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2- Main Islamic Finance Terms.
"While a basic tenant of Islamic banking - the outlawing of Riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognized as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam. "The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society. "Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euro-money Publication, 1997) It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle-Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen. The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and philosophy of Islam. Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organizations have opted for ethical operations. Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shari’a (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as: • While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is Haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. • While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it. • While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat. • While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive. The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions. It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shari’a. The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management. Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law. Mudaraba refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise and who agrees to the division of any profits made in advance. In other words, the Bank would make Shari’a compliant investments and share the profits with the customer, in effect charging for the time and effort. If no profit is made, the loss is borne by the customer and the Bank takes no fee.
In a Mudaraba contract, the expert who manages the investment is known as a Mudarib.
Musharaka means partnership. It involves you placing your capital with another person and both sharing the risk and reward. The difference between Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested.
Tawarrouq is a way to provide you with cash, enabling you to purchase a commodity or service. It is used in cases of genuine need, or where the goods or items you wish to purchase are too numerous for the Bank to purchase for you in a practical sense - for example, if you wish to pay for medical services, or a wedding. We buy Shari’a compliant commodities and sell these commodities to you on a cost-plus-profit basis. You then appoint an independent agent (we can advise you how to do this), who sells the commodities on your behalf and puts the resulting cash into your account. You pay for the purchase of the commodity from the Bank on a deferred basis, thus complying with Shari’a principles
Ijara is a form of leasing. It involves a contract where the Bank buys and then leases an item – perhaps a consumer durable, for example – to a customer for a specified rental over a specific period. The duration of the lease, as well as the basis for rental, are set and agreed in advance. the Bank retains ownership of the item throughout the arrangement and takes back the item at the end.
Ijara-wa-iktana is similar to Ijara, except that included in the contract is a promise from the customer to buy the equipment at the end of the lease period, at a pre-agreed price. Rentals paid during the period of the lease constitute part of the purchase price. Often, as a result, the final sale will be for a token sum.
Ijara with diminishing Musharaka The principle of Ijara with diminishing Musharaka can be used for home-buying services. Diminishing Musharaka means that we reduce our equity in an asset with any additional capital payment you make, over and above your rental payments. Your ownership in the asset increases and ours decreases by a similar amount each time you make an additional capital payment. Ultimately, we transfer ownership of the asset entirely over to you.
A Qard is a loan, free of profit. We use this arrangement for our Current Accounts. In essence, it means that your Current Account is a loan to the Bank, which is used by the Bank for investment and other purposes. Obviously it has to be paid back to you, in full, on demand.
Riba means interest, which is prohibited in Islamic law. Any risk-free or guaranteed interest on a loan is considered to be usury.
Wakala is an agency contract, which usually includes in its terms a fee for the expertise of the agent. We may use it for our large Deposit accounts: you own the capital invested, you appoint us as your agent and pay a fee for our expertise.
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Islamic banks appeared on the world scene as active players over
three decades ago. But
"many of the principles upon which Islamic banking is based have
been commonly accepted all over the world, for centuries rather
than decades". The basic principle of Islamic banking is the
prohibition of Riba- (Usury - or interest): 
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