SHARIA COMPLIANT BANKING SERVICES

Islamic Banking has been experiencing extraordinary developments in several islamic countries and Europe. In some countries this sharia compliant banking system has been enjoying an average growth-rate of 40.2 percent per year from 2007 to 2011.

 

All over Europe Islamic banks are establishing branches, western banks are offering Sharia-compliant financial services, and European governments are trying to outcompete each other in welcoming them.

 

 

 

Sharia Banking or Islamic Finance overarching principle  is that all forms of interest are forbidden. The Islamic financial model works on the basis of risk sharing. The customer and the bank share the risk of any investment on agreed terms, and divide any profits between them. The main categories within Islamic finance are: Ijara, Ijara-wa-iqtina, Mudaraba, Murabaha and Musharaka.

 

Ijara is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period.

Ijara-wa-Iqtina is a similar arrangement, except that the customer is able to buy the item at the end of the contract.

Mudaraba offers specialist investment by a financial expert in which the bank and the customer shares any profits. Customers risks losing their money if the investment is unsuccessful, although the bank will not charge a handling fee unless it turns a profit. Murabaha: Islamic banks extend a type of Islamic “credit,” called Murabaha, that shifts risk to the borrower.  It is a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer on a deferred basis. For example: an Islamic bank granting Murabaha to a customer for a car, would purchase this car for the customer for $25,000 and the customer would owe the bank $30,000 in a year’s time.

Musharaka is a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested. Under the ‘diminishing Musharaka’ the Islamic version of a mortgage, the bank and the customer purchase the property together. The customer must make monthly payments to the bank and pay a monthly rental fee, both based on the portion of the purchase price the bank still owns.