ADMAS UNIVERSITY

GROUP MEMBERS
1. HIBO ANWAR
2. ASIA DJAMAL
3. RAKIA HASSAN
4. CHALTU SULTAN
5. AYAAN JAMA
6. SHAKIRA ABDIRAHMAN

Lecturer; warsame Djamal

ASSIGNMENT OF BANKING
PRACTICES
SHIFT; AFTERNOON
SECOND YEAR STUDENTS
Banking assignment

QUESTION ONE – CENTRAL BANK OF SOMALILAND

A. Discuss how central bank of Somaliland should be carrying out its function in
introducing and ensuring successful implementation of banking system?

The basic tasks of bank of Somaliland for which bank of Somaliland shall be exclusively
responsible are;

 To formulate, adopt and execute the foreign exchange reserves of Somaliland.

 To formulate, adopt and execute the foreign exchange policy and exchange
arrangements of Somaliland.
 To hold and manage the official foreign exchange reserves of Somaliland.
 To print and issue Somaliland banknotes and coins.
 To act as banker and advisor to and as fiscal agent of the state.
 To license or register and to regulate and supervise banks, foreign exchange
dealers, money service providers, payment system operators, securities service
providers, securities transfer system operators and such others as shall be
submitted to its oversight by or pursuant to the law.
B. Explain in brief how does the central bank of Somaliland control commercial
banks by using monetary policy, to achieve price stability and to help manage
economic fluctuation?

As mentioned by one of Central bank’s officials, the central bank of Somaliland’s

supervisory section practically only does onsite and offsite supervision by entering
the offices examining the accounts, books, documents, and other records of all the
four banks. They regulate and check both their balance sheet and income
statements. And they require them to deposit money in case they put people’s
money in risk and loose it. According to the Bank of Somaliland Act (2012), the bank
requires reserve ratio, which is an important tool of the monetary policy of an
economy and plays an essential role in regulation of the money supply, for example
when the central bank wants to increase money supply in the economy, it lowers the
reserve ratio. According to the Act, in article 63, the required reserves of banks is
described as below:

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In the conduct of its monetary policy, Bank of Somaliland may require that banks
shall maintain deposits with Bank of Somaliland at prescribed minimum levels
that relate to the size, type or maturity of their deposits, borrowed funds and such
other liabilities as Bank of Somaliland may determine by regulation. Required
reserve levels shall be the same for all banks for liabilities.

Bank of Somaliland may from time to time prescribe by regulation the

required reserves that shall be maintained by way of cash holdings or by
way of money deposits with Bank of Somaliland, which shall be calculated
as average daily reserves over such time periods. Required reserves
maintained with Bank of Somaliland may be remunerated as decided by
Bank of Somaliland.
Regulations mentioned in paragraph 2, by which required reserves or
levels of required reserves are established or modified, shall specify the
date by which banks shall comply with the new reserves or reserve levels.

The reserves required by commercial banks shall be deposited in the

Central Bank of Somaliland or international banks recognized by bank of
Somaliland.

In article 64, the act describes the regulations in case the bank fails to maintain required
reserves. It states that, Bank of Somaliland may impose on and collect from any bank
that fails to maintain required reserves at the minimum levels prescribed in accordance
with Article 63, a levy on the shortfall in such bank's required reserves, until the shortfall
is corrected; such levy shall be set by regulation of Bank of Somaliland.
QUESTION TWO – COMMERCIAL BANKS OF SOMALILAND

A. Explain the different types of Islamic deposit accounts and how it differs from the
conventional deposit accounts.
Islamic savings accounts are based on Sharia Law practices. Islam prohibits earning
money on interest which is employed under conventional savings accounts. When you
deposit your money in a conventional savings account, it is usual to expect a small
interest based on the amount deposited. On the other hand, Islamic savings accounts
work on profit sharing rather than interest.

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The reason Islamic savings accounts don’t use interest rates and apply profit sharing
instead is because of how Sharia law prohibits usury in the form of interest rates. This is
why profit rates are used instead. In fact, Sharia law prohibits quite a few things that
conventional banking has no doubts applying in their system. They have terms for these
which are:

 Riba’: Interest-based transactions like any borrowing or lending where interest is

incurred. Sharia law claims that any form of interest is unlawful gains.
 Gharar and Maysir: Transactions that involve the element of uncertainty,
chance, randomness, or speculation. Sharia law insists on full transparency in
financial transactions to avoid fraudulent behavior.
 Non-Halal Investing: Sharia law is against banks contributing their business to
activities that run counter to Islamic values like non-halal meats, gambling,
pornography, alcohol and prostitution.
Under the conventional wing, the bank can take your deposits and lend it to others in
the form of a personal loan or housing loan. With the interest earned on loans given out
by the banks, it can then pay you a small interest for using your available funds
deposited.
However, since that’s considered riba’, an Islamic savings account can’t function this
way. So instead, an Islamic savings account works by forming a business relationship:
You provide the money, and the bank does business with it. As part of this relationship,
a profit-sharing ratio is stipulated (e.g. 95% of profits go to the bank, and 5% of the
profits go to you).
Another difference is that a conventional savings account will allow you to transact your
debit card in any shop or business that accepts credit cards. However, all transactions
under the Islamic bank accounts are required to be halal in nature.
Therefore, an Islamic debit card will not be accepted in establishments that serve
alcohol and serve pork as they are deemed non-halal. Technically, even if you were
purchasing meat like chicken or beef that is not halal certified should not be transacted
with an Islamic debit card or online bank account.

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B. There are different Islamic banking commercial contracts “products” which are
sharia compliant including;
1. Murabaha

Murabaha is a term of Islamic Fiqh (Islamic jurisprudence). It refers to a particular kind

of sale having nothing to do with financing, in its original sense. If a seller agrees with
the purchaser to provide him with a specific commodity with a certain profit being added
to his cost, it is called a Murabaha transaction. The basic ingredient of Murabaha is that
the seller discloses the actual cost he has incurred in acquiring the commodity, and then
adds some profit thereon. This profit may be in a lump sum form or may be based on a
percentage.
Murabaha, in its original Islamic connotation, is simply a sale. The only feature
distinguishing it from other kinds of sale is that the seller in Murabaha expressly tells the
purchaser how much cost he has incurred and how much profit he is going to charge, in
addition to the cost. If a person sells a commodity for a lump sum price without any
reference to the cost, this is not a Murabaha, even though he is earning some mark-up
profit on his cost, because the sale is not based on a ‘cost-plus’ concept. In this case,
the sale is called Musawamah.
Murabaha is sometimes referred to as ‘Murabaha to the purchase-ordered’. In this
version the seller (the bank) does not buy and stock goods, but rather waits for buyers
to ‘order’ him to buy goods and then sells them these goods on a Murabaha basis.
Murabaha to the purchase-ordered could be defined as an ‘arrangement wherein two
parties negotiate, agree to specific terms of a sale contract and promise each other to
consummate it’. According to this contract, one party ‘orders’ another to buy a specific
commodity and then sell it to him on a Murabaha basis. There are four elements to this
contract, as follows:
• An order by a prospective buyer to a seller to buy a specific commodity promising to
buy it for a profit. Sharia’a scholars consider this order as an invitation to do business. It
is not a commitment.
• If the seller accepts this invitation, he is bound to ensure that he can locate the
commodity, buy and own it via a true and legitimate contract.

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• The seller then makes an offer to the prospective buyer after the commodity has been
bought and owned by the seller.
Murabaha requirements at Dahabshiil Bank In Somaliland for Car Financing:

 The customer should have a personal account with the bank

 Performa Invoice
 Letter of introduction from employer
 Customer certification letter
 The customer should print out his bank statement
 Valid Employment contract
 Collateral security
 Personal Guarantee
 Copy of Passport
 Somtel Number
You have to pay 20% of the car’s price in advance

I. Mudarabah:
Parties Involved: A special kind of partnership where one partner gives money to
another for investing it in a commercial enterprise. The investment comes from the first
partner who is called “Rabb-ul mal”, while the management and work is an exclusive
responsibility of the other, who is called “Mudarib”.

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Profit and loss sharing: It is necessary for the validity of Mudarabah that the parties
agree, right at the beginning, on a definite proportion of the actual profit to which each
one of them is entitled. No particular proportion has been prescribed by the Shari‘ah;
rather, it has been left to their mutual consent. They can share the profit in equal
proportions, and they can also allocate different proportions for the rabb-ul-mal and the
mudarib. However, they cannot allocate a lump sum amount of profit for any party, nor
can they determine the share of any party at a specific rate tied up with the capital. For
example, if the capital is $ 100,000, they cannot agree on a condition that $10000/- out
of the profit shall be the share of the mudarib, nor can they say that 20% of the capital
shall be given to rabb-ul-mal. However, they can agree on that 40% of the actual profit
shall go to the mudarib and 60% to the rabb-ul-mal or vice versa. It is also allowed that
different proportions are agreed in different situations. For example, the rabbul-mal can
say to mudarib, “If you trade in wheat, you will get 50% of the profit and if you trade in
flour, you will have 33% of the profit”. Similarly, he can say “If you do the business in
your town, you will be entitled to 30% of the profit, and if you do it in another town, your
share will be 50% of the profit.” Apart from the agreed proportion of the profit, as
determined in the above manner, the mudarib cannot claim any periodical salary or a
fee or remuneration for the work done by him for the mudarabah.

Termination:

The contract of Mudarabah can be terminated at any time by either of the two parties.
The only condition is to give a notice to the other party. If all the assets of the
Mudarabah are in cash form at the time of termination, and some profit has been
earned on the principal amount, it shall be distributed between the parties according to
the agreed ratio. However, if the assets of the Mudarabah are not in the cash form, the
Mudarib shall be given an opportunity to sell and liquidate them, so that the actual profit
may be determined.

II. Musharakah:

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In the context of business and trade it means a joint enterprise in which all the partners
share the profit or loss of the joint venture. It is an ideal alternative for the interest-based
financing with far reaching effects on both production and distribution.

The financier in an interest-bearing loan cannot suffer loss while the financier in
Musharakah can suffer loss, if the joint venture fails to produce fruits. Islam has termed
interest as an unjust instrument of financing because it results in injustice either to the
creditor or to the debtor. If the debtor suffers a loss, it is unjust on the part of the creditor
to claim a fixed rate of return; and if the debtor earns a very high rate of profit, it is
injustice to the creditor to give him only a small proportion of the profit leaving the rest
for the debtor. Islam has a clear-cut principle for the financier. According to Islamic
principles, a financier must determine whether he is advancing a loan to assist the
debtor on humanitarian grounds or he desires to share his profits. If he wants to assist
the debtor, he should resist from claiming any excess on the principal of his loan,
because his aim is to assist him. However, if he wants to have a share in the profits of
his debtor, it is necessary that he should also share him in his losses. Thus, the returns
of the financier in Musharakah have been tied up with the actual profits accrued through
the enterprise. The greater the profits of the enterprise, the higher the rate of return to
the financier. If the enterprise earns enormous profits, all of it cannot be secured by the
industrialist exclusively, but they will be shared by the common people as depositors in
the bank.

Profit and Loss Sharing:

The proportion of profit to be distributed between the partners must be agreed upon at
the time of doing the contract. If no such proportion has been determined, the contract
is not valid in Shari‘ah.

But in the case of loss, all the Muslim jurists are unanimous on the point that
each partner shall suffer the loss exactly according to the ratio of his investment.
Therefore, if a partner has invested 40% of the capital, he must suffer 40% of the loss,
not more, not less, and any condition to the contrary shall render the contract invalid.
There is a complete consensus of jurists on this principle.

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Management of Musharakah

The normal principle of musharakah is that every partner has a right to take part in its
management and to work for it. However, the partners may agree upon a condition that
the management shall be carried out by one of them, and no other partner shall work for
the musharakah. But in this case the sleeping partner shall be entitled to the profit only
to the extent of his investment, and the ratio of profit allocated to him should not exceed
the ratio of his investment, as discussed earlier. However, if all the partners agree to
work for the joint venture, each one of them shall be treated as the agent of the other in
all the matters of the business and any work done by one of them in the normal course
of business shall be deemed to be authorized by all the partners.

Termination:

Termination of Musharakah is deemed to be terminated in any one of the following

events:

1) Every partner has a right to terminate the musharakah at any time after giving his
partner a notice to this effect, whereby the musharakah will come to an end. In
this case, if the assets of the musharakah are in cash form, all of them will be
distributed pro rata between the partners. But if the assets are not liquidated, the
partners may agree either on the liquidation of the assets, or on their distribution
or partition between the partners as they are.
2) If there is a dispute between the partners in this matter i.e. one partner seeks
liquidation while the other wants distribution of the non-liquid assets themselves,
the latter shall be preferred, because after the termination of musharakah, all the
assets are in the joint ownership of the partners, and a co-owner has a right to
seek partition or separation, and no one can compel him on liquidation. However,
if the assets are such that they cannot be separated or partitioned, such as
machinery, then they shall be sold and the sale-proceeds shall be distributed.
III. Istisna
‘Istisna’’ is the second kind of sale where a commodity is transacted before it comes into
existence. It means to order a manufacturer to manufacture or construct a specific
commodity for the purchaser. If the manufacturer undertakes to manufacture the goods

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for him with material from the manufacturer, the transaction of istisna’ comes into
existence. But it is necessary for the validity of istisna’ that the price is fixed with the
consent of the parties and that necessary specification of the commodity (intended to be
manufactured) is fully settled between them. The contract of istisna’ creates a moral
obligation on the manufacturer to manufacture the goods, but before he starts the work,
any one of the parties may cancel the contract after giving a notice to the other.
However, after the manufacturer has started the work, the contract cannot be cancelled
unilaterally.

IV. Ijarah
“Ijarah” is a term of Islamic fiqh. Lexically, it means ‘to give something on rent’. Ijarah’ in
the sense of financing it means, ‘to transfer the usufruct of a particular property to
another person in exchange for a rent claimed from him.’ In this case, the term ‘ijarah’ is
analogous to the English term ‘leasing’. Here the lessor is called ‘mu’jir’, the lessee is
called ‘musta’jir’ and the rent payable to the lessor is called ‘ujrah’.

Like murabahah, lease is not originally a mode of financing. It is simply a transaction

meant to transfer the usufruct of a property from one person to another for an agreed
period against an agreed consideration. However, certain financial institutions have
adopted leasing as a mode of financing instead of long-term lending on the basis of
interest. This kind of lease is generally known as the ‘financial lease’ as distinguished
from the ‘operating lease’ and many basic features of actual leasing transaction have
been dispensed with therein.

Basic Rules of Leasing

1. Leasing is a contract whereby the owner of something transfers its usufruct to

another person for an agreed period, at an agreed consideration.

2. The subject of lease must have a valuable use. Therefore, things having no usufruct
at all cannot be leased.

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3. It is necessary for a valid contract of lease that the corpus of the leased property
remains in the ownership of the seller, and only its usufruct is transferred to the lessee.
Thus, anything which cannot be used without consuming cannot be leased out.
Therefore, the lease cannot be affected in respect of money, eatables, fuel and
ammunition etc. because their use is not possible unless they are consumed. If anything
of this nature is leased out, it will be deemed to be a loan and all the rules concerning
the transaction of loan shall accordingly apply. Any rent charged on this invalid lease
shall be an interest charged on a loan.

V. Tawarruq
Tawarruq is a financial instrument in which a buyer purchases a commodity from a
seller on a deferred payment basis, and the buyer sells the same commodity to a third
party on a spot payment basis (meaning that payment is made on the spot). The buyer
basically borrows the cash needed to make the initial purchase.

Later, when he secures the cash from the second transaction, the buyer pays the
original seller the installment or lump sum payment he owes (which is cost plus markup,
or murabaha).

Because the buyer has a contract for a murabaha transaction, and later the same
transaction is reversed, this scenario is called a reverse murabaha. Both transactions
involved must be sharia-compliant.

Tawarruq is a somewhat controversial product. Because the intention of the commodity

purchases isn’t for the buyer’s use or ownership, certain scholars believe that the
transactions aren’t sharia-compliant. Their argument is that the absence of any real
economic activities creates interest, which is prohibited in sharia.

References:

1. An Introduction to Islamic Finance. Kluwer Law International, 2002.

2. Bank of Somaliland Act. 2012, Accessed 2 July 2021.

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3. Dahabshiil Personal Finance Document.

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