Why Islamic Banking?
In the light of Allah’s commands, it is obligatory on us to try to find and adopt the right banking system, one that follows the principles set by the Creator. Those who learn to differentiate between what has been allowed and what has been forbidden will be the ones with a clear conscience when they assemble in front of the Creator on the Day of Judgment.
Allah has clearly ordained the prohibition of Riba in the Glorious Quran. Verses [2:278-279] translate into:
278. O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are Indeed believers.
279. If ye do not, take notice of war from Allah and His Messenger: but if ye repent, ye shall have your capital sums; Neither will you deal with others unjustly, nor shall you be dealt with unjustly.
Beware! false interpretations of these verses has led many individuals to assume that the prohibition only relates to situations where the creditor is likely to charge exploitatively high rates of interest. It is wrong to see the above translation as proof that the (sole) objective served by the prohibition of Riba is the avoidance of injustice (in the sense of exploitation of the poor debtor by the rich creditor). In Islam, there is no room for Riba, marginal or otherwise.
Riba gives birth to an economic system that is unjust; one that favors the rich at the expense of the poor. Rather than reward for effort and entrepreneurship with profit, the Riba based economic system rewards capitalists.
Islamic Finance attempts to create a fair economic system. It works on the principle of profit and loss sharing. Riba (Interest) is strictly prohibited in all its forms and kinds.
Islamic banks enter into trade and investment to earn Halal profit as they neither take deposits/funds on interest nor do they advance loans on interest. They have to purchase and sell assets in order to make profit from the higher sale prices or enter into investment arena. The most common sale contracts used by Islamic banks are Murabaha, Salam, Istisna, sale on deferred payment basis while Ijara is the sale of the usufruct of an asset owned by the bank. For investment, the Islamic banks have Mudaraba, Musharaka and Wakala structures.
Islamic banks have to strictly comply with the principles and rules of Shari’a which prohibit outright any transaction involving alcohol, pork, gambling, etc. Further, the Islamic modes of finance and investment used by these banks must fulfill the basic conditions of these contracts to be considered Shari’a compliant.
In an Islamic mortgage transaction, instead of lending money to the buyer, an Islamicbank buys the item from the seller, and sells it to the buyer at a profit with the sale price deferred and paid to the bank by the buyer/customer in installments. This mode of financing is called Murabaha. It is a Shari’a requirement that the bank must purchase the asset and get the title/ownership, and hence the associated risks and potential benefits before selling it to the customer. In conventional financing, the bank does not assume ownership or the associated risk. In such a system, capital alone is used to produce more capital.
At DIBPL we have a full fledged Sharia Department that monitors every transaction the bank is involved in. All products, marketing material and campaigns are also certified by this department ensuring that nothing is in conflict with the guidelines of Sharia. Moreover Sharia Audit is conducted to ensure that none of the bank’s income is from transactions that were Sharia repugnant. If such a case is found, the income from the infringing transaction is removed from the bank’s profit and donated to charity.