Islamic business banking is an alternative approach to modern business banking that remains consistent with Shari’ah law and Islamic economic guidelines. This type of banking is not only reserved for Muslims but non-Muslims can also access its services.
Islamic business banking is similar to conventional business banking in one important aspect. It acts as an intermediary and trustee of other people’s money. It however differs on the basis of its depositors sharing in the profits and loss of the bank. The depositors become its customers and have limited ownership rights.
Financing Options of Islamic Business Banking
The cornerstone of Islamic business banking is the prohibition of interest based transactions. The acceptance of interest between purchasers and sellers of capital resource is forbidden. Islamic banking is interest free. Therefore financing for properties and enterprises are undertaken via the finance options listed below:
- Murabaha (Trade Finance): This is a sale contract where the seller reveals his profit and cost. Typically involves a customer requesting the bank to buy specific goods on their behalf. The bank facilitates the purchase for a profit minus the cost, usually declared in advance.
Murabaha mode of finance covers the following assets:
- Commercial vehicles
- Business equipment
- Industrial machinery
The sale repayments are made in regular installments. The terms and conditions established for repayment cannot be altered during the period of transaction.
- Murabaha (Asset Trade finance): In this transaction, ownership of the asset shifts to the customer once both parties agree on terms of repayment and profit mark-up. There are no charges for deferred payments due to the agreement on the product price at the time of sale. Once the agreement is finalized the terms and conditions for repayment cannot be changed for the transaction period.
- Ijaarah(Motor vehicle finance): This is a type of lease where you can finance a car through an Islamic bank. You get to choose a suitable repayment plan, which can extend to about 72 months.
- Takaful: Insurance is not an accepted practice in Islamic banking. However, there is an Islamic compliant system founded on mutual assistance and cooperation (termed as takaful). The system has some similarities to traditional mutual insurance. Some examples of items covered by Takaful are cars, restaurants and warehouses.
How Does Takaful Work?
- Money is paid out by members in takaful to a mutual cooperative fund for the purposes of using it for compensation when a situation arises.
- The takaful company is responsible for managing the fund.
- The takaful cover provides products designed to meet the needs of individuals and their enterprises.
Islamic Business Banking Benefits
Islamic business banking most importantly offers a wide range of fee paying retail services that are free of any interest payments. This has enabled Islamic banks to attract finance and investment from both Muslims and Non-Muslims.