Syariah Banking: A Primer

To: Ferry H.
From: Dr. John Vong

(Excerpt from Vong, J. & Erramili, K., “Marketing of Financial Services”. Published by Institute of Bankers Malaysia in 1997)

KEY CONCEPTS

 Islamic banking is an interest-free banking system that undertakes business, trade activities and all forms of transactions on the basis of fair and legitimate profits, principally in the form of equity participation or profit-loss sharing principle.

 Riba (sometimes referred to as excessive interest) is universally held to mean all interest, which is haram and the payment or receipt of interest is considered usury and thus prohibited in an Islamic banking environment.

 Islamic banks use deposits to achieve the socioeconomic goals of Islam, while conventional banks maximise the wealth of their shareholders.

 AI-Mudharabah and AI-Musharakah are transactions based on the profit-loss sharing principle.

 AI-Murabahah (cost-plus financing) and A I-Ijarah (leasing) are transactions based on profit margin or cost-plus principle.

 The role of Syariah in an Islamic economy encourages mutual cooperation and social responsibility of all members of the society to one another, and thus profiteering from a transaction or relationship is scorned.

6.1 Growth of Islamic Banking

In the 1980s, a proliferation of over 100 Islamic banking institutions around the world had been witnessed. It first started from the Islamic countries such as Iran, Pakistan and other Arab nations. It then became a reality in several non-Muslim and western countries. Dr Mohd. Ariff, a senior university lecturer, noted that in some countries where Muslims are minorities, a parallel Islamic financial network can be found alongside the conventional interest-based financial system. This includes countries such as South Africa, Luxembourg, Denmark, Switzerland and Great Britain.

Citibank is a prime example of a conventional bank that has been offering Islamic banking services through its offices in London and Bahrain since the early 1 980s. Mr Mohammed Al-Shroogi, Gulf and Levant regional director of Citibank in Bahrain, talked about the Islamic products they offered in a conference, “We have been offering Islamic-compatible solutions to our customers with respect to deposits, assets, syndication loans, merchant banking and in a more narrow sense, foreign exchange.”

Indonesia, with the world’s largest Muslim population, set up an Islamic bank in May 1992 while Brunei launched its Islamic bank in January 1993. The Bank Muamalat Indonesia (BMI) has an authorised capital of 50 billion rupiah (RM$53 1 million) in 1993. BMI has helped to service the small and medium businesses which are 80% to 90% run by Muslims, and in doing so, has helped to foster the economic growth in Indonesia.

In Malaysia, Bank Islam Malaysia Berhad (BIMB) which was incorporated in 1983, pioneered the Islamic Banking system. It started off as the only Islamic bank in Malaysia. However, Islamic banking facilities are increasingly being offered by conventional banks and financial institutions. In March 1993, Finance Minister Dato’ Sen Anwar Ibrahim announced that Bank Bumiputra Malaysia Berhad, United Malayan Banking Corporation (now known as Sime Bank) and Maybank would be allowed to implement the interest-free scheme alongside the mainstream conventional banking practices as an additional measure to further boost the economy and living standards in Malaysia. Even a foreign bank, Standard Chartered Bank Malaysia Berhad, is offering Islamic banking instruments to attract Muslims, who comprise 59% of Malaysia’s population.

In some Muslim countries, other forms of finances such as Islamic leasing, venture capital and pawn-broking have also been developed. For instance, an Islamic capital market has been spawned in Malaysia and firms like BIMB Securities, a subsidiary of Bank Islam Malaysia Berhad, was set up.

Conventional bankers are still struggling to come to terms with the phenomenal expansion of Islamic banking, which has been growing at the rate of 15% a year. Although estimates vary on the scale of deposits held by Islamic banks, the Association of Islamic banks puts the figure at US$30 billion to US$40 billion. Many are convinced the real figure is much higher. In fact, Mr Adnan A1-Bahar, Chairman of the International Investor, a Kuwait-based Islamic bank estimates that the Islamic banks worldwide now manage around US$60 billion to US$80 billion, with the figure increasing at a rate of 15% per year.

Being one of the leading proponents, Mr Adnan believes that Islamic banking will be responsible for managing up to 50% of all savings in the Islamic world within the next eight to 10 years. He said, “Today, Islamic banking is no more than just a niche in the financial services industry. It is a niche market and we have started to witness the dynamics of the market through the growth of a variety of institutions, including institutional investors and products, and the way in which regulatory bodies are dealing with the market and looking into the industry.”

Islamic banking has become a growing industry for project financing, with more interest and collaboration between export credit agencies, the World Bank and the International Finance Corporation in funding major projects.

6.2 Characteristics of Islamic Banking

Islamic banking is a banking system that performs the same functions as the conventional system but is constrained by the rules of Syariah. It is an interest-free banking system that relies on profit and loss sharing basis between the bank and its customer. The principal restriction under which this financial system works is the injunction against interest.

Depositors are treated as the shareholders of the Islamic bank. They are not guaranteed a nominal value or any predetermined rate of return on their deposits with the bank. That is to say, if the bank makes a profit, the depositor (shareholder) is entitled to receive a certain share of it. On the other hand, if the bank incurs a loss, the depositor is expected to share the loss and thus receive a negative rate of return. The funds that are collected by the bank will be used in the special modes of investment and financing permitted under the rules of Syariah.

The teaching of Islam encompasses the essence of economic well-being and development of the Muslims at the individual, family, society, state and ummah (or Islamic universal community) level.

Islam may be perceived as comprising three basic elements. This can be seen from the following diagram, which depicts the Islamic view of life of a Muslim and the place of economic activities within the framework.

Islam, Syariah, Muamalat

The first element is Aqidah, which concerns all forms of faith and belief by a Muslim in Allah and His will, from the fundamental faith in His being to the ordinary beliefs in His individual commands (ahkam). The second is Syariah, which is concerned with all forms of practical actions by a Muslim manifesting his faith and belief. The third is Akhlaq, which concerns behaviour, attitude and work ethics with which a Muslim performs his practical actions.

The second element, Syariah can be subdivided into two branches: Ibadat and Muamalat. Ibadat is concerned with the practicalities of his worship to Allah, dealing in the context of man-to-Allah relationship. Muamalat, on the other hand, is concerned with the practicalities of his mundane daily life, in the context of man-to-man relationship.

The Syariah is the legal aspect of Islam and in the economy sphere, it aims to safeguard all the rights of man. Men are entrusted to co-operate with each other in establishing social justice. Hence, all forms of exploitative commerce such as monopoly, hoarding, black-marketing and all other forms of individual and social aggrandisement have been prohibited. All forms of crime and all games of chance, such as gambling, lottery and speculation have been prohibited. Besides these restrictions, Islam has provided positive ways whereby man can co-operate with each other and contribute towards the welfare of the community.
The role of Syariah in economics is to purify the whole Muslim society. It strives to purify the soul, the heart and the actions from evil tendencies and to inculcate it in the praiseworthy actions. The prohibition of interest consumption is one example of purifying the economic system.

In an Islamic economy, it also stresses equality and absence of bias. It encourages universal interaction of mankind regardless of nationality and languages. The implication of this principle is the emphasis on mutual co¬operation and social responsibility of all members of society to one another. As discussed above, Islamic financial transactions are governed by the Syariah laws. In the next section, prohibition of interest, which is the main characteristic of Islamic banking, will be discussed.

6.2.1 Prohibition of interest

It is useful to begin examining the Islamic banking system by first defining some basic terminology. Riba is the Arabic word for the predetermined return on the use of money.

Riba is sometimes defined as excessive interest, but most Muslim scholars today universally hold it to mean all interest. On the other hand, there are also some Muslim scholars who interpret riba as the increasing of a capital sum before payment — the predetermined return on the use of money. Based on the Quran, transactions based on riba are strictly prohibited. Therefore, the payment or receipt of interest is considered usury and one has committed the very grave sin of haram by accepting riba.

Riba is scorned and forbidden because of its pernicious effects. It is that riba is useless and a reward gained without any productive effort contributed. Its abolition is a consideration of equity — it was intended to protect the poor and weak against exploitation and at the same time to encourage investors and labourers to combine their resources in joint ventures. Muslim scholars usually accept this prohibition to mean not only interest for the use of money, but also any fixed or guaranteed interest payment on cash advances or on deposits.

Other reasons that exist for the prohibition of interest are as follows. The Islamic religion considers money to be only a medium of exchange, a store of value and a way of defining the value of a thing; so it has no inherent value in itself. Therefore, Islam dictates that money should not be allowed to earn more money, for instance, in the form of interest earnings simply by placing deposits idly with a bank.

Another justification for its prohibition is that for a Muslim, there must be a marriage between money and work, initiative and risk that is just and equal, so that both suppliers and user of capital should have a share in profits and losses. Capital should earn a profit if it is invested in productive enterprise or in the provision of tangible services involving human effort and an element of risk.

Thus, Syariah (sacred law grounded in divine revelation) states that the provider of capital and the user of capital should equally share the risk and rewards of financing business ventures, whether they are in the forms of industries or trade deals. Islam clearly forbids the former, however; it not only permits but rather encourages trade and therefore profits. Intangible rewards are also permitted, using the Arabic term Sadaqat for charity or alms.

In essence, what is forbidden in Islam is the fixed or predetermined return on financial transactions and not an uncertain rate of return such as that represented by profits. From this distinction it follows that, if a banking structure could evolve in which the return for the use of money would fluctuate according to actual profits made from such use, the resultant system would be consistent with the guidelines of Islam.

6.3 Differences between Conventional and Islamic Banking Systems

Having explained the essential difference between the conventional interest-based commercial banks and the Islamic banks concerning the interest element, this section will proceed to highlight some other differences between them.

The primary objective of the conventional banks is to maximise the wealth of their shareholders. Contrasted to this, the Islamic banks view the importance of public interest over the individual or group interest. The Islamic banks use the deposits from the public for serving public interest and realising the relevant socioeconomic goals of Islam.

Moreover, under the Islamic banking system which engages in profit-and-loss sharing arrangement, the depositors are viewed as the shareholders of the banks. They are not guaranteed a predetermined return, but are entitled to share the profits of the banks as shareholders. However, they are required to share any losses incurred by the bank. Hence, the depositor in Islamic banks in essence purchases equity in the bank, and the bank, in turn, has an equity position in whatever activity the borrower uses the funds for.

On the other hand, in a conventional banking system, the depositors are paid a predetermined nominal interest to compensate them for supplying the funds. Thus, in conventional banks, dealing with customers are restricted to debtor and creditor relationships with the limitations stipulated by legislations. This distinction between equity-based and interest-based systems is essential.

In addition, there is also a difference in the way the two types of banks view deposits. Unlike the conventional banks which classify deposits as liabilities of the bank, the Islamic banks do not view deposits as such because they do not provide any guarantee to return these funds or their profitability.

Finally, there is also a difference between the ways the banks’ funds are deployed. The Islamic banks come continuously under the strict scrutinisation of a Religious Supervisory Board which has to appraise each deal in terms of its consistency to the principles of Islam and its relevance to the welfare of the economy. This can be contrasted to the conventional banks’ way of deployment of funds based on project profitability.

6.4 Islamic Banking Products

Basically, all the products available in the conventional banking system can be offered in the Islamic banking system. All it needs is some modifications to the conventional banking products to suit Islamic banking needs.

Generally, the services and products provided by Islamic banks can be classified into three main categories:

(a) Transactions based on the profit-loss sharing (PLS) principle. For example, A1-Mudharabah and Al-Musharakah.

(b) Transactions based on profit margin or cost-plus principle like Al¬Murabahah (cost-plus financing) and Al-Ijarah (leasing).

(c) Transactions based on service charges, for instance letters of credit and guarantee, domestic and international money transfer, travellers’ cheques, spot foreign exchange deals, and investment management.

As can be seen, the financial techniques employed by Islamic banks are mostly based on equity participation. In addition, they also offer a full spectrum of fee-based retail banking services not involving interest payments. In the following sections, an overview of an Islamic bank’s balance sheet is discussed.

6.4.1 Sources of funds

An Islamic bank can raise the funds through issue of shares and deposits received from the public.

• Shareholders’ funds
The bank is able to raise funds through the sale of shares to the public. The shareholders would have sole control over the management of the bank. The shareholders’ equity is only a secondary source, with the bulk of the funds coming from deposits.

• Customers’ deposits
On the liability side of the balance sheet, the depositor in essence purchases an equity position in whatever activity the bank uses the capital for. Deposits are also treated as shares and their nominal value is not guaranteed.

There are four primary types of accounts that are provided for depositors by Islamic banks, namely current accounts, savings and credit accounts, investment accounts and social services funds.

Current accounts
The current account is similar to the demand deposit in an interest-based conventional bank. However, an Islamic bank needs to operate the current account under the principle of the Al-Wadiah Yad-Dhamanah law. The unique feature of these accounts is that the bank should seek permission from the depositors to use the funds for particular projects as long as the money is kept with the bank.

Furthermore, the customers have the right to withdraw some or all of that savings balance on demand, and in this matter the bank will give assurance to return that balance. In addition, cheque book facilities and other common current account services will also be provided. The fund may be invested by the bank but the depositors do not receive any returns.
Savings and credit accounts
Banks accept savings deposits from depositors in the form of savings accounts under the Al-Wadiah law. The nature of these deposits varies from bank to bank. Some banks offer no returns, whilst others invest deposits on a profit and loss sharing basis. For those depositors who are not paid interest, they are instead entitled to special privileges like gifts and interest-free loans such as financing for small projects. These privileges are only given to regular savers.

Investment accounts
Investment deposits are the major source of funds for Islamic banks. The bank accepts deposits from depositors who wish to invest through the bank in the form of investment accounts under the principle of Al-Mudharabah law. There are two types of investment accounts, namely General Investment Account and Special Investment Account.

Under the General Investment Account, the bank acts as a manager providing the skills and efforts to manage the funds while depositors provide the needed capital. Both parties will reach an agreement on the profit and loss ratio. If the bank’s investment faces a loss, the depositors will bear the loss.

As for the Special Investment Account, it allows the depositor to specify the manner in which the deposits are to be used by the bank. These special investment depositors are paid from the profit (or loss) of the activity in which their deposits were utilised. These accounts are mainly directed at government and corporate funds.

The general investment deposits and special investment deposits operate more like fixed deposits as they have to be maintained for a certain period of time and cannot be withdrawn on demand. As can be seen, investment account is one of the best illustration that Islamic banking is essentially a particular variant of an equity-participation system.

Social services fund
Qard hasan (social services fund) is the fourth type of bank account which represents the social consideration of an economy. Basically, it is fostered by the zakat money whose payment is a sacred duty of every Muslim. It may also be supported by a portion of the profits of the bank’s investment if the board of directors so affirms.

The fund is used as a source of benevolent loans given to support those socially incapable individuals who are faced with exceptional expenses arising from illness, accidents, weddings, or funerals.

6.4.2 Applications of fund

After having examined an Islamic bank’s sources of funds, it is essential to understand how these funds are utilised. Generally, there are four main applications for the funds — as statutory reserve, liquidity requirements, financing and investing.

Statutory reserve
The statutory reserve is a requirement that the Islamic bank needs to maintain with Bank Negara Malaysia (BNM). The level of the required reserve is determined by BNM with reference to the bank’s deposits.

Liquidity requirements
The bank needs to maintain a capital adequacy and liquidity ratio as determined by BNM to ensure adequate liquidity in the banking system.

Financing
In this section, financing can be placed into three principal modes, namely equity financing, term financing and trade financing. Financing should only be granted for projects that are acceptable under the Syariah laws.

Equity financing — Generally, equity financing would be carried out under the principles of Al-Mudharabah (profit-sharing) and Al-Musharakah (partnership). The Islamic financial instruments available are Mudharabah (trust financing) and Musyarakah (profit-sharing).

Mudharabah — Basically, this is an agreement between a lender and an entrepreneur whereby the lender agrees to finance the entrepreneur’s project on a profit-sharing basis according to a predetermined ratio agreed by negotiation. In the event of a loss, the lender bears the loss.

Musyarakah — It is a type of equity financing in the form of a partnership for a specific business activity. The lender provides the capital and may also participate in management. The distribution of the profits is agreed beforehand and need not be in the same ratio as the financing. But all parties bear any loss in proportion to their shares in the financing.

Term financing — Another type of financing is term financing. It normally operates under the principles of Al-Bai Bithaman Ajil and Al-Jjarah. The products available are Al-Murabahah (cost-plus financing), Al-Ijarah (leasing) and Qarz-e-hasna.

Al-Murabahah — It is a contract in which a client wishing to purchase equipment or goods requests the Islamic financial institution to purchase these items on his behalf and then sell them to him at cost plus a reasonable profit. Capital and profit are due and payable on terms agreed between the parties.

Al-Ijarah — Al-Ijarah is similar to leasing. Lease purchase is a contracted transaction whereby the owner of a specific capital rents the assets to an end-user for a predetermined period of time. There are two forms of leasing:

(a) Al-Ijarah (true lease) — with no option of ownership for the lessee

(b) Al-Ijarah Wal Iktina (financial lease) — where the lessee has the option of eventual ownership.

Trade financing — Trade financing is the most popular type of financing that links a customer and a bank. Islamic banks have undertaken to provide trade financing facilities to ensure Muslims are able to conduct their trading activities according to Syariah laws. These facilities are generally granted in connection with the acquisition and sale of stocks, raw materials, plant and machinery, etc.

The Islamic banks will offer trade financing facilities like letters of credit under the principles of Al-Wa kalah, Al-Musharakah, Al-Murabahah, letters of guarantee under the principle of Al-Kafalah and financing of working capital under the principle of Al-Murabahah.

Letters of Credit

Al-Wa kalah (Agency) — The bank effectively acts as an agent for the customer and a fee is charged to the customer for its services. Generally, a deposit equivalent to the total cost of the goods will be demanded from the customer when the customer informs the bank of the letter of credit requirements. The deposit will be placed with the bank under the Al-Wadiah Yad-.Dhamanah principle.

On presentation of the letter of credit by the negotiating bank, the issuing bank will pay the proceeds from the deposit taken from the customer.

Al-Musharakah — The Al-Musharakah principle rests on the concept of joint venture/partnership profit-sharing. The customer has to place a deposit for his share of the cost of the goods once he has negotiated his letter of credit requirements with the bank.

This deposit as well as the bank’s funds will be utilised to pay the negotiating bank upon presentation of the letter of credit. The documents are released to the customer who is in charge of disposing the goods under the Al¬Musharakah agreement. The profits derived will be shared between the bank and the customer as agreed.

Al-Murabahah — The principle here involves a deferred lump sum sale (cost plus basis). The bank will then establish a letter of credit under this principle and use its own funds to pay the negotiating bank. The bank subsequently sells the goods at the agreed profit margin, while the customer is allowed to repay at a deferred term.

Letters of Guarantee (Al-Kafalah) — The bank will provide the customer with a letter of guarantee under the Al-Kafalah principle for a fee. However, before that, the bank will usually require the customer to place a deposit under the principle of Al- Wadiah Yad-Dhamanah.

Financing Working Capital (Al-Murabahah) — Under this form of financing, the bank will first appoint the customer as its agent to purchase the required goods using the bank’s name and funds. The goods will then be sold to the customer at an agreed profit margin. The customer is allowed to settle his liability on a deferred term.

Investment
Islamic banks are entitled to utilise shareholders’ funds and customers’ deposits to undertake investment activities. The principle of joint-venture profit-sharing, A1-Musharakah, will be used if other parties are involved.

Some of the more common types of investment are as follows:
(a) Setting up wholly-owned subsidiaries;
(b) Taking up equity in unquoted companies;
(c) Purchase of shares in the Stock Exchange quoted companies for long-term investment; and
(d) Portfolio investment in shares of companies quoted on the Stock Exchange.

Islamic banks are also allowed to carry out investment in Government Investment Certificates, Islamic Accepted Bills, Islamic Corporate bonds and other such investments.

6.5 Competition from Conventional Banks

Conventional commercial banking has existed for a very long time. The major challenge is how the Islamic system can survive in an economy dominated by a conventional financial system would have to be dealt with if Islamic-style banking were to be offered as a viable alternative to conventional commercial banking. Islamic banks have to compete with the long-established conventional banks which have operated smoothly and successfully. Therefore, the perception of an Islamic banking system as opposed to the conventional system must be addressed.

Islamic banking services are based on principles of participation and returns are not guaranteed. This discourages other customers from participating in Islamic banking when they can enjoy predetermined, higher returns under conventional banks. In addition, especially for the non-Muslims, the perception is primarily that Islamic financial services are available to Muslims only.

In order to change the perception of a non-Muslim as well as for a client to compare the competitiveness of the two financial systems, there is a need for educating the public on the role of Islamic banks, the principles of Islamic banking and finance and the different types of services that are available.

6.6 Changing the Mindset

Islamisation of the complete financial systems has taken place in some Muslim states, namely Iran and Pakistan. Most Muslims will participate in Islamic banking as it is a way of enriching their religious needs. Non-Muslims perceive that Islamic banks are just offering a different type of service to both depositors and those seeking advances, but there is no significant difference in services offered by conventional banks and thus do not see a need to change bankers. This may hinder the long-run survival of Islamic banks especially in a market dominated by conventional bank products and services. For instance, take the case of Bank Islam Malaysia Berhad; although it has its operations in a Muslim-dominated state, it still encounters problems in attracting deposits from the Muslim population.

Many non-Muslims express fears for having to bear the loss from the poor performance of Islamic banks. They feel that the system lacks the security that a normal financial intermediary provides. They perceive it to be similar to speculative investment vehicles, such as share trading.

On the other hand, among those who understand the workings of Islamic banking, they have an entirely different opinion. They perceive Islamic banking to be a fair system which enables depositors to share in the bank’s profit. The implementation of Islamic banking will create stiffer competition. To remain competitive, banks will strive to improve their customer service. Hence, this healthy competition will benefit the consumers. Some Muslims feel that the Islamic banking system is able to enrich their religious needs as investment is made according to Syariah law under Islamic regulation.

6.7 Demand and Need for Islamic Banking

A survey on Islamic banking was conducted in Singapore to assess the viability of an Islamic banking system operating in a conventional bank services dominated environment.

Of the 271 people interviewed, 67% do not feel a need for Islamic banking, of which Muslim respondents numbered 49. One of the several reasons cited is there are already too many banks in existence providing sufficient banking services. In addition, they perceived no significant difference between a conventional banking system and an Islamic banking system. However, out of the 271 respondents, 89 (32.8%) feel that there is a need for Islamic banking. Among these, 42 respondents are Muslims.

In addition, 65.3% of the respondents perceived that Islamic banking is only available to Muslims (see table below). This may be due to the perceived implication attached to the phrase “Islamic banking”, that gives the notion that the banking products are only available to Muslims.

Availability of Islamic Banking to Muslims

              Yes   No  Total

Muslims 25 24 49
51% 49% 18.1%
Non-Muslims 152 70 222
68% 31%. 81%
Total 177 94 271
65.3% 34.7%

6.8 Results and Implications

The two main objectives of the survey was to determine the awareness and demand for an Islamic banking system. Generally, Muslims have a better understanding of Islamic banking and are more receptive to the implementation of an Islamic banking system. Non-Muslims, however, indicated that they may not make use of Islamic banking facilities if it is available in Singapore. This may be due to their insufficient knowledge of Islamic banking.

The intense competition from conventional banks may make it considerably more attractive to provide Islamic banking services to the Muslim population in the region, which approximates 218 million in several ASEAN countries and China, in addition to competing against conventional banks locally.

Muslim Population in the Region

Countries Total Population Percentage of Muslim Muslim Population
Malaysia 19,186,000 55% 10,552,300
Philippines 69,922,000 8% 5,593,760
Thailand 59,605,000 4% 2,384,200
Indonesia 195,623,000 87% 170,192,010
Brunei 301,000 71% 213,710
China 1,241,221,000 2.4% 29,141,304

Total 218,077,284

Source: Operation World 1993

6.9 Islamic Banking is Embarking on its Market Niche

Malaysians are benefiting from access to a dual banking system — the conventional system and the Interest-Free Banking Scheme which offers Islamic banking facilities. Malaysia is said to be the only country in the world which endorses a dual banking system — a full-fledged Islamic banking system operating parallel to the conventional banking system.

Skim Perbankan Tanpa Faedah (SPTF) which is the Interest-Free Banking Scheme, was launched in March 1993 on a pilot basis involving the three largest commercial banks in Malaysia, i.e. Malayan Banking Berhad, Bank Bumiputra Malaysia Berhad and United Malayan Banking Corporation Berhad (now known as Sime Bank Berhad).

Although Islamic banking has been around for nearly 20 years, it has only recently caught on with more consumers participating. There are over 12 million Muslims in Malaysia, but the number of non-Muslims taking up the Islamic banking products are beginning to be tapped.

The first thing to be noted is that the SPTF system is accessible to every one regardless of religion. Islamic banking locally offers a diverse and sophisticated array of products, from the savings scheme based on the principle of Al-Wadiah (guaranteed custody) and general investment account following the principle of Al-Mudharabah (trustee joint venture) to vehicle financing based on Bai’ Bithaman Ajil/Al-Ijarah/Thumma Al-Bai, car refinancing and education financing packages and even a credit card scheme.

6.10 Interest-Free Benefits

Islamic banking offers consumers an alternative choice for their banking and some benefits as outlined below.

• It provides a Muslim account-holder with a clear conscience, as the financial institutions involved in offering the Interest-Free Banking scheme would invest the depositors/investors fund in stocks or activities allowed by the Syariah principles.

• Rates offered under Islamic financing do not fluctuate, therefore the account holder can plan better his or her cash flow.

• Islamic banking and financing operations is based on a partnership between the depositor/investor and the financial institution.

• There is potential for better returns, as the rates earned depend on the profitability of the bank’s investments and financing. However, if the investments are not doing well, the depositors or investor’s return will bear the risk of lower returns.

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