Given below are answers of some of the Frequently Asked Questions, about Islamic Banking and Finance system.
(1). How rules for Islamic banking are governed?
(2). What is the difference between interest and profit
(3). Can Islamic bank pay any kind of dividend to their depositors?
(4). Difference between Sale and Murabaha
(5). Difference between Ijarah and Murabaha
(6). Difference between a common Ijarah and that of a bank
(7). What kind of Ijarah is acceptable in Islamic banks?
 

       How rules for Islamic banking are governed?

Interest is taking excessive compensation by the lender of the money from the borrower, over the principle amount of loan. The lender does not take any kind of risk and claims for the money lent plus profit even the business of the borrower suffers loss. Profit taking, as against interest is based on taking risks, either on the assets which are sold by seller or the on the capital invested by an investor to earn profit. Following are the specific examples to elaborate both of the two concepts:
Interest: A has lent money of Pak Rupees 100,000 to B for one year at an interest rate of 10% by having mortgage over A’s assets. The purpose of this loan is to purchase wheat by B. B in fact purchased the wheat but unfortunately when it was under shipment/dispatch to the end consumer, the truck caught fire.
A filed a suit in the courts and court declared that A’s property be sold out and the realized sales proceeds up to Pak rupees 110,000( principal plus interest be paid to B.
Profit of an asset: A has entered into an agreement to sell wheat of Pak Rupees 100,000 to B for one year credit at a profit rate of 10%. A purchased the wheat from the farmer and dispatched the goods towards B’s destination by truck. Before the truck reaches to the destination it caught fire. B is not liable to pay any thing to A because no risk of wheat passed on to B.

Islamic banking system has been governed by the Shari’ah rulings given by the following four resources of Shari’ah:
1. Quraan: Shari’ah rulings given in Quaraan
2. Sunnah: Shari’ah rulings given in Sunnah through Qauli (saying of Prophet Muhamamd peace be upon him), Fail (acts of Prophet Muhamamd peace be upon him) and Taqreer (saying or acts of Sahaba Karam, acknowledged by Prophet Muhamamd peace be upon him)
3. Ijama: Shari’ah rulings given through the consensus among all Shari’ah scholars at any point in time
4. Ijteehad: Shari’ah rulings given by a single or a group of Shari’ah scholars at any point in time

On the basis of Shari’ah rulings given by the above four resources of Shari’ah can be summarized into following six basic principles which differentiate Islamic banking from conventional:
1. Sanctity of contract: It makes sure that all the contracts, agreements and promises are according to Islamic law of contracts
2. No riba: It means that Islamic banking transactions are free from Riba-al-Quraan( excess compensation taken by the lender of the money from the borrower, over the principal amount in a loan transaction) and Riba-al-fadl( the quality premium taken by the trader while exchanging Homogenous goods which sold either by weighing or by measuring and also include six mandatory commodities (that are gold, silver, barley, dates, wheat, salt)
3. Risk-sharing: There are two Ahadith(saying of prophet Muhammad peace be upon him) both have same meanings that you can not earn profit of an asset or capital which risk(responsibility of ownership) has not been taken by you.
4. Materiality/Economic purpose: No financing of Islamic banks are free from materiality/economic purpose. This is why Islamic banks do not involve in buy back assets financing (means financing for assets which are already owned by the client and it needs financing to fulfill liquidity crunch problems)
5. Fairness/no Exploitation: Islamic banking transactions are free form excessive risk/uncertainty (which is called gharar in Shari’ah). Accordingly, they deal in true facts and the major facts of the transactions are neither hidden nor attached with any speculative events/contingent upon uncertain events.
6. No financing of activities prohibited by Shari’ah: The subject matter of all financing transactions of Islamic banks are based on the principles that the subject matter must be Halal. Accordingly, it is impossible that the Islamic Banks could provide finance for those commodities which are prohibited according to shari’ah (like wine and pork)

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       What is the difference between interest and profit?

Interest is taking excessive compensation by the lender of the money from the borrower, over the principle amount of loan. The lender does not take any kind of risk and claims for the money lent plus profit even the business of the borrower suffers loss. Profit taking, as against interest is based on taking risks, either on the assets which are sold by seller or the on the capital invested by an investor to earn profit. Following are the specific examples to elaborate both of the two concepts:

Interest:
A has lent money of Pak Rupees 100,000 to B for one year at an interest rate of 10% by having mortgage over A’s assets. The purpose of this loan is to purchase wheat by B. B in fact purchased the wheat but unfortunately when it was under shipment/dispatch to the end consumer, the truck caught fire.
A filed a suit in the courts and court declared that A’s property be sold out and the realized sales proceeds up to Pak rupees 110,000( principal plus interest be paid to B.

Profit of an asset:
A has entered into an agreement to sell wheat of Pak Rupees 100,000 to B for one year credit at a profit rate of 10%. A purchased the wheat from the farmer and dispatched the goods towards B’s destination by truck. Before the truck reaches to the destination it caught fire. B is not liable to pay any thing to A because no risk of wheat passed on to B.

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Can Islamic bank pay any kind of dividend to their depositors out of their profits, even the deposit holders do not have share holding in Islamic banks?

Yes. Through the liability side products namely Musharkah or Mudarabah, Islamic banks can receive deposits from deposit holders. The profit of the Islamic banks is distributed among the deposit holders and the Islamic banks according to a pre-agreed ratio of profit, on monthly basis. If the Islamic banks suffer loss for any month then the dep[oist holder swill have to bear the loss according to their respective ratio of investment in the overall pool of deposits as well as equity of the banks.

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       Difference between sale and murabaha

Murabaha means that the seller declare the price of the item and the profit which he wants to get, while the seller in a sale contract needs not to tell anything about his profit. He demands a fixed price of the item. (This kind of sale is named as musawama).

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       Difference between Ijarah and Murabaha

Ijarah, in fact, a rental agreement, in which a party allow the other to use the usufruct of his fixed asset, such as car or machinery etc, for a fixed term and on a fixed and specified rent. While murabah is a kind of sale in which the seller sells something to another clarifying that the thing cost him such and such amount and he is charging such and such profit on it.
The lessor remains continuously the owner of the leased asset in Ijarah agreement while in murabah the ownership of the thing-sold transfers simultaneously after the execution of the contract of murabah.

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       Difference between a common Ijarah and that of a bank

The Ijarah commonly takes place among the people, such as a rented house, a rented shop, a rented tent etc. This is called as Operating Lease while the Ijarah executed by the bank or a financial institution is named as Financial Lease.

There are following differences between the two:
1. The lessor, in financial lease, fixes the installments of rentals in a manner that he can receive his capital along with the profit. The situation is not same in Operating lease rather it works in accordance to the market and normal rent is fixed accordingly.
2. The ownership of the asset transfers to the client, automatically or through a contract, in financial lease. While in operating lease the propriety rights remain with the lessor and he gets his asset back after the term of lease is expired.
3. The period of financial lease is fixed in accordance to the financial life of the asset. Contrary to this any term in months or years can be fixed in operating lease.

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       What kind of Ijarah is acceptable in Islamic banks?

The kind of Ijarah in Islamic banks is Financial Lease. The special feature in Islamic banks or Islamic financial institutions is that the procedure of Ijarah has been purified and is reshaped as Islamic financial lease, according to the Injunctions of Islam. There are certain defects in financial lease in conventional banks and it is for this reason there for the reason of which transaction is held as impermissible.

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