Sharia-compliant banking, also referred to as Islamic banking refers to a system of banking which is consistent with Islamic Sharia (law) and guided by Islamic economics, and it is a fast growing form of banking. Islamic law prohibits the payment and collection of interest. The main argument against this is that money is not used as a commodity with which to make a profit but that profit should be earned on goods and services only.
Kenya hasn’t been left behind in the world-wide phenomenal growth of Sharia-compliant finance and banking. Huge gains having been made since its inception and Kenya currently has two banks that exclusively offer Sharia-compliant products these being First Community Bank and Gulf African Bank. Conventional banks have also created specific windows and divisions that enable them to offer Sharia-compliant products to their customers. Barclays bank for instance has the Barclays La Riba account that is Sharia-Compliant. Barclays Bank even has a branch in Eastleigh that exclusively offers Sharia-compliant services.
If Sharia law prohibits collection of interest, how do these banks make money? As nzibo puts it, “Islamic banking is based on the principles of trade, partnership, sharing of gains and losses, and prohibition of reckless risk.”
Lending in Islamic banking:
Islamic financing involves a buy-sale deal or rent to sale deal and there’s an underlying asset behind the deal. Some of the Islamic lending contracts available in Kenya include:
- Murabaha: A client identifies goods which they wish to buy and requests a bank to finance the transaction. The bank buys the said goods and resells them to the client at an agreed profit. The client then repays for the goods within an agreed timeframe.
- Ijara: It’s the same as leasing where the bank purchases the asset and a form of partnership is created between the bank and the client. The client then rents the asset from the bank and over time buys shares of it from the bank over an agreed time frame. Repayment is in the form of rental costs which changes as the percentage ownership by the client increases. Since the value of the asset can increase, the bank has right to charge a higher price for the sale of its shares.
- Diminishing Musharaka: This is a form of financing where a bank purchases an asset on behalf of the client who then buys out the banks share of the asset.
Depositing funds in Islamic banking is like loaning money to the bank, money which the bank is obligated to pay back. Since Islamic banking does not pay interest, the bank will share its profits in situations where one has an investment account. In Sheriah-compliant current accounts you pay no interest or receive interest. Some sharia compliant accounts have banking charges.
Interestingly though sharia law is not only available to muslim customers, anyone can get one.