• What is an Islamic Bank?

    An Islamic bank is a deposit-taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a mudarabah or wakalah (agent) contract. It can also accept demand deposits which are treated as interest-free loans from the clients to the bank. And which are guaranteed. On the assets side, it advances funds on a profit-and-loss sharing or a debt-creating basis, in accordance with the principles of the Shari'ah. It plays the role of an investment manager for the owners of time deposits, usually called investment deposits. In addition, equity holding as well as commodity and asset trading constitute an integral part of Islamic banking operations. An Islamic bank shares its net earnings with its depositors in a way that depends on the size and date-to-maturity of each deposit. Depositors must be informed beforehand of the formula used for sharing the net earnings with the bank.

  • What is Salam?

    ​Salam is a sales contract in which the price is paid in advance at the time of contracting, against delivery of the purchased goods/services at a specified future date. Not every commodity is suitable for a Salam contract. It is usually applied only to fungible commodities.

  • What is Al- Istisna'?

    ​Al- Istisna' is a contract in which a party orders another to manufacture and provide a commodity, the description of which, delivery date, price and payment date are all set in the contract. According to a decision of the OIC Fiqh Academy, this type of contract is of a binding nature, and the payment of price could be deferred.

  • What is AI Istisna' Al-Tamwili?

    ​AI Istisna' Al-Tamwili, which is used by Islamic banks, consists of two separate istisna' contracts. The first is concluded between the beneficiary and the bank, in which the price is payable by the purchaser in future, in agreed installments and the bank undertakes to deliver the requested manufactured commodity at an agreed time. The second Istisna' contract is a subcontract concluded between the bank and a contractor to manufacture the product according to prescribed specifications. The bank would normally pay the price in advance or during the manufacturing process in installments. The latter undertakes to deliver the product to the bank on the date prescribed in the contract, which is the same date as that stated in the first istisna' contract. The original purchaser (i.e., the bank's client) may be authorized to receive the manufactured commodity directly from the manufacturer.

  • The Holy Qur’an, has prohibited riba. What is meant by this term?

    The word riba as a noun literally means in Arabic, an increase, and as a root, it means the process .of increasing. Riba has been understood throughout Muslim history as being equivalent to interest paid on a loan.

    Shari'ah scholars have used the term riba in three senses; one basic and two subsidiaries. In its basic meaning riba can be defined as "anything (big or small), pecuniary or non-pecuniary, in excess of the principal in a loan that must be paid by the borrower to the lender along with the principal as a condition,' (stipulated or by custom), of the loan or for an extension in its maturity." This is called riba al-qard or riba al-nasa. It is also referred to as riba al-Qur'an as this is the kind of riba which is clearly mentioned in the Qur'an and is known today as interest on loans.

    However, the term riba has a more comprehensive implication and is not merely restricted to loans. Even though Islam has allowed the sale of goods and services, riba may surreptitiously even enter into sales transactions. Hence the two subsidiary meanings of riba relate to such transactions and fall into the category of riba al-buyu' (riba on sales). The first of these is riba al-nasi'ah, which stands for the increase in lieu of delay or postponement of payment. The second is riba al fadl, which relates to the purchase and sale of commodities. In this context, riba al-fadl refers to the excess taken by one of the trading parties

  • Does the prohibition of riba applies to Muslims and non-Muslims?

    ​Resolution No. 10/2 of the Islamic Fiqh Academy mentioned above does not recognize any distinction between Muslims and non-Muslims, or between individuals and states with respect to the receipt and payment of interest. Resolutions of the Islamic Fiqh Academy are considered to reflect the consensus of fuqaha' at the present time. Therefore, the prohibition of riba has universal application.

  • What is Mudarabah?

    This is a contract between two parties: a capital owner (rabb-al-mal) and an investment manager (mudarib). Profit is distributed between the two parties in accordance with the ratio that they agree upon at the time of the contract. Financial loss is borne by the capital owner; the loss to the manager being the opportunity cost of his own labor, which failed to generate any income for him. Except in the case of a violation of the agreement or default, the investment manager does not guarantee either the capital extended to him or any profit generation. While the provider of capital can impose certain mutually agreed conditions on the manager he has no right to interfere in the day-to-day work of the manager.

    As a mode of finance applied by Islamic banks, on the liabilities side, the depositors serve as rabb-al-mal and the bank as the mudarib.

  • What is Musharakah?

    A musharakah contract is similar to that of the mudarabah, with the difference that in the case of musharakah both partners participate in the management and provision of capital and also share in the profit and loss. Profits are distributed between partners in accordance with agreed ratios, but the loss must be distributed in proportion to the share of each in the total capital.

  • What is Murabahah?

    Under this contract, the client orders an Islamic bank to purchase for him a certain commodity at a specific cash price, promising to purchase such commodity from the bank once it has been bought, but at a deferred price, which includes an agreed upon profit margin called markup in favor of the bank.

  • What is Ijarah (Leasing)?

    The subject matter in a leasing contract is the usufruct generated over time by an asset, such as machinery, airplanes, ships or trains. This usufruct is sold to the lessee at a predetermined price. The lessor retains the ownership of the asset with all the rights as well as the responsibilities that go with ownership.

    As a form of financing used by Islamic banks, the contract takes the form of an order by a client to the bank, requesting the bank to purchase a piece of equipment, promising, at the same time, to lease it from the bank after it has been purchased. Thus, this mode of financing includes a purchase order, a promise to lease, and a leasing contract.

  • What are the Major Modes of Financing used by Islamic Banks?

    ​Islamic banks provide financing using two basic methods. The first depends on profit-and-loss sharing and includes mudarabah and musharakah. In this case the return is not fixed in advance and depends on the ultimate outcome of the business. The second involves the sale of goods and services on credit and leads to the indebtedness of the party purchasing those goods and services. It incorporates a number of modes including murabahah, ijara, salam and istisna. The return to the financier in these modes is a part of the price. These modes of finance are unique for two main reasons. First, the debt associated with financing by way of markup results from the sale/purchase of real goods and services rather than the lending and borrowing of money. According to the prevailing fiqh verdicts, such as debt is not marketable except at its nominal value. Secondly, the introduction into banking of modes that depend on profit and loss sharing bring important advantages. It has almost the same economic effects as those of direct investment, which brings pronounced returns to economic development.

  • What are the Modes of Financing for Trade and Industry?

    Murabahah, installment sale, leasing and salam are particularly suitable for trade while istisna' is especially suitable for industry. More specifically, in trade and industry, financing is needed for the purchase of raw materials, inventories (goods in trade), and fixed assets as well as some working capital for the payment of salaries and other recurrent expenses. Murabahah can be used for the financing of all purchases of raw materials and inventory. For the procurement of fixed assets including plant and machinery, buildings etc. either installments sale or leasing can be used. Funds for recurrent expenses can be obtained by the advance sale of final products of the company using salam or istisna'.