Guide to Islamic Banking

Are you looking for an alternative banking solution? Banking activities that have principle-based approach? Alina Hardcastle explores the topic of Islamic banking: what it is, how it differs from conventional banking and asks whether non-Muslim are allowed to invest in these products, and how exactly does it differ from conventional banking?

What is it?

Islamic banking is system of banking that is consistent with the principles of Islamic law also known as Shar’iah law. The principles that are applied highlight the importance of moral and ethical values in all dealings.

Difference between Islamic and conventional banking

“Islamic banks have many products similar to those offered by conventional banks, the products differ conceptually,” says Uwaiz Jassat, head of Islamic banking at ABSA.

He notes the following key differences:

  • Interest – conventional banks earn their money by charging interest and fees for services, whereas, Islamic banks, at its core is interest free, earn their money by profit and loss sharing, trading, leasing, charging fees for services rendered, and using other forms of contracts of exchange.
  • Shari’ah Oversight – all Islamic banks, in addition to normal regulatory oversight, are governed by an independent Shari’ah Board to ensure on going compliance with Islamic Law.
  • Type of Relationship with customer – with conventional banking there is a standard debtor and creditor relationship whereas, the relationship between a customer and an Islamic bank can be varied based on what the contract entails.
  • Real Asset Backed Transactions – Islamic banking tends to create a link with the real sectors of the economic system by using trade related activities. Since, the money is linked with the real assets it contributes directly in the economic development.

Non-Muslims and Islamic banking

Islamic banking is not only available to the members of the Muslim community but to non-Muslims who wish to comply with Islamic/Shar’iah law.

Amman Muhammad, CEO of FNB Islamic banking, says that more non-Muslim South Africans are gradually starting to make use of Islamic financial services at FNB.

He adds; “Over the last few years, we have seen a consistent rise in the number of South Africans, irrespective of faith, who has approached us for various Islamic banking services such as transactional banking, investments, vehicle and property finance.

“Islamic banking is not a religious push but rather an alternative for conducting financial transactions according to a set of defined ethical values and parameters that differ from the conventional offering,” says Jassat.

Shari’ah laws in Islamic banking

Besides interest free transactions known as riba, some of the other key governing principles of Islamic banking are: the avoidance of economic activies that involve oppression (zulm) and speculation (gharar). There is also the discouragement of the production of goods and services that contradict Islamic values which is referred to as haram. Therefore, customers know that their money will never be invested in areas such as tabaco, alcohol, gambling, pornography nor weapons.

Islamic banking also introduces zakat/ Islamic tax; this forms part of alms giving and is obligatory to Muslims who meet the necessary criteria of wealth.

Jassat adds that in order to make the implementation of the laws easier and consistent, a global organisation called the Account and Auditing Organization for Islamic financial institutions provides guidance with regards to accounting and auditing standards that deal with Islamic financial products.

Ways consumers can make use Islamic finance

Muhammad informs us about the ways we can make use of Islamic finances at FNB;

  • Purchasing a home – choose a property that they wish to purchase; the financial institution will conduct an affordability check; they will purchase it after you qualify and then prepare an agreement which allows you to take gradual ownership over a term that is suitable to you.
  • Purchasing a vehicle – Islamic vehicle financing comes with a fixed repayment plan, so your contract will not be impacted by the movements in interest rates.
  • Savings and investments – you can transact, save or invest in a compliant manner and still enjoy the benefits that are available through commercial banking.

Banks that offer Islamic banking in South Africa

Banks currently offering Islamic banking options in South Africa include Absa, First National Bank, which launched Islamic banking in 2005, and Al Baraka Bank which has been in South Africa for 20 years and was the first Islamic bank in the country.

In conclusion

Jassat highlights the proof of Islamic banking’s viability by pointing out that Islamic finance has also been highlighted in the Vatican’s official newspaper, Osservatore Romano, which stated that “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service.”

To view the accounting and auditing standards that deal with Islamic financial products click here.

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