SHARIA-COMPLIANT BANKING: A BRIEF OVERVIEW How is Islamic microfinance different? Islamic banking was complies with prohibitions stipulated by Islamic law. Also referred to as Sharia law, Islamic law can be considered God's law as interpreted by Muslims. Banks and institutions that offer Islamic banking products and services must establish a Shariah Supervisory Board to ensure that its operations and activities are sharia-compliant. What are prohibitions under the Sharia law? 1. Riba: Riba: The Qur'an forbids usury, or riba based riba based on the belief that money is only a medium of exchange and has no value in itself. 2. Maysir: Maysir is involved in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future. 3. Gharar: Similar Gharar: Similar to Maysir, but describes speculative transactions. 4. Trading activities: There activities: There should be absolutely no investment in unsuitable businesses, including those involved with armaments, pork, tobacco, drugs, alcohol or pornography. What are common sharia-compliant financial products? 1. Bai’ al ‘inah: Sale ‘inah: Sale and buy-back agreement; a financing facility with the underlying buy and sell transactions between the financier and the customer. 2. Bai’ bithaman ajil: Deferred ajil: Deferred payment sale; sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. 3. Bai’’ muajjal: Credit muajjal: Credit sale; is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. 4. Bai’ Salam: a Salam: a contract in which advance payment is made for goods to be delivered later. 5. Hibah: Hibah: Gift; usually arises in practice when Islamic banks voluntarily pay their customers a gift on savings account balances, representing a portion of the profit made by using those balances in other activities. 6. Ijarah: Leasing Ijarah: Leasing of goods with a second contract to purchase them at the end of a period. 7. Ijarah thumma al bai': Hire purchase; Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. 8. Ijarah-wal-iqtina: A contract contract under which which an Islamic Islamic bank bank provides equipmen equipment, t, building, or other assets to the client against an agreed rental together. At the end of the lease period, the ownership in the asset would be transferred to the lessee. 9. Istisna: Manufacturing Istisna: Manufacturing finance; a process where payments are made in stages to facilitate step wise progress in the Manufacturing / processing / construction works. 10. Joala: Payment of upfront fees 11. Mudaraba: A Mudaraba: A limited liability partnership (not allowing for direct investor involvement). involvement). 12. Murabaha: Purchasing goods for borrowers and charging a fee or mark-up. 13. Musawama: The seller and buyer arrive at an agreed price for a commodity. 14. Musharaka: A Musharaka: A joint venture with profit and loss sharing. 15. Qard Hassan: Hassan: Interest free loans, usually to students or the very poor. 16. Sukuk: Islamic Sukuk: Islamic bonds; financial certificates that are the Islamic equivalent of bonds. 17. Takaful: Islamic insurance; an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. 18. Wadiah: Safekeeping; a bank is deemed as a keeper and trustee of funds. 19. Wakala: An Wakala: An agreement that the bank will work as the individual's agent in certain situations, such as sharia-compliant sharia-compliant trading activities.
References: AZMI & Associates. (2008). The emergence of Islamic financing based on the Syariah concept of Tawarrug . Retrieved from, http://www.azmilaw.com/Article/Article_8_&_9/Article_9_Tawarruq_00093603 _.pdf Bradford, Brigitte. (May 1, 2012). Islamic microfinance: How is it different . Retrieved from, http://www.kiva.org/updates/kiva/2012/05/01/kivas-approach-to-lending-and-islamic.html El Diwany, Tarek. (June 2003). Islamic banking isn’t Islamic . Retrieved from, http://www.irfi.org/articles/articles_301_350/is_islamic_banking_islamic.htm Guidance Residential. (2012). The declining balance co-ownership program: An overview. Retrieved from, http://www.guidanceresidential.com/wp-content/themes/residential/images/gr-white-paper-2012.pdf Lewis, Mervyn K. and Alagoud, Latifa M. (2001). Islamic banking . Cheltenham: Edward Elgar Publishing. Mashreq al Islami. (n.d.). Glossary of terms. Retrieved from, http://www.badralislami.com/en/general/ glossary-of-terms.aspx Nomani, Farhad and Rahnema, Ali. (1994). Islamic economic systems. New Jersey: Zed Books Limited. Osborne, Hilary (October 29, 2013). Islamic finance – the lowdown on sharia-compliant money. The Guardian. Retrieved from, http://www.theguardian.com/money/2013/oct/29/islamic-finance-shariacompliant-money-interest Wikipedia. (2014). Islamic banking . Retrieved from, http://en.wikipedia.org/wiki/Islamic_banking
