Is Interest / Riba related only to consumption loans or it also applies to commercial loans?Islamic Banking FAQs

With respect to the receipt and payment of interest, there is no distinction between Muslims and non-Muslims or between individuals and states because interest is prohibited not only in Islamic scriptures but also in other religious scriptures of the world. Therefore, prohibitions of interest apply to Muslims as well as to non-Muslims.

The interest is prohibited whether it is consumption loan (loan for meeting day to day human needs) or commercial loan (loan for business purpose). There are quite a number of ahadith which clarify that in the days of Holy Prophet (Peace be upon Him), people not only borrowed for consumption purposes but also for productive purposes.

A few of the ahadith are quoted below for reference: 

This is ample testimony that the commercial loan was in practice when Quranic verses on Riba were revealed and the term Riba covers not only consumption loan but also the commercial loan.

There are at least six basic principles that are taken into consideration while executing any Islamic banking transaction. These principles differentiate a financial transaction from a Riba/interest-based transaction from an Islamic banking transaction.

• Sanctity of contract: Before executing any Islamic banking transaction, the counter parties have to satisfy whether the transaction is Halal (valid) as per Islamic Shariah . This means that Islamic bank’s transaction must not be invalid or voidable.
  • An invalid contract: Contract, that by virtue of its nature is invalid according to Shariah rulings.
  • A voidable contract: Contract, that by nature is valid, but some invalid components are inserted in the valid contract. Unless these invalid components are eliminated from the valid contract, the contract will remain voidable.
• Risk sharing: Islamic jurists have drawn two principles from the saying of Prophet Muhammad (PBUH). These are “Alkhiraj Biddamaan” and “Alghunun Bilghurum”. Both the principles have similar meanings that no Profit can be earned from an asset or a capital unless ownership risks have been taken by the earner of that Profit. Thus, in every Islamic banking transaction, the Islamic financial institution and/or its deposit holder take(s) the risk of ownership of the tangible asset, real services or capital before earning any Profit there from.
• No Riba/interest: Islamic banks cannot involve in Riba/interest related transactions. They cannot lend money to earn additional amount on it. However as stated in point No. 2 above, it earns Profit by taking risk of tangible assets, real services or capital and passes on this Profit/loss to its deposit holders who also take the risk of their capital.
• Economic purpose/activity: Every Islamic banking transaction has certain economic purpose/activity. Further, Islamic banking transactions are backed by tangible asset or real service.
• Fairness: Islamic banking inculcates fairness through its operations. Transactions based on dubious terms and conditions cannot become part of Islamic banking. All the terms and conditions embedded in the transactions are properly disclosed in the contract/agreement.
• No invalid subject matter: While executing an Islamic banking transaction, it is ensured that no invalid subject matter or activity is financed by the Islamic financial transaction. Some subject matter or activities may be allowed by the law of the land but if the same are not allowed by Shariah , these cannot be financed by an Islamic bank.

Islamic banking is defined as banking system that is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah . In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. The model of Islamic banking system leads toward the achievement of a system that helps achieve economic prosperity.

According to Islamic Shariah, Islamic banking cannot deal in transactions:

• Involving interest/riba (a stipulated increase sought over the principal of a loan or debt).
• Having the element of Gharar (uncertainty) or Maiser (Gambling).
• Subject matter that is invalid (haram in the eyes of Islam).

Bank AL Habib-Islamic banking focuses on generating returns through investment tools that are Shariah Compliant. Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, our operations of Islamic banking are based on sharing the risk that may arise through trading and investment activities using contracts of various Islamic modes of finance.

The word “Riba” means excess, increase or addition, that correctly interpreted according to Shariah  terminology, implies any stipulated excess compensation without due consideration (consideration does not include time value of money). This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars.

Shariah  lexically means a way or path. In Islam Shariah refers to the divine guidance and laws given by the Holy Quran, the Hadith (sayings) of the Prophet Muhammad (Peace Be Upon Him) and supplemented by the juristic interpretations by Islamic scholars. Shariah  embodies all aspects of the Islamic faith, including beliefs and practices. Islamic Shariah  or the divine law of Islam is derived from the following four sources: 

• The Holy Quran
• The Sunnah of the Holy Prophet (Peace Be Upon Him)
• Ijma’ (consensus of the Ummah)
• Qiyas (Anology)

The validity of a transaction does not depend on the end result but rather the process and activities executed and the sequence thereof in reaching the end. If a transaction is done according to the rules of Islamic Shariah it is halal even if the end result of the product may look similar to conventional banking product.

The Best example in this regard is that a person who owns Rs.100 and wants to earn Rs.10 from it, he has two options :

• To lend another person for one month with the condition that he will return Rs.110 after one month
• To purchase a thing worth Rs.100 and sell it to a person on Rs.110 on credit for one month.

In both the cases he can earn Rs.10, however the first case is Haram because it falls into Riba and the second case is Halal because it falls into BAI.

The same is also true for Islamic and conventional banking. Therefore, it can be concluded that it is the underlying transaction that makes something “Halal” (allowed) or “Haram” (prohibited) and not the result itself. Apparently, Islamic banks may look similar to conventional banks, however the contracts and product structures used by Islamic banks are quite different from that of the conventional bank. In the verse 2:275 of the Holy Quran, Allah the Almighty has responded to the apparent similarity between trade and interest by resolutely informing that he has permitted trade and prohibited Riba (though they may look similar to someone).

The Board comprises of Shariah scholars who consider, decide and supervise all Shariah  related matters of the bank.

All decisions, rulings, fatawa of the Shariah Board are binding on the Bank whereas Shariah Board is responsible and accountable for all its Shariah  related decisions.

Bank AL Habib-Islamic Banking Division Shariah Board comprises of three Shariah  Scholars: 

• Chairman Shariah Board
• Member Shariah Board
• Resident Shariah Board Member

The Shariah Board discharges its duties independently and objectively. The members of the Shariah Board continuously assess their relationship with the Bank to identify any situation where any issue related to independence may actually or potentially arise or can reasonably be inferred.

Bank AL Habib-Islamic Banking has a SCD headed by Islamic finance trained and experienced officer recommended by the Shariah Board. The SCD has dedicated an adequate staff as per the advice of the Shariah Board, so as to enable it to discharge its due responsibilities in a proper and timely manner. Further, the SCD is working under the overall guidance and supervision of the Shariah Board and the Head reports to the Shariah Board.

The responsibilities of SCD are as follows: 

• Secretarial support to Shariah Board
• Conduit between Management and the Shariah Board
• Shariah Compliance Review as per Shariah Board approved plan
• Enforcement of Shariah Audit Reports
• Management of training on Shariah Compliance

Bank AL Habib-Islamic Banking Division offers following modes of Islamic banking and finance to their clients:

• Financing Products
  • Murabahah
  • Musawama
  • Ijarah
  • Diminishing Musharakah
  • Istisna
  • Islamic Export Re-finance Scheme (IERS)
  •  
• Liability Products
  • Savings Deposit Account
  • Current Deposit Account
  • Term Deposit Certificates / Receipts (TDRs)
  •  
• Fee Based Products
  • Local Guarantees
  • Financial Guarantees
  •  
• Letter of Credit
  • Sight
  • Usance

Financing products are those products offered by the Bank in which Bank takes exposure (Risk) on the client. There are three types of lending products offers by the Bank:

Purchase and sale of goods:

The Bank purchases goods on cash basis and sell to client on deferred, on cost plus Profit, basis.

Purchase and Lease / Ijarah:

The Bank purchase fixed asset, either from market or from client, and leases / makes Ijarah of the same to client for the specified period.

Joint Purchase and Lease / Ijarah:

The Bank and client jointly purchase fixed asset and then Bank leases / make Ijarah of its portion of ownership to the client for the specified period.

Funds for manufacturing:

The Bank provides financing to client for manufacturing the goods required under confirmed sale order of the client’s client.

Partnership:

The Banks provides funds as partner to run the specific segment of business for specific period. The Profit and loss will be calculated in agreed manner.

The operation of all Pakistani Rupee (PKR) and Foreign Currency (FCY) Current Accounts is based on the Islamic principle of Qard. The structure of Remunerative Saving Accounts & Term Deposits is based on the principle of Mudarabah and is strictly in conformity with the rules of Islamic Shariah and is approved by the Shariah Board of BAHL-IBD Islamic Banking.

Murabaha is a sale transaction, whereby the seller (Bank) expressly mentions the cost and the Profit is charged thereon while quoting the price. Furthermore: “Murabaha” is in fact a term of Islamic Fiqh and it refers to a particular kind of sale having nothing to do with financing in its original sense.

The purpose of Murabaha is to cater to your short-term financing requirements.

Under Murabaha arrangement Bank AL Habib-Islamic Banking Division allows you to purchase from time to time goods / commodities (raw material/ finished goods etc.) for commercial use up to a specific limit assigned.

• The subject matter must exist at the time of sale.
• The subject matter must be in the ownership of seller.
• The subject matter must be in the possession (absolute or constructive) of seller.
• The price must be agreed and fixed at the time of sale.
• The subject matter must have value from Shariah perspective.
• The transaction can either be spot or on deferred payment basis.

The target Market for Murabaha Finance is Corporate/Commercial/ Retail and SME sectors to meet their working capital needs. These entities must fulfill credit entitlement criteria of Bank Al Habib-Islamic Banking Division

Istisna is a sale contract that is executed for goods that need to be manufactured or constructed as per customer’s specification, with the obligation of the seller (manufacturer) to deliver the goods upon completion.

The purpose is to finance the working capital requirements of the customers.

Bank Al Habib-Islamic Banking Division offers Istisna finance to meet entire working capital finance requirements of Corporate and SME sector that manufactures/ constructs assets to be sold in local and international market.

• The description and the quantity of goods must be explicitly defined
• The price and time of delivery must be fixed.
• The price may be paid in advance, in installment or at the time of delivery.
• Manufacturer becomes the owner of the funds disbursed as Istisna price and can use it for all business requirements

The Manufacturers in Corporate and SME sectors who qualify the minimum credit criteria of Bank Al Habib-Islamic Banking Division.

Musawama is a sale transaction, whereby the seller (Bank) quotes the price without any reference to cost or Profit.

To cater post manufacturing / shipment financing requirements by purchasing the inventory from the customer and subsequently selling the same by appointing the customer as an agent.

Under Musawama arrangement Bank AL Habib-Islamic Banking Division agrees with customer to purchase goods / commodities (finished goods) from time to time, up to a specific limit assigned.

• The subject matter must exist at the time of sale
• The subject matter must be in the ownership of seller
• The subject matter must be in the possession of seller
• The Price must be certain and agreed at the time of sale
• The subject matter must have value from Shariah perspective
• The transaction can either be spot or on deferred payment basis

The target market for Musawama Finance is Corporate/Commercial/ Retail and SME sector to meet their post manufacturing / shipment financing needs. These entities must fulfill Bank AL Habib-Islamic Banking Division credit entitlement criteria.

Ijarah is a term of Islamic fiqh and it means “to give something on rent” or “to acquire service”. Ijarah can be defined as “transferring of usufruct of an asset to another person for an agreed period and agreed rent”. The asset should be valuable, identified and quantified.

To meet the long-term business requirements, such as project financing, BMR activities and fleet financing.

Corporate, Commercial and SME sectors who qualify the minimum credit criteria of Bank Al Habib-Islamic Banking Division.

According to the concept, a bank and customer participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the bank is further divided into a number of units and it is understood that the client will purchase the units of the share of the bank one by one periodically, thus increasing customer’s own share till all the units of the financier are purchased by the customer so as to become sole owner of the property, or the commercial enterprise.

To meet your long-term business requirements, such as project financing, BMR activities, fleet financing car financing, and house financing.

Corporate, Commercial, SME and Consumer sectors who qualify the minimum credit criteria of Bank AL Habib-Islamic Banking Division.

Bank AL Habib-Islamic Banking Division has classified its deposit products into two categories:

• Non-Remunerative Accounts
• Remunerative Accounts

The funds under these types of accounts are accepted under the concept of Qard. Withdrawals from these accounts can be made on demand. These funds are utilized by Bank AL Habib-Islamic Banking Division for Shariah compliant financing and investment activities. The following accounts are offered under this category:

• AL Habib Current Account
• AL Habib Islamic Aasan Current Account
• AL Habib Islamic Asaan Remittance Current Account

The funds under these deposits are invested with the intention to earn returns on invested funds. Bank AL Habib-Islamic Banking Division offers remunerative deposits under Mudarabah arrangements. Under the arrangements the depositor is Rab-ul-Maal and bank is Mudarib. The funds generated under this category become the part of Mudaraba pool and are utilized for Shariah Compliant financing and investing activities. The Profit generated therefrom is shared between the bank and depositors in agreed ratio. In case of loss, the Rab-ul-Maal i.e. depositors will bear the loss, provided loss is not due to negligence of Mudarib i.e. Bank.

Checking deposits

• AL Habib Savings Deposit
• AL Habib Islamic Asaan Savings Account
• AL Habib Islamic Asaan Remittance Savings Account
• AL Habib Tijarat Account
• AL Habib Apna Individual Account
• AL Habib Islamic Senior Citizen Account
• AL Habib Islamic Young Savers Account

Non-Checking Deposits

• 7 Days Term Deposits
• 1 Month Term Deposits
• 3 Months Term Deposits
• 6 Months Term Deposits
• 1 Year Term Deposits
• 1 Year Mahana Munafa Term Deposit
• 1 Year Senior Citizen Term Deposit
• 3 Years Term Deposits
• 5 Years Term Deposits