FINAL PROJECT
MONEY AND BANKING
Topic
CONVENTIONAL BANKS AND NON NON-CONVENTIONALS BANKS
Presented By:
S.M RAZA KAZMI
SAUD SHAHID
HASSAAN AHMAD
Presented To:
Maám Neha zaib
National College of Business Administration &
Economics
Contents
At first we would like to express my gratitude to
Almighty ALLAH who has bolstered us and bestowed us the will to make this
project.
The main source of guidance is received from our Respected MA’AM NEHA ZAIB, It might
seems quite trivial here in this set of words or it might seems like a set of
words of praising towards a TEACHER, but it’s nothing like that, To be very
honest with everyone, If we hadn’t got proper guidance from Ma’am Neha zaib, we
could’ve never been able to complete this whole project, and even if we had
completed it, it would’ve been never gotten over such a robust and inevitable
level. We believe that we have tried our utmost to make it the best there is
and now we will also try our very best to present each and every thing, we will
try our very best just not to deliver the phenomenal information, but also
deliever each, and everything there could be delivered to brainstorm the minds,
and to give them a positive view, and also to explain the product, the working,
the processes, and much more that could be explained.
A Bank is an economic institution whose main aim is
to earn profit through exchange of money & credit instruments. It is a
service oriented as well as profits oriented organization.
The motto of Islamic banking is profit sharing and
loss bearing. The main objective of Islamic banking is as same as conventional
banking system which is profit making. To follow the shariah system Islamic
banks actually follow certain terms which is known as Mudharabah, Wadiah,
Musharakah, Murabahah, Ijar.
The difference between the conventional and
non-conventional banks
·
Time value is
the basis for charging interest on capital.
·
Profit on trade
of goods or charging on providing service is the basis for earning profit.
A commercial
bank (or business bank) is a type of retail bank that provides services, such
as accepting deposits, giving business loans and basic investment products.
A financial
institution that provides services, such as accepting deposits, giving business
loans and auto loans, mortgage lending, and basic investment products like
savings accounts and certificates of deposit. The traditional commercial bank
is a brick and mortar institution with tellers, safe deposit boxes, vaults and
ATMs. However, some commercial banks do not have any physical branches and
require consumers to complete all transactions by phone or Internet. In
exchange, they generally pay higher interest rates on investments and deposits,
and charge lower fees.
Categories of
commercial banks in Pakistan:
Commercial banks operating in Pakistan can be
divided into four categories:
§ Nationalized Commercial Banks (NCBs),
§ Privatized Banks
§ Foreign Banks.
A banking system that is based on the principles of
Islamic law (also known Shariah) and guided by Islamic economics. Two basic
principles behind Islamic banking are the sharing of profit and loss and,
significantly, the prohibition of the collection and payment of interest.
Collecting interest is not permitted under Islamic law.
Fundamental
of Islamic Banking:
§ Shariah laws are the tenets of Islamic Banking. As
such, the comparison with that of the conventional are not exactly
like-to-like.
§ Conventional banking was build upon the
fundamentals of debtor-creditor relationship with interest being the price of
credit and reflecting the opportunity cost of money. Hence, money is a
commodity somewhat.
§ Financial relationship in Islam is generally
participatory in nature. E.g. the principles of Musharakah and Mudharabah, or
contractual transaction. In addition, risk and reward relationship is guided by
the socio-economic principles.
Islamic Bank in Pakistan:
§ Bank Islami Pakistan Limited
§ Burj Bank
§ Dubai Islamic Bank Pakistan Limited
§ Meezan Bank Limited
§ Al Baraka Bank (Pakistan) Limited
§ Emirates Global Islamic Bank Basic
Products of
Islamic Banks:
·
Sukuk:
Islamic Finance also has a bond like conventional
financial system has bonds as a medium of investment. The word Sakk refers
to a single bond and its plural is Sukuk, which is a famous word in
the world of Islamic Finance. Sukuk are Islamic bonds that are structured in a
way to generate returns to the investors, without any transaction
involving riba (usury)
·
Murabahah
Murabahah is another product based on the Islamic
Sharee’ah; it refers to the sale of goods at a price which includes a profit
margin, i.e. cost plus. This product is predominantly offered by Islamic banks
in asset financing, property, microfinance and commodity import and export. A
Murabahah contract has an honest declaration of cost and the expenses incurred
on the product, along with the profit mark up being taken by the seller, which
is the bank in this case
·
Musharakah
Musharakah is a partnership-based contract or an
investment product with a partnership structure for sharing profits and losses,
which is based on the Islamic Sharee’ah. It involves investment from all the
partners and an agreement to share profits in a predetermined ratio and to
share losses in the ratio of contribution. Parties to the contract of
Musharakah are referred as “musharik” which literally means partner
·
Mudarabah
Mudarabah is an equity-based contract offered by
Islamic banks, which is based on the Islamic Shari’ah. It is a special kind of
partnership, where one partner provides money to another and the latter manages
the money by investing it in commercial projects in order to earn profit which
is shared among the two in a predetermined ratio. The first partner who
provides the money to the second is called “rabb al maal (capital provider)”
while the second partner is known as “mudarib (manager)”
Islamic
Modes of Financing
Participatory Modes
1.
Mudarabah
2.
Musharakah
Sale Modes
1.
Murabaha
2.
Salam and
parallel salam
3.
Istisna and
parallel Istisna
Rent based Modes
1.
Ijarah
2.
Ijarah wa Iqtina
|
Conventional Banking
|
Non-Conventional Banking
|
|
Money is a commodity besides medium
of exchange and store of value. Therefore it can be sold at a price higher
than its face value it can also be rented out.
|
Money is not a commodity it is used as a
medium of exchange and store of value; therefore it cannot be sold at a price
higher than its face value rented out.
|
|
Time value is basis for charging
interest on capital.
|
Profit on trade of goods or charging on
providing service is the basis for earning profit.
|
|
Interest is always charged if your
organization or business in loss and some kind of suffering and it is not
based on profit and loss sharing.
|
Non-conventional banks operates on the
basis of profit and loss, the bank will share these losses based on the mode
of finance used.
|
|
There is no exchange of goods and
services are made.
|
The execution of agreements for the
exchange of goods and services is a must under murabaha salam and istisna
contracts.
|
|
Conventional bank use money as a
commodity which leads to inflation.
|
These banks tend to create link with the
real sector of the economic system by using trade related activities.
|
|
The functions and operations modes of
conventional banks are full manmade principles.
|
The functions and operating modes of
Islamic banks are based on the principles of Islamic shariah.
|
|
The investor is guaranteed of
predetermined rate of interest or returns.
|
It promotes risk sharing between
provider of capital and the user.
|
|
It does not deal with zakat.
|
This bank is deal in zaqat. It also work
as a zakat collector.
|
|
Non conventional banks have no provision
to charge any extra money from the defaulter except for compensation.
|
It can charge additional money in case
of defaulters.
|
|
For interest based commercial banks
borrowing from the money market is relatively strictly private and
confidential easier.
|
For the Islamic banks, It must be base
on a shariah approved underlying transaction.
|
|
Greater emphasis on the viability of the
projects.
|
Emphasis equals to commodity pricing.
|
|
The relation is often defined as those
creditor-debtors.
|
The status of Islamic bank in relation
to its clients that of partners investors and trader buyers and seller.
|
|
A conventional has to guarantee all its
deposits.
|
The Islamic bank can only guarantee deposits
for deposit account.
|
|
Aiming for profit without religious
moral boundaries.
|
Aiming for profit that adheres to
Islamic discipline that is limited to that which benefits society.
|
|
The retail loan product applies the
system of giving out loans with multiplied interest.
|
Its retail products utilize the trading
or renting of an assets and not the loan contract.
|
|
Charging a compounding penalty on a loan
if there is late payment.
|
Charges compensation for any late
payment.
|
|
Earn revenue from fixed interest charged
to the customers.
|
Profit according to the concept of
sharing profit and loss.
|
The financial transactions of a bank are generally
divided in two sides;
1. The Asset side - This side of a bank's transactions
refers to the financing facilities that the banks provide to their clients. For
instance, a conventional bank provides financing to its clients by giving them
interest based loans where as an Islamic bank provides financing to its client
based on profit based financing such as Murabaha, Ijarah, Salam, Istisna etc.
2. The Liability side - This side of a bank's
transactions refers to the deposit and investment facilities that the bank
provides to its clients. A conventional bank accepts deposits from its client
and forwards them on interest to other clients who require financing. The
interest that accrues on such a transaction is distributed amongst the
depositors and the bank. On the other hand, an Islamic bank receives deposits
on the basis of Musharakah or Mudarabah and invests these funds in a Shariah
compliant manner. The profit that is earned on such a transaction is thereafter
shared amongst the bank and the depositors based on a pre-agreed profit sharing
ratio.
A conventional bank's transactions on the asset side
include financing on interest. It is clear that the underline transaction of
all such financing is an interest based loan no matter what purpose the client
may have taken this facility for. An Islamic bank, on the other hand, provides
financing facilities based on different transactions depending on the
requirements of its clients. The following are the three common types of
transactions used to provide financing facilities:
1. Murabaha
2. Ijarah
3.
Diminishing Musharakah
In addition to the above, sometimes Salam and
Istisna are also used to provide financing
facilities.
Come; let us now discuss the transactions of Islamic
banks in some detail.
Murabaha
Murabaha is a
type of sale in which the seller informs the buyer about the cost at which he
would acquire the goods and the amount of profit that he would sell the goods
at to the buyer.
In other
words, together with all the other conditions of a valid sale, the seller is
obliged to fulfill one more condition which is to disclose his cost and the
amount of profit he would make on the transaction.
Murabaha
transactions, that are concluded in Islamic banks comprise of the following
stages.
1.
Signing a Facility Agreement
In the first stage, the
client and the bank arrive at a mutual understanding of the transactions that
would commence and sign a general agreement or facility agreement. The limit of
the amount at which the client will purchase goods from the bank, the profit
that the bank will make on these goods, the method of payment of these goods
etc. are amongst those aspects that are agreed upon in this agreement. (It
should be noted that this is not the Murabaha transaction. It is merely a
memorandum of understanding or a general framework for the transaction that
would follow.)
2.
Purchasing the desired goods
Thereafter the bank
purchases the goods from the market that it would later sell to the customer.
At this point, the Islamic bank either
purchases the desired goods from the market itself or appoints an agent other
than the client to purchase these goods; however, in case of Difference between
Islamic And Conventional Banking necessity the client himself may be appointed
as an agent of the bank to purchase the goods from the market on behalf of the
bank.
From this we understand
that it is not necessary for the client to be appointed as the bank's agent and
neither does the Islamic bank stipulates that it would only sell goods to the
client if the client agrees to become its agent. In fact, if circumstances do
not allow the bank or an agent of the bank other than client to purchase the
goods, only then can the Islamic bank appoint its client as an agent to
purchase the goods. However, currently Islamic banks generally appoint their
clients as their agents to purchase goods on their behalf. The client also
prefers to purchase the goods themselves as the bank or a third party client
may not be aware of their exact requirements. In fact, there is a strong
possibility that the required goods purchased by the bank or the third party
client may not fulfill the requirements of the client and the client may reject
the goods. In such a situation, if the supplier refuses to take the goods back,
the Islamic bank would suffer a heavy monetary loss. Therefore, with the mutual
agreement of both parties, the client can be appointed as an agent to purchase
the goods on behalf of the bank.
3.
Taking possession of the purchased goods and informing
the Islamic bank
If the client himself
is appointed as the agent of the bank to purchase on its behalf then, he is
supposed to take possession of the goods after purchasing the required goods
and inform the bank accordingly. According to the Shariah, the possession taken
by an agent is considered as possession taken by the principal. Hence, these
goods are now in possession of the principal, which is the bank and all the
rules pertaining to possession would take effect immediately. At this point if these
goods are destroyed without any negligence on part of the client, then the bank
would have to bear this loss. The client cannot be held responsible for such a
loss. Similarly if the goods are being imported from a foreign country, the
risk of the goods being destroyed lies with the Islamic bank until the goods
reach the country of import, and are sold to the client. In case of destruction
the bank would have to bear the loss.
4.
Execution of Murabaha
After purchasing the
required goods as a bank's agent the client offers to purchase these goods from
the bank at a certain price which clearly states the cost of the bank and its
profit. The client agrees to pay for the goods either immediately or according
to a particular schedule. When the bank accepts this offer, the Murabaha
transaction is concluded and the client becomes responsible to pay the amount
agreed upon to the bank. The bank acquires some collateral from the client as a
guarantee for the payment of this amount.
This is the gist of the
transaction that has been named Murabaha in Islamic banks. The different stages
of Murabaha mentioned above are not against the Shariah or they are
impermissible. However, it's the responsibility of the Islamic banks to execute
Murabaha with the above mentioned details conditions.
The
Difference between Murabaha and an Interest Based Loan.
The above explanation
clarifies the fact that there is a world of difference between the Murabaha
transaction and the conventional interest based loan.
A conventional bank advances cash on the basis
of a loan against which it earns an interest. As these funds are advanced on
the basis of a loan the bank does not hear any risk of loss on these funds. On
the other hand, an Islamic bank first purchases an item and by taking its
possession, assumes the risk of that item. Thereafter, the bank sells it at a
specified profit. This transaction is same as that of a shopkeeper who
purchases goods and sells them in his shop at a specific markup.
The only difference is that a normal
shopkeeper does not generally discloses the cost and profit to his customer
(this sale is called Mussawamah), whereas an Islamic bank discloses its cost
and markup in Murabaha.
According to a verse of the Holy Quran, sale is
permissible whereas interest is prohibited:
As Murabaha is also a
type of sale and the Holy Quran has permitted sale transactions (buying and
selling), Murabaha transactions are also permitted, provided that the required
conditions are adhered to.
The logical reasoning
for the permissibility of Murabaha is that the Islamic bank assumes the risk of
the subject matter of the sale and it is a law of the Shariah that the one who
assumes the risk of an item is eligible to earn a profit from that item.
It should be kept in
mind that "risk" refers to the risk associated with the subject
matter of the sale and not the risk of default by a client. The risk of default
by the client is found in every transaction but no expert of Shariah has permitted
any transaction based on this risk to date. However if by assuming a risk, the
risk of default of the client is considered to be meant, then there would be no
transaction in the world that would be impermissible whereas there are many
transactions that are impermissible in the light of the clear rulings of the
Quran and the Hadith.
Ijarah
Ijarah in the terminology of Shariah is
called to hire a specific thing or a person for a permissible purpose against
specific remuneration.
Ijarah is basically of two types.
1.
Ijarah of an Asset
To rent out something which is called
leasing in English and in the terminology of Fiqh it is called “Ijaratul Ayaan”
2.
Ijarah of a person
To hire ones services for a specific
remuneration, it is usually referred in English as employment, while in the
terminology of Fiqh it is called as “Ijaratul Ashkhas”
Ijarah of an asset or lease is further
of two types:
1. Financial lease
2. Operating lease
Operating
Lease
Operating lease is the Ijarah done
commonly in which a person or an institution leases its specific asset for a
specific period against a specific rent, and after the expiry of the period the
asset is returned back to the owner. For example renting out a house or a shop
or any item of daily usage like tent, speaker system etc. This type of Ijarah
is in practice since long.
Financial
lease
The type of Ijarah which is used in the
banks is the finance lease. This type of lease was adopted as a form of capital
investment and Ijarah was used as a tool of financing. The asset is leased out
for a specific period like 3-5 years in which the lessor receives the principal
with the profit of the asset in the shape of rent and after the lease period
the ownership is transferred to the client or lessee.
Defects
in Conventional lease
The finance lease in practice in the
conventional banks has the following Shariah defects.
1)
The agreement
comprises of sale and lease contracts since the installments paid by the client
are initially considered as rent, while at the end of the lease period they are
supposed to be the price of the asset and the ownership is automatically
transferred from the institution to client without any further contract. If
such transaction is analyzed in the light of Shariah it will be considered that
the client asks the institution in such a manner that "I will take this
car on rent with the condition that at the end of lease period I will be the
owner of the car against the rental paid. "Islamic jurisprudence will
consider this transaction „Suf‟qataan Fisa‟afqa‟ or two contracts tied in a
contract which is not permissible. Such a transaction is clearly prohibited in
the Hadith (see 398/, Nasai 4629, Tabrani alAwsat 1633)
2)
All the
liabilities of the leased asset are borne by the lessee, where as the Shariah
only imposes the liabilities on lessee which are regarding to the usage of the
asset. For example in a car the lessee's liability is to make service, change
the oil, etc, while the liabilities regarding the ownership are the
responsibility of the lessor, like paying ownership taxes and the maintenance
of asset if it is defected/destroyed without the negligence of the lessee.
3) Rentals are charged from the lessee
even before the asset is delivered to the lessee while Shariah does not allow
charging any rental unless the asset in working condition is handed over to the
lessee.
How
are these defects being eliminated in Islamic banks?
These defects have been eliminated in
the Ijarah product, designed for the Islamic banks in the following manner.
1)
During the lease
period only rental contract is signed between the client and. the bank. Hence
the asset remains in the ownership of the bank from beginning to the end of
Ijarah. At the end of Ijarah after handing over the asset back to the owner,
the client is given an option that he might purchase the car through a separate
sale contract.
2) It is clearly mentioned in the Ijarah
contract that the liabilities regarding "Minor Maintenance" will be
borne by the lessee while the ownership expenses like tax, takaful, defects in
case of accident will be borne by the bank. This is what Shariah requires.
3) The bank does not charge any rent
unless the asset is handed over to lessee.
The above detail clears the difference
between the procedure of Islamic banks and the conventional banks, and also
clears the argument made by some people that there is no difference between
them, as some Islamic banks also take rentals from the very first day.
Difference
between Ijarah and Conventional Lease
A common argument is also given that
Islamic banks in Ijarah say that they bear the risk of the leased asset, but
like conventional banks, Islamic banks also insure their leased asset
Therefore, whatever loss occurs, it will be the loss of insurance company.
The answer to this argument is that
first of all, Islamic banks do not insure their asset from the conventional
insurance companies; rather they are bound to have their agreements from
Islamic insurance or Takaful. Conventional insurance is not permissible since
it consist of Interest, Gambling &Uncertainty while in Islamic Takaful
these impermissible elements have been removed.
Secondly although the conventional bank
insures its asset, in case of loss if the claim amount is insufficient, the
bank does not bear the loss and recovers it from the lessee. On the other hand,
in case of loss if the amount of claim from the takaful company is
insufficient, the Islamic bank bears this loss by itself and is not recovered
from the client rather it hands over the security deposit back to the client.
This difference clears the fact that the
conventional bank does not consider itself as the owner of the asset nor it is
ready to bear the Liabilities of the leased asset while the procedure adopted
by the Islamic banks proves that they consider themselves as the owner and bear
the ownership liabilities.
Diminishing Musharakah
The third common
product of financing used in the Islamic banks is Diminishing Musharakah. This
product is generally used for home financing, therefore, it is also known as'
Home Musharakah'
The Procedure of this product consists of
three stages.
1) In the first stage the Islamic bank and the
client jointly buy a house in which usually the share of the Islamic bank is
greater than the clients share. For example a house is jointly bought by the
client and the bank in such a manner that the share of the bank is 80% in the
property and the share of the client is 20%.
2) Banks share is divided into small units.
For instance in the above example, the banks ownership of 80% share will be
divided into 80 units and the client will gradually purchase these units, which
will result in an increase in the client's ownership and decrease in the bank's
ownership.
3) As the client wishes to use the bank's
share, a separate rent agreement is executed between the bank and the client,
through which the client uses the banks share and pays a certain rent. But as
mentioned above, the client gradually purchases the bank's ownership share, the
rent amount also gradually decreases until the client becomes the sole owner of
the property.
Hence, there are three stages in this procedure.
1)
A property
bought jointly.
2)
A partner (bank)
rents out its share to the other (client).
3)
Client gradually
purchases the share of the bank.
All three stages
mentioned above are of course permissible according to Shariah. The question
which arises is that, either is it permissible to gather these three stages in
a single agreement. The answer to this is that if two to more transactions are
linked with each other in such a manner that they are conditional to each
other, then it is not permissible.
But if the transactions
are not linked to each other in such a manner that if one of them is terminated
the other transactions are terminated automatically then it is permissible. In
Diminishing Musharakah none of the transactions are conditional to others;
rather the client himself promises unilaterally that after partnership he will
gradually buy the banks share.
It might be objected
that the undertaking of the client to purchase the banks share is similar to
make a condition in a sale. This is because, the bank from the first stage
knows that the client will purchase the banks share, therefore it should be
considered as conditional.
It may be replied that
making a transaction conditional for the validity of the other transaction is
different from making a unilateral undertaking. Conditional transactions mean
that one will be considered complete when the other is fulfilled.
For example Khalid says
to Ahmad that I will sell my car with the condition that you will rent your
house to me. It means the sale of the car will be completed when Ahmad leases
his house to Khalid.
This is prohibited by
Shariah as it consist of uncertainty, but if a transaction is not conditional
and only undertaking is done then the transactions will not be considered
conditional and a transaction will not be dependent on the other. Therefore in
the product of house financing of the Islamic banks it cannot be said that the
purchase of the house jointly by the bank and the client is dependent on the
promise of the client, rather the client in future fulfills his promise or not,
the transaction of purchasing the house will take place. Although the client will
be enforced to fulfill his promise, if he excuses do so. But because of his
breach of promise the transaction executed will not be considered as void
automatically. It can be said therefore, that the product of house financing in
Islamic banks is not contrary to Shariah principles.
The previous
discussions all relate to that side of the balance sheet which is generally
referred to as the asset side. Now we shall briefly analyze the
"liability" side of the balance sheet in which the Islamic Banks
accept funds from various depositors and make them partner in their profits.
The difference between the liability products of a conventional and Islamic
Bank can be clearly understood if certain common arguments are explicitly
explained.
The
Current account of Conventional Banks and Islamic Banks are identical to each
other
The money that a
conventional bank accepts as deposits is regarded as a loan in the Shariah
regardless of which account it accepts the deposits for. This is because the
conventional banks guarantees that every account holder will definitely receive
the full amount of money that he has deposited and any capital whose return is
guaranteed is regarded as a loan in Shariah. Now, if the account is a current
account then the conventional bank will not give its depositors any extra money
above their deposits. Rather, they are only responsible to return the amount
deposited. This transaction of the conventional bank does not go against any
principle of the Shariah. The current account of an Islamic bank also transacts
in exactly the same manner. However, if a depositor wishes to place some funds
in a current account then he should deposit his funds with an Islamic bank
rather than a conventional bank so that his loan to the bank is used in Shariah
compliant forms of financing rather than in financing on the basis of interest
based loans.
The difference in the other accounts
Besides the current
account, the other accounts such as saving account or fixed deposits etc, the
conventional bank takes an interest based loan from its depositors.
It is as though a Conventional Bank takes
capital from its depositors and gives them this assurance that their capital is
safe and that after specified period they shall receive their deposits along
with an extra mark-up.
How will they receive
this mark-up? Where will these funds of the depositors be spent? How much will
the bank earn from these funds? What will be the share of the depositors from
this income? A veil is placed on this question. Whether the bank earns 100%
profit from the depositors' funds or does not earn anything, the bank is bound
to give its clients the stipulated rate of interest. Hence, it is as though there
is no connection between the relationship that the depositor has with the bank
and that which the bank has with the clients that acquire finance from it.
Contrary to this, the
funds that an Islamic bank accepts in account that generate profits are accepted
on the basis of Mudarabah or Musharakah. Also, these funds are held as a trust
by the Islamic Bank. In other words, if these funds or a part of them are
destroyed due to circumstances not under the control of the bank, then the bank
will not be responsible to return these funds.
Secondly, after
accepting funds from its depositors, an Islamic Bank: does not put a veil on
these funds. Rather, they make their depositors partners in their investment
projects in which the "depositors are the Rabbul Maal (investor of
capital) or sleeping partners and the Islamic bank is the Mudharib or working
partner. The bank gives a proportional share of the profit that it earns from
its different forms of financing such as Ijarah, Murabaha and Musharakah etc.
to its depositors. This profit sharing ratio is pre determined. For example, it
is agreed that whatever profit the bank earns will be distributed between the
bank and the depositors on a fifty-fifty basis.
Since, the bank makes
the depositors partners of proportionate shares in the profit it earns, a chain
is formed amongst the depositors, bank and clients who acquire finance. The
result of this chain is that the profit that the bank earns from its clients
directly impacts the profit that the depositors receive. Hence, if the Islamic
bank provides financing at a higher rate, their depositors will receive a
larger profit whereas if they offer financing at a lower rate, their depositors
will receive a smaller profit and this is in accordance with the principle of the
Shariah.
An Islamic bank cannot fix the profit in advance
It is important to keep
in mind that when accepting a deposit, an Islamic bank cannot guarantee its
return to the depositors; neither can the Islamic bank tell the depositors with
certainty that it will give a specific amount of profit. The fixing of a profit
in relation to the capital invested by the depositors is not at all permissible
in Shariah. For example, if an Islamic bank tells its depositors that it will
give them a profit of 10% on the amount that they have invested, then such a
fixture of the profit renders the transactions of Shirkat and Mudarabah void.
However, at the end of a particular term, when the bank distributes the
proportionate shares of the actual profits earned to its depositors then it is
permissible to calculate the profit received in relation to the capital
invested and to announce the same.
This could be
understood by the following example. The bank (A) accepts a deposit of Rs.100/-
from a depositor (B) and earns a profit of Rs.20/- on this investment. The bank
keeps 50% of the profit earned and gives the depositor 50%. In this manner the
depositor receives Rs.10/- in the form of profit on his investment. This Rs.10
/- is in reality 50% of the profit earned. However, if it is calculated in
relation to the capital invested by the depositor then it will be 10% of the
capital invested.
Hence, if an Islamic
bank announces that it has given its depositors a profit of 10% on their
investment, it is allowed. However, at the outset a specific rate cannot be
fixed with certainty. This is because, firstly, the transaction of Shirkat and
Mudarabah become void and impermissible. Secondly, the Islamic bank does not
know in advance how much profit it will earn from this capital. This explains
that if an Islamic bank, after distributing profits, announces that this year
it has given its depositors 10% profit then this does not go against any
principle of the Shariah.
