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Islamic Banking

Questions to test your knowledge in Islamic Banking

1.  What is Islamic banking?

Answer:   Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah. Interest free banking is a narrow concept denoting a number of banking instruments or operations which avoid interest. Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices. In practical sense,Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. The model of Islamic banking system leads towards the achievement of a system which helps achieve economic

2.  What is the philosophy of Islamic banking?
Answer:  The philosophy of Islamic banking takes the lead from Islamic Shariah. According to Islamic Shariah, Islamic banking cannot deal in transactions involving interest/riba (an increase stipulated or sought over the principal of a loan or debt). Further, they cannot deal in the tran sactions having the element of

1,  Gharar or 2. Maiser.  Moreover, they cannot deal in any transaction, the subject matter of which isinvalid (haramin the eyes of Islam). Islamic banks focus on generating returns through investment tools which are Shariah compliant as well. Islamic Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of Islamic banking are based onsharing the risk which may arise through trading and investment activities using contracts of various Islamic modes of finance.

1.  Excessive level of uncertainty or ambiguity created due to the lack of information or control in a contract.
2. Game of Chance The prohibition of a risk free return and permission of trading, as enshrined in the Verse 2:275 of the Holy Quran, makes the financial activities asset-backed in an Islamic set-up with ability to cause ‘value addition’.

3. What is meant By Riba?
Answer: The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars. The meaning of Riba has been clarified in the following verses of Quran (Surah Al Baqarah 2:278-9) “O those who believe; fear Allah and give up what still remains of the Riba if you are believers. But if you do no
t do so, then be warned of war from Allah and His Messenger. If you repent even now, you have the right of the return of your principal; neither will you do wrong nor will you be wronged.”
4.  What is interest? Is there any difference between interest and Riba?
Answer: The origination of term interest dates back to 17 century with the emergence of banking system at global level. Interest means giving and/or taking of any excess amount in exchange of a loan or on debt. Hence, it carries the same meaning/value as that of Riba as defined in the previous question. Further, it is narrated that “the loan that draws interest is Riba”. There is consensus among the Muslim scholars of all the fiqhs that interestis Riba in all its forms and manifestations

5. What are the different kinds of Riba?

Answer: There are two kinds of Riba:

  1. Riba-An-Nasiyah/Riba-Al-Quran
  2. Riba-Al-Fadl

1.    1.    Riba An Nasiyah/Riba Al-Quran:
In the Holy Quran, Allah (SWT) says in Sura Al-Baqarah (2-279): “…..And if you repent, yours is your principal” It is reported by Harith ibe Abi Usamah  in his Musnad that Sayyidna Ali Radi-Allahu Anhu reportedly referred that the Holy Prophet said: alayhi wa sallam, said that: “Every loan that derives a benefit (to the lender) is riba” Example of Riba-al-Nasiyah/Interest : If Mr. A lend $100 to Mr. B (a borrower) with a condition that Mr. B shall return him $110 after one month. In this case, the extra amount of $10 is Riba or Interest.
2 2.   Riba-al-Fadl:
Abu Said al Khudri Radi-Allahu anhu narrated that Holy Prophet (Peace be upon Him) said:
 “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for like, payment made hand by hand. If anyone gives more or asks for more, he has dealt in riba. The receiver and giver are equally guilty”

Based on aforesaid definition, it may be noted that economically speaking it would be irrational to exchange one kilogram of wheat with one and a half kilogram of wheat in a spot exchange. Therefore, some fuqahahave pointed out that Riba-al-Fadl has been prohibited because if it was left un-prohibited it could be used as a subterfuge for getting Riba-al-Nasiyah. Of the six commodities specified in the hadith, two (gold and silver) unmistakably represent commodity money used at that time. One of the basic characteristics of gold and silver is that they are monetary commodities. As a matter of fact, each of the six commodities mentioned in the hadith has been used as a medium of exchange at some time or the other. During the dark ages, only the first form (Riba An Nasiyah) was considered to be Riba. However, the Holy Prophet (peace be upon him) also classified the second form (Riba-al-Fadl) also as Riba