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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: The Qur'an forbids usury, or 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 to Maysir, but describes speculative transactions.
4. Trading 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 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 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 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 contract in which advance payment is made for goods to be delivered later.
5. 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 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 under which an Islamic bank provides equipment, 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 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 limited liability partnership (not allowing for direct investor 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 joint venture with profit and loss sharing.
15. Qard Hassan: Interest free loans, usually to students or the very poor.
16. 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 agreement that the bank will work as the individual's agent in certain situations,
such as 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 isnt 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-sharia-
compliant-money-interest

Wikipedia. (2014). Islamic banking. Retrieved from, http://en.wikipedia.org/wiki/Islamic_banking