Islamic Banking - Swap Free

Islamic Banking available to Muslims and to non-Muslims.
Islamic Banking is open to all, without regard to religion.

What is Islamic Banking?
Islamic Banking is a financial structure in keeping with the principles of Islamic Law, or Shari’ah. The primary guiding principle of Islamic Banking is the ban on the payment of interest, or riba (usury). This system of finance follows Islamic rules on transactions, or fiqh muamalat, which assert that money be earned not from interest, but from commodities and services. As trade is permitted, Islamic banking, therefore, encourages asset-based transactions that are ethically sound and just. In these transactions, the risk is shared between the patron and the financial institution.

How do Islamic Banking practices differ from those of traditional banking?
The primary difference is traditional banking profits from the charging of interest. Islamic Banking forbids the charging of interest. Islamic banks therefore earn money through other means such as those established around the acts of purchasing and selling as prescribed by the Quran. For example, profit sharing between the patron and the financial institution is allowed, when the earning ratio is predetermined. The giving and receiving of gifts, by both client and bank, is also permitted.

What types of transactions are allowed?
Financial dealings in line with Islamic rules on transactions, which are rooted in the teachings of the Quran and the Sunnah, as well as other bases for Islamic law, are allowed under the system of Islamic Banking. Profits from trade and business are permitted through this system, unless they are in opposition to Islamic law.

To guarantee that it acts in accordance with Shari’ah, an Islamic Bank must form an independent religious advisory council, which will guide their business practices and transactions. The institution’s council will provide oversight regarding Shari’ah compliance through doctrine and ethics. The members will be required to issue fatawah, or religious rulings, regarding the bank’s practices. They should therefore be scholars of both religion and economics, with experience in banking and finance. For example, the National Shari’ah Advisory Council in Malaysia oversees the activities of the Bank Negara Malaysia, and is the strongest Shari’ah financial advisory council in the country. Such a council guides and assists Islamic banks, while providing the patron the assurance that the business practices are in keeping with Islamic morals and ethics. Each of the different kinds of transactions available from Islamic financial institutions requires council approval.

The system of Islamic Banking forges a partnership between the bank and the patron, referred to as Mudarib. These partnerships facilitate the sharing of profits and allow for a number of different types of transactions including, but not limited to:

Mudharabah
In profit sharing, or Mudharabah, the financial institution provides capital to a patron who will use it to finance a business idea. The gains made on this transaction are shared between the patron and the institution, by way of a prearranged ratio. However, only the institution, not the patron, will be affected by capital losses.

Murabahah
Murabahah is a contract between the financial institution and the patron in which the institution purchases goods for the patron, who in turn purchases shares of the goods on a pre-agreed schedule from the bank at cost, plus a predetermined profit percentage. As this is not a loan but rather the patron is purchasing the good from the financial institution, penalties such as late fees are not assessed, and the patron is not responsible for losses.

Bai' Bithaman Ajil
Bai' Bithaman Ajil is a system of deferred payment that features a predetermined profit percentage, but with the difference that payments are not made in installments but rather as one lump sum when the term of the transaction is at its end.

Qard
Qardis a loan that is offered to the patron without any interest. The patron is only responsible for the initial amount of money given by the financial institution. He may then in turn offer a voluntary gift, or purposes of investment.

Wadiah
Another type of deposit account, or Wadiah, is a safekeeping service in which the bank holds and cares for the finances deposited at the institution, which in turn agrees to refund the deposit, in part or in whole, upon request of the client. As this is a service, the patron may be assessed a fee for safekeeping by the financial institution. The patron may also receive a gift, or hibah, from the bank as a sign of both gratitude for his business and appreciation for the use of his money.

Musyarakah
In joint ventures, or Musyarakah, profits and losses are both shared by the parties involved. These profits and losses are not shared evenly, however, but are determined by the ratio of equity contribution. This differs from banking that is based on the collection of interest in three ways. First, the Islamic Banking institution, as well as the patron, both face risk. Second, the return rates of the transaction are fixed, and finally, the bank possesses a stake in the business ownership.

Salam
Salam is the sale of goods, completely paid for in advance, with an agreed-upon delivery date in the future. The goods are usually agricultural commodities, which are not yet available, but will mature at a future date. The sale, however, can be conducted with any commodity that can be clearly depicted in a contract, barring gold, silver and currency.

Istisna’a
This is the purchase of a good before it is available. For instance, a pre-construction house may be purchased in advance on land already in the possession of the patron. The transaction amount is fixed and must be agreed upon by both patron and financial institution in advance of the sale. The amount may be repaid to the financial institution either at once, at the end of the term of the transaction, or through installments.

Wakalah
Wakalah functions similarly to power of attorney, when the patron arranges for a representative to have the power to conduct financial transactions under his name. Financial institutions may assess a fee, as this is a service provided to the patron by the bank.

Ijara
Ijara is a form of leasing or rental. The bank finances the purchase of an item, such as a house or car, yet the patron and the financial institution share ownership. The patron purchases the good from the institution over time, in installments, until he owns the item completely. The client also pays fees that are assessed by the bank. These fees may change with the evolving ratio of ownership between the financial institution and patron, and with the change in value of the item.

What types of transactions are not allowed?
All business practices, as well as specific investments not adhering to Shari’ah are explicitly forbidden. The payment or assessment of interest, or riga, is expressly not permitted. Speculation, or Maysir, is also forbidden. Transactions should be ethically and morally sound. For example, Islamic Banking unequivocally forbids trade or investment in companies that produce or sell pork or alcohol, and media companies whose publications are contrary to Islamic values, such as those, which are gossip-oriented or pornographic. Islamic Banking transactions must also be rooted in tangible reality; that is, they must not offer a good or service with disproportionate uncertainty.

Why are transactions involving interest not allowed?
The Quran states, “Oh believers, take not doubled and redoubled interest, and fear God so that you may prosper.” (Surah Al Imran, 130-1) There are two main kinds of interest, or riba, which are forbidden: Riba al Nasiah is the charging of interest for time allowed to pay back borrowed money. Riba al-Fadl is interest, which is based on the comparative value of two commodities. The Quran offers the clearest reasons for the forbidding of riba:

“That which you give as interest to increase the peoples wealth increases not with God; but that which you give in charity, seeking the goodwill of God, multiplies manifold.” (Surah Al Rum, 39)