Islamic Bank of Britain plc (IBB) has held an exclusive event, entitled Islamic Finance Question Time – an open, public Q&A session hosted by the Bank’s Shar’ah Scholars. Islamic Finance Question Time is the first event of its kind, and the only time a UK Islamic bank has given public access to the Scholars that form its Shari’ah Supervisory Committee (SSC).
IBB, a wholly-owned subsidiary of Qatar International Islamic Bank, is the UK’s only wholly Shari’ah-compliant retail bank in the UK. It was originally established in 2004 and has attracted over 50, 000 customers.
Chairman of the IBB SSC, Sheikh Dr Abdul Sattar Abu Ghuddah said, “Islamic finance is as old as the religion of Islam itself. However, there is still a lot of misunderstanding around how it works and the need for Muslims to manage their finances in Shari’ah-compliant manner. The IBB SSC hopes the Islamic Finance Question Time event has shed some light on the matter and gone some way to encouraging the further take-up of Shari’ah Finance amongst the Muslim community.”
Samir Alamad, Senior Manager, Shari’ah Compliance at IBB who works closely with the IBB SSC on a day to day basis, said, “The feedback from attendees of Islamic Finance Question Time has been very positive. The public welcomed the opportunity to engage with the IBB SSC so openly. The event is the first time a UK Islamic bank has given open access to its SSC, and this reflects the open and transparent way the bank works with its customers.”
Over 150 guests attended the event, held at the Bloomsbury Hotel in London. Over 10 questions were put to the panel leading to a debate lasting over 1.5 hours. Among these questions, the following generated a lively and informed discussion amongst the panel and their guests:
Why don’t you use the rental market rate for your Home Purchase Plan product?
Islamic banks use BBR or LIBOR to price their products as these are the most accurate, widely accepted and consistent benchmarks for financing. This allows Islamic banks to meet the important Shari’ah criteria of avoiding uncertainty. If rental rates were to be used as a benchmark instead, there would be too much variation. Not only would this go against the Shari’ah it would also be more costly for the customer. Rental rates fluctuate across a wide spectrum depending on location, condition of the property and other aspects, e.g. rent charged for a property in London would be three or four times more expensive than a similar property in the North. Hence, the Islamic bank would end up offering many various rental rates which would not be practical. The customer would also be disadvantaged by having to pay more if the rental rate was to be used as a benchmark.
Importantly, basing the rental rates of HPPs on benchmarks such as LIBOR or BBR does not affect the actual contracts that the product is based on. The rent or lease agreement are not rendered Haram, or not compliant with Shari’ah. Established benchmarks such as BBR and LIBOR therefore play an important role. They allow the bank to meet the Shari’ah requirements for a benchmark that is widely accepted, consistent, transparent and reliable which in turns eliminates any uncertainty around pricing.
An Islamic benchmark is currently being developed and this is a great step forward for the industry. Once established it will eliminate the confusion that exists over the use of BBR or LIBOR, as explained above.
Is it permissible under the Shari’ah to quote a profit rate for Fixed Term Deposit savings accounts?
It is important to clarify that this Shari’ah compliant savings product(s) is called ‘Fixed Term’ and not ‘fixed return’. It is usually offered under the Islamic principle of Wakala (an agency agreement). With this product, the Islamic bank provides an expected profit rate over a set period of time as a ‘target’ based on the investment activity it will undertake with the deposits. The ‘Fixed’ element relates to the length of time the bank will undertake the investment activity for the customer. For example, two years for the Two Year Fixed Term Deposit Account.
These savings products do not offer a fixed return, in the same way that conventional banks that pay interest, do. Under Shari’ah, the bank cannot guarantee a rate of return, because with investment there is always an element of risk.
However, Islamic banks mitigate this risk for the customer in many ways, so that the customer’s deposits and return do not suffer. Essentially, the bank monitors the investment activity, and its performance, very closely. If, at any time, it looks likely that the customer’s return may be less than the expected profit rate the bank will contact the client and offer them the option to close the account and take back the full deposit amount and the profit accrued up to that date. Alternatively, the customer can choose to carry on till the end of the term on the lower expected profit rate from that point.
This process is all in accordance with Shari’ah which encourages trade, and forbids Riba. Shari’ah also mandates that risk is part of all transactions and that these risks are managed responsibly to ensure the best possible outcome for all parties.