FAQ

Frequently Asked Questions about Trust Islamic Bank

                 

1.            What are the differences of Islamic banking & Conventional banking?

2.            Is all Islamic banking transactions are under Profit & Loss sharing scheme?

3.            In a PLS (Profit & Loss sharing) system, how Islamic banks always gives profit?

4.            How Islamic banks charge fixed rate of profit in deposit & investment ?

5.            Islam prohibits usury not present day interest ?

6.            What is Riba ?

7.            Commercial interest did not exists in the days of Prophet,pbuh.

8.            Banks are receiving interest from Bangladesh Bank against their deposits, then how their earning are sharia compliant ?

9.            At the time of Prophet, pbuh, their was no existence of banks, how come now Islamic banking evolves ?

10.          “Simultaneous operation of conventional & Islamic banking under same roof” – is it possible ?

11.          What are the available options of investment for a Islamic bank ?

1.            What are the differences of Islamic banking & Conventional banking?

               

 

 

Business objective-wise there is no difference between an Islamic bank & a conventional bank – both are profit oriented, they invest in profitable ventures to ensure return on their investment, takes measures to safe guard their investment and timely recovery.

 

The differences lies are in the operational ethics, procedure & approach, e.g. an Islamic banker must think about the permissibility of the project/business in the light of Qur’an before making any investment – while a conventional banker does not have any obligation in this regard.

 

By following the sharia rulings, an Islamic banker consider his/her work as prayer – while by disobeying God’s order, a conventional banker does not have that scope.

 

Account holders of an Islamic Bank are Partners, they authorize the bank to invest or transact on their behalf and share the profit & loss on a pre arranged ratio.

 

Total profit earned by the Islamic bank is shared between the bank and depositors at pre-agreed ratio (not rate) as per account agreement. Individual depositors get his/her share of the total profit as per weightage. In a conventional bank depositors get fixed interest irrespective of bank’s earning.

 

Islamic Banking is trade based while Conventional banking is lending based.

 

2.            Is all Islamic banking transactions are under Profit & Loss sharing scheme?

               

 

No, basically Islamic banks follow 2 types of operation both of which are approved in Sharia;

 

    * Profit/Loss sharing method (Musharaka)

    * Profit mark-up (sale) or Rental method (Ijara,Murabaha,Bi-muajjol)

 

                 

3.            In a PLS (Profit & Loss sharing) system, how Islamic banks always gives profit?

               

 

If we can understand the 1st part of the question, the 2nd part will be easy to answer. Islamic banks use trade tools mostly used & approved by the Islamic scholars to avoid the presence of interest. Most of these tools were in practice during the time of Prophet, pbuh. Different models are used for different purpose, e.g.

 

Al-wadia (safe-keeping) arrangement between the depositor and the bank, which allows the depositor to withdraw his/her money any time and permits the bank to use the money for its business. The bank may at its absolute discretion may allow payment of a portion of this profit to the depositor.[ A.L.M.Abdul Gafoor (Netherland) in his book ISLAMIC BANKING & FINANCE – ANOTHER APPROACH, recommended this modular implementation in current, savings & term deposits.]

 

Mudaraba (silent partnership) is a PLS arrangement and used in deposit schemes where bank act as an agent or mudarib of the depositor. This mode was in practice even in the pre-Qur’anic days and it was approved by the Prophet. Pbuh.

 

Now the 2nd part of the question, how profit can be given every time without sharing loss? An Islamic bank shares its gross profit with the depositors. If the bank earns gross profit in a year, it gives profit to the depositors. Since bank exercises due diligence and careful analysis before making any investment, default or bad-loss cases are very few (avg 3%) and accordingly a good bank always earns profit from its investments and can give profit to its depositors (partners) in every year.

                 

4.            How Islamic banks charge fixed rate of profit in deposit & investment ?

               

 

Theoretically and ethically Islamic banks cannot give fixed profit on deposits – what they declare initially is a provisional rate, which is subsequently corrected after approval of accounts by concern authority.

 

In case of investments, the vary nature of finance determines the rate of profit. For example, in Musharaka mode of finance there is no scope of charging any fixed profit again in a bi-salam or Murabaha mode, the rate of return or sale price is already agreed or determined by the parties.

 

You cannot sign a sale agreement without defining the price of the goods in advance or we can not rent a premise without fixing the rent in advance. The Prophet, pbuh, very clearly sets the guidelines for a valid contract to avoid any ambiguity and western Law of Contract is formed by following the Islamic contract law.

                 

5.            Islam prohibits usury not present day interest ?

               

 

This statement is most widely used by the proponents to justify the interest. I hope, following quotations will give the answer :

 

O, believers, fear Allah, and give up what is still due to you from the interest, if you are true believers ~ Sura Baqara;278 – Qur’an do not distinguishes interest & usury.

 

…. If you repent, you can have your principal..~ Sura Baqara;279 – here also asked to forgo all interest but only principal.

 

“Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, …. But if a person transacts in excess, it will be riba.” – Al Hadith, Bukhari.

 

“He, who does not abandon Mukhabara, will be caught in a war against Allah & His Prophet.” – Abu Hurairah (R). Mukhabara is a system of crop sharing between landlord & the cultivator at a pre-agreed quantity irrespective of whether production is low or high. Prophet, pbuh, had called it a form of Riba and rendered illegal.

 

Now, the other theory that in usury, borrower uses the loan for personal use and not in productive purposes (and reverse in case of commercial loans) hence prohibited by Islam.

 

But,we see Mukhabara is a commercial loan used for productive purpose – yet the Prophet, pbuh, declared is illegal.

 

The fact is, the Prophet, pbuh, in all his instructions mentioned, Riba and never differentiated or specifies any particular type of Riba.

                 

6.            What is Riba ?

               

 

Every loan that draws interest is Riba ~ Al Hadith (Ali ibn Talib)

 

The word Riba means excess, increase or addition, which interpreted according to Sharia terminology, implies any excess compensation without due consideration (and sharia do not include time value of money as consideration).

 

This definition of Riba is derived from the Qur’an and is unanimously accepted by all Islamic Scholars. There are two types of Riba, identified by these scholars are; Riba An Nasiyah and Riba Al Fadl

 

Riba An Nasiyah ~ it is defined as excess which results from pre-determined rate (interest) which a lender receives over and above the principal. During the dark ages only this form was considered as Riba. However, the Holy Prophet, pbuh, also classified the second form also as Riba.

 

Riba Al Fadl or Riba Al Bai ~ it means the excess which is taken in exchange of specific homogeneous commodities and encountered in their hand-to-hand transactions. Hadith says, “Sell gold for equivalent gold, …….. but if a person transacts in excess, it will be Riba”.

                 

7.            Commercial interest did not exists in the days of Prophet,pbuh.

               

 

This is not true. In the Islamic & pre-Islamic history of Arabia, we find that interest bearing loans were given for commercial and profitable purpose. We quote below 3 examples:

 

The tribe of Umro bin Aamir and tribe Mughaira, the two very wealthy tribe of that time were involved in interest bearing transaction between them – these 2 wealthy tribes loan transactions were for purely commercial lending.

 

Hazrat Usman (R) was one of the wealthiest businessmen of pre-Islamic period and he also used to lent money on interest to the traders.

 

Sydna Abbas bin Abdul Mutalib and Sydna Khalid bin Waleed had company with joint capital, whose prime business was to lend money on interest to traders.

                 

8.            Banks are receiving interest from Bangladesh Bank against their deposits, then how their earning are sharia compliant ?

               

 

Since Islamic Banks cannot receive interest on its SLR, accordingly they maintain their SLR in the current account maintained with Bangladesh Bank. Considering this practical limitation, BB allows a preferential rate of SLR for the Islamic banks @ 10% instead of 18%. BB is also working in the development of Mudaraba Perpetual Treasury Bond, so that Islamic Banks can profitably maintain their SLR and surplus fund. So it is clear Islamic banks do not earn any interest on its SLR.

                 

9.            At the time of Prophet, pbuh, their was no existence of banks, how come now Islamic banking evolves ?

               

 

This is another important question needs careful understanding. We do not find any reference of Ice-cream, in the Qur’an or Sunnah ~ then what is your interpretation? Ice-cream is Halal or Makruh or Haram? Of course Halal, because the ingredients used are Halal and product is not injurious to health or society.

 

Al Qur’an says, Hallallahul Baya Wa Haramullahur Riba i.e. God forbids interest and allows trade. Islam favors production and trade. Our Prophet, pbuh, had actively participated in such activities. Accordingly we get different trading and production sharing methods from the Sunnah, which can be effectively used in modern day business. These are the Islamic ways of doing economic activities. Islamic banks do their business by following these practices in banking & by avoiding the riba.

 

In the days of Prophet, pbuh, the Arabian society was a closely knitted tribal community. The decision of the tribe was supreme against individualism while the present day scenario is a complete reverse. Tribal support and bondage is replaced by Internationalism & service industries like Banks. However, the fundamentals of business remained the same.

 

Islamic banks use sharia approved trade tools as todays Finance tool to meet modern day banking needs avoiding interest ~ and interestingly the history of conventional banking also starts from simple merchant banking activities which are similar to the present day Sharia compliant tools.

                 

10.          Simultaneous operation of conventional & Islamic banking under same roof” – is it possible ?

               

 

If a practicing Muslim can survive in this society – even in the western society, why not an Islamic Bank can not operate with the conventional banking?

 

The basic difference of an Islamic bank with a conventional bank is avoidance of interest from its transaction. This involves the system of book-keeping and in today’s centralized accounting environment it is very much possible to ensure segregation of fund for Islamic banking from the conventional bank deposits. It’s not the question of physical management of funds – rather it’s the application of sharia principles while managing it.

 

Bank must ensure that from receiving the deposit (fund), to its subsequent investment & realization, all are done in compliance with the Sharia principles – this is core concern of an Islamic bank. Process of business is important - not the venue.

                 

11.          What are the available options of investment for a Islamic bank ?

               

 

    * Consumer finance (Retail banking) except any purpose loan.

    * Higher Purchase

    * Lease/rental finance

    * Real Estate development Finance

    * House building Finance

    * Equity finance/participation.

    * Merchant banking operation.