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Sharia Banking
What is Shari’a Compliant banking?

It is a banking system which provides banking services and products in line with the rules and principles of Shari’a and is conducted under direct supervision and audit of Shari’a scholars.

What is Interest/ Riba?

Interest/Riba is rent of money or the time value of money. It is the additional amount charged by a creditor in lieu of the time that he gives to the borrower for repayment or delay in payment.

What are the major modes of Sharia compliant banking and finance?

Following are the most commonly used modes of Sharia compliant banking and finance:

 MURABAHA: It is a sale contract in which an individual/entity sells an asset at cost plus an agreed profit. The sale price could be paid on spot or deferred basis.

 IJARA: It is a leasing contract in which the owner of an asset or its usufruct sells the usufruct of the underlying asset to the lessee for an agreed rental.

 MUDHARABA is a form of partnership where one party provides the funds while the other provides management services against a pre-agreed share in the profit of the investment. However, if there is any loss, it is borne solely by the capital provider.

 MUSHARAKA is a partnership with all the parties contributing to the capital of the Musharaka on the basis of profit and loss sharing. The profit shall be shared as per the agreement but the loss will be borne pro rata.

 SALAM: It is a forward sale in which payment is made on spot while the delivery of the Salam asset is deferred.

 ISTISNA’: It refers to a sale in which the buyer orders the would-be manufacturer to produce and deliver a fully described commodity from raw materials of its own. It is basically an order to manufacture.

Is it permissible for a Shari’a compliant Bank to impose penalty for late payment?

If Shari’a compliant banks do not impose any penalties on late payment the customers shall not pay in time and thus Shari’a compliant banks will not be able to run their business efficiently and give good returns to the investors. Therefore, Shari’a compliant banks have been allowed to take from each client an irrevocable undertaking that in case of late payment he/she shall be charged a penalty which shall be donated to a charity supervised by the Shari’a Board of the bank independently from the bank. Shari’a compliant banks do not use these donations for their own benefit, but incorporate such provisions in their contracts to check potential default.

How do Shari’a compliant banks make profit?

Shari’a compliant banks invest/utilize the funds received from Account Holders/customers under Shari’a compliant modes of financing such as Ijara, Murabaha, Salam, Istisna’ and investment contracts such as Mudaraba, Musharaka, Wakala etc. to generate profit.

Is there any difference between Interest and Usury?

No, both have the same meaning. The Qur’an, Sunnah and Fiqh do not differentiate between the two. Islam terms what is known as interest or usury as Riba and therefore prohibits it.

What are the key differences between Shari’a Compliant banking and conventional banking?

Shari’a compliant banking offers Riba free banking in line with Shari’a rules. It neither gives nor takes loans on interest. It operates as a trading company which buys, sells and enters into different modes and contracts of investment such as Mudharaba, Musharaka and other forms of trading instruments to make profits.

• The absence of interest in Shari’a compliant financing is one of the key factors that differentiate Shari’a compliant banks from conventional banks.

• Shari’a compliant banking is asset-backed which means that Shari’a compliant banks does not carry out business unless an asset is purchased to allow the transaction to be conducted according to Shari’a.

• The source of the Shari’a compliant bank’s funding, profits and business investments cannot be in/from businesses that are considered unlawful under Shari’a, i.e. companies that deal in interest, gambling, pornography, speculation, tobacco and other commodities contrary to Islamic values.

• The whole premise of Shari’a compliant banking is to provide a way for society to conduct its finances in a way that is ethical and socially responsible. Trade, entrepreneurship and risk-sharing are encouraged and these are the financial principles that underpin financing and the products offered in a Shari’a compliant bank

Why are Shari’a compliant finance products benchmarked to conventional indices such as Overnight Rate (ON), T-bill rate and the Central Bank of Kenya Rate (CBR)?

It is important to understand that there is no Shari’a violation in using these benchmarks as long as the transaction and financing instrument are Shari’a compliant and are executed in line with the attendant principles.

A benchmark is an important tool in banking; Shari’a compliant banks must ensure that their products, and the prices that are charged, avoid uncertainty for the customer and are consistent with the prices of the local market. Shari’a compliant banks therefore use CBR or ON rate to price their products, as they are very widely recognized and enable them to meet these important criteria.

Why do Shari’a compliant banks advertise % rates for products if they do not charge or pay interest?

• It is important to remember that Shari’a compliant banks are based on Shari’a. A % is simply a method of calculation; Shari’a necessitates avoidance of gharar or ambiguity in a transaction, therefore the repayment amount should be clearly known from the outset. The liability products receive a % of actual profit realized from the assets which are charged a profit.

• As a Kenyan bank regulated by the Central Bank of Kenya and aligning to the Prudential Guidelines (2013), DIB Bank is required to display its charges in this way so that consumers can judge the value of what it offers and charges. Customers must be able to compare DIB Bank’s profit rate and charges against what they would receive or be charged by conventional financial institutions.

• By expressing the rental rate as a % the charge is not converted into interest. It simply expresses how much rental DIB Bank is charging the customer as a percentage of the property purchase price. It also allows the customer to compare this charge with other providers in the market, including conventional mortgage companies, and to make a decision on which product is most suitable for them. Whilst our Home Finance is Shari’a compliant and the conventional mortgage is not, the % rate is a common measuring tool that makes the two products comparable.

• Displaying % rates for products from Shari’a compliant banks therefore benefits the customer and their ability to make a choice about the products they wish to take.

Will Interest be paid on deposits received? What will I earn and is it Halal for me to earn from my savings?

• DIB Bank will not pay interest to customers that open a savings account with them. However, when opening a savings account or a term deposit you partner with the bank. Your funds are put in a Shari’a compliant investment pool which earns you halal returns.

• The savings accounts are based on Shari’a finance principles and pay profits. For example, the Fixed Term Deposit Account is based on the Shari’a financial principle of Mudharaba (partnership Agreement).

• Under the Mudharaba Agreement, a customer deposits their savings with DIB Bank making the bank the fund manager of the investment pool. The Bank uses the cash deposit to invest in Shari’a compliant and ethical trading activities and generates a target profit for the customer over a fixed term. The Bank manages and monitors the performance of the investments on a daily basis to minimize the risk and ensure that the customer receives the projected target (‘expected’) profit rate.

• Customers are given a guarantee that their funds will only be invested in Shari’a compliant and ethical investments, which will exclude all interest-bearing transactions and non-Shari’a compliant business activities such as gambling, speculation, tobacco and alcohol. The bank intends to invest in trades of low risk commodities (metals) and in the Bank’s Home Purchase Plans and Financing, whereby the rents received by the Bank for investing the customers’ funds are paid as profits, after deducting the Bank’s share of profit.

• DIB Bank therefore offers its customers a personal, highly managed service for their savings to ensure that they receive a competitive return based on Progressive, Innovative, Ethical and Responsive Shari’a compliant principles.

Is it permissible under the Shari’a to quote a profit rate for Fixed Term Deposit savings accounts?

• It is important to clarify that our Shari’a compliant savings product(s) is called ‘Fixed Term’ and not ‘fixed return’ usually offered under the Sharia’ principle of Mudharaba (an investment agreement). With this product, DIB 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. These savings products do not offer a fixed return in the same way that conventional banks that pay interest do. Under Shari’a, the bank cannot guarantee a rate of return, because with investment there is always an element of risk.

• However, DIB bank mitigates this risk for the customer in many ways, so that the customer’s deposits and return do not suffer

Do Shari’a compliant banks have credit cards?

Yes, they offer interest free credit card facility for which the client pays a monthly fee irrespective of the way he uses the card during the period. The fee is in lieu of some real services that a credit card holder becomes entitled to. The fee neither increases nor decreases on the basis of the use, frequency of usage or non-use of the card by the customer

What is different about DIB-K as other banks are also offering the same services?

As for as comparison with the services provided by conventional banks are concerned, the main difference is that:

– DIB-K provides only Shari’a compliant products and services and in no way enters into any Shari’a repugnant and interest based transaction.

– Compared with other Islamic banks or windows, DIB-K is proud of its pioneering role in the world of Shari’a compliant Banking combined with the rich experience and involvement in global deals of importance that such a long journey entails.

– Moreover DIB-K has a full-fledged Shari’a Supervisory Department and a Shari’a Coordination Department which are involved in structuring, documentation, vetting approval and post transaction audit of all transactions and products. The affairs of the Bank are supervised by the Shari’a Board whose decisions are binding on the Bank. The Shari’a Board is comprised of a number of internationally renowned Shari’a scholars. Dr. Hussein Hamid Hassan, the Chairman of Shari’a Board, is one of the most prominent Shari’a scholars in the world in the field of banking.

What would the bank do if a customer has any confusion while doing transaction? Do you have a council desk where he/she can consult with someone or refer the literature?

Yes, DIB-K has its Shari’a Department which customers can consult if they have any confusion regarding any Shari’a compliant transaction.

How would it be possible to forecast long term profit rate?

No one can forecast profits. Shari’a compliant banks declare the profit of their investment pools periodically, and the declared rates can be referred to show their past performance with a clear disclaimer that the bank may or may not perform similarly in future.

Would you be catering to the customers involved in business/activities prohibited in Sharia?

No, Shari’a does not allow business in prohibited items and or services. This is one of the major differences between a Shari’a compliant bank and a conventional one.

Who is eligible to open accounts in Shari’a compliant banks?

All persons (individuals, corporate entities, firms, societies, clubs, government organizations, statutory bodies/corporations, public and private institutions, etc.) are eligible to open accounts in Shari’a compliant banks provided they fulfill the banks’ and the regulatory authorities’ requirements

How can we ensure that all the investments are in line with the pronouncements and directives of the Shari’a Board?

All investments are first approved before signing the contracts by our Shari’a Board. The Shari’a coordinator monitors the operations of the Bank and the implementation process. If they find any transaction is executed in violation with Shari’a, they take away its return and dispose it for charitable courses.

Are Shari’a compliant banking services offered to Muslims only?

No, Islam does not prohibit from selling or buying or entering into partnership with non-Muslims provided the underlying transactions are Shari’a compliant


What would be the procedure and ratio of Zakat deduction in accounts maintained at DIB-K?

Zakat is accounted as per the Articles and Memorandum of Association of the Bank and is approved by the Bank Fatwa and Shari’a Supervisory Boards on the following basis:

a. The portion of Zakat payable by the Bank on its shareholders’ behalf is calculated on ‘statutory reserve’, ‘general reserve’, ‘retained earnings’ and ‘provision for employees’ end of service benefits’;

b. Zakat on depositors’ investment risk reserve is calculated and deducted from the investment risk reserve balance held with the bank and added to the Zakat payable balance; and

c. Zakat is disbursed by a committee appointed by the Board of Directors and operating as per the by-law set by the Board of Directors.

In a loss event, does the customer bear any loss?

Yes, the Account Holder bears the loss in proportion to his/her investment.

Is insurance allowed in Shari’a compliant banking?

The form of Islamic insurance is TAKAFUL which is based on Shari’a rules. In case of absence of a Takaful based company, Shari’a compliant banks are allowed to get insurance cover through conventional insurance to avoid exposing the investors’ deposits to high risk.

What is Takaful?

Takaful is the Islamic way of Insurance. Takaful means mutual protection and joint guarantee through contribution by each member.

How is Takaful different from conventional insurance?

Takaful eliminates the element of chance, gambling and ambiguity by:

a. Investing the deposit pool in only Shari’a compliant products.

b. The participants are investors and they share the profit of their investment.

c. A Takaful Company manages the Takaful Fund on Wakala or Mudharaba basis. At the same time they compensate those of the group who are exposed to losses.

Is there a Takaful company in Kenya?

Yes, Takaful Insurance of Africa

Will DIB-K offer overdraft facility?

No, overdraft facility is not allowed in Shari’a compliant banking. Shari’a compliant banks may offer Shari’a compliant alternatives for such a facility.

Do Shari’a compliant banks offer loans?

Shari’a compliant banks do not offer loans; they offer financing through Shari’a compliant modes of investment and transactions.

Who are the members of Shari’a Board?

Members of DIBPL’s Shari’a Board are:

1) Dr. Hussein Hamed Hassan (Chairman of Shari’a Board)

2) Mian Muhammad Nazir (Member Shari’a Board)

3) Sheikh Badru Jaffar Swaleh (Resident member Shari’a Board)

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