Islamic Retail Products

ISLAMIC BANKING & FINANCE: PRINCIPLES

AND PRACTICES
Learning Objectives:

After completing this module, the reader should be able to:

⚫ Understand the six Islamic Retail Products namely Home
Finance, Vehicle Finance, Personal Finance, Goods Finance,
Credit Card and Bank Accounts.
⚫ Understand the various Islamic Finance structures that are
applied (in) or used to design each of the Islamic Retail
Products.
⚫ Practically calculate the financials such as Return, Profit,
Installment and so on for each of the Islamic Retail Products.
Islamic products offered by banks

Following are the most common Islamic

products.
1. Home Finance
2. Vehicle Finance
3. Personal Finance
4. Goods Finance
5. Credit Cards
6. Islamic Bank Accounts
 HOME FINANCE

Banks provide home financing based on following

Islamic mods of finance .

i. Diminishing Musharaka (Musharakah Mutanaqisa)

ii. Mark-up sale (Murabaha)
iii. Islamic Lease (Ijarah or Ijarah Muntahiya Bittamleek)
iv. Manufacturing Finance (Istisna or Parallel Istisna)
Financing through Diminishing Musharaka

Diminishing Musharaka is most commonly used for the

financing of fixed and movable assets, long term projects, etc.
You and the Bank participate in joint ownership of a property,
equipment or a commercial enterprise. The share of the Bank
is divided into number of units. You purchase these units from
bank one by one with periodic intervals, thereby increasing
your share in the undivided property/asset gradually until you
ultimately becomes sole owner of the property/asset. During
the period of Musharakah bank charges rent for the use of that
portion of asset which is owned by bank. The rent amount of
the bank diminishes as its stake in the asset decreases after
purchase of units.
Mark-up sale (Murabaha)

It is one of the famous modes of financing of Islamic banks.

A customer approaches a bank and tell about
his/her requirement (A car, a house or machinery
etc). Then bank check creditworthiness of the
customer , if satisfied then purchased required
asset for the customer and sells it to the
customer on cost plus profit on deferred
payments. Later , customer pay to bank in
installment or any agreed method.
DIMINISHING MUSHARAKA (MUSHARAKA MUTANAQISA):

It is a form of partnership in which one

partner promises to gradually buy the
equity share of the other partner at market
value or a price agreed on at the time of
sale, in case of Musharka al Aqdor at any
price agree upfront, in case of Musharaka
al Melk, until the title to the equity is
completely transferred to him.
STRUCTURE OF HOME FINANCE BASED ON MUSHARAKA
MUTANAQISA:

⚫ A Customer who is in need to purchase a house approaches the

Islamic Bank and applies for finance through Musharaka
Mutanaqisa (Dimnishing Partnership).
⚫ As per Customer’s financing requirement Bank assesses the
customer’s creditworthiness and approves the request.
⚫ Bank and customer purchase prosperity , with an agreed
proportion. In the common banking practice, the Customer’s
share is known as Down Payment.
⚫ The Bank seeks an undertaking from the Customer to purchase
gradually the entire Bank’s share in the property during the finance
period. The Bank may exercise such undertaking to oblige the
Customer to purchase immediately the Bank’s then share in the
property in case of any default or a breach by the Customer
⚫ The Customer as per given promise keeps on purchasing the Bank’s
share on regular intervals throughout the finance period.
⚫ Each time when the Customer purchases the Bank’s share, a
separate Sale and Purchase Agreement is signed by and between
the parties.
⚫ The Customer leases the Bank’s portion in the property against
the payment of specified rent for a specified period and enters
into a lease contract with the Bank.
⚫ As per the terms of the lease agreement the Customer pays the rental
amount to the bank on the due dates which coincide with the date of
Bank’s regular sale of its specific portion to the Customer. The rental
amount for each rental period is adjusted due to a decrease in the
Bank’s share in the leased property.
⚫ Through a separate agency agreement the Customer is appointed as
Bank’s agent to carry out the major maintenance and obtain the Islamic
property insurance for the portion of Bank’s share in the property.
⚫ The Bank pays all the costs and expenses incurred to the
77Customer under the above said agency agreement. Bank also
pays a fixed (generally a very nominal amount) agency fee to the
Customer for his services.
⚫ To secure its finance, the Bank may place a mortgage over the
entire property or seek some other collateral.
⚫ To secure his right to settle the finance early, Customer may
seek an undertaking from the Bank to sell its entire portion to
the Customer at any point in time during the finance period
Calculations:
⚫ Let us take an example of Home Finance where the total cost of a house
is USD 1,000,000/- (USD 1 million).
⚫ The customer owns 20% share of the property and makes a down
payment of USD 200,000 and the Islamic bank owns the remaining 80%
and pays USD 800,000/-. In this way, the capital contribution ratio of
the customer and the Islamic Bank is 20:80.
⚫ The customer promises to buy the share of the Islamic bank in
60 monthly installments. The payment per installment comes to
USD 13,333. It is calculated by dividing the Bank’s total share
by the total number of installments, i.e., 800,000/60 = 13,333/-.
⚫ Under a lease agreement, the customer would be paying monthly rental
for occupying the Islamic bank’s portion in property at 1% of the value
of Islamic bank’s outstanding share. The monthly rent can also be
calculated using this formula: [Bank’s Total Finance - (Bank’s Total
finance/ Total No. of installments) X (Current Month-1)]*(Rental Rate).
Monthly payment
Islamic Retail Products

Islamic Bank Account

 Islamic Bank Account

ISLAMIC BANKING & FINANCE: PRINCIPLES

AND PRACTICES
⚫ CURRENT ACCOUNT:
⚫ ISLAMIC SAVINGS ACCOUNT:
⚫ INVESTMENT ACCOUNT:
CURRENT ACCOUNT:

An Islamic current account provides the account

holder with a guarantee on the principal amount
deposited. The account holders are not entitled to
receive any profits, but do not bear any losses
either. This type of account is designed
specifically to meet the needs of customers who
want to deposit or withdraw funds by cheques,
through cash tellers at bank branches or through
the ATM machines.
 How Islamic Current Account work
?
⚫ The Islamic current account is structured using the wadia or
Qard contract. Wadia in the legal sense signifies a thing
entrusted to the care of another.
⚫ The proprietor of the item is known as Mudi (depositor),
⚫ The person entrusted with it is known as ‘Wadi’ or Mustawda
(custodian) .
⚫ The deposited asset is Wadia.
⚫ A depositor,by depositing their money with a bank for safe
custody purposes, has entered into a Wadiah contract.
ISLAMIC SAVINGS ACCOUNT:

Islamic Savings account is offered to depositors primarily to fulfill

their precautionary motives of holding money, as well as to meet
some of their transactionary and investment needs where relevant.
Savings accounts are designed specifically to meet the needs and
requirements of customers who authorise the bank to invest their
deposited money. Customers can deposit or withdraw funds at any
time.
How ISLAMIC SAVINGS
ACCOUNT works ?
⚫ The contract that could facilitate this purpose would be
Mudaraba (profit sharing). Mudaraba is a partnership in profit
whereby one party provides capital (rab-al-maal) and the other
party provides labour (mudarib).
⚫ In this contract, the depositors act as rab-al-maal and the bank
as mudarib. Therefore, a portion of the deposits would be
invested in various projects and the profit shared on the basis
of the agreement. In case of loss, the rab-al-maal, i.e., the
depositors would bear all the losses.
INVESTMENT ACCOUNT:

This account enables customers to deposit specific sums of

money with the bank throughout the year for specific
periods of time (one month, 3 months, 6 months, 9 months
or 12 months) with the option to withdraw profits at
specific times. It also enables banks to hold some money
for depositors and invest on the basis of pre-agreed deposit
tenure. Islamic investment account can be considered a
substitute for conventional fixed time deposits.
 How INVESTMENT ACCOUNT works ?

⚫ Islamic investment account is structured using the Mudaraba

and Wakala contracts.
⚫ A Mudaraba is a partnership in profit whereby one party
provides capital (rab-al-maal) and the other party provides
labor (mudarib).
⚫ In this contract, the depositors act as rab-al-maal and the bank
as mudarib.
⚫ Therefore, a portion of the deposits would be invested in
various projects and the profit is shared in ratios as agreed
upon between the parties.
⚫ In case, a loss is incurred, then the rab-al-mall, i.e. the
depositors would bear all the losses.
The term Wakala literally means preservation. Legally, Wakala can
be defined asthe delegation of one person (the principal) for
another (the agent) to take their place in a known and permissible
dealing. In this regard, the agent (wakil) deals in others’ properties
and preserves them in return for a specific fee known as Wakala
fee.
Islamic Retail Products

CREDIT CARD
Credit card

A credit card authorises the holder to buy

goods and services on credit without
having to use cash. The issuer of the card
grants a line of credit to the consumer
from which the user can withdraw cash
money and can pay to the merchant for
the purchases.
Why need Islamic Credit card ?

The introduction of Islamic credit cards

happened to be one of the most
challenging tasks, as the mechanism of
modern credit card facility works on the
principle of Interest which is clearly
prohibited in Islam. This is where the
Islamic product development was required
to create something as flexible as the
conventional credit card without involving
interest.
How Islamic Credit Card work?

The Islamic finance institutions have adopted two structures to

develop Islamic credit cards. They are as follows:

⚫ i. Ujrah based Credit Card

⚫ ii. Tawarruq based Credit Card
UJRAH-BASED CREDIT CARD:

Ujrah (Ajr) means payment for services rendered. A person or an

institution can render services for a wage.

The Ujrah Card is based on the Islamic

principle of “Qardh Al Hasan”or
benevolent loans as well as a bunch of
services are made available to the
customer. Under this structure the credit
amount lent as Qardh to the customer is
repaid by the customer in installments
without any premium.
⚫ The bank charges a flat monthly fee which is for the services
which it provides along with the Ujrah Card such as discounts
at restaurants as well as access to airport lounges etc.

⚫ In the event of a delay in payment of the Qardh amount, the

bank cannot charge the customer any extra amount.

⚫ Also in the event of a default the customer will still be able to

avail the services that are provided with the Ujrah Card and
therefore the flat monthly fee can continue to be charged.
TAWARRUQ BASED CREDIT CARD:

Tawarruq is a financial instrument in which a buyer

(Customer) purchases a commodity from a seller
(Bank) on a deferred payment basis, and the
buyer(Customer) sells the same commodity to a third
party on a spot payment basis (in this step sale
proceeds which is equal to the initial Cost price of the
commodity) (meaning that payment is made on the
spot). The buyer basically borrows the cash needed to
make the initial purchase
In simple words

How does tawarruq work in matters of personal

finance? First, the customer purchases a commodity
(other than a medium of exchange) from the bank on
a cost plus profit basis. Then the customer sells that
commodity to a third party. (In reality, the customer
simply authorizes the bank to sell the commodity to
the third party on his behalf.) The proceeds from the
sale are credited to the customer’s account, and the
customer pays back the bank (the cost plus profit).
 Tawarruq based credit card
foundation
⚫ Customer apply for Islamic Credit Card.
⚫ After the credit assessment bank approve customer case and
allowed credit limit to customer based on Tawarruq transaction .
⚫ In Tawarruq based credit card the amount equal to the
total Murabaha profit paid by the customer is spread
over the period of the Murabaha Agreement tenor on a
monthly basis.
⚫ The sale proceeds (in the step when customer sells
commodity to a third party after purchasing from bank)
are placed in a special Mudaraba account as a security
against the deferred sale price (Collateral for the
transaction between customer and bank).
 Can we use Islamic credit card for the non-Shariah compliant
products ?

It is to be noted that in order the card

holders should not use the Islamic Credit
Card for non-Shariah compliant products
and services, the Islamic Banks block all
the MMCs (Merchant Category Codes)
which are assigned to those products and
services not in compliance with Shariah
principles.
Transaction Procedure and Calculations:

An Islamic bank buys bulk

commodities (Metals) from
the Market and takes
the constructive possession.