The Most Frequently Asked Questions (FAQs) about Islamic Banking and Finance

1. Can a conventional bank open an Islamic branch/window?

Certainly, a conventional bank can offer Islamic banking services with the following pre-conditions:

Establishes a Shari'a Board to direct the operation of Islamic banking services and activities, and guarantee that every services, products, contracts, and framework are set up under strict Shari'a supervision.
The bank should develop separate accounts for the Islamic banking operation section like balance sheet/financial statements. And make sure that all the funds, books, records, products and transactions of its Islamic banking operations independent and fully segregated from those of its conventional banking operations,
Establish effective Shari’ah compliance mechanisms by establishing Shariah compliance department which is well staffed with Shari’ah expertise or experts that have Islamic banking knowledge,
builds up Shari'a consistent products and services,
Install systems that guarantee Shari'a consistency,
Provides its staff with sufficient Shari'ah related training or employed certified Islamic bankers,
Conducts Shari'a reviews and audits regularly and frequently.

2. Islamic banking simply changed the name interest with profit. However, the end of result is the same. Is not it?

Islamic banks accept the deposits either on profit and loss sharing basis or on a Qard basis. These deposits are deployed in financing, trading or investment activities by using the Shariah-compliant modes of finance.

First of all, let’s define interest and profit because the two are the are the basis for the existence of the two banking systems. Interest is the money that is paid in exchange for borrowing or using another person's or organization's money, which is in its all forms, strictly forbidden in Islam. On the other hand ‘profit’ is a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something. Profit is earned on the sale of goods and the provision of services. Hence profit, rent and markups are asset and service backed and permissible in Islam.

In contrast to the Interest, which is charged on a borrower whether the business succeeds or fails, in Islamic financing (like a Musharaka and a Mudaraba) the investor benefits just when the business benefits and lost his cash when the business fails, in this manner the investor completely shares in the business risks. Some may opposed that an Interest-based bank also shared risks - the danger of whether his cash will be returned or not. However, this isn't a business risk, rather it is a credit risk. The distinction is clear, that is, a business risk just dangers the business; a credit risk will risk both business and the credit (by driving reimbursement, in outrageous cases through personal bankruptcy).

3. Is it permissible to put my cash in an interest-based bank because there are no Islamic banks in my country?

Depositing cash in a conventional bank is not allowed, regardless of whether it is free of interest or not, on the ground that the bank will take the cash and lend it in return for interest. However, there is an exception in one case, according to the scholars, which is when a person fears for his wealth and there is no safe place to put his money. So that, he is allowed to put his cash in the conventional (ordinary) bank. This is based on the Shari’ah ruling on the ‘necessity’ where forbidden things become permissible. However, in the cases of necessity, things are only permitted as much as is needed. In this case, he needs to protect his money, but he does not need to deal with interest. So that he must put his cash in an interest-free account like ‘current account’.

4. Is halal to renting out a building to an interest-based bank?

Renting out a store or house to at least one who can use it for evil functions is not allowed; this includes renting out a building to a conventional bank, as a result of that is clearly serving to one who did sin and transgression. This is because the owner of the building is aware that the bank is renting this place to undertake interest-based transactions which is haraam according to Islam. This was clearly stated by Al-Bayhaqi in Sharh Muntaha al-Iraadaat (2/358) as “it is not valid to rent out a house to be used as a church, synagogue or monastery, or for alcohol sale or for gambling etc.,”

5. Islamic banking doesn’t adequately address the inflation problem and you say interest banking is forbidden. That is if today’s $1 is going to be worth 90 cents next year because of inflation, why can’t I charge interest to compensate for the loss?

Charging interest by any way is haram. The justification given by the questioner is not acceptable because doing haram for haram did does not make it Halal. That is charging interest in order to compensate inflation means just like consuming away someone’s money given to you to keep it by a trust (Trusted Money) and paying it up by stealing from others. By doing this you committed to sins. Several Muslims, without proper understanding, have somehow reconciled the taking of interest with their personal definition of what the Holy Quran and Sunnah say concerning the matter. Hence, taking interest as a compensation for inflation continues to be no excuse. However, Islamic banks may develop different instruments, like Musharaka certificates given by Mizan Bank, while also providing Islamic banking products like deposits, finances, and contracts.

6. How Islamic banking is different from conventional banking?

There are many core activities in which Islamic banks are different from conventional banks due to the fact that these core activities are developed basically to be Shari’ah compliant transactions as opposed to that of riba-based banks. Islamic Banks are prohibited primarily from stepping into any interest-based transactions or any transactions that violate the principles of Shari’a. In distinction, a riba-based bank would face no such prohibitions in finance in any dealings.

Islamic banking products are completely different from their typical counterparts in each substance and nature. Most products of the interest-based banks are supported in one structure (a loan with interest), whereas those of Islamic banks are supported by a range of various Shari’a compliant contracts. Islamic Banks are prohibited from transactions that aren't Shari’a compliant. These include, among others, the sale and purchase of debt; futures; sale of assets before getting title and possession thereof; and financing of goods and activities prohibited by Shari’a.

7. How can be we sure that Islamic banks are Shariah compliance?

The following are some of the important points used to ensure all the financial activities and products The following are some of the important points used to ensure all the financial activities and products of the Islamic banks are Shari’a complainant that every customer of Islamic bank has to check before establishing any relationship with the bank.

Monitor the existence of a comprehensive system that ensures Shariah compliance at all levels.
Assure the establishment of Shari’a Board (SB) or any arrangement to work with Shariah scholars by the bank in order to be sure that all the services and products of the bank are regularly supervised for their Shariah compliance
Assure the staffs have the proper understanding of all the types and features of the services and products; and the Shariah on which all the service and products developed based on.
Check the availability of clear information and evidence for which all the products of the bank were developed based on the principles and Fatwas given by scholars, supervised and approved by the Shari’a Board.
Check that whether or not the staff had taken the appropriate training like Shariah and/or Islamic banking that enable them to implement the transactions in a fully Shari’a compliant way by observing their training certificates etc
check the existence of proper and adequate detail explanation about the requirements of Islamic banking transactions and the processes and execution

8. Is it permissible to receive salary via an interest-based banks?

Nowadays in many countries and public and private institutions pay salaries to their employees via conventional banks. This is haram for the employer, not the employees. Because the banks are benefited from the actions of the employers as it strengthens its position. Though this is not haram for the employees, subject to certain conditions

If they cannot have ways to receive in cash or through Islamic Bank
They should open a current account of their salary, this is because this account has no interest, is readily accessible and the bank cannot make use of this funds

Tuesday, April 23, 2019