Frequently Asked Questions
Q. What is Barkat Islamic Banking?
A. Barkat Islamic Banking is a division of Faysal Bank which is offering Islamic banking through dedicated branches under the State Bank of Pakistan’s Policies for the promotion of Islamic Banking.
Q. What is the philosophy of Islamic banking and finance?
A. Islamic shariah prohibits ‘interest’ but it does not prohibit all type of gains on capital. It is only the increase stipulated or sought over the principal of a loan or debt that is prohibited. Islamic principles simply require that performance of capital should also be considered while rewarding the capital. The prohibition of a risk free return and permission of trading, as enshrined in the Verse 2:275 of the Holy Quran, makes the financial activities in an Islamic set-up real asset-backed with ability to cause ‘value addition’.
Islamic banking system is based on risk-sharing, owning and handling of physical goods, involvement in the process of trading, leasing and construction contracts using various Islamic modes of finance. As such, Islamic banks trade and / or invest in assets / business deals for the purpose of income generation.
Profit has been recognized as ‘reward’ for (use of) capital and Islam permits gainful deployment of surplus resources for enhancement of their value. However, along with the entitlement of profit, the liability of risk of loss on capital rests with the capital itself; no other factor can be made to bear the burden of the risk of loss. Financial transactions, in order to be permissible, should be associated with goods, services or benefits. At macro level, this feature of Islamic finance can be helpful in creating better discipline in conduct of fiscal and monetary policies.
Q. What is the difference between Islamic and Conventional banking?
A. Islamic Banking transactions are always based on:
i) Purchase & Sale of Goods and / or services;
ii) Equity participation such as Mudarabah & Musharakah (Including Diminishing Musharakah) where Bank’s capital is exposed to all or most business risks.
Conventional banking, on the other hand, with the exception of a small segment relating to services (such as transfer of funds, collection of Bills, Lockers) is based on providing credit, in cash, and earning interest thereon.
Q. Is not Faysal Bank already an Islamic bank?
A. Faysal Bank started operations in Pakistan in 1987 as a branch of Faysal Islamic Bank of Bahrain with the sole purpose of introducing Islamic modes of finance. This set up was converted into a locally incorporated bank in Pakistan and on October 03, 1994, Faysal Bank Limited was incorporated as a public limited company under the Companies Ordinance, 1984. Its shares are also listed on Karachi, Lahore and Islamabad Stock Exchanges. Ithmar Bank B.S.C., an Investment Bank listed in Bahrain, is the ultimate holding company of Faysal Bank Limited.
Complying with State Bank of Pakistan’s regulations under the policies announced for the promotion of Islamic Banking, Faysal Bank is introducing “Barkat Islamic Banking”.
Q. How knowledgeable in Islamic financing are the staff members manning the Barkat Islamic Banking branches?
A. Barkat Islamic Banking staff is well experienced and committed to promoting the cause of shariah banking. Faysal Bank’s shariah advisor is a fully qualified Mufti who oversees all business of these dedicated branches and ensures its compatibility and compliance with shariah principles.
Q. What type of deposit accounts is Barkat Islamic Banking offering?
A. The different deposit products being offered are:
• Barkat Islamic Current Account (value added current account)
• Barkat Islamic Basic Banking Account (current account with no minimum balance requirement
• Barkat Islamic PLS Account
• Barkat Islamic Investment Certificate
• Barkat Iislamic FCY Account (current account)
(See individual product brochures for features).
Q. What Type of Islamic Schemes would the Bank invest depositors funds in?
A. Like other Islamic Banks, Faysal Bank would also invest depositors’ funds (net of CRR / SLR requirements specified by SBP from time to time) in shariah compliant modes such as Diminishing Musharakah, Ijarah and Murabaha facilities to Commercial and Corporate Customers as well as individuals. Reliance would also be on shariah compliant liquidity management techniques to invest surplus funds so as to minimize the time lag between mobilization of deposits and their deployment. The Bank will also invest in Sukuk (Islamic Bonds) issued or guaranteed by GoP as well as by private sector companies with a good credit rating, to diversify its portfolio of assets and optimize returns.
Q. How is the bank going to ensure that profits shared with customers of Barkat Islamic Banking are free from any element of Riba?
A. All deposits mobilized through Islamic Banking Branches shall be used only for providing finance under Islamic modes and only profits there from will be shared with the depositors.
Q. What will be the mode of profit sharing?
A. The mode of profit will be
(i) The PLS account is based on the Mudaraba mode. Faysal Bank is the “Mudarib” (manager of the funds) and the customer is the “Rabb-ul-Maal” (owner of fund). Rate of Profit on deposits will be determined through a shariah approved weightage mechanism. Weightages for each calendar month will be pre-announced and applied as per rules to determine the actual amount of profit payable to each depositor. Profit will be paid every month.
(ii) The Barkat Islamic Investment Certificates (BIIC) is a “Riba Free” investment based on the principles of Mudaraba Mushtarika with the customers being the “Rabb-ul-Maal” (owner of funds) and Faysal Bank the “Mudarib” (manager of funds) as well as investor (Rabbul Maal).
The BIIC holders’ funds shall be eligible for a prorata portion of profit which the Barkat Islamic Banking Branches will earn (after deduction of expenses) through investing these in various modes of Islamic finance. Based on strict shariah principals of Mudaraba Mushtarika, the BIIC holders are informed that in case of loss, this shall also be shared as per shariah rules.
Q. Will profit rates on deposits be known in advance by customers?
A. Profit sharing weightages on different types of deposits will be announced monthly and displayed at Barkat Islamic Banking branches. Expected profit rates will be mentioned when taking customer deposits but actual rates of profit may be different. Over a period of time, rates declared in the past will give the customer a fairly good idea of the business growth of Barkat Islamic Banking and the kinds of returns to expect.
Q. What type of financing products is Barkat Islamic Banking offering?
A. Financing is being offered under the shariah approved modes of Ijara and Murabaha (also see individual product brochures for features).
Q. What are the Major modes of Islamic banking and finance?
A. Following are the main modes of Islamic banking and finance
MURABAHA OR MURABAHA MUAJJALA
Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller discloses his cost and profit. Islamic banks have adopted this as a mode of financing. As a financing technique, it involves a request by the customer to the bank to purchase certain goods for him. The bank does that for a definite profit over the cost, which is included in the Selling Price. To provide credit to the Customer, Islamic Banks normally allow the deferment of Selling Price to a future date or dates. Deferment of Price is not an essential feature of Murabaha. In practice, however, Murabaha has become synonymous with Murabaha Muajjala where Selling Price is deferred. In such transactions, the Selling Price can be the same as Cash Price or it can be higher or lower.
MUSAWAMAH / BAI MUAJJAL
Musawamah is a general and regular kind of sale in which price of the commodity to be traded is agreed between the seller and the buyer through the normal process of bargaining, without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, the seller in Musawamah is not obliged to reveal his cost. All other conditions relevant to Murabaha are valid for Musawamah as well. Musawamah can be used where the seller is not in a position to ascertain
precisely the costs of commodities that he is offering to sell. Like Murabaha, Musawamah can be on the basis of spot payment of Price or it can be a credit sale. If latter, it is referred to as Bai Muajjal. Selling Price can be equal to or higher or less than the cash price. Usually it is higher and this is explicitly allowed in shariah.
Ijarah is a contract of a known usufruct against a specified and lawful return or consideration for the service or return for the benefit proposed to be taken, or for the effort or ork proposed to be expended. In other words, Ijarah or leasing is the transfer of usufruct for a consideration, which is rent in case of hiring of assets or things, and wage in case of hiring of persons.
A contract under which an Islamic bank provides equipment, building or other assets to the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the ownership in the asset would be transferred to / acquired by the lessee under a separate Agreement of Sale. The undertaking or the promise does not become an integral part of the lease contract. The rentals are fixed in such manner that the bank gets back its principal sum alongwith with profit over the period of lease.
It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. Istisna’a can be used for providing the facility of financing the construction of houses, projects, bridges, roads and highways or fabrication / manufacture of plants & machinery.
Salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale may be any kind of goods but cannot be gold, silver or currencies. Barring this, Bai Salam covers almost everything, which is capable of being definitely described as to quantity, quality and workmanship.
A form of partnership where one party provides the funds while the other provides expertise and management. The latter is referred to as the Mudarib. Any profits earned are shared between the two parties in a pre-agreed ratio, while loss is borne only by the provider of the capital.
Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds, which are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by the partners strictly in proportion of their respective capital contributions.
Q. Is Murabaha a mode of financing?
A. No, it is not. Financing in the conventional sense cannot be dealt through MURABAHA. In those cases, however, where the customer needs funds to actually purchase a commodity or asset, MURABAHA can be used to provide credit if the payment of price is deferred and the buyer (customer of the bank) is permitted to pay the price on a certain future date or dates, in lump-sum or installments.
Q. How is Murabaha different from interest bearing loans and mark-up financing?
A. MURABAHA differs from an interest bearing loan in that the seller (even though it may be a bank) does not provide any cash to the buyer and there is no concept of a lender or borrower. Also, the selling price is agreed in absolute terms in MURABAHA while in the case of an interest bearing loan, a percent per annum increase in the principal amount, based on time, is agreed. Such interest earning goes to the income of the lending bank. Sometime there are penalty payments in the case of interest bearing loans but no such penalty can be imposed in the case of MURABAHA.
In terms of practice, mark-up financing in Pakistan has almost become synonymous with interest bearing loans. Yet an important distinction between mark-up financing and MURABAHA is that mark-up financing is almost always based on the buy-back of goods already owned by the customer of the bank to whom financing is provided. There is no mechanism to check the existence of such goods at the time of inception of the transaction (even though this does not have any bearing on the invalidity of the transaction in the eyes of Islamic shariah ). At no point in time, the conventional bank assumes the risk relating to the goods that it supposedly purchases in a buy-back transaction .MURABAHA is always based on the purchase of goods from a third party by the bank, thereby assuming the risk related to their ownership, and sale of these goods to the customer after taking the title and possession (physical or constructive) thereof.
For more information, please call our Customer Interaction Centre at 111 06 06 06, or visit your nearest Faysal Barkat Islamic Banking branch.