Modes of Financing
Our Shari’a compliant offerings bring benefit to multiple industry sectors, with products and services that include:
- Murabaha: A financing facility, where the bank buys an asset on the order of the customer at cost price, and sells it to the customer at an agreed sale price (cost price + profit). Murabaha is not considered a personal loan but a commercial transaction, and is therefore an Islamic instrument of financing.
- Ijarah: The Arabic term for ‘give something on rent’ involves a contract where the bank buys an asset and then leases the right of usufruct (use) of the asset to the customer for a particular period of time. The rent amount can be split into a fixed portion and a variable portion (the variable portion should be based on a benchmark).
- Istisna: In this sale transaction, a commodity is transacted before it comes into existence. It is an order to a manufacturer to manufacture a specific commodity for the purchaser, and the manufacturer uses his own material to manufacture the required goods. In Istisna', the price must be fixed with the consent of all parties involved, and all other necessary specifications must also be fully settled.
- Musharaka: In this form of partnership between bank and client, each party contributes to the capital of partnership in equal or varying degrees, to establish a new project or share in an existing one. Each party thereby becomes an owner of the capital on a permanent or declining basis, and shall receive due share of profits.
- Commodity Murabaha / Tawarruq: In this sale transaction, the bank buys a commodity at cost price and sells it to a customer at an agreed deferred sale price (cost price + profit). Subsequently, the customer can sell the commodity to a party other than the bank on spot, for the purpose of obtaining cash.
- Islamic Covered Drawings: Based on the Commodity Murabaha concept, the bank grants finance by entering a deal, and also opens a Current Account and Short Term Investment Account. The amount will be deposited in the Short Investment Account and accordingly, utilised from available funds in the Current Account.
Frequently Asked Questions
What is Islamic banking?
Islamic banking is banking that is consistent with Shari’a, and carried out in accordance with the rules of Shari’a known as fiqh mu’alamat, which means ‘rules of financial transactions’. One of the key highlights of Islamic banking is that it promotes a greater degree of fairness and equity in the conduct of business.
What is Shari’a and which of its principles apply to Islamic banking?
Shari’a is the set of rules derived from the Holy Quran, the authentic traditions (Sunnah) of the Prophet Muhammad (peace be upon him), and scholarly opinions (Ijtihad) based on the Quran and the Sunnah. The principles of Shari’a that govern Islamic banking include:
- Prohibition of interest (riba) in all financial transactions
- Prohibition of gharar (extreme uncertainty) on the subject of the transactions
- Entitlement to returns due to liability of loss, and vice versa
- Obligations of trust (amanah), covenants (uqud), interdiction against unlawful (haram) earnings and expenditures, fraud of giving less than due in measure and weight, and unjust enrichment.
How can Noor Bank’s products be considered Islamic?
Shari’a requires that banking products or transactions comply with Shari’a rules and principles, and promote halal activities. These products should be approved and certified by the Fatwa and Shari’a Supervisory Board (FSSB) of the bank and also supported by an internal Shari’a Department to ensure that operations are in line with resolutions of the FSSB. At Noor Bank, all these and several additional measures are followed diligently.
What advantages does Noor Bank offer over other Islamic financial providers?
At Noor Bank, we constantly strive to create and provide financial solutions that meet the requirements of our customers. As a result, we offer banking solutions that combine our expertise with your values.
If you remunerate Shari’a scholars for their services, is there not a conflict of interest?
Just like external auditors are required to ensure that the activities of a certain institution are in line with regulations, Shari’a scholars are mandated to ensure that the financial activities of the institution they supervise are in accordance with the Shari’a. Their decisions are also watched very closely by the market and their peers. This adds a further layer of comfort that the decisions of Shari’a scholars are independent of the pressures of the institution they work for.
Is it permissible to use EIBOR (Emirates Inter-Bank Offer Rate) as a benchmark in Islamic finance?
Shari’a permits using the conventional market as a benchmark, like in the example of home finance based on Ijarah. According to Shari’a, the rent in an Ijarah transaction can be set at any value agreed between Noor Bank, and you as a customer. If the rent is not ideal, it is certainly permissible to use the prevailing interest rate as a benchmark in determining the rate. The criterion for acceptability by Shari’a is that the transaction is compliant with Shari’a rules and principles, regardless of the price of the goods or how that price is determined.
Is it permissible for Noor Bank to impose a charge for any late or partial payments?
It is permitted by Shari’a in contracts involving indebtedness (such as Murabaha), to prescribe an obligation on the customer, in the case of defaulted payments, to donate an amount or a percentage of the payment to charitable causes under the supervision of the FSSB. Such charges are imposed in order to encourage financial responsibility, and to recover administrative losses (other than opportunity cost) due to default. This charge is not considered interest, and does not reflect the interest rate. If the charge collected is more than the actual losses of the bank, the remaining amount will be donated on the customer’s behalf to a charitable organisation.
How is Ijarah financing different from conventional financing? Is it not re-labelling interest as profit?
Ijarah is a contract “to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.” In other words, the term Ijarah is comparable to a conventional leasing mode of financing. Under this arrangement, the customer pays rent for the use of the property, instead of paying interest on the loan amount. Throughout the term of finance, the asset remains the property of the bank which is responsible to bear all ownership- related risks attributable to those assets.
How do Islamic banks reward their depositors since payment of interest is not allowed?
Shari’a allows a profit sharing arrangement between the bank and the depositor. Profits from Islamic banking activities will be shared between the bank and the depositor based on an agreed profit sharing ratio and paid in the form of dividends. The amount of dividend pay-out depends on the profits generated from the bank’s operation. This arrangement is called Mudarabah.
What is the mark-up in Murabaha? How is it different from interest?
The mark-up is a small margin added as a profit to the real cost of the commodity sold under Murabaha sale. This mark-up is agreed upon between the bank and the customer. Mark-up is different from interest in that it is related to machinery, equipment and commodities, whereas interest is related to money.
If Shari’a prohibits interest on loans, how does Noor Bank earn income?
Noor Bank does not charge any interest on its financing operations. Most of our income is derived from leasing (rental payment), sale (instalment), and foreign trade financing on which a mark-up rate is applied in accordance with Shari’a rules and principles. Further, we recover the administrative costs of financing and technical assistance in financing by charging a service fee, subject to approval from our Fatwa and Shari’a Supervisory Board.
What is the purpose of Islamic financial providers?
The International Association of Islamic Banks (IAIB) explains the purposes of Islamic banks as follows: “The Islamic banking system involves a social implication, which is necessarily connected with the Islamic order itself, and represents a special characteristic that distinguishes Islamic banks from other banks based on other philosophies. In exercising all its banking or developmental activities, the Islamic bank takes into prime consideration the social implications that may be brought about by any decision or action taken by the bank. Profitability - despite its importance and priority - is not therefore the sole criterion or the prime element in evaluating the performance of Islamic banks, since they have to match both between the material and the social objectives that would serve the interests of the community as a whole and help achieve their role in the sphere of social mutual guarantee. Social goals are understood to form an inseparable element of the Islamic banking system that cannot be dispensed with or neglected. Within the broader financial system, Islamic finance plays a role in re-establishing a lost sense of ethics, by trying to make its concepts and products acceptable to ethically minded Muslims, Christians, Jews and any others who are engaged in financial transactions.”
What constitutes Riba?
Riba is simply interest - any amount, big or small - over the principal, in a contract of loan or debt. Riba is prohibited by the Shari’a and has been classified by Islamic scholars into Riba al-Nasi’ah and Riba al-Fadl.
Riba al-Nasi’ah is collected in compensation for deferring a due debt to a new term of deferment regardless of the source of the due debt: whether it results from a loan or a deferred price in a sale. It is associated with interest as practiced in conventional banking industry and also known as Riba al-Quran because of the clear prohibition on this type of riba in the holy book, or Riba al-Jahiliyyah due to its wide practice during the age of ignorance (jahiliyyah). The prohibition of this form of riba is primarily based on the following verse of the Quran: “O you who have believed, fear Allah and give up what remains (due to you) of interest, if you should be believers. And if you do not, then be informed of a war (against you) from Allah and His messenger. But if you repent, you may have your principal – (thus) you do no wrong, nor are you wronged. (Al-Quran 2 (Al-Baqarah):278-279)”
Why did Islam prohibit Riba?
“But if you repent, you may have your principal – (thus) you do no wrong, nor are you wronged. (Al-Quran 2 (Al-Baqarah): 279).” As is evident from the verse quoted above, the rationale behind the prohibition of interest suggests an economic system where all forms of exploitation (neither wrong, nor be wronged) are eliminated. In particular, Islam wishes to establish justice between the financier and the entrepreneur: the financier should not be assured of positive returns without doing any work or sharing in the risk, while the entrepreneur, in spite of management and hard work, is not assured of such positive returns.
Is there any independent central body that regulates Shari’a scholars globally, in order to maintain some degree of consistency within the Islamic banking industry?
There are global bodies of Shari’a scholars that work towards promoting consistency and standardisation, like the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and International Islamic Fiqh Academy under the ambit of the Organisation of Islamic Conference (OIC). The Shari’a Board of AAOIFI has issued Shari’a standards that are widely followed within the Islamic banking industry. However, scholars are not regulated by a central authority and it is expected that the general acceptance of Shari’a standards will create a market precedent, and overall consistency.
Is Islamic banking meant for Muslims only?
No, Islamic banking is available to all individuals, of all religious beliefs.
Glossary of terms
|Jurists/Scholars who follow the apparent meaning of hadith.|
|Safe custody. Originally, safe custody is referred to as wadi’ah yad amanah, i.e. trustee custody, which according to Shari’a; the trustee custodian has the duty to safeguard the property held in trust.|
|The two parties to the contract|
|A tangible (physical) asset or corpus|
|A sale contract based on cost plus where the acquisition cost and the seller’s profit margin are disclosed to the buyer at the time of the contract. The settlement of the price is normally made on deferred payment terms.|
|A purchase order contract whereby a buyer orders a seller to manufacture an asset according to specifications in the purchase contract to be delivered on a certain future date. The settlement of the purchase price is according to an agreed terms and conditions between the two parties.|
|A contract of buying and selling of currencies.|
|Resale of goods with a discount on the original stated cost.|
|A contract where a person underwrites claims or obligations that should be fulfilled by a debtor, supplier or contractor. In the event that the debtor, supplier or contractor fails to fulfil his obligations, the guarantor is responsible to fulfil such obligations. A majority of Shari’a scholars are of the view that dhamānah is similar to kafālah.|
|An opinion or pronouncement on Shari’a issued by a group of scholars (fuqaha’ - فقھاء ) who are sufficiently qualified and knowledgeable of the methodology for the issuance of fatwa, as well established under the discipline of Islamic jurisprudence (usul al-fiqh – .(أصول الفقة )|
|Science of Islamic law|
|Islamic law of transaction|
|An unknown fact or condition. In a commercial transaction, an excessive/major gharar (gharar fahish), e.g. the fact or condition of either the contracting parties or the asset in the contract or the price of the asset are not known or made known to contracting parties makes a contract null and void.|
|Cheating, fraud, or deception. All of these are prohibited by the Shari’a.|
|Lawful or permissible. The concept of halāl ( حلال ) has spiritual overtones. In Islam there are activities, professions, contracts and transactions that are explicitly prohibited (harām - حرام ) by the Shari’a. All other activities, professions, contracts and transactions are halāl. The concept of halāl differentiates Islamic economics from conventional economics. In conventional economics all activities are judged on economic utility. In Islamic economics, spiritual and moral factors are also involved, where an activity may be economically sound but may not be allowed if it is forbidden by the Shari’a.|
|Unlawful or forbidden. Activities, professions, contracts and transactions that are explicitly prohibited by the Shari’a.|
|A gift awarded to a person voluntarily or something given to a person without exchange.|
|A contract of transferring a debt obligation of a debtor to a third party.|
|Giving up of a right. In a commercial transaction a creditor gives up part or all of his right to a debtor usually for early settlement of the debt.|
|A contract whereby an owner of asset leases out the asset to a lessee at an agreed rental payment and pre-determined lease period upon the contract. The ownership of the asset remains with the lessor while the lessee only owns the right of the use of the asset.|
|Ijarah Muntahiah Bit-Tamleek
إجارة منتهية بالتمليك
|Refers to an Ijārah contract to be followed by a bai’ (sale) contract. Under the first contract, the lessor leases out an asset to a lessee at an agreed rental payment over a specified period. Upon expiry of the leasing period, the lessee enters into a second contract to purchase the property from the owner at an agreed price.|
|A jurist (faqih)’s endeavour to formulate a rule or legal decision (hukum) by interpretation of the evidence (dalīl) found in the Shari’a sources.|
|Consensus of Muslims scholars|
|A unilateral contract promising a reward for the accomplishment of a specific task.|
|A breach of trust, betrayal or treachery which is clearly prohibited by Shari’a.|
|Gambling. Any activity that involves betting, involving money or any items on the outcome of an unpredictable event. The bet is forfeited if the outcome is not as predicted by the bettor and the person against whom the bet is made takes the bet. This activity is clearly prohibited by the Shari’a.|
|Anything of natural desire by humankind, and can be stored for times of necessity; has specific or general use and is permissible by Shari’a for the purpose of extracting its benefit.|
|A contract between a capital provider (rabbul māl) who provides 100% capital for a business and entrepreneur (mudhārib) who manages the business applying his expertise. Under this contract, the resulting profit is to be shared between them according to a pre-agreed ratio, while any loss is to be borne solely by the provider of capital.|
|Debt settlement by contra transaction or setting off.|
|An agricultural contract based on partnership whereby the owner of agricultural land shares its produces with another person in return for his services in irrigating the garden.|
|A contract between two or more parties to contribute capital in various proportions to a partnership. Profits generated by the partnership are shared in accordance with the terms of the mushārakah contract whilst losses are shared in proportion to the respective contributors’ shares of the capital.|
|Diminishing mushārakah; allows equity participation and sharing of profits in a pre-agreed ratio, and sharing of losses on a pro-rata basis. This provides a method through which the financier – partner (bank) keeps on reducing its equity in the asset, ultimately transferring ownership of the asset to the customer/ partner.|
|Subject matter of a contract|
|Majlis al –aqd
|Usufruct / Benefit|
|Commercial transaction and social sphere of human activity|
|Qabadh means taking possession in the contracts of exchange (‘uqud al- muāwadhāt). Generally qabadh is practiced based on urf i.e. the common practices of the local community in recognizing the way the possession of an asset has taken place. Qabadh varies from one type of asset to another.|
|Refers to benevolent loan i.e. a loan contract between two parties with no extra charge over and above the loan. Any extra payment imposed by the lender or promised by the borrower is considered as riba, thus prohibited. However during payment of debt the borrower is permitted to pay extra on payment at his absolute discretion as a token of appreciation to the lender.|
|The holy scriptures of Islam i.e. the words of Allah revealed to the Prophet Muhammad SAW in Arabic conveyed by the angel Jibrail AS.|
|Making an asset a security or collateral for a debt. The collateral will be used to settle the debt when the debtor is in default. It may also be used as a name for a kind of financing with collateral or pawn broking.|
|An increase, in a loan transaction or in exchange of a ribawī asset, accrued to the owner (lender or seller) without giving an equivalent counter value or compensation in return to the other party. It is prohibited according to Shari’a. In financing, it is the extra payment imposed by the lender or promised by the borrower over and above the loan (known as ribā qardh). In trade it is mostly the difference in weight in the exchange of gold of different measures of purity, e.g. 10 grams of 750 gold with 8 grams of 835 gold (known as ribā al-fadhl); or the difference in time between payment and delivery in foreign currency exchange, e.g. payment or AED10,000 on 1st January 2010 and delivery of USD3,800 on 2nd January 2010 (known as ribā al-nasīah).|
|Owner of wealth who invests under the contract of mudarabah|
|Voluntary charitable giving.|
|Islamic laws relating to all aspects of human life established by Allah for his servants. The laws are divided into three i.e. those relating to belief (aqīdah), those relating to deeds (fiqh) and those relating to ethics (akhlāq). In this meaning, Shari’a is another word for Islam.|
|Certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity.”|
|Certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity.”|
|Shahadah al dayn
|Certificates of the debt|
|Sharikah al inan
|Partnership under which each partner invests capital and agrees to share profits and losses in a specified ratio|
|Sharikah al mulk
|An act of a seller intentionally hiding the defects of goods, which is clearly prohibited by Shari’a.|
|Shari’a compliant insurance i.e. a protection plan based on Shari’a|
|A conspiracy between a seller and a buyer wherein the seller is willing to sell the asset at a price higher than that of the market. This is done so that others will rush to buy the asset at a higher price, resulting in the seller obtaining a huge profit. This act is prohibited by Shari’a.|
|A purchase of an asset/commodity on deferred payment basis by way of either bai al-musāwamah or bai al-murābahah. The commodity is then sold for cash (wàriq) to a party other than the original seller.|
|A payment for manfa’ah i.e. benefit of other’s property. Another term related to ujrah is ajr (plural ujūr), which refers to payment for a service. It is also applied to salary, wage, pay, fee(s), charge, enrolment, honorarium, remuneration, reward, etc.|
|Also called Islamic jurisprudence i.e. the discipline of knowledge and methodologies of understanding and interpreting Shari’a resources.|
|A contract of appointment of an agent whereby a person appoints another to act on his behalf.|
|An endowment or a charitable trust set up for Islamic purposes (usually for education, mosques, or for the poor). It involves tying up a property in perpetuity so that it cannot be sold, inherited, or donated to anyone.|
|A religious obligation of alms-giving on a Muslim to pay a certain amount of his wealth annually to one of the eight categories of needy Muslims (asnāf). The objective is to take away a part of the wealth of the well-to-do to be distributed among the asnāf. According to the Shari’a, Zakat purifies wealth and souls.|