frequently asked questions

Islamic banking is a system which provides banking services and products in line with the rules and principles of Shariah. Further, Islamic banking operations are conducted under direct supervision and guidance of Shariah scholars in their capacity as members of Shariah Boards of Islamic banking institutions.

Shariah literally means a ‘way’ or a ‘path’. In Islam, Shariah refers to the divine guidance and laws given by the Holy Quran, Hadith {sayings of Prophet Muhammad (Peace Be Upon Him)} and supplemented by juristic interpretations by Islamic scholars.

Literal meaning of Riba is increase or growth. Any transaction of loan or a debt where payment of an additional amount is made conditional while advancing a loan is called Riba e.g. Zaid gives an amount of Rs. 100,000/- to Khalid as loan to be repaid after one year and it is agreed between them that Khalid will return Rs. 110,000/- after one year. This additional amount of Rs. 10,000/- is Riba or interest. This definition of Riba is derived from the teachings of Holy Quran and all Shariah scholars have a consensus on it.

Is there any difference between interest and Riba ? The origination of term interest dates back to 17th century with the emergence of banking system at global level. Interest means giving and/or taking of any excess amount in exchange of a loan or on a debt. Hence, it carries the same meaning/value as that of Riba.

The use of word banking does not make an institution Halal or Haram. It rather depends on underlying scope and nature of activities which make it Halal or Haram. Therefore, despite nonexistence of the contemporary banking concept in Shariah, processes and procedures adopted by Islamic banks are in line with Shariah principles.

The question can be addressed in two parts; i) do we need banks, and if yes, ii) why based on Islamic Shariah. Firstly, banking has become one of the basic needs of a society due to its various roles and functions and thus has significance in any economy e.g. placing deposits for safe keeping or to earn profit thereupon, to seek financial support from banks for business or other needs, facilitating international trade, and other banking services. Secondly, Islam provides a complete set of guidance for activities in every aspect of life whether personal, social and economic. Hence, there is a need that banking services may also be available as per Islamic principles to serve Muslim community.

The basis of Islamic banks is laid down on ethical values and socially responsible system. The values like justice, mutual help, free consent and honesty on the part of the parties to a contract, avoiding fraud, misrepresentation and misstatement of facts and negation of justice or exploitation form the basic principles of Islamic banking. Therefore, principles of Islamic banking lead an economic system to a common good and economic prosperity. On this premise, Islamic banking becomes a viable option for everyone irrespective of his/her religion.

No, this is not the case. Islamic banks accept deposits either on profit and loss sharing basis or on a Qard basis. Banks do not pay any return over deposits taken on Qard basis while deposits taken on profit and loss sharing basis are deployed in Shariah compliant activities like trading or investment. The profit so earned by an Islamic bank is passed on to the depositors according to pre-agreed ratio which, therefore, cannot be termed as interest.

In Islamic law, it is permissible to penalize a debtor who is financially sound but delays payment of debt without any genuine reason. Such act of the debtor is unjust as the Prophet (PBUH) has said, "A rich debtor who delays payment of debt commits Zulm". To discourage willful delays in repayments, Islamic banks use the concept of charity. Under this arrangement, a customer signs an undertaking that in case he delays payment, a fixed amount will be paid by him as charity. This is to encourage customers to make timely payments. Further, opposed to a conventional bank which take such penalties as its income, Islamic bank cannot use charity amount as its income, neither directly nor indirectly. Moreover, Islamic banks under the guidance of their Shariah Boards distribute such charity amount for charitable and social welfare purposes.

Islamic banks use their funds in various trade, investment and service related Shariah compliant activities and earn return thereupon. The return earned from such activities is then passed on to the depositors according to the agreed terms.

Islamic banks do not offer loans, because any premium/ additional amount over and above the loan amount is tantamount to Riba. Islamic banks instead offer financing through different Shariah compliant modes e.g. trade, rental arrangements, investments and other participatory modes.

Yes, a conventional bank can offer Islamic banking services through a dedicated set up of Islamic banking branches/windows, provided it ensures proper segregation of funds and fulfills all Shariah, legal and prudential requirements prescribed by the regulatory and supervisory authorities. Further, funds acquired under Islamic modes can only be invested in Shariah compliant avenues while ensuring that operations of Islamic banking branch/ window are not mixed up with conventional banking branches.

The operation of current accounts is based on the Islamic principle of Qard while the structure of remunerative saving & term deposit accounts is based on the principle of Mudarabah/Musharakah and strictly in conformity with the rules of Islamic Shariah. Further, the structures of all these products are approved by Shariah scholars in capacity of their being member Shariah Board of an Islamic bank.

Using interest rate benchmark for determining the profit in Halal transactions does not render the transaction as invalid or Haram. It is rather the nature of transaction which determines the validity of a transaction. Taking an example of two individuals: Mr. A is selling wine on a 10% profit while Mr. B is selling juice using the same profit rate of 10%. This does not render Mr. B’s profit Haram as his business is a Halal one. It may however be mentioned that the need of using conventional banking benchmark for pricing Islamic banking products will eliminate with the passage of time as Islamic banking industry matures and gains a significant pie in the overall banking system.

The validity of a transaction does not depend on the end result; it rather depends on the process and activities executed and the sequence thereof in reaching the end. If a transaction is done according to the rules of Islamic Shariah, it is Halal even if the end result of the product looks similar to conventional banking product. Further, contracts and product structures used by Islamic banks are quite different from those of a conventional bank.

Yes, Islamic banks can play an effective role in economic development by using trade, rental, and participatory modes of financing. Islamic banks are able to play their critical role of financial intermediation by pooling funds from surplus units of the economy and channeling these to entrepreneurs who are in short of funds to run their business. Hence, Islamic banks due to their inherent nature of business have close linkage with the real sector which may facilitate in achieving objectives of economic development.