INTRODUCTION TO ISLAMIC FINANCING GLOSSARY
Q. What is Shari'ah?
Shari'ah means a way or path. In Islam, Shari'ah refers to the divine guidance & laws as given by the Holy Quran, the Hadith (sayings) and the Sunnah of the Prophet Muhammad (Peace Be upon Him).
Q. What are the sources of Islamic Shari'ah?
Islamic Shari'ah or the divine law of Islam is derived from the following four sources
1. The Holy Quran
2. The Sunnah of the Holy Prophet (Peace Be Upon Him)
3. Ijma' (consensus of the Ummah)
4. Qiyas (Analogy)
Q. What is a Fatwa?
A Fatwa is an authoritative legal opinion based on Shari'ah (Islamic law). A Fatwa is issued by a qualified person or body with authoritative knowledge.
Q. What is Riba or Interest?
Riba literally means increase, addition, expansion or growth. It is however, not every increase or growth which has been prohibited by Islam. In Shari'ah, Riba technically refers to the premium that must be paid on a financial transaction without any consideration.
Q. Is interest only prohibited in Islam only?
Prohibition of interest is not limited to Islam. It is also prohibited in Judaism and Christianity - for reference see Exodus 22:25, Leviticus 25:35-36, Deuteronomy 23:19, Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and Ezekiel 18:8,13,17 & 22:12.
Q. Why Interest/Riba is prohibited in Islam?
First of all, as a believer we must accept all the injunctions of Islamic Shari'ah whether we understand the logic behind them or not. Secondly to give a brief answer to what this is, we would like to quote what one of the well-known Islamic scholars, Imam Al-Ghazali pointed out in the following words:
"Riba (interest) is prohibited because it prevents people from undertaking real economic activities. This is because when a person having money is allowed to earn more money on the basis of interest, either in spot or in deferred transactions, it becomes easy for him to earn without bothering himself to take pains in real economic activities. This leads to hampering the real interests of the humanity, because the interests of the humanity cannot be safeguarded without real trade skills, industry and construction."
Q. Is there a difference between interest and usury?
The Holy Quran has used the word Riba to explain any excess taken on any type of loan. Through several Hadith, it is also proved that any amount taken, over and above the principal in a loan, is Riba whether it is for commercial or productive purpose or for consumption purpose. This is the conventional banking system that has classified two different terms as commercial interest for businesses and usury for consumption loan. For example, if Mr. X takes loan from a bank to start a business then the amount he will pay to the bank regardless of profit & loss in the business would be called interest or commercial interest. On the other hand, if he takes a loan to purchase a computer for his personal use then the amount paid over and above the principal would be usury. But according to Islamic principles, both types are Riba and are not permissible.
Q. What is Islamic Banking?
Islamic banking is a system of conducting trade and banking activities in line with the principles of Islamic Shari'ah while avoiding all the prohibited activities such as interest or Riba, Gharar, financing of haram trade and businesses.
It is not banking which is based on pricing money and earning interest as conventional interest-based banks do but it is a system of trade where goods and services are sold and capital is invested by taking risk to earn halal profits. It is also not just change of name as many mis-understand but it is based on the Quranic injunction of 'Allah has permitted trade and forbidden riba'. Interest free banking is a subset of Islamic banking concept.
Q. Is there a need for a Shari'ah compliant Micro financing and Banking in Ghana?
Muslims in Ghana will have access and enjoy microfinance and banking service that is provided by a stand-alone Islamic institution and in accordance with Islamic Shariah principles.
Q. Other banks have Islamic finance offerings. What makes Ghana Islamic Microfinance different?
Ghana Islamic Microfinance is the first of its kind in Ghana to provide Shari'ah compliant microfinance services in Ghana. As the pioneer in this field we make every effort to ensure that we do not compromise the principles of the faith.
Q. How are you funded?
Ghana Islamic Microfinance intends to raise its funds through a WAQF endowment from well wishers, Islamic Venture Capital Firms and individual shareholders.
Q. What is the difference between Shari'ah compliant microfinance banking and conventional microfinance banking?
The main difference between Shari’ah compliant banking and conventional banking is that Islamic teachings says that money in itself has no intrinsic (fundamental) value and forbids people from profiting by lending it, without accepting a level of risk – in other words, interest (known as "riba") cannot be charged on money. To take money from money is prohibited- wealth can only be generated through legitimate trade and investment. Any gain/profit related to this trade/investment is shared between the person providing the capital and the person providing the expertise (Mudharabah). At Ghana Islamic Microfinance, we generate all our profits through Shari'ah compliant trading and investment activities. We then share the profits with our customers at a pre-agreed ratio. In order to share profits you must hold one of our savings or investment accounts (term deposit accounts).
Q. Surely, are you just charging interest and dressing it up as something else?
No. We participate in the risk of transaction and accordingly earn profit. Interest is fixed and does not require participation in risk. The fact that the profits we make through trade and share with customers are similar to interest rates is because we operate in a conventional economic environment. The safest and best way for you to judge is to check the value of what you would receive from conventional financial institutions. We make every effort to remain competitive so that our customers are not penalized by banking in a way that is true to their faith.
Q. The end result of Islamic Banking and Conventional Banking appears to be the same. They appear similar?
The validity of a transaction does not only depend on the end result but rather the steps followed in reaching the end. For example, a normal McDonald's burger in USA and Qatar look the same smells the same and tastes the same but the former is disallowed (haram) and the later is allowed (halal) for Muslims due to its compliance of Islamic guidelines of slaughtering animals.
Q. How do you generate profit to pay a customer?
The money our customers deposit into their savings accounts goes into a pool, which is then invested by us in Shari'ah compliant financing and investments. The profits generated from these activities are then allocated to different sources of funds raised by us. We aim to ensure that profit rates paid in all our savings accounts are market–competitive.
Q. Ghana Islamic Microfinance does not allow payment or receipt of interest in its activities. How does do you intend to make profits? More specifically how will you be able to meet your overhead costs?
Interest/usury is likened to riba which is considered to be exploitative and forbidden by Islam and frowned upon by the major world religions. Thus Shari'ah compliant instituitions do not pay interest or receive interest.
Ghana Islamic Microfinance does not engage in, or finance activities that are prohibited in Islam. It also shuns activities that are harmful to the society. For example, it would not finance sale of alcohol, tobacco and casinos (gambling).GIMF will engage in business that have tangible economic purposes and give positive benefit to the society at large.
GIMF is based on profit-sharing on the deposit side hence the higher the bank's profits the higher the depositors earnings.GIMF will actively participate in trade and production of goods and services hence getting a profit on its assets products.
Q. Does Islamic banking allow/permit investment in stocks and equity funds? Are there guidelines?
Yes, as long as they conform to the screening guidelines, each company stock has to be looked at and analyzed to confirm it is Shari'ah compliant.
The Shari'ah compliance focuses on two aspects of the company:
- The business - The type of business operation the company is engaged in. The business should not be prohibited by the Shari’ah laws.
- Financials of the business
- Some Shari'ah scholars have done research and have come up with financial analysis that should be used to ascertain compliance. Income generated in non-halal (not allowed) activities should not exceed 33% of total investment portfolio;
– Interest income to total income should not exceed 5% generated by the company;
– Total interest bearing debt to total asset should not exceed 45%;
– Illiquid assets to total assets should be more than 10%
This is an area that is currently causing excitement in the market. It is recommended that an investor looking for a Shari'ah solution obtains approval from a competent Shari'ah Board before investing.
Q. Does Islamic investment deal in speculation and preclude short selling?
Speculation and short selling are not allowed. Shari'ah compliant banking allows one to trade when in ownership. It discourages speculation by demanding full disclosure avoiding any uncertainty.
Q. What about conventional debt instruments?
Conventional debt instruments are not allowed as they are interest based.
Q. What is GIMF position on asset-backed debt financing?
We undertake assets backed finance through modes of Islamic lease and diminishing partnership.
Q. How do I open an account?
You will need to visit one of our branches, where you will complete an application form with your personal details and supply proof of identity documentation before we can open an account. Our branch staff will be happy to answer all your queries and help open an account for you
Q. What happens when my current account is overdrawn?
Obviously, we are unable to charge penalty interest to your account. However, we will charge an administrative fee for items such as returned cheques and letters of notification. In accordance with the principles of fairness inherent in Shari'ah banking, the charge will reflect expenses incurred by the bank. If an account is consistently conducted in an inappropriate manner, we will close the account.
Q. Do you have to be a Muslim to bank with Ghana Islamic Microfinance?
No, Ghana Islamic Microfinance is open to both Muslims and Non Muslims. It is an equal opportunity employer and encourages professionalism and offers attractive career prospects.
Q. Do you employ only Muslims?
No, we employ the best person for the job regardless of color, creed, gender, ethnicity etc. We are committed to our equal opportunities policy.