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Wednesday, 20 February 2013

Q&A on Islamic finance and riba

Islamic Finance Column - II — By Ashar Nazim —

1) What is the current status of Islamic finance?

n Islamic finance has a current global market size of over $1.2 trillion and is expected to grow at a rate of 15 to 20 per cent per annum in the foreseeable future. There are close to 500 financial institutions worldwide and over 75 countries where Islamic banking is practiced.

2)What is Riba (interest)?

According to Encyclopedia Britannica the definition of interest is “the price paid for the use of credit or money”. A working definition of interest is “any predetermined/conditional additional amount in a loan over and above the principal”. No explicit definition of Riba/interest has been given in the Quran, but it can be derived from a verse as any sum received over and above the principal (“if you repent yours is your principal” — 2:279). In a Hadith narrated by Hazrat Ali (RA) the definition of Riba is given as any conditional excess in a loan over and above the principal. In other words, Riba or interest is the rent charged by the lender for the use of his money by the borrower.

3) If an Islamic bank cannot charge interest from its customers then how does it make money?

n The verse of the Quran “And Allah has permitted trading and prohibited Riba” is the guiding light for Islamic banks. They cannot lend money on interest but they can buy goods and commodities and sell them onwards to their customers on deferred payment basis (Murabaha). They can also buy assets and give them on rent to their customers (Ijarah). They can manage money for their customers by investing funds in Shari’a compliant investment opportunities and charge a fee for this service. They can also enter into a joint partnership with their customers for an asset purchase and then gradually sell their partnership share to the customer (Diminishing Musharaka). Hence there are many Shari’a compliant ways to do business and earn legitimate returns by an Islamic bank.

(Oman Daily Observer / 20 Feb 2013)

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