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Islamic Banking

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions).

The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).

Islamic banking does not allow a fixed return on capital, as charging and receiving interest (riba) is forbidden. As a Sharia’a compliant bank, all our products and services avoid riba.

The essential feature of Islamic banking is that it is interest-free. Islam prohibits Muslims from taking or giving interest (riba) regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged.

The relationship between us, Salaam Financial and you, our customer, is based on sharing risk – and sharing the rewards from the financing and investments we make on your behalf. The returns are based on the amount of profit realised from each transaction.

Some Types of Islamic Banking that Salaam Providing is:

  • Murabahah: This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement.

    The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin.

    The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the Murabaha is paid in full.

    There are three parties involved to it. The seller, the buyer and the bank as an intermediary trader between the buyer and the seller. The bank here does not purchase unless the buyer specifies his desire and a prior outstanding promise to purchase.
     
  • Mudharabah: Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. The entrepreneur provides expertise, labor and management.

    Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. That justifies the bank's claim to part of the profit. The profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits.
     
  • Musharakah: This is a contract by mutual consent of parties sharing profits and losses in a joint business. Under this agreement, the bank provides funds which are mixed with funds of a business enterprise or others. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportions to respective capital contribution.

    The musharaka principle is invoked in the equity structure of Islamic banks and is similar to the modern concepts of partnership and joint stock ownership.

     
 
 
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Salaam Financial Services.