How can we help you? Test

Concepts of Sharia’a

NON-ISLAMIC CONVENTIONAL BANKING

Traditional banking: The employment of public savings and directing them towards investments based on lending and borrowing, to make money.

ISLAMIC BANKING

Islamic banking: The employment of public savings and directing them towards Sharia-compliant investments, to contribute to the economic growth and comprehensive development of societies. Islamic banks also bear the responsibility of strengthening social partnership.

THE CONCEPT OF ISLAMIC BANKING VS. CONVENTIONAL BANKING

1. Islamic banks and conventional banks offer banking services in exchange for commissions and fees, but the issue of Sharia compliance remains limited to Islamic banking

2. Islamic banks and non-Islamic banks are intermediaries that transfer money from savings surplus units to savings deficit units with the aim of achieving a return through these investment operations; the mechanism of transferring these funds remains the basis for the difference between the two systems

3. The money is transferred in conventional banks as a trace or under usurious contracts (lending and borrowing) with interest

4. A conventional bank takes profit (interest) and does not bear the fine (loss)

THE CONCEPT OF ISLAMIC BANKING:

1. An Islamic bank is neither a lender nor a borrower and cannot achieve a return based on moving money in lending and borrowing

2. An Islamic bank is a trader, owner or lessor, manufacturer, manager, i.e. its transactions are always based on the existence of assets and services and their sale, lease or otherwise

3. Funds are used under Shari'ah financing and investment contracts such as sales, leasing, speculation, Musharaka and other Sharia contracts.

4. Risk sharing is the basis of the Islamic bank as it participates in profit and loss

CONVENTIONAL BANKS

1. A traditional bank borrows money from depositors in exchange for interest paid to them, and lends to customers at predetermined interest rates that customers pay to the bank

2. By virtue of borrowing, the bank is responsible for returning the money with interest to depositors, even if the bank as a borrower suffers losses

3. Depositors have "sold" their money on the basis of a deferred sale in increment, waiting for the sale price to be paid upon completion of the deferred sale period, which is principal and interest

4. The interest that the bank pays to depositors is much less than the interest it charges borrowers, and the difference between them is the bank's interest

5. The bank has the power to increase its interest rates when lending, but depositors who lend to the bank have no such power

6. Traditional banks are not allowed to trade commodities with depositor money but are only allowed to lend money

ISLAMIC BANKS

1. The Islamic bank does not borrow money from depositors, nor does it lend money to customers

2. Islamic banks accept funds from clients on a money-management basis and invests them on their behalf and at their own risk

3. The Islamic bank is the fund manager, the customer is the money provider and the contract is fund management

4. Islamic banks are allowed to invest depositor money and are prohibited from lending this money illegally

5. Islamic banks cannot provide advance notice of the rate of return to depositors; can only indicate a certain average based on the bank’s past performance

6. An Islamic bank has full authority to manage funds as it deems appropriate but within the standards of Islamic Sharia

7. The Islamic bank plays a dual role as a "fund manager" and "investor" with entrepreneurs

8. An Islamic bank receives deposits through money management contracts and makes profits by investing in various types of investment contracts and sales contracts

9. The Islamic Bank agrees with the depositors on the rates of distribution of return realized after the capital safety

10. Only the distribution ratio is pre-agreed, not the return

11. The Islamic bank invests funds at depositors risk, and shall not be liable except in the event of infringement or default

12. In the event of negligence, the bank's case of being a trust hand shall be transformed into a guarantor hand

The most important investment formulas in force in the bank:

Speculation:

Definition of Mudaraba: A contract between two parties on the basis of profit sharing. One party contributes capital and is called Rab Al-Mal while the other contributes with its experience and investment management and is called Mudarib.

Speculative elements:

Contracting Parties: The bank as the Mudarib (Funds manager) and the customer (Rab al-Mal)
Capital: The funds deposited by the client in the Deposit account (Mudaraba based investment)
Business: The Bank invests these funds in Shari'ah-compliant activities
Terms of profit and loss: An agreement to share the realized profit while the loss is borne by the client (Rab Al Mal) unless there is negligence, default, or non-compliance with the terms and conditions of the Mudaraba contract

RULES OF PROFIT AND LOSS IN SPECULATION

Profit is the amount earned and realized after the safety of the capital
It is distributed on the basis of pre-agreed ratios
Ratios may be changed by agreement, and new ratios apply to future periods
The loss shall be borne by the owner of the money, unless there is negligence or violation of the terms of the contract by the Mudarib

Agency by Investment

Definition: Agency by investment is the assignment of another person to develop their money with or without a fee, under a restricted or unrestricted agency, where the owner of the money (the principal) puts his money with (the agent) to invest it on his behalf.

Elements of the Agency for Investment:

Contracting Parties: The bank that is the manager of the funds as agent, and the customer who owns the money as the principal.
Capital: The funds deposited by the principal in the deposit account ( Wakala based investment).
Business: The Bank invests these funds in its Shariah-compliant activities.

Conditions of profit and loss: The parties agree that the principal shall have an expected profit percentage, and what is more than that, the agent shall have an incentive for his good performance, the guarantee of the capital shall be on the principal, while the agent's hand shall be a trust hand unless there is negligence or non-compliance with the terms and conditions of the investment agency contract, in which case the trust hand becomes a guarantor hand, In situations where the agent is held liable for loss of capital, such liability is limited to the capital amount and the agent is not liable for loss of expected profit whether the capital was invested immediately or delayed or not invested at all..

Rules of profit and loss in speculation

Profit is the amount earned and realised after the safety of the capital
The principal shall take the profit according to the agreed expected profit rate, and if it is increased, the agent shall have an incentive for his good performance
The loss shall be borne by the owner of the money, unless there is negligence or violation of the terms of the contract by the principal

Murabaha:

Definition of Murabaha: The sale of a commodity at the same price at which the bank bought it and increase a known agreed profit, whether signed with or without a previous promise from the customer to buy.

The most important features of Murabaha are that the seller discloses the cost to the buyer and adds an agreed known profit to it.

Following is the Murabaha mechanism:

1. The customer goes to the bank to obtain financing in the form of Murabaha by filling out the application and "Promise to Buy"

2. After receiving the quotation, the bank purchases the commodity subject of the transaction and receives it in real or judgmental receipt as a carrier of the guarantee

3. The bank and the customer shall sign a Murabaha sale contract under which the ownership of the commodity is transferred to the customer who receives it in real or judgmental receipt of the guarantee

4. After the customer receives the commodity, he shall have the absolute right to dispose of it with all kinds of actions

5.The bank shall record the transaction in its records

1. Conditions of the assets to be sold:

Such assets must be permissible in Sharia
They must exist at the time of contracting
It must be in the ownership of the bank at the time of sale
It must be in physical or constructive possession of the seller
It must be deliverable

2. The selling price must be specified in the contract session

3. Selling by postponing the two allowances together (commodity and price) is not permissible

4. The offer and acceptance must be exchanged, followed by the delivery of the sold commodity to the customer and the payment of the price or its registration in the buyer's possession in one payment or in instalments as agreed

The bank offers several products based on the Murabaha formula/structure, based on a promise from the customer to purchase the commodity and owns it, then the bank buys the commodity and sells it to the customer in accordance with the mechanism stipulated above, and the following is a statement of these products:

1. Car Murabaha: The bank sells the car Murabaha to the customer after his request and promise to buy the car from the bank after the latter has purchased the car and owns it.

2. Murabaha Goods: The bank sells Murabaha goods to the customer after his request and promise to purchase that commodity from the bank after the latter purchases the commodity and owns it, and in cases of necessity the bank may appoint the customer as his agent in purchasing the commodity from its original owner (agency in Murabaha), in which case the commodity remains in the hands of the agent customer as a trust that he is not entitled to dispose of until after the conclusion of the Murabaha contract.

3. Murabaha shares: The bank sells Murabaha shares to the customer after his request and promise to buy those shares from the bank after the latter purchases the shares and owns them, and the bank appoints the customer as his agent in buying shares from the financial markets on behalf of the bank, and in this case the shares remain in the hands of the agent dealer in trust that he is not entitled to dispose of until after the conclusion of the Murabaha contract, and the customer has the right after concluding the Murabaha sale to dispose of them and sell them through the financial markets whenever he wants, and he also has the right to Keep it if he wants.

4. National Bonds: The bank sells Murabaha Sukuk to the customer after his request and promise to purchase such Sukuk from the Bank after the latter's purchase of the Sukuk from National Bonds Company, Dubai, and owns it. The customer has the right, after concluding the Murabaha sale, to dispose of the Sukuk and recover its value from the National Bonds Company whenever they please, and has the right to keep them.

5. DMCC Murabaha: The bank sells a commodity or commodities to the customer after requesting and promising to buy that commodity from the bank after the latter purchases the commodity or commodities through the DMCC platform and owns it. In this transaction, the customer appoints a third party as an agent who acts as the customer in all matters related to Murabaha sale. The customer also authorizes their agent to sell the commodity through the DMCC platform and deposit the sale proceeds in their account with the bank or others. The customer also has the right to keep it if they please.

6. International Commodity Murabaha: The bank sells a commodity or commodities to the customer after their request and promise to buy that commodity from the bank. After the latter purchases the commodity or commodities through the London Metal Exchange platform through an agent and owns it, and after the customer buys the goods from the bank Murabaha, the customer appoints the bank as an agent to sell the commodity and deposit the sale proceeds in his account with the bank or others. The customer also retains the right to keep the commodity if they please.

7. Murabaha Letter of Credit: The bank sells Murabaha goods to the customer after their request and promise to buy those goods from the bank. After the latter purchases them through a letter of credit in which the bank is the buyer of the goods, and when the documents reach the bank in its name, the bank is considered to have received the goods. The customer summons the applicant for the goods to conclude the Murabaha sale, and the bank delivers the documents to the customer after endorsing them to him (unless he is an agent in the purchase).

8. Murabaha collection: The bank sells Murabaha goods to the customer after his request and promise to buy those goods from the bank. After the latter purchases them from their original owner, and when the documents arrive at the bank in his name, the bank is deemed to have received the goods, so the customer summons the applicant for the goods to conclude the Murabaha sale and then delivers the documents to the customer after endorsing him. In this case, the transaction must be arranged between the bank in its capacity as the buyer and the supplier selling to the bank. The customer buying Murabaha from the bank, and in cases of necessity, the customer may sign a main Murabaha collection contract, under which the customer is entrusted with the purchase on behalf of the bank, receives the goods in trust, and disposes of them only after concluding the Murabaha sale contract between him and the bank.

Ijara and its mechanisms

Definition of Ijarah: It is the lease of a specific asset or described in the disclosure or usufruct right owned by the lessor in return for a known rent for a known period.

● Or it is the transfer of the usufruct for consideration, such as the lease of a particular asset or the lease of land, construction, equipment, etc.

● Or it is a known, proposed and legitimate usufruct right of specific assets for a specified period in exchange for a specific fee or in return for the service, effort or work proposed to be extended.

IJARA RULES

1. The leased asset must be owned by the bank at the time of concluding the Ijara contract, and the lease may fall on a property described in the liability owned by the bank (lessor) under a Musharaka or Istisna'a contract or otherwise.

2. Ownership of the leased asset remains with the lessor for the duration of the lease.

3. The lessor assumes all rights and obligations related to ownership, such as insurance and basic maintenance (unlike regular maintenance, it is the responsibility of the lessee).

4. The subject of rent must be of a specific value.

5. The rental period and rental amounts must be determined with clear conditions.

6. The lessor may not unilaterally increase the rent.

7. The tenant assumes no responsibility for any damage except in case of negligence or breach of the terms and conditions of the Ijara Agreement.

8. The Ijara contract is terminated in case of total destruction of the leased asset.

Ijara cases:

- The lease may be based on a specific lease that the bank buys from a third party and leases to the customer as a lease ending with ownership, if the customer wishes to own the asset.

- Or the lease shall be based on a specific purchase by the bank from the customer themself and leased to them by lease ending with ownership, if they want to provide liquidity for any purpose that requires the provision of liquidity to the customer.

- Or the lease shall be held on a basis described in the liability, provided that the bank owns it by entering into a partnership with the customer. The bank then leases its share in the project to the customer as a lease described in the liability that becomes effective upon completion of the project and the final delivery of the property in which the benefit is achieved.

- Or the lease is held on what is described in the disclosure by the bank owning the asset under a contract for the purchase of Istisna'a from the customer themself or others. The bank then leases its share in the project to customer A’s lease; the liability becomes effective upon completion of the project and the final delivery of the property in which the benefit is achieved