publications monitor Summer 2007 Islamic banking | Islamic banking |
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Under
Islamic finance arrangements, any transfer of wealth or property has to
be made through a valid contract based on mutual consent. The
consideration payable under a contract in Islamic law must be known to
both parties and the payment can be deferred provided that the time and
method of payment is known.
From a banking point of view, the biggest difference between an Islamic banking agreement and a traditional banking agreement is that interest cannot be charged under an Islamic contract. A number of other structures are used to allow the finance industry to operate. One of the basic Islamic finance products is a contract under which the financier buys the item chosen by the customer, and then sells it to the customer at a marked up price over a term of years. In effect, a loan agreement is converted into an instalment contract. Under this type of structure, no interest is charged and the amount payable by the customer is fixed. There have been some recent decisions in the High Court in Malaysia about the obligation (or otherwise) of the financier to allow a rebate to the customer if the instalment contract is paid out early.
The
product is very popular in Malaysia for both Islamic and non-Islamic
people because the cost is known and fixed. There is no change in the
payments to the bank because of interest rate fluctuations. |