AlMurshid Islamic Booklet 4thEng

7/30/2019 AlMurshid Islamic Booklet 4thEng

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4ADCB Al Murshid IslamicFinance GuidanceKey to Islamic Retail Banking


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C o n t e n t s :

Introduction Retail financing services

Personal/professional retail financing

a. Short-to-Medium Term Murabaha Financing

b. Auto Financing

c. Medium-to-Long Term Ijara Financing

d. Home and Real Estate Financing

Istisnaa and Salam: industrial and agricultural financing

Ancillary retail services

Legitimacy of fee incomea. Agency fee

b. Financing fee

c. LG fee

d. Fee on banking cards

Conclusions


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This booklet is the irst cultural product o a special public awareness programme on Islamic inance

organized by Abu Dhabi Commercial Bank (ADCB) or the beneit o its highly valued clients. ADCB is

proud to take the lead in this cultural campaign, the irst o its kind in the Emirates, with the objective

to enlighten the public on the ethical and practical appeal o Islamic banking and investment services.

Believing that public awareness is necessary or the breaking o new grounds in the provision o Islamic

inance, the ADCB is already committed to the gradual but steady introduction o authentic Islamic

banking products. We believe that public awareness on the principles o Islamic inance leads to better

customer relationships, and hence augurs or brighter and wider horizons vis--vis the growth o Islamic

inance.

As the title implies, the Master Key to Islamic Banking and Finance 1 is intended to set the scene or

its readers to appreciate the potential capacity o Islamic inance in terms o accommodating modern

banking needs. At this stage, basic questions are addressed about Islamic inance, why it is needed,

and how it undamentally diers rom conventional banking. This is done in terms o ive basic questions

which are careully chosen to address the most common queries which tend to be publicly raised about

the case or Islamic banking. This preliminary background will, then, be supplemented by the Master

Key to Islamic Banking and Finance 2 which is intended to lay down the basic oundation o Islamic

modes o inancing.

Having set the scene and laid the basic oundation o Islamic inance, the programme will proceed to

more practical questions o how banking needs can be provided in the Islamic way. It is the objective

o orthcoming booklets, to be produced later this year, to handle more technical issues in relation toretail, corporate, and investment banking. The programme is addressed to a wide spectrum o potential

audience who wish to understand the relevance o Islamic inance to the ever rising challenges o the

modern world. Retail banking clients, corporate executive managers, institutional investors, proessional

bankers, government oicials, and academic students may all beneit rom ADCBs planned series.

Introduction (1) Why Islamic banking and inance?

It is the mechanism o lending and borrowing at the interest-rate which triggered Muslims search or

an alternative inancial order. Islamic inance owes its driving orce to a solid consensus amongst

contemporary Shariah scholars that the charging o interest on borrowed money is a breach o the

Quranic prohibition o usury (riba). It is well known that similar prohibition existed in the earlier scriptures

o Judaism and Christianity.

In the Quran, it is stated that God has permitted trade and prohibited usury (Quran 2:275). The

prohibition o usury is stated in the strongest terms whereby Muslims are warned o war rom God

and His Messenger i they ail to abide by this order (Quran 2:279). The tradition (Sunnah) o the

Prophet (peace be upon him) came to reassert this Quranic prohibition and to elaborate on various

maniestations o usury.

Money lending at a (ixed) price was practiced in many ancient civilizations though under severe ethical

criticisms by philosophers and r eligious leaders. The amous Greek Philosopher, Aristotle, developed the

argument that money is sterile and thereore it should not command a return or its own sake. In other

words, money can only unction as a medium o exchange, to acilitate trade in goods and ser vices.

It is noteworthy that the contemporary Western banking system emerged rom a historical battle against

the Christian Church on the issue o usury. It eventually beneited rom a groundbreaking verdict by the

Protestant Bishop, John Calvin, who argued that money lending or productive activities was per missible

since it diered rom the biblical usury. Yet, when related to the Quran and the Prophets Sunnah, this

verdict was not shared by the majority o Muslim scholars. It explains why Muslims have conscientiouslyshouldered the responsibility o reviving the human ethics o interest-ree inancing.

This is the ourth cultural product o ADCBs public awareness programme

which aims at portraying ethical and practical dimensions o Islamic nance.

It comes ater three successive ADCB introductory booklets: (a) ADCB

Master Key to Islamic Banking and Finance 1, which addressed preliminary

questions why Islamic nance is needed, and how it undamentally diers rom

conventional banking (b) ADCB Master Key to Islamic Banking and F inance 2,

which demonstrated alternative Islamic nancing modes, and (c) ADCB Key to

Islamic Retail Banking 3, which explained the nature o assets and deposits

o a typical Retail Islamic bank. It also urnished a historical background o a

vibrant Islamic banking system which prevailed in the early centuries o the

Abbasid and Fatimid periods o Muslim civilisation.

As an extension to ADCB Key to Islamic Retail Banking 1, the present booklet

aims at shedding light on retail nancing activities o Islamic banks together

with ancillary banking services which command ee income rather than an

interest income. Retail nancing activities are presented by reerence to the

generic nancing modes which have already been demonstrated in (ADCB Key

to Islamic Banking and Finance 2) Auto Financing and Home Financing are

presented as typical high demand retail banking needs.

The idea is to provide complementary material or the previous booklet and

pave the way or the next booklet on Islamic Corporate banking. Although

o-balance sheet products like Letters o Credit and Letters o Guarantee are

also oered as Retail banking products, these are more appropriately detailed

within the context o Corporate banking, thus, two more booklets remain in

order to conclude ADCBs public awareness programme: ADCB Key to Islamic

Corporate Banking and ADCB Key to Islamic Investment Banking.

The purpose o the public awareness programme is to benet a wide spectrum

o individuals who wish to understand the relevance o Islamic nance upon the

ever rising challenges o the modern world. Retail banking clients, corporate In

tr

o

d

u

ct

io

n

Retail fnancingservices

executive managers, institutional investors, proessional bankers, government

ocials and academic students may all benet rom ADCBs planned series.

ADCB is already committed to the gradual and steady introduction o authentic

Islamic banking products. We believe that public awareness on the principles

o Islamic nance will lead to better customer relationships, and eventually

brighter growth prospects.

The nancing mechanism o Islamic Retail banking ollows the principles

explained in the rst booklet ADCB Master Key to Islamic Banking and

Finance 1. The model o an Islamic Retail bank has been shown as one which

mobilises a large pool o small savings with the objective to meet the nancing

needs o individuals, households and business entrepreneurs. Although, much

o the current Islamic nancing experience emerged as an Islamic conversion

o modern conventional banking. It was made clear in the ADCB Key to I slamic

Banking and Finance 1 that Islamic banking fourished to phenomenal scales

in the early history o Muslim civilisation.

Islamic banking implies abidance by Shariah in all nancing and investment

activities. Most notably, the prohibition o interest is maniest in the interest-

ree benet o Islamic nance while the prohibition o gharar is shown in the

avoidance o uncertain terms and c onditions in the contracts and agreements

between Islamic banks and their clients. For example, an undetermined price

or uncertain quantity o goods, in a sale contract are cases o gharar.


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Interest-ree banking, however, does not mean the oering o benevolent loans

(qard hasan) by Islamic banks. Reerence to ADCB Master Key to Islamic

Banking and Finance 1 and ADCB Master Key to Islamic Banking and Finance

2 made it clear that the alternative to usury is legitimate prot. Hence,

Islamic nance modes have been presented as prot-generating modes,

involving the direct engagement o Islamic banks in the provision o goods and

services to clients.

The major challenge o Islamic Retail Finance Modes is, perhaps, the ability

to extend cash nancing in situations where clients are not interested in the

banks engagement with the provision o real goods and services. Extensive

research is currently carried by Shariah scholars and Islamic bankers in

order to develop viable Islamic alternatives or cash nancing. Tawarruq is

sometimes regarded as an Islamic alternative or cash nancing but signicant

Shariah objections against this alternative have been raised by many Shariah

scholars.

Tawarruq arises when a client enters into an Auto Murabaha transaction (or

any other asset), not or a real need o a car (or that other asset), but rather

or the sake o selling the car (or that other asset) or cash. Although there are

two Shariah compliant independent transactions the rst, buying through

Murabaha rom the bank. The second, selling on spot-basis to a third party.

However, an objection to this rom the Shariah view point is the intention o

the client, aiming to gain immediate cash and not the asset (usually metals),

where such cash is less than what is let payable to the bank in the uture.

Another Shariah objection, raised by a good number o Shariah scholars, is

when such a process is orchestrated by the bank acilitating such a transaction

to the client in a single package, reducing it to one o cash today against

more cash tomorrow. This is more importantly the view o the Jiddah-based

Fiqh Academy and it was adopted in the Tawarruqs Shariah Standard o the

Accounting and Auditing Organization or Islamic Financial I nstitutions (AAOIFI).

However, some jurists rom the Hanbali school o thought, like Ibn Taimiah and

Ibn AlQayema, consider this type o Institutional Tawarruq prohibited like Ina.

Retail nancing addresses a wide range o personal, household and

proessional needs o small-to-medium (SME) economic enterprises. Personal

and household nancing is consumer-oriented while proessional nancing,

on the other hand, is producer-oriented. This basic classication is more

consequential to Islamic Retail banking than it is to Conventional banking or

the simple act that Islamic banks seek to directly satisy clients demand

or goods and services through alternative modes o nancing. Unlike the

single option o Conventional banks where money is lent to satisy personal

or proessional needs or whatever purpose, Islamic modes are particularly

responsive to the clients actual needs.

Mudaraba and Musharaka are typically producer-oriented and thereore cannot

be adopted to satisy clients needs. This is because the adoption o Mudaraba

and Musharaka presupposes a prot-making trade or productive activity such

that the realized prot could be shared between the contracting par ties based

on a pre-agreed prot distribution ratio. Since consumer nancing generates

no prot, Islamic banks can only satisy such demand through xed return

modes like Murabaha, Istisna and Ijara as explained in ADCB Master Key to

Islamic Banking and Finance 2. The class o variable return modes like

Mudaraba and Musharaka cannot be adopted in consumer nancing.

On the other hand, there is no restriction on the class o Islamic nance

modes that can potentially be adopted or proessional nancing.

Personal /proessional

retail inancing


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Whether xed or variable return modes, all that matters rom the standpoint

o the Islamic bank is the degree o risk exposure. It was made clear in ADCB

Master Key to Islamic Banking and Finance 2 that risk management is

commendable both ethically and religiously since Islamic banks are responsible

or the sae-keeping and prudent use o depositors unds.

Thus, although Mudaraba and Musharaka are viable modes o nancing or

proessional rms and SME enterprises, the dominant practice o Islamic

retail banking is to meet such nancing mostly rom xed return modes

(ie. Murabaha, Ijara, Salam, and Istisnaa). This trend, however, is likely to

reverse in avour o a greater emphasis on the PLS Mudaraba and Musharaka

as it can be seen rom the growing amount o research which oers practical

and Shariah compliant remedies or the daunting problem o risk management

in the PLS modes.

Short-to-Medium Term Murabaha Financing

Personal and household needs encompass a potentially endless list o

consumer durable goods (mostly house urniture and electric appliances) and

motor vehicles (cars or motor cycles) or consumption purposes. Similarly,

proessional nancing involves a broad range o demand or producer durable

goods (oce urniture, productive equipments, computers and various

proessional tools) together with the demand or motor vehicles or investment

purposes.

The common practice o Islamic banks is to meet the above nancing needs

through short-to-medium Murabaha nancing acilities that is, rom less than

a year to ve years. As has been introduced in ADCB Master Key to Islamic

Banking and Finance 2, Murabaha nancing consists o purchasing a speci c

consumer goods or asset by the bank to the order o the client, possessing

the goods and then selling the same to the client on deerred payment at cost

plus prot.

Murabaha is oten the most preerred mode o nancing i the goods in question

are already available in the market and the required nance term does not

go beyond short-to-medium term. Although it is not uncommon or Murabaha

nancing to be used in long-term nancing, it is mostly used in the nancing

o short-to-medium term needs o personal and proessional clients. This is

because Murabaha is a sale transaction, usually deerred, whereby the sale

price must be xed once-and-or-all throughout the nance term even i the

payment o the price is deerred. In act, this basic Shariah provision makes

Murabaha nancing subject to the risk o uture price fuctuations in long-termtransactions, and hence, makes it more attractive in the nancing o short-to-

medium term transactions when goods prices tend to change only slightly.

Taking security or collateral (rahn or rihan) as cover or the likelihood o the

clients deault is a Shariah compliant procedure to the extent that it secures

clients payment o banks dues in deerred sale contracts like Murabaha.

Rahn given by an obligor to a creditor is explicitly stated in the Holy Quran as

a possible recourse to the creditor in lieu o the obligors payables; I you

happen to be on travel and c annot nd a writer, [you may demand] a deliverable

rihan (al-Baqara)

Yet, the Islamic bank can only have a hand o trust on the security or

collateral, thus inability to benet rom such collateral so long as the client

keeps honouring his payment obligations as agreed. It is only in the case

o the client deaults that the bank may exercise its right to sell the rahn to

recoup its dues and surrender to the client whatever residual value remains

out o the rahn.

Auto Financing

The Murabaha procedure is best explained through the example o auto nancing

which tends to be a dominant Islamic banking practice in the Arab and Muslim

World. The procedure normally starts with the clients submission o a ormal


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application orm, requesting the bank to purchase (according to the clients

order) a brand new car (or even a used one) available at a designated showroom

or company, and henceorth sell the same to the client at a price (including cost

plus agreed prot) paid over an agreed nance term. The client would normally

provide a pro-orma invoice stating the cost price o the car, its make, quality and

whatever technical eatures are requested in the application orm.

Although, the Murabaha applications are airly standardised, Islamic banks

have dierent approaches in regards to the inormation and required amount

o detail in the initial application orm. At any rate, the most basic inormationwhich should be captured by the application is: the cost price o the car, as

clearly shown by the pro-orma invoice, and the required nance amount, the

nance term and the mode o payment.

The Islamic bank will stric tly abide by the Shariah provisions o having to buy

the car or automobile or the banks own account, receive the title thereto,

gain the possession thereo and then sell it to the client at an agreed price

that includes the cost plus the agreed prot amount (as highlighted in ADCB

Master Key to Islamic Banking and Finance 2).

The Murabaha transaction cannot be legitimately oered i the client and the

proposed vendor turn out to be an identical legal entity, or that one o them is a

legal subsidiary o the other. Such a transaction is precisely the orbidden buy-

back transaction (called ina in Islamic jurisprudence) which boils down to an

interest-rate lending transaction without any eect o the goods in question.

In execution o a Murabaha transaction, two independent sale contracts must

be signed. First, a sale contract between the bank as buyer and the owner

(showroom), as seller o the car. Next, the Murabaha sale contract will be

signed between the bank, as seller o the car, and the client, as buyer. Islamic

banks must appoint employees to take delivery o the car in the name o and

on behal o the bank and then sell it to the client.

Understandably, Islamic banks cannot commit unds in Murabaha without

ensuring clients credit worthiness and acquiring suitable collateral to secure

payment o the Murabaha installments. Credit analysis not only complies with

the principles o Shariah but it is also highly encouraged according to the

principles o Shariah. This is because avoidance o waste is a undamental

Shariah objective, and thereore minimising the potential incidence o deault

is an encouraged practice in Islamic nancial transactions.

Every care must be taken in the comparison o Murabahas prot with the

market interest rate. It is not unlikely or the prot to be somewhat higher than

the interest rate on similar class o nance in a Conventional bank, but this

cannot be taken as an indicator o relatively higher cost o Islamic nancing.

One basic reason is that the Murabahas prot cannot be adjusted ater the

conclusion o the Murabaha contract even in the event o deault. Whereas, the

interest rate o a conventional loan is easily updated or adjusted to penalise

deaulting behaviour or any delay in payment.

Medium-to-Long Term Ijara Financing

As an alternative to Murabaha, Islamic Retail banks may satisy client

needs through the Ijara mode o nance (which is the Islamic counterpart o

conventional lease nancing but with denite Shariah provisions as explained

in ADCB Master Key to Islamic Banking and Finance 2). The major appeal

o Ijara lies in the banks ownership o the leased asset which makes the

Ijara return rates more readily adjustable in response to external actors

(e.g. infation rate) unlike Murabaha and other sale type o Islamic modes o

nance.

Ijara payments, however, cannot be adjusted or an Ijara period that have already

commenced. However, it can be adjusted or an Ijara period sometime beore

its commencement. Thus prior to the commencement o each lease period

by say two working days, the lessor (owner o the asset) may negotiate the


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new Ijara rate or the rental with the lessee. This is the basic fexibility which

makes the Ijara rate adjustable to uture price changes and hence suitable or

medium-to-long term nancing needs.

In comparing Murabaha and Ijara, it is noteworthy to mention that the above

fexibility o Ijara can be counterbalanced by risk o ownership which does not

exist in Murabaha. Hence, the choice between the two modes is not always an

easy decision. This partly explains why some Islamic banks preer Murabaha

over Ijara in the provision o medium-term nancing.

Ownership risk is in act the basic point o departure between conventional

nancial lease and Islamic Ijara. A s was shown in ADCB Master Key to Islamic

Banking and Finance 2, the lessor in Ijara is held accountable or maintaining

the continuous fow o the assets usuruct to the lessee throughout the Ijara

term. This is translated into major maintenance and property insurance

responsibilities on the lessor without which the Ijara would not conorm to

Shariah.

Home and Real Estate Financing

The best example o Ijara in Retail Islamic nance relates to home nancing

where Ijara is adopted as a replacement to conventional home mortgages.

Currently, there are many dierent orms o Ijara nancing which are adopted

by Islamic banks. Ijara wa Iqtina, is the most common. Under this structure,

the bank, as lessor, grants a unilateral Sale Undertaking to the client, as

lessee, pursuant to signing the Ijara Agreement. This Sale Undertaking gives

the lessee an option to buy the leased asset rom the lessor at a given price

(usually a nominal value) ater the Ijara term has ended, conditional to the

lessee having ullled all his obligations under the Ijara Agreement.

The above dened Ijara wa Iqtina can be drawn between the bank as owner

and lessor o the house (or the real estate property), and the client as lessee

and potential buyer o the house (or real estate property), on the other hand.

The concept here is to enter into a renewable Ijara arrangement whereby the

bank leases a house o its ownership (or real estate property) to the client or

a given number o years (e.g . twenty ve years) with the added benet or the

customer to purchase the house at a nominal price when the Ijara term has

ended.

Alternatively, Ijara can be combined with diminishing Musharaka to oer

another Shariah compliant alternative or conventional home mortgages.

In this structure, the transaction starts o with a joint ownership by the bank

and the client (e.g. Banks share is 90% and clients share is 10%). This isSharikatul Melk (co-ownership). Thus, the Ijara Agreement between the bank,

as lessor, and the client, as lessee, will be relating to a (90%) common share in

the house (subject o the Ijara Agreement). During the Ijara term, the client will

be purchasing, every period, a small raction o the banks share. Hence, the

clients periodic payments will consist o two payments: a rental or the lease

o the common share owned by the bank and leased to the client, representing

banks prot, and a ractional purchase o the banks equity, or which a spot

sale and purchase agreement would need to be executed. This process

will result in the gradual transerence o house ownership (or real estate

property) rom the bank to the client, which is the gist o Ijara with diminishing

Musharaka.

Istisnaa and Salam have been introduced in ADCB Master Key to Islamic

Banking and Finance 2. Salam is particularly pertinent to the nancing o

Istisnaa and Salam:industrial and agriculturalinancing:


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agricultural or natural resource enterprise, whereas Istisnaa pertains more

closely to the nancing o industrial enterprises. A similar element between

the two nancing modes is the deerence o a certain goods/assets or uture

delivery and the payment o price at the time o sale either ully (as in Salam)

or partially (as in Istisnaa).

Unlike Murabaha and Ijara which ac ilitate the acquisition o consumer goods

or producer assets, Istisnaa and Salam are relevant to situations in which

money capital is needed to nance a specic productive activity. Yet it is

not a transaction o present money or more uture money as it is in theconventional interest-bearing loans. Rather, it is a transaction o present

money or protable uture goods. Hence, it is the prospect o disposing

protably o uture goods which motivates Islamic nancial institutions to oer

nancing products by way o Salam and Istisnaa. Islamic banks have already

acquired an extensive experience in the structuring o Salam/parallel Salam

and Istisnaa/parallel Istisnaa contracts or the retail nancing o a wide range

o SME economic activities.

In a Salam contract, the process would normally begin with a ormal application

orm submitted by the client to speciy the quality and volume o agricultural

or natural resource to be produced, the time it is bound to take until uture

delivery and the current price oered by the client or the sale o the goods

to be delivered in the uture. The oered price multiplied by the volume would

then determine the total amount o capital nancing required by the client.

The bank would then carry out its own easibility study about the proposed

nancing. This involves making a credit analysis o the clients proessional

competence, track record and integrity, working out a reasonable projection

o expected uture price and choosing an appropriate route to make prot out

o the transaction. Hence, a parallel Salam becomes necessary as a route

or the bank to make prot out o the original Salam contract. In the parallel

Salam, the bank cannot reer to the original goods already bought rom the

client since Salam goods are sold based on detailed description and not

per specic, identied or named goods. The bank would rather bear the ull

legal obligation to deliver the parallel Salam g oods even i the client ailed

to deliver the original Salam goods.

On the other hand, the retail service o the Istisnaa contract is most oten

adopted as a means to deliver an industrial product (e.g. real estate building,

equipment etc.) to the client. Hence, the process would normally start rom a

clear statement by the client speciying the technical detailed specications

o the needed industrial product, the proposed name o manuacturer, thetime it is bound to take till the nal delivery o the product, the total amount

o the needed capital and a proposed nance schedule.

As in the case o Salam, the bank would have to carry out a easibility study

regarding the proposed Istisnaa nancing. But since the Istisnaa contract

ends up with the delivery o an industrial product to the client, the parallel

Istisnaa contract would normally be the means to acquire the needed

product in order to be able to deliver the same to the client. Thus, the

parallel contract is drawn between the bank as buyer o the product and the

manuacturer as seller o the product. It should be noted that the client is

not party to the parallel Istisnaa contract and thereore bears no liability

towards the manuacturer. Furthermore, there should be no reerence o

any kind in one agreement to the other agreement.

The banks liability towards the client regarding the technical quality o

the product, as well as the highly-sensitive nature o industrial products

to legal disputes, place an enormous burden on the bank to monitor

the production process and guarantee the products quality and

conormity to the pre-agreed specications. This duty is ideally perormed

through the staging o the production process and the appointment o a

technical advisory rm to monitor the production process and issue quality

certication acceptable to the client.


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Due to liberalisation o interest rates and nancial sector deregulation, the

traditional business o money lending ceased to be the leading competitive

edge in Retail banking. Competition over ee-generating services is gradually

taking the lead over the traditional competition on interest income. Undoubtedly,

deposit-taking and nancing still remains to represent the core o Retail

banking, but it is the innovative activity or better quality ancillary banking

services which has lately taken the lead in the Retail banking industry.

As the term implies, ancillary banking services include a wide range o

subsidiary services not directly involved in the process o nancing or deposit-

taking, like the issuance o travellers cheques, issuance o debit and credit

cards, oreign currency exchange, remittance, sae-deposit boxesetc. Despite

the wide variety o such services, they all share the same property o being

ee-generating rather than interest income generating services. The dening

criterion between the two classes o Retail banking services is that ee income

is a price on a specic banking service not directly related to unding while

interest income is the time price o lent money.

The shit o emphasis rom interest income to ee income has ar reaching

consequences in Islamic banks, since one o the basic principles o Islamic

banking is the prohibition o interest on borrowed money. All that matters

about the legitimacy o ee income rom the Shariah perspective is the nature

o banking service being oered to the client. As a g eneral rule, Islamic banks

oer most o the ancillar y services that Conventional banks oer, except or a

ew which may contravene the principles o Shariah or need special Shariah

provisions to ensure their legitimacy.

The qh rulings which underlie the legitimacy o banking services all

beyond the scope o this cultural booklet as they are extensively discussed

in the contemporary Fiqh academies. Also, it is not our intention to review

the qh rulings or all ancillary services provided in the Retail bankingindustry, but rather we may highlight the basic principles which govern the

legitimacy o ee income in Islamic banking.

The basic principle is that i the service oered by the Islamic bank is

a permissible one (halal), and i the production o the service involves

exertion o human eort (mental or physical) and the possible use o

supportive material (paper, electric power, rented building, etc), then it

is a permissible ee. The banking ee is then set to recover both labour

cost and the material cost used up in the productive process o

the service. It is customary to express workers wages in units o time

because production takes time, and thereore banking ees can also be

expressed per unit time over the period needed to complete the production

and delivery o a particular service (e.g. weekly or monthly rates).

Agency ee:

The best example o permissible banking services is an agency service

where the bank oers to perorm a particular activity on behal o its

clients (e.g. management o an investment und). The agent, in Islamic

jurisprudence, can be authorised to act on behal o the principal and

to ully assume the principals capacity in a wide variety o situations.

Agency ee is thereore a legitimate income so long as the required service

is a halal activity.

Legitimacy o

ee incomeAncillary

retail services


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However, it is important to note that an agent is a best eort worker in

the sense o not guaranteeing the desired result to the principal except in

the case o proven misconduct or negligence. This is a crucial dierence

between agency in Islamic banking and agency in Conventional banking

(where the Conventional bank is held to indemniy the principal and hold

him harmless against all possible risks, irrespective o misconduct or

negligence).

Financing ee

Charging ees or the processing o Islamic nance transactions and

documentations are good examples o ee-generating Islamic banking

services, even i the serv ice was to provide a Qard Hasan. Such ees have

been approved by Shariah Scholars. For example, the Jeddah-based Fiqh

Academy (16/10/1986, Ammans Session) approved o charging ees in the

processing o qard hasan (interest-ree loan) subject to the strict condition

that any excess amount over the actual administrative costs incurred in

this process is orbidden. Thus, i such an excess is accumulated at the

bank at a cer tain period end (or example, quarter or year end), the same

would be deposited in the banks Charity account.

The example o qard hasan brings the dierence between ee income (as

dened above) and interest income to a particularly sharp ocus, given

that interest income is a time price o money, which is Shariah repugnant,

whereas ee income is a recovery o labour and material costs. The oering

o qard hasan is not only permissible but even highly encouraged. Thereare, however, signicant labour and material costs involved in the delivery

o qard hasan that must be acknowledged and appropriately recovered in

order or this activity to be properly institutionalised and continue to be

provided to those who need it.

LG ee

An LG (Letter o Guarantee) is a document issued by a bank to the order

o a client and to the benet o a third party (e.g. government, supplier o

petrol etc). Basically, it is an assurance to the third party that in the event

o the client ailure to honour an agreement concluded with that party

(e.g. completing an inrastructure project or paying a deerred price to a

supplier) the bank will then stand ready to compensate the third party up

to a certain amount o money.

This service is permitted as an act o benevolence in Islamic jurisprudence

where it is called kaala. The mainstream standpoint in Islamic jurisprudence

is to maintain kaala as an act o benevolence and thereore kaala cannot

be oered against a ee. Nonetheless, as in the case o processing o qardhasan, there are considerable labour and material costs which have to be

covered in the provision o kaala. Hence, Islamic banks are allowed to

cover such costs in the processing o LGs under the strict condition that

any excess amount would be orbidden. However, since such costs include

direct and indirect costs, they are usually based on careul estimates.

Fee on banking cards

An escalating growth o credit cards, debit cards and charge c ards since

the early 1980s in Western markets is putting Islamic banks under

increasing pressure to cater similar services to Muslim consumers.

The question invoked dierent viewpoints among Muslim scholars, not

only rom the perspective o Shariah compliance but also rom the ethical

standpoint towards modern consumerism. The phenomenal growth o

debit/credit cards is seen by many observers as being conducive to an

extravagant social culture, which seems to drive society members to an

endless spiral o indebtedness.

Nonetheless, the use o debit/credit cards has its own merits. That people

need no longer worry about taking cash, and the ease o payment to traders,

travel agents, hotels, restaurants etc, is by all standards a groundbreaking

development in modern banking. It should be recalled that sakk and sutaja

were deliberately encouraged in the early Muslim civilisation or the very


11/12

purpose o averting the risk o travelling with cash. Hence the idea o using

cards in place o cash is not alien to I slam. All that needs to be assured is

the compliance with the principles o Shariah.

It is only attainable in such an introductory booklet to give a brie explanation

on credit, charge and debit cards as they are developed in the modern

world. On one hand, credit cards are built upon the conventional lending

transaction whereby the holder o the card borrows money at interest

whenever he uses the credit card or drawing cash rom the ATM or buys

goods at any outlet. Obviously, this is not a permissible card, and thereorethe issuance o such card cannot be endorsed by Islamic banks.

On the other hand, debit cards are simple means to draw rom ones current

account whenever cash is drawn rom an ATM or goods are bought. This is

permissible so long as no lending/borrowing relationship is involved.

Thus, issuance o debit cards or a ee is permissible or Islamic banks.

Debit cards become impermissible credit cards when an overdrat acility

is oered to the account holders at an interest charge or amounts

overdrawn. This is a c ommon eature o Conventional banks.

The act that any card (debit, charge or credit) may stipulate a charge o

interest in any event o delay o payment or overdrawing, makes the whole

card Shariah repugnant and all the transactions, starting rom applying

or such a card, using it to conduct any transaction and ending by the

expiry o such card, Shariah repugnant. Hence, it is never an excuse to

apply or such a card and claim that it is Shariah compliant (Halal) due

to the sincere intention, dedication and cautiousness o the person not to

overdrat or use credit, where interest may be charged, and rather just use

it to acilitate payments or or just making payments abroad. The Shariah

repugnant aspect simply lies in the Shariah repugnant provision in the

agreement relating to the card.

Islamic banks can issue charge cards under special conditions.

Charge cards oer interest-ree credit or a shor t period, normally a month

during which the cardholder can use the card or drawing cash or buying

goods. The Islamic bank as issuer o charge cards charge ee income and

never interest income.

Islamic banks may even issue Credit cards under special conditions too,

much similar to those relating to the Charge cards above. The Islamic bank

or this product would also charge a ee only.

In case o delay in payments o nancial obligations relating to any Charge

or Credit card, the Islamic bank would be entitled to collect a late payment

donation rom the customer, to be payable to charity, as is the case with

other transactions based on other Islamic modes o nance and not qard

hasan. Where the client undertakes to pay a late payment donation,

in case o delay in payment. Many Islamic banks to deter clients rom

delaying on payments have devised this.

The late payment donation was also due to Islamic banks alling as a

victim to a majority, who simply exploited the Islamic banks by deciding to

delay payments, since the Islamic banks do not charge any late payment

interest. Although a charge may now exist that seems similar between

Islamic bank and Conventional banks, Islamic banks do not make prot

at all rom the late payment donation, however, Islamic banks benet bymaking sure clients have another reason to meet their nancial obligations

on time. Had the behaviour o meeting nancial obligations was never as

such rom the rst place, this late payment donation, would have never

come to existence within the Islamic banks.


12/12

This booklet is an extension on the background material given by ADCB

Key to Islamic Retail Banking 1. It ocused mainly on Retail banking

nancing services or personal, household, proessional enterprises needs

and ancillary banking products. The classication o Retail banking clients

into personal/proessional is shown to be more consequential or Islamic

banks than it is or Conventional banks. Islamic modes o nancing are

more attuned towards clients needs than banks that take a conventionalinterest rate approach.

The role o ancillary services in Islamic banking is explained by reerence

to ee income in Islamic jurisprudence. In the rst place, the service must

be permissible (halal), and the production o the service should involve

exertion o human eort (mental or physical), as well as the possible

use o supportive material (paper, electric power, rented building etc).

Banking ees may then be set to recover both labour cost and the material

cost used up in the productive process o the service.

Agency ees, nancing ees, LG ees have been reviewed by reerence to

the above criterion. The question o ees on nancial cards (credit cards,

debit cards, and charge cards) has also been addressed, shedding light on

the basic considerations, which govern the Shariah compliance o banking

cards.

Conclusion

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AlMurshid Islamic Booklet 4thEng

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