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Islamic banking and finance

Islamic banking, and finance is the application of banking and finance activities using Islamic commercial laws or principles instead of conventional (man-made) principles.

Islamic Banking

Islamic finance: the future of banking for all times

by admin 25/10/2023

written by admin

As public confidence in the Islamic finance and banking sector remains low, consumers are looking for greater transparency and risk avoidance from their bank. Can Islamic banking provide an alternative to Western banking models, and how is this model looking to expand into African states?

Since the economic crisis, eight years ago, the banking world has been widely criticised and come under much greater public scrutiny. With financial scandals becoming almost commonplace, it seems that the public has lost faith not only in the banks themselves, but also in the banking system and, perhaps, the ability of regulators to address the core issues.

As regulators and banks attempt to address the issues that have plagued the finance industry and clean up its reputation, consumers are also looking for alternatives, ones which are more visibly compliant with ethical or religious norms. The Co-operative Bank’s much-touted guarantee of ethical banking is one such, rooted in 19^th Century non-conformism. One non-Christian alternative is Islamic banking, a system which follows the core principles of Sharia law.

Islamic banking and finance is based on profit and loss sharing, along with a religious prohibition in dealing in interest and transactions which are deemed too speculative in nature. These aspects of Islamic finance also invariably apply to the infrastructure of all Islamic financial institutions – for example, Sharia compliant operational procedures, relating to the purchase and sale of assets as well as, usually, audits by the bank’s Sharia advisors.

ETHICAL BANKING?

While the conventional banking system is based on paying interest at a pre-determined rate, this function is prohibited under Sharia law. The foundation of the Islamic finance model is based on a profit-sharing principle, whereby the risk is shared by the bank and the customer. Faizal Jusob partner at Couto, Graça e Associados in Maputo, Mozambique, tells ALB: “This system of financial intermediation contributes to a more equitable distribution of income and wealth, which is attractive to clients (Muslims and non-Muslims).”

Hogan Lovells partner Imran Mufti, based in the based in the firm’s associate office in Riyadh, Saudi Arabia,points out that “Islamic finance is very much seen as an ethical mode of finance given the asset screenings that the majority of Islamic banks adopt. For example, [there is a] prohibition against investing in enterprises involved in the arms, alcohol or gambling sectors”.

Faizal Jusob, a partner at Couto, Graça e Associados in Maputo, Mozambique, explains that currently there is no Islamic finance in Mozambique, although he notes the “growing popularity of Islamic banking/finance across Africa”.

He attributes this to the significant Muslim population that exists across Africa (although he points out that Islamic finance is also available to non-Muslims), as well as the risks being shared among all parties.

Zineb Bensaid, senior consultant at Islamic markets advisory ISFIN in Brussels, explains that transparency behind Islamic banking is about conducting business in “a fair and transparent manner.

“Guiding you through to ensure full understanding of risks and costs associated with the products and services is the utmost prerogative”, says Bensaid.

Her colleague, Ihssane Bouhyaoui, international sales manager at ISFIN, adds: “The strong ethical and moral dimensions of doing business and selecting business activities to be financed play an important role in promoting socially desirable investments and better individual or corporate behaviour. “

Although Mufti notes that transparency is likely to “become more of an issue when it comes to sukuk transactions as investors (both Islamic and conventional) will always want to be comfortable with the underlying credit of the issuer”.

Another key element of Islamic banking is actively discouraging speculation.Speculative transactions are sources of instability, under Islam, which means by nature, they lead to the misallocation of capital, says Bensaid, and Islamic banks are prohibited from carrying out such activities. Instead, she explains, they focus on “deployment of capital to the real economy, to promote socio-economic justice”.

CONSTRAINTS

Despite a number of benefits offered to customers including transparency and risk sharing, the system is also subject to a number of constraints – most notably transaction costs and difficulties involved in supervising and monitoring.

Nevertheless, Jusob states, “Islamic finance is supposed to have a strong ethical and moral objectives of doing business and in selecting business activities to be financed, which raises the need to promoting socially desirable investments and better individual or corporate behaviour”.

Jusob points out that the Islamic Financial Services Board (IFSB) has recently released a number of exposure drafts providing Core Principles for Islamic Finance Regulation specifically aimed at Islamic financial institutions.

He states: “The aim is not thereby to establish an entirely new governance framework for the Islamic finance industry, but rather to build on and complement existing international standards and encourage institutions to view compliance as part of a general strengthening of good corporate governance culture.”

Therefore, he adds, Islamic finance can contribute to dealing with current issues of transparency in finance with the increased use of “robust corporate governance systems of internationally recognised standards, incorporating transparent, fair and ethical working practices”.

However he explains, that particularly in Mozambique, the introduction of Islamic finance will have to deal with issues relating to capital gains taxation for sukuk (Islamic bond) issuances and other Islamic finance products.

ISLAMIC FINANCE IN AFRICA

According to IMF report, Islamic finance is growing in Sub-Saharan Africa, including Botswana, Kenya, Gambia, Guinea, Liberia, Niger, Nigeria, South Africa, Mauritius, Senegal and Tanzania have Islamic banking activities. There is also scope for development of Islamic finance in a number of African states says Jusob, particularly those with relatively large Muslim populations, such as Zambia – which is interested in using Islamic finance instruments to fund investment in the mining sector.

The Ugandan central bank has gone further, having already started the process of amending its banking regulations to allow for the establishment of Islamic banks – to date, three Islamic banks have applied for a license in the country. Jusob identifies four countries in particular, which have considerable potential for becoming a regional hub of Islamic finance activities, namely South Africa, Nigeria, Kenya and Mauritius.

Mufti notes that Islamic finance is growing in Africa, particularly across the Francophone jurisdictions: “We are also seeing an increasing interest in Islamic financing transactions from the international development banks, particularly for infrastructure projects in the transportation and telecoms sectors.”

The growing popularity of Islamic finance in Africa is no coincidence Mufti tells ALB: “Africa has a significant Muslim population, which means there is a natural synergy with that market.”

Bensaid agrees, anticipating that Africa’s middle-class population is expected to increase and this will “boost demand for Islamic finance products”.

Islamic finance FUTURE GROWTH

“Africa is attracting interest globally, not solely from Islamic banks,” says Mufti. “I see a growth in Islamic finance as issuers and sponsors in the continent look to diversify their investor base.”

“That coupled with African governments encouraging the development of Islamic finance with the introduction of legislation specifically to accommodate Islamic structures means that prospects are positive for future growth.”

Among the opportunities for Islamic banks in Africa, Bouhyaoui points out the potential role these could play in funding small-to-medium enterprises (SMEs) across the continent. She states that in light of “relatively low-income levels, a large informal sector and the prevalence of small businesses in Africa, Islamic microfinance is also a [key] growth area”.

However, Jusob stresses that despite its growing African presence, Islamic finance is still at an early stage of development in Sub-Saharan Africa – pointing out that currently, the share of Islamic banks is still small, and Islamic capital markets are virtually non-existent.

However he has an optimistic outlook for the sectors future in Africa, estimating a likely increase in Islamic finance products in the coming years, something that will comfort many Muslim-owned businesses.

WHERE DO I TAKE ISLAMIC FINANCE COURSES OR PROGRAM

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25/10/2023 0 comment

Islamic banking and finance Takaful or Islamic Insurance

Islamic Insurance (Takaful) Compare to Conventional Insurance

by admin 12/01/2023

written by admin

In Arabic, Takaful means ‘solidarity and cooperation among group of people’.

Takaful insurance is a form of co-operative insurance in compliance with Islamic Shariah, which is based on the concept of shared contributions and mutual co-operation between the participants to compensate one another in case of loss.

Takaful insurance parties include “participants” and “Takaful fund operators”, which corresponds to “the insured” and “the insurer” in conventional insurance.

Takaful mechanism

Participants pay the contributions on a voluntary basis as a donation to a shared Takaful fund, providing protection for each member against combined risks and sharing surplus equally. The company will manage and operate the Takaful fund on their behalf with no prior expectations of fixed returns.

How is Takaful different from conventional insurance?

Takaful provide products based on the concept of Takaful, which differs from the conventional insurance in the following aspects:

· Under Takaful, capital is only invested in funds that are fully Shariah compliant.

· Takaful ensures that no one member can gain an advantage at the expense of another creating a cooperation among policyholders for the common good of all members.

· Conventional Insurance involves making investments that can incur risk and generate profits that will be retained by the company, while under Takaful, Investment profits are distributed among both participants and shareholders on the basis of Mudaraba or Wakala models.

· Policyholders will not get back their contributions where there is no claim, while in a Takaful contract a some of the money will be refunded to the participants in case of no claims made.

· Surplus is distributed back to members as a renewal discount.

· Participants ‘accounts and shareholders’ accounts are kept separate.

· If there is a deficit in any Participants’ Fund, Shareholder Fund provides an interest-free loan (Qard Hasan) to the Participant/s.

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12/01/2023 0 comment

Islamic Banking

What is Islamic Banking

by admin 03/01/2023

written by admin

While Islamic banks respond to the needs of Muslim customers, they are not acting as religious institutions. Like other banks they are profit-maximizing entities. They act as intermediaries between savers and investors and offer custodial and other services found in traditional banking systems. The constraints facing Islamic banks are, however, different. They are based on prescriptions in Shariah law, which encompasses a set of duties that also apply to commercial transactions, and the hadith—the authentic traditions.

Islamic law 4 affects how the banking system functions. Four factors in particular are unique to Islamic banking. We summarize them here briefly (for a good exposition, see El-Gamal (2006).

Prohibition of interest (Riba).

Riba is the major difference between Islamic and traditional banking. Islam prohibits all forms of riba (interest paid on loans) on the grounds that interest rates are a form of exploitation, inconsistent with the notion of fairness.

Practically, this implies that Shariah law does not allow fixing in advance a positive return on a loan as a reward for waiting. The argument is that riba implies an improper appropriation of other people’s property and is bad for growth. Islam does recognize the importance of the time value of money, but the time value is not realized as part of a loan contract; it can be realized only as part of a real transaction. For example, in a leasing agreement, the time value of money is an integral part of the rent to which the parties agree, with longer leases expected to yield higher returns.

Prohibition of maysir (games of chance) and of gharar (chance).

Islamic banking bans speculation, which is increasing one’s wealth by chance rather than productive effort. In practice, though, the distinction between speculation and productive effort is often blurred. While entrepreneurship itself could be interpreted as a form of gambling, maysir refers to unnecessary uncertainties not part of everyday life, such as going to a casino. Unavoidable risk is permitted. A related concept is the prohibition of gharar contracts. It applies to doubtful or uncertain contracts, such as undertaking a business venture without sufficient information or taking excessive risk. It is similar to asymmetric information; the objective is to minimize possibilities of misunderstanding and conflicts between contracting parties.

Prohibition of haram (illegal) activities.

The code of conduct for Islamic banks allows them to finance only halal (legal) activities. They are not supposed to lend to companies or individuals involved in activities deemed to have a negative impact on society (for example, gambling) or that are illegal under Islamic law (for example, financing construction of a plant to make alcoholic beverages).

Payment of part of bank profits to benefit society (zakat).

Muslims believe that justice and equality in opportunity (not outcome) are crucial for a society to function. One mechanism to achieve this goal is to redistribute income to provide a minimum standard of living for the poor. This form of giving, zakat, is also one of the five tenets of Islam. It is generally agreed that the amount of zakat is 2.5 percent of assets held. In countries where zakat is not collected by the state, Islamic banks establish a zakat fund for collecting money to be donated to religious institutions. 2 As companies become increasingly complex, it is more and more difficult to find pure halal investments. Islamic scholars have found a way around this. Typically, when a small share of a company’s business deals with haram activities, that part of the dividend that is deemed ―tainted‖ should be donated to charity. So if 5 percent of the business of a company is deemed to be in activities not compatible with the Shariah, 5 percent of the dividend received should be given to charity. 5 Given these characteristics, would Islamic banking be good for growth? The analysis by Bhalla (2002) revealed that in comparison to the worldwide mean, Islamic countries are poor and not highly developed. Some scholars argue that Islam, by preaching fatalism, might negatively affect growth (Kuran, 1997). However, much of the evidence does not support this argument. First, the Golden Age of Islam between the 9th and 15th centuries, when advances were made in science, literature, navigation, law, and philosophy, illustrates that Islamic societies are capable of progress and innovation when the right environment is in place (Turner, 1997). More recently, Noland (2003), in an authoritative study, concludes that:

Predominantly Muslim countries are seldom outliers (either positively or negatively) in the cross-country regressions. In most cases, the coefficient on the Muslim population share is statistically insignificant. With one exception, where it is significant, it is always positive. The only case of a statistically significant negative coefficient is in the sub-national regression for Malaysia. Islam does not appear to be a drag on growth or an anchor on development as alleged. If anything, the opposite appears to be true. If one is concerned about economic performance in predominantly Muslim regions or countries, conventional economic analysis may yield greater insight than the sociology of religion.

In fact, not only does Islam not negatively impact growth, but Islamic banking could complement conventional banks and thereby help diversify systemic risk. In conventional banks, when a bank gives out a loan, the borrower bears all risks, except in the case of bankruptcy. In Islamic banking, both bank and entrepreneur share the rewards and failure. In many developing countries risk sharing might allow entrepreneurs with little savings to undertake projects they could not contemplate in an environment where all the risk lies on them. In conventional banking, the creditworthiness of the borrower is the main determinant of the lending decision, and banks are interested in the interest and principal on the loan. In Islamic banking, because profits and losses are shared, banks will receive a return only if a project is successful. Therefore, Islamic banks are more prone to finance sound projects, even if the entrepreneur has no credit history.

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03/01/2023 0 comment

Halal Industry

What is Halal ?

by admin 30/10/2021

written by admin

Halal means all things or behaviours sanctioned (permitted as lawful) by Islamic law and ritually fit to be done or use. The word Halal means permissible or lawful, and it is derived from an Arabic root word hala, which means to become lawful, or permitted. In Islamic theology, halal food, thing, or deed can be carried out by a person without having penalty. In the modern world, and especially non-Muslim, the meaning of the word halal has been associated with food, or drink that are permitted to be taken by Muslims. This is not the case in terms of Muslims ideology, the entire life of Muslims is controlled by what is regulated and prescribed by the Holy Quran to be Halal or Haram. A Muslim food, dress, shelter, actions, manners, ethics, and even look should all conform to what is permitted (Halal) by Allah.

The Concept of Halal in the Quran and Hadith

Halal are all things permitted and allowed to be done without penalty in Islam and this permission is found in the Quran and Hadiths (traditions of Prophet Mohammed SAW), and it is not limited only to food, but also businesses, services, finance, travel and tourism, chemicals and ingredients for production, pharmaceuticals, and clothes. The opposite of Halal is Haram, which has been contracted in the Quran. All Halal things are to be good for human beings, and all things that are forbidden (Haram) or prohibited by Islam are found to harm human beings or nature. Pork, Alcohol, blood, dead animals, and animals slaughtered without with other than Allah’s name are all deemed haram, unlawful to be eaten by Islam. Several Islamic organizations have literature quid lines and standards based on the Shariah law, as principles for measuring, and determining what halal should be. One of them is the Malaysian standard, prepared by Malaysia Department of Islamic Development (JAKIM), which defined the Halal as follows: “Halal is defined as food not made of, or containing parts of animal origin which Islamic law forbids to be consumed. Food is Halal if it does not contain or come into contact with anything regarded as filth e.g. carrion, alcohol, pork, blood, faeces, and urine. It must also be prepared, processed or manufactured using equipment untainted by anything unclean.”

Allah says in the Holy Quran:

“O ye people! Eat of what is on earth, lawful and good and do not follow the footsteps of the Evil One, for he is to you an avowed enemy” (Al Baqarah: 168).

On the authority of Abu Hurayrah (ra): The Messenger of Allah (ﷺ) said, “Allah the Almighty is Good and accepts only that which is good. And verily Allah has commanded the believers to do that which He has commanded the Messengers. So the Almighty has said: “O (you) Messengers! Eat of the tayyibat [all kinds of halal (legal) foods], and perform righteous deeds.” [23:51] and the Almighty has said: “O you who believe! Eat of the lawful things that we have provided you.” [2:172]” Then he (ﷺ) mentioned [the case] of a man who, having journeyed far, is dishevelled and dusty, and who spreads out his hands to the sky saying “O Lord! O Lord!,” while his food is haram (unlawful), his drink is haram, his clothing is haram, and he has been nourished with haram, so how can [his supplication] be answered? [Muslim)

The above Quran verse ask Muslims to eat lawful (Halal) and desist from what is unlawful (evil), while the hadiths clearly shows that entire life of Muslim (food, cloth, drink, nourishments) should be halal and not haram, before a Muslim prayer will be accepted.

In conclusion a Muslim entire life is sanctioned by the Quran and the Hadith in terms of what is halal and haram, the opposite.

What is Haram

Haram means all things, deeds, and actions that are prohibited by Islam. Haram is the opposite of halal. In the study of Halal ecosystem, it refers to food items and non-food items that are prohibited to be eaten. Example of such food are rotten flesh of halal meat, dead animals, pork, and alcoholic drinks.

The Rationale Behind Haram Food

Eating dead animal is prohibited and the obvious rational to it is dangerous to the health of human being. It is also considered degrading in every human society to eat dead animal. In addition, the dead animal may have been killed by a dangerous disease which can spread to human if eaten.

Flowing blood is prohibited from Allah’s saying below

“I do not find within that which was revealed to me [anything] forbidden to one who would eat it unless it be a dead animal or blood spilled out or the flesh of swine – for indeed, it is impure – or it be [that slaughtered in] disobedience, dedicated to other than Allah . But whoever is forced [by necessity], neither desiring [it] nor transgressing [its limit], then indeed, your Lord is Forgiving and Merciful.”

The above prohibition is specifically linked to blood that flows out when the animal has been

Slaughtered. This kind of blood would be a terrible drink for humans. This is because it has high chance of spreading disease and secondly it has no nutrition, but contains toxics.

There are other forms of food prohibition, and Allah knows best the reasons for the prohibition, and Muslims entire life is to submit to Allah, and obey his commandment

Prohibition of Pork and Drug in Islam

Pork

Port is prohibited to be eaten because it is impure (rijis). Allah said in the Quran:

“He has forbidden you only dead animals, and blood, and the swine, and that which is slaughtered as a sacrifice for other than God.” (Quran 2:173)

In reference to the flesh of swine (Pork) Allah says in Quran 6: 145 “for that surely is impure”

From above reference it is clear that pork is not clean to be eaten.

Scientist has also proved that Pork contain parasites and diseases harmful to human beings, and hence not good to be eaten. In addition, pork has high cholesterol and harmful for human beings.

Finally, as Muslim we spend our entire life worshiping Allah, as Allah told us in the Quran that, He created Jinn and Humans to worship him and one of the worship is to obey his commandment of not to eat Pork.

Drugs and intoxicants

Drugs and intoxicants deadens the nervous system rendering a person to be helpless of himself, and such state compels him to neglect his spiritual, material, and moral duties and responsibilities. Allah says: “O you who believe! Truly, intoxicants and gambling and divination by arrows are an abomination of Satan’s doing; avoid it in order that you may be successful. Assuredly Satan desires to sow enmity and hatred among you with intoxicants and gambling, and to hinder you from there remembrance of Allah and from Salat. Will you not then desist?” (5:90, 91)

Note: Halal and Haram are discussed in more details, in the Post Graduate Diploma program, which is offered by giibic

30/10/2021 0 comment

Islamic Banking

Race for Future of Money

by admin 03/10/2021

written by admin

Crypto versus Central Banks

Central Banks around the world have fear that crypto currency will render their domestics currencies obsolete. Their concern is if more and more citizens invest, hold funds in digital wallets, or trade in crypto-currencies, the banks will not be able to control its money supply.

These Central banks concerns that local currencies become obsolete, or they lose control over it, have compelled central banks to launch their own digital currencies called Central Bank Digital Currencies (CBDC).

83 Central Banks Entered into Race

Mr Benoît Sureau ,a Financial Services Risk and Blockchain of PwC, has stated that “More than 60 (now 83) central banks have already entered the central bank digital currency race. CBDCs will be a game-changer, providing access to alternative payment solutions for citizens and corporates, as well as reinventing financial market settlement and interbank monetary transactions.”

Governor of Bank of Ghana Assertion of Competition

Ghana is among the 83 countries who have entered the digital currency race, and Dr. Ernest K. Y. Addision, Governor of Bank of Ghana, observed that “CBDC presents a great opportunity to build a robust, inclusive, competitive and sustainable financial sector, led by the Central Bank. From all indications, the concept has a significant role to play in the future of financial service delivery globally. This project is a significant step towards positioning Ghana to take full advantage of this emerging concept.”

There are numerous benefits of CBDC, and reasons to develop it, however one utmost reason is competition. It is a means to compete for a “sustainable financial sector”, being derived by “emerging concept” which is crypto, and led by bitcoin, hence a competition between bitcoin and central banks, in a short-put. This is seen as a neutralization effort of crypto currencies dominancy at the digital arena. A competition to control the future of an “emerging concept” of money. What then is Islamic finance ruling on crypto currency in general? Is Crypto currency considered a Currency in the perspective Islamic business law?

Sharia Ruling on Crypto currency

Dr Mohammed Burhan Arbouni, Head of Sharia Compliance of Alsalam Bank of Bahrain, answering question whether cryptocurrency is permitted in Islamic financial dealings, explained that “there is no haram or halal quality on crypto currency.” According to him one will not know whether a physical currency, example the Ghana cedi is halal or haram. For that matter, the line of “argument for or against crypto currency is false.” The argument should then be “whether crypto currency is currency or not currency from sharia point of view and if it is not currency what is it?”

Crypto is not a Currency – Dr Burhan

According to Dr Burhan, there are “number of criterion that are necessary from sharia point of view in order to categorise something as currency. Among them is that a currency should be something that even small boy or a person in a remote village can hold and use it to acquire necessary goods. It should be something that everybody in the world or a particular society can be used to buy and sell goods. It should not be something that only few people in the society can have access to. In this case, it is not a currency in the border meaning of currency. It should be a thing that store value, of course crypto currency is so as well as a property stores value. The fact that property or land store value does not mean it is a currency. Until bitcoin or otherwise available for everyone without the use of big computers and data to get them they still remain something that represent intellectual property similar to car plate numbers that are sold and bought. Similar to telephone chips with unique numbers that are sold and bought.”

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03/10/2021 0 comment

Islamic Banking

Essential Elements of Islamic Business Contracts

by admin 02/10/2021

written by admin

Islamic commercial law of contracts are those that most impact Islamic banking today. However the area of law relating to contracts and their application is a dynamic area of modern-day Sharia’s jurisdiction on commercial laws. Islamic commercial contract prohibits Riba and Gharar, examples of which have been given in classical Islamic jurisprudence called FIQH. Now the accepted thinking is that modern business contracts can be engineered as far as it does not offend anything in the Sharia’s laws pertaining to business

Islamic commercial law is much base around the law of sales termed as bai (an Arabic word for sales). Bai in Islamic commercial law means exchange of one item of property of some value (mal) for another

The Basis of the Law of Sales

The basis, for most jurists, of the law of sales is that:

The parties entering into the sales contract are identified and named
The object of the contract is specified
That is an offer and acceptance

Basic stipulations

In addition to legal prohibitions in sales contract, there are basic stipulations that need to apply

Parties entering into the contract must be sane and legally entitled to do so
The object of the contract must be legal and lawful (mutaqawwam)
The object of the contract should be specific and known, and the price should be specific and known

Other Stipulations from classical Islamic Jurisprudence

Two or more contract should not be connected together in one contract
Seller should not sell something is not own by the seller – this prevent short selling in modern day Islamic banking
Contract should not be make based on some future event (which may or may not happen)
Delaying the beginning of a contract

Relevant to Achievement of Sharia’s Objectives

Objective of Islamic law known as Maqasidal Sharia is important in all business transactions, as it provides toolkits and matrix for legislation and independent reasoning. Earlier and cotemporary Islamic scholars have given below as the general objectives of Islamic law (sharia):

Faith Life
Intellect Lineage
Property Protection of Honour
Fulfilment of contract Preservation of ties of kinship
Honouring the right of one neighbour Love of God
Sincerity Trustworthy
Moral purity Social welfare support
Freedom Human dignity
Human fraternity

All above objectives of Sharia are upheld and supported by the Quran, and are relevant in our human day to day business transactions for the good of mankind. It erases greediness, and selfishness, and promote fairness and equitable distribution of resources for better societies.

4. Types of Contracts

Islamic contract can generally be grouped into one of the three types:

Mutually onerous – each party has responsibility- e.g. Sales transaction one party buys and the other sells
Gratuitous – One party gives something to the other (e.g. a loan)
Accessary – One party gives assistance to the other e.g. an agent

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02/10/2021 0 comment

Islamic Banking

Blockchain in Islamic Finance

by admin 20/09/2021

written by admin

Understanding Blockchain in Islamic Finance & Banking

The blockchain technology is rapidly gaining the attention of Organizations of Islamic Cooperation. There are various Islamic financial institutes which are planning to use the blockchain system to bring the benefits that come with it. The authorities in Dubai have revealed their plan that in 2020 they will be using blockchain in public and private sectors. It is no surprise that even government is showing interesting in the digital currency. Here we have the information related to the relationship of blockchain in Islamic finance and banking system.

What is Blockchain?

The blockchain is a decentralized digital currency which helps in recording the transactions publicly and chronologically. It will allow users to access and verify their data. Blockchain is an underlying technology which is used to power Bitcoin and other digital currencies. Blockchain will allow you to send money around the world with no or little cost. There will be no banks or other third-party companies involved in the system which makes it more reliable. There are unlimited uses of Blockchain, and you can manage any type of transactions with it from property to goods and money.

Blockchain Technology in Banking and Finance

There are some people who are interested in knowing how blockchain in banking can be beneficial. There are two fold solutions provided by blockchain technology for the banking system. It can help banks save billions in the case by reducing the transaction and processing cost. As well as with blockchain technology in banking there will be a dramatic reduction in the time and paper that is processed. It will be valuable and profitable for the banks in the long run.

Is Blockchain Relevance for Islamic Finance Products?

The best thing about blockchain is that it provides an ideal solution for Islamic banking. It will not only reduce the cost of transactions, but also blockchain in Islamic banking will help get rid of interest rate. In the digital currency system, there is no interest that customers usually have to deal with. It means that management of services will become easier for the service providers.

Applications of Blockchain in Islamic Finance

There are various interesting applications of blockchain in Islamic finance that can bring different benefits:

1. Smart Contracts:

To avoid the rapidly increasing interest rates, Islamic banks can take help from smart contracts. It will help to reduce uncertainty and speculations. There are different types of contracts available in Islamic financing that will help in the management of profit sharing agreements, agency arrangements and partnerships.

2. Cloud Storage

The biggest attraction of blockchain in Islamic banking is that banks will get access to cloud storage. It will reduce all types of conflicts and help customers maintain their partnerships. The cryptographic mathematic algorithms will provide access to all the information. It will store all important data that can be accessed by banks and customers to avoid any issues.

3. Digital Currencies

There are different types of digital currencies available, but the development of digital currency is not as simple as it seems like. It requires a complete process to manage the services. That is why such currencies come with benefits like improved security and different rewards to miners.

Future of Blockchain in Islamic Banking and Finance Industry

The blockchain in Islamic finance and banking will surely help the Islamic banks, and financial institutes to succeed. Without worry about the interest and other such issues Islamic banking system will be able to work more productively. Management of loans and other relatable services will become easy. It is discussed in more details in the diploma in Islamic finance and Islamic finance courses of fered by giibic.

20/09/2021 0 comment

Islamic Banking

Difference Between Enah and Tawarruq

by admin 18/09/2021

written by admin

What is Tawarruq and Enah?

“Tawarruq is a financial instrument in which a buyer purchases a commodity from a seller on a deferred payment basis, and the buyer sells the same commodity to a third party on a spot payment basis”.
It could be observed in Tawarruq that “Commodity” is not the actual need of buyer, and it is only bought to fulfill the running cash requirements.

Difference Between Tawarruq And Enah:

In Tawarruq, the person who acquires liquidity, sells the commodity to a third party; While in Enah, buyer resells it to the same seller, from whom the commodity was bought, with a difference in the sale and purchase price.

Example Of Tawarruq:

“Ali” owns a small textile mill, and to complete $20,000 order of 1,000 shirts, he immediately needs $10,000.
“Ali” needs this amount to buy raw materials; such as cloth, buttons, and yarn. “Ali” is expecting to complete and deliver 1,000 shirts, and get its payment in less than 3 months.
So, fulfill the cash requirement for the raw material, “Ali” purchases a car of value $11,000 from his friend “Bilal” on deferred payment, and agrees to pay this amount in three months.
“Ali” sells this car to another friend on a spot payment of $10,000.
This way, “Ali” gets $10,000 for three months, to complete the order.
“Ali” completes the order in 80 days, delivers it to the ordering firm, and gets his payment of $20,000.
“Ali” pays $11,000 to “Bilal” for the car that he bought on deferred payment.

Tawarruq and Enah in the View of Jurisprudence:

Imam Ahmed Bin Hanbal and Imam Shaafi generally allow Tawarruq.
Imam Malik, who is very strict about Enah, does not see a major problem in it and consider it a way to avoid Riba.
Some other scholars do not see it as permissible. However, the preferred view of all four schools of thoughts is that it is permissible.
In view of AAOIFI, if a commodity is sold back to the original seller on a deferred payment, it is invalid. However, it is acceptable if the commodity is sold to a third party.

Verdicts On Tawarruq:

Its nature is allowed by the Jurists. Here are some views:

Tawarruq sale is the purchase of a commodity acquired, and possessed by the seller with a time fixed price, which the buyer will later sell to another person.
Consider the Shariah Ruling: “Allah allows the selling, but forbids Riba”. And, there is no trace of a Riba in type this transaction.
Tawarruq is permissible, only if the selling price is higher than the buying price. If it is not, then it will eventually fall into the unlawful credit sale.
Tawarruq is to support cooperation and mercy among Muslim Brothers, to secure them from debt; and to save them from prohibited transactions.

Role of Tawarruq in the Growth of Islamic Economics:

Tawarruq is basically a legal trick and a lawful way out. However, it may impede the natural path for the Islamic economy, on which Islamic Shariah urges. So, it is necessary for the Shariah boards to strictly monitor all Tawarruq based transactions.

Mechanism of Tawarruq:

Tawarruq Agreements:

According to Islamic jurists, it consists of some simple agreements:

First Agreement:

Seller sells a commodity in his possession, to the Buyer, for a fixed particular period of time.

Second Agreement:

The buyer sells this commodity to a third party, that has no connection with the first seller.

Third Agreement:

Banks and institutions add another agreement. Bank authorizes the seller to sell commodity in the market. Islamic banks are practicing Tawarruq in the international stock market, because stock exchanges are the shortest way for processing the fast sales.

Classical Tawarruq:

Let us understand its classic form, through following scenario:

Islamic Bank purchases commodity from Trader “Ali”, on cash, and ownership is transferred to Islamic bank.
Islamic bank then sells the commodity to the “Bilal” on deferred payment, and on cost price plus profit margin basis. And the ownership of the commodity is transferred to “Bilal”.
“Bilal” then sell the commodity to “Zayn” on cash basis, in the commodity market, and its ownership is transferred to “Zayn”.

Mechanism Of Tawarruq Among Financial Institutions:

It may be executed in the following manner:

Suppose Bank-B is in need of funds, and Bank-A intends to place funds.
Bank-A selects a commodity or stocks, which are liquid in nature.
Bank-A approaches Bank-B for Tawarruq, arrangements.
Bank-A purchases the commodity on cash payment, from the market or broker.
Bank-B bank purchases it from Bank-A on credit, or on Murabahah basis.
After taking delivery, Bank-B sells it in the market.
Bank-B uses this amount to fulfill its financial needs, and pays the amount to Bank-A, over the agreed period of time.

Tawarruq Contract and Enah are discussed in more details during the Islamic banking courses , Islamic finance course, and diploma in Islamic banking programs, offered by AIMS through highly interactive learning contents.

Islamic Banking Practices:

Agency Agreement With Buyer:

Suppose a bank appoints a person to purchase the commodity on its behalf:

If bank is buying to sell it to the same person, this transaction is “not” valid.
But if bank sells it to that person through another contract, with offer and acceptance, this transaction becomes valid.

Conditional Agency Agreement:

Suppose that the client, after purchasing the commodity from bank, appoints the bank as his agent to sell it in the market:

If this agency is stipulated as a condition in the contract of sale, the transaction is “not” valid.
If the agency was not a condition in the sale contract, and was affected after unconditioned sale, this transaction is valid but not advisable.

Areas Of Application:

Both Tawarruq and Enah are used to provide short-term working capital financing, and short-term personal finance.
They both are used in structuring credit cards.

Time Gap Between Transactions:

There must be a time gap between the sale by the bank to client, and sale by the client in the market.
This time gap is essential to expose the parties to price risk. And it ensures that gains are a reward for risk borne, and hence they are free from Riba.

18/09/2021 0 comment