Compliance of Shariah Principles in Banking Transactions Presented by Md. Fariduddin Ahmed Advisor Export Import Bank of Bangladesh Limited Former Managing Director & Chief Executive Officer Islami Bank Bangladesh Limited

Compliance of Shariah Rules in Deposit Account Opening of an Account in a Bank is a contractual relationship. Therefore, before opening any Account, be it an Al-Wadeeah Current Account or any type of Mudaraba Deposit Account, the rules and procedures of the concerned account to be read out and clearly explained to the prospective account holder & his signature to be obtained at the appropriate place of the Account opening Forms. Special care to be taken to communicate the rules for distribution of profit to the Mudaraba depositors. 2

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions The principles, rules and procedures of the related investment modes/foreign exchange transactions to be discussed in details with the prospective client(s) to give them clear understanding of the Islamic financing system. Formal Ijab (offer) of the terms and conditions of the investment/facility to be given to the client and his acceptance (kabul) to be obtained, preferably on the approval letter. No investment should be made against shariah prohibited items. 3

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions In Bai-Murabaha and Bai-Muajjal investments, goods should be purchased in the name of the bank by the employee/ representative of the bank, possession of the goods to be taken and then sell to the client. In Bai-Murabaha investment, cost price and sale price of the goods to be declared separately. It is not necessary in case of Bai-Muajjal investment. No amount of profit can be added with the sale price of Bai-Murabaha and Bai-Murabaha investment after expiry of the period of investment. 4

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions Once the sale price of the goods under Bai-Murabaha and Bai-Muajjal investments are fixed up adding all related cost, expenses and profit, no other cost and expenses like remittance charge, miscellaneous expenses can be realized separately from the client. In Bai-Murabaha and Bai-Muajjal mode of investment, no cash facility can be allowed to the client. 5

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions In case of financing of imports under Bai-Murabaha single deal concept should be followed i.e. profit should not be charged at the time of payment of invoice value. Profit should be added only once at the time creation of investment deal adding up all related expenses like duty, sale tax, VAT, transportation charges, etc with the invoice value. Back dated/post dated, excess or less amount in Cash Memo/Bill than actual amount of investment should not be taken/accepted. 6

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions Investment Agreement should not be kept blank. It should be properly filled in, signed and witnessed. Letter of authority to be taken from the investment client where the allotment letter of goods stands in his name. Goods purchased by the client on behalf of the Bank as “Buying Agent” should be inspected by the authorized employee of the Bank. 7

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions No investment should be made against the goods owned by the investment client. In other words, goods should be purchased from a seller other than the investment client. Cash Memos, Bills, Vouchers etc. to be taken in the name of the Bank and not in the name of the client on the date of investment. These should be preserved in the file for inspection by the Shariah Inspector. The client should receive the goods directly from the bank’s representative and not from the seller of goods giving acknowledgement. 8

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions Existing investment deal should not be adjusted by creating new investment deal. Rent should not be charged in HPSM investment before the asset against which investment is made become usable/rentable. Total amount of investment under Bai-Salam mode should be disbursed at a time. In case of Bai-Ishtisna mode, sanction amount of investment can be disbursed in phases. 9

Compliance of Shariah Rules in Investment & Foreign Exchange Transactions No profit can be charged under Bai-Salam mode at the time of making investment. Profit/Loss position is reflected on conclusion of the deal and after sale of goods. Goods against Bai-Salam mode of investment should not be sold through the investment client without engaging him as selling agent. Predetermined profit cannot be realized in Mudaraba and Musharaka modes of investments. 10

11 Compliance of Shariah Principles in Banking Transactions Shariah ruling on trading in currencies It is permissible to trade in currencies provided that it is done in compliance with the following Shariah rules and precepts: Both parties must take possession of the counter values before dispersing, such possession being either actual or constructive. The counter values of the same currency must be of equal amount, even if one of them is in paper money and the other is in coin of the same country, like a note of one pound for a coin of one pound. 11

12 Compliance of Shariah Principles in Banking Transactions Shariah ruling on trading in currencies The contract shall not contain any conditional option or deferment clause regarding the delivery of one or both counter values. The dealing in currencies shall not aim at establishing a monopoly position, nor should it entails any evil consequences to the interest of individuals or societies. Currency transactions shall not be carried out on the forward or futures market. 12

13 Compliance of Shariah Principles in Banking Transactions The Shariah rulings for different types of card Debit Card – It is permissible for institutions to issue debit cards, as long as the cardholder does not exceed the balance available on his account and no interest charge arises out of the transaction. Charge Card – Its is permissible for institutions to issue charge cards on the following conditions: The cardholder is not obliged to pay interest in the case of delay in paying the amount due. 13

14 Compliance of Shariah Principles in Banking Transactions The Shariah rulings for different types of card If the institution obliges the cardholder to deposit a sum of money as a guarantee and this amount is not available for the use of the cardholder, then it must be made clear that the institution will invest the money for the benefit of the cardholder on the basis of Mudaraba and that any profit accruing on this amount will be shared between the cardholder and the institution according to a specified percentage. The institution must stipulate that the cardholder may not use the card for purposes prohibited by the Shariah and that the institution has the right to withdraw the card in case such a condition is violated. 14

15 Compliance of Shariah Principles in Banking Transactions The Shariah rulings for different types of card Credit Card – It is not permissible for an institution to issue credit cards that provide an interest-bearing revolving credit facility, whereby the cardholder pays interest for being allowed to pay off the debt in installments. 15