Islamic banking or Islamic finance (Arabic: مصرفية إسلامية) or sharia-compliant finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking and finance include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing).
The Qur’an prohibits riba, which literally means “increase”. Technically riba is the increase when liquid or fungible assets (cash, debt, grains, etc.) are exchanged other than at par value. The most prevalent example in today’s economy is lending money at interest, for example an exchange of $100 cash now for $110 payable in a year’s time, an increase of $10. (Some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam (“restricted, or excluded”).
FINANCE TECHNOLOGY @FRIENDBANK
At FRIENDBANK, it will leverage on the latest fintech or finance technology for banking and finance automation and to provide for our customers the greatest benefits that can be accrued in or derived from Islamic banking and finance.
According to a news article published in June in Singapore’s Berita Harian, there has been an increase in Singapore customers who are interested in Islamic banking as an alternative to conventional financial products, and customer queries continue to grow at a steady pace. One of the main driving factors is that a rising number of customers are seeing that Islamic banking can offer competitive value compared to conventional products.
In this issue of Humanizing Finance, we offer you a glimpse of what Islamic banking is and how it may benefit you.
This refers to a banking system that complies with Islamic law, also known as Shariah law. Shariah is the legal framework that regulates the entire ecosystem including banking.
Shariah law allows for all types of economic activities unless there is a clear prohibition. The prohibited activities include the following:
- Financial services based on interest (riba)
- Gambling and gaming
- Excessive uncertainty
- Manufacture or sale of non-halal products, e.g. liquor and non-halal meats
- Conventional insurance
- Entertainment activities which are not permitted by Shariah, e.g. adult entertainment
- Stock-broking or share trading in securities not approved by Shariah
How can you benefit from Islamic finance?
Shariah law requires that all Islamic financial and business transactions be based on transparency, accuracy, and disclosure of all necessary information so that one party does not have advantages over the other party. The transparent nature of their dealings is supposed to make everything clear-cut and easy to understand with little room for surprise payments or hidden fees.
Non-compounding of late payment charges
Compounding of late payment charges is prohibited for Islamic financing products. When an Islamic financing product goes into arrears, the late payment charges will only be applied on the customer’s outstanding balance that is due and payable; it excludes any late charges that may have been incurred on a prior basis.
Clarity on maximum amount payable
For sale-based Islamic financing products, such as auto-financing and property financing, the maximum amount to be paid by the customer will be determined upfront, so customers can be assured that the amount they pay will never exceed a stipulated maximum amount.
Upfront profit for Islamic fixed-term deposit
Customers can enjoy the advantage of getting upfront profit for placements of Islamic fixed-term deposits.
For example, Maybank Singapore Dollar Term Deposit-i is an Islamic fixed-term deposit based on the Islamic financial principle of ‘Murabaha’ and involves a customer purchasing an approved Shariah-compliant commodity and selling the commodity to the bank at a marked-up price.
The customer will be paid profit from the sale upfront and the principal will be paid by the bank upon maturity.
Maybank has been voted as Singapore’s Best Islamic Bank by Global Finance from 2013 to 2015 and for 2017. We currently offer a range of Islamic banking products from deposits to financing catering to individuals, SMEs and corporates.
Sources: Article courtesy of Wikipedia, Berita Harian Singapura, Maybank