While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative option for Muslims, though Islamic banking is not restricted to Muslims.
What is Islamic banking?
It refers to a system of banking or banking activity that is consistent with the principles of the shariah or Islamic rulings and its practical application through the development of Islamic economics. Shariah prohibits the payment or acceptance of interest charges or riba for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles.
How long has it been in operation?
While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative option for Muslims, though Islamic banking is not restricted to Muslims.
How large is the local Muslim community?
It is estimated to be over 731000.
What is the growth rate of Islamic banking internationally?
Internationally Islamic finance has grown at a rate of between 10% and 15% annually, where the current global economy’s annual growth rate is 4,2%.
Though interest is prohibited in Islamic law, is it true that similar forms of payment, such as mark-ups, are accepted?
Islamic law prohibits the payment or acceptance of interest. However, trade is encouraged. There are a number of ways trade contracts are set up. Rental with a view to ownership or cost plus mark-up are widely used. An example of a rental agreement would be that the financing partner (the bank) purchases the asset on the client’s behalf and rents the goods to the customer at a fixed rental repayment price over an agreed period. The rental amount would include the bank’s profit mark-up that was agreed on at the inception of the sale. The agreed repayments are not subject to any fluctuations, irrespective of market conditions.
What are the benefits?
The benefit of this structure is that it allows a client to budget for the monthly instalment. This amount is constant throughout the period of the contract, which gives the client the certainty required by shariah. The interest-free banking model could be regarded as a win-win situation for the bank and the customer. It has even been suggested by the Vatican as a possible cure for ailing markets.
The structure of Islamic finance products is gaining rapid acceptance as the model is seen as a viable alternative to traditional Western banking. This is because the sale and buy-back agreement between the financier and the customer is agreed on when the partnership is entered into. The terms of the sale and the profit margin are fixed. This structure complies with the strict code of ethics documented in the Koran and prevents possible exploitive practices, which include unstructured and fluctuating interest rates.
Which products are incompatible with Islamic financing?
Islamic finance does not offer overdraft facilities, the option to purchase items on credit cards, or the financing of personal loans.
What does a typical product range at a bank include?
It normally includes a range of vehicle and asset finance options and commercial products, including retail and merchant banking, commercial and residential property and a private banking facility.
Is Islamic finance available to non- Muslim clients?
Yes, the non-Muslim customer base is increasing beyond initial projections. Currently Islamic finance at the bank has a 5% non-Muslim product uptake.
Source : FM.co.za
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