such as a vehicle or other Shariah-compliant asset, is sold at a specified price equal to cost plus profit.
Under this structure, the bank purchases the asset and sells it to the customer at a disclosed cost plus an agreed profit margin, usually on a deferred payment basis.
What is the difference between a Personal Loan in conventional banks and Personal Finance in Islamic banks?
A Personal Loan in a conventional bank is a loan whereby the customer borrows money from the bank and repays the principal with interest over an agreed tenure.
Islamic banks are prohibited from charging interest on financing. Personal Finance is a Shariah-compliant financing solution based on the Islamic contract of Murabaha or Commodity Murabaha. Accordingly, Personal Finance in Islamic banks is free from Riba (interest).
What is Auto Finance?
Auto Finance is a facility provided to customers for the purpose of purchasing a vehicle based on the concept of Murabaha. Under this structure, the bank purchases a vehicle from the dealer or owner, after obtaining the customer’s promise to purchase, and subsequently sells the vehicle to the customer at a disclosed cost plus an agreed profit margin, usually on a deferred payment basis.
Pursuant to the Murabaha sale, ownership of the vehicle is transferred to the customer, and the customer becomes liable to pay the Murabaha sale price in accordance with the agreed terms and schedule. The vehicle may be mortgaged in favour of the bank as collateral for the customer’s payment obligations under the Murabaha arrangement.
What is Home Finance?
Home/Land Finance facility extended to customers is based on the structure of Ijarah Muntahia Bit Tamleek. Under this structure, the Bank, referred to as Mu’jir, purchases and owns the property as requested by the Customer, referred to as Musta’jir, and leases the property to the Customer for a specified period against an agreed rental amount, referred to as Ujrah.
Upon fulfilment of all obligations as per the Ijarah terms and conditions, ownership of the property is transferred to the customer either through a Hiba (gift) contract or an independent sale contract based on the bank’s sale undertaking.
What is the concept behind Savings Accounts in Islamic Banking?
Savings Account is an investment account based on a Mudaraba structure, whereby the customer acts as Rabb-ul-Mal (capital provider) and the bank acts as Mudarib (investment manager). It allows customers to safely access their funds whenever needed, while investing available balances for the possibility of generating profit.
Profits generated from such investments, if any, are distributed between the bank and account holders in accordance with the agreed profit-sharing ratio and the Bank’s Profit Distribution Policy. The customer’s share of profit, if any, is deposited into their account.
In the event of investment losses, such losses shall be borne by customers in proportion to their investment shares, except in cases of negligence, misconduct, or breach of contract by the Bank acting as Mudarib.
What is the concept of Wakala Deposits in Islamic Banking?
Wakala Deposits are a type of investment account based on the concept of Wakala (agency), whereby depositors appoint the bank as Wakeel (agent) to invest their funds in Shariah-compliant activities on their behalf and in accordance with the agreed investment mandate.
The Bank, acting as Wakeel, may be entitled to a pre-agreed agency fee for managing the investments and may also receive an incentive fee if the actual profit generated exceeds the expected profit rate, subject to the terms and conditions of the Wakala arrangement.
How do Wakala Deposits differ from conventional fixed deposits?
Unlike conventional fixed deposits, Wakala Deposits are not based on interest and do not guarantee a fixed or predetermined return. Instead, the expected profit rate is indicative in nature and is based on the anticipated performance of the underlying Shariah-compliant investments managed by the Bank as Wakeel.
The actual profit payable may vary depending on the performance of the investments. The Bank does not guarantee profits or the principal amount, except in cases of negligence, misconduct, or breach of contract by the Bank acting as Wakeel.
Accordingly, Wakala Deposits are exposed to investment risks and potential losses that may affect returns and, in certain circumstances, the principal amount invested.
What is an Islamic covered credit card?
An Islamic Covered Credit Card is a credit card fully compliant with Shariah principles, structured based on the concepts of Commodity Murabaha and Wakala.
Under the Commodity Murabaha arrangement, the Bank purchases Shariah-compliant commodities and subsequently sells them to the customer at a disclosed cost plus an agreed profit margin. Post Commodity Murabaha transaction, the proceeds are utilised to provide the limit to the credit card holder for personal expenditures and transactions in accordance with the card terms and conditions.
The structure differs from conventional credit cards as it is designed to comply with Shariah principles, including the prohibition of Riba (interest), while facilitating payment and purchase transactions in a Shariah-compliant manner.
Can the bank charge profit on accrued profit?
Charging profit on accrued profit or overdue profit is not permitted under Shariah rules and principles, as it is tantamount to charging interest (Riba), which is strictly prohibited.
Islamic banks avoid such practices to ensure compliance with Shariah rules and principles. In other words, Islamic banks do not capitalise overdue profit amounts for the purpose of charging additional profit thereon.
Any commitment to donation fees or late payment fees, if applicable, is usually imposed only as a deterrent mechanism in accordance with Shariah requirements and is not recognised as income for the Bank, subject to the applicable contractual terms.
To confirm the specific terms and conditions of your Islamic covered credit card, please review the cardholder agreement provided by the bank.
