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Key Facts Statement
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Why should I consider Islamic banking? Is it really necessary to switch from my existing bank?
The Qur'an makes it clear that interest, or riba, is forbidden. The Qur’an does permit trade as a method of generating wealth and this is the basis for Islamic banking. It operates without interest to offer approved Sharia’a compliant financial products. These are based on Islamic finance principles involving trade, such as leasing, investments and partnership. With Islamic banks individuals can save their money, buy their homes and carry out their day to day banking in a Sharia’a compliant way.
How does Islamic Banking work?
The basis for all Islamic finance lies in the principles of the Sharia’a, or Islamic Law, which is taken from the Qur'an and from the example of Prophet Muhammad (pbuh). Islamic banking operates without interest. Interest is not permitted in Islam, as money in itself is not considered to have intrinsic value. As interest is income generated from money, it is seen as effortless return. Instead, money must be used in a productive way and wealth can only be generated through legitimate trade and investment, which involves an element of risk.
What are the differences between Islamic and conventional banking?
The most important difference between Islamic and conventional banking is that Islamic banking must follow the Sharia'a in conducting banking transactions. Islamic banking must avoid dealing with Interest as well as avoiding activities such as Riba or Gharar which involve excessive uncertainty. For example, instead of charging interest on financing given out, Islamic banks give financing based on Musharakah and will share any profit or loss.
Is Islamic banking meant for Muslims only?
No. Islamic banking is for all individuals regardless of their religious beliefs.
What is Interest? Is there any difference between Interest and Riba?
The origination of term interest dates back to the 17th century with the emergence of banking system at global level. Interest means giving and/or taking of any excess amount in exchange of a loan or debt. Hence, it carries the same meaning/value as that of Riba.
Does Interest / Riba relate only to consumption loans or it also applies to commercial loans?
Interest is prohibited whether it is in consumption loans (loans for meeting day to day human needs) or in commercial loans (loans for business purpose). There are quite a number of Ahadith which clarify that in the days of Holy Prophet (pbuh), people not only borrowed for consumption purposes but also for productive purposes.
What are the basic principles of Islamic banking?
There are at least six basic principles which are taken into consideration while executing any Islamic banking transaction that differentiate a Riba/Interest based transactions from an Islamic banking transaction. 1. Sanctity of contract: Before executing any Islamic banking transaction, the counter parties have to make sure whether the transaction is halal (valid) in the eyes of Islamic Sharia’a. This means that Islamic banks’ transactions must not be invalid or voidable. Voidable contract is a contract, which by nature is valid, but some invalid components are inserted in it. Unless these invalid components are eliminated from the valid contract, the contract will remain voidable. 2. Risk sharing: Islamic jurists have drawn two principles from the saying of Prophet Muhammad (pbuh). These are “Alkhiraj Biddamaan” and “Alghunun Bilghurum”. Both principles have similar meanings that no profit can be earned from an asset or a capital unless ownership risks have been taken by the earner of that profit. Thus in every Islamic banking transaction, the Islamic financial institution and/or its deposit holder take(s) the risk of ownership of the tangible asset, real services or capital before earning any profit there from. 3. No Riba/Interest: Islamic banks cannot get involved in Riba/Interest related transactions. They cannot lend money to earn additional amount on it. However as stated in point No. 2 above, it earns profit by taking risk of tangible assets, real services or capital and passes on this profit/loss to its deposit holders who also take the risk of their capital. 4. Economic purpose/activity: Every Islamic banking transaction has certain economic purpose/activity. Further, Islamic banking transactions are backed by tangible asset or real service. 5. Fairness: Islamic banking inculcates fairness through its operations. Transactions based on dubious terms and conditions cannot become part of Islamic banking. All the terms and conditions embedded in the transactions are properly disclosed in the contract/agreement. 6. No invalid subject matter: While executing an Islamic banking transaction, it is ensured that no invalid subject matter or activity is financed by the Islamic financial transaction. Some subject matters or activities may be allowed by the law of the land. If the same are not allowed by Sharia’a, those cannot be financed by an Islamic bank.
The end result of Islamic Banking and Conventional Banking is the same. Why do they appear similar?
The validity of a transaction does not depend on the end result but rather on the process and activities executed and the sequence thereof in reaching the end. If a transaction is done according to the rules of Islamic Sharia’a, it is halal even if the end result of the product may look similar to conventional banking product. For example if a person is feeling hungry, he may steal a piece of bread and eat or alternatively buy a piece of bread to eat. The apparent end result would be same but one is permissible in Sharia’a and the other is not allowed. The same is also true for Islamic and conventional banking. Therefore, it can be concluded that it is the underlying transaction that makes something “Halal” (allowed) or “Haram” (prohibited) and not the result itself. Apparently, Islamic banks may look similar to conventional banks, however the contracts and product structures used by Islamic banks are quite different from that of the conventional ones. In the verse 2:275 of the Holy Quran, Allah the Almighty has responded to the apparent similarity between trade and interest by resolutely informing that he has permitted trade and prohibited Riba (though they may look similar to someone).
If Islamic banks do not invest in interest based activities, then how do they generate profit to pay to their customers?
Islamic banks use their funds in various trade, investment, and other service related Sharia'a compliant activities to earn profits. Profits earned from such activities are passed on to the depositors according to the agreed terms.
What are the basic rules of a valid Murabaha transaction?
The following are the rules governing a Murabaha transaction: 1. The subject matter of sale must exist at the time of the sale. Thus anything that may not exist at the time of sale cannot be sold and its non-existence makes the contract void. 2. The subject matter should be in the ownership, either actual or constructive, of the seller at the time of sale. If he sells something that he has not acquired himself then the sale becomes void. 3. The subject matter of sale must be in physical or constructive possession of the seller when he sells it to another person. Constructive possession means a situation where the possessor has not taken physical delivery of the commodity yet it has come into his control and all rights and liabilities of the commodity are passed on to him including the risk of its destruction. 4. The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. For example, 'A' tells 'B' on the 1st of January 2008 that he will sell his car on 1st of February 2008 to 'B', the sale is void because it is attributed to a future date. 5. The subject matter should be a property having value. Thus goods having no value cannot be sold or purchased. 6. The subject matter of sale should not be a thing used for an non-Islamic purpose. 7. The subject matter of sale must be specifically known and identified to the buyer. For Example, 'A' owner of an apartment says to 'B' that he will sell an apartment to 'B'. Now the sale is void because the apartment to be sold is not specifically mentioned or identified to the buyer. 8. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance. 9. The certainty of price is a necessary condition for the validity of the sale. If the price is uncertain, the sale is void. 10. The sale must be unconditional. A conditional sale is invalid unless the condition is recognized as a part of the transaction according to the usage of trade.
What is the difference between Istisna' and Ijarah?
Under Istisna', the manufacturer either uses his own material or arranges for the material himself. Under Ijarah, on the other hand, the material is provided by the customer. The manufacturer uses only his labor and skill which means that his services will be hired for a specified fee paid to him. Further, under Istisna' the purchaser has the right to reject the goods after inspection if those are not according to the specifications agreed at the time of contract, whereas under Ijarah the right of inspection does not exist.
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