Basic Principles of Islamic Banking

Topics: Investment, Risk, Islam Pages: 2 (435 words) Published: February 23, 2013
Wakalah (Agency) occurs when a person appoints a representative to undertake transactions on his/their behalf, similar to a power of attorney. It is an agreement between the Bank and an agent whereby the agent invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakalah.

Qardul Hassan (Benevolent Loan) is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan.

Ijarah is an agreement whereby the Bank (lessor) purchases or constructs an asset for lease according to the customer’s request (lessee), based on his promise to lease the asset for a specific period and price. Ijarah could end by transferring the ownership of the asset to the lessee and there must be usufruct. Usufruct is a legal term describing a situation wherein a person or company has a temporary right to use and derive income from someone else's property (provided that it isn't damaged).

Hibah (Gift) is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers interest on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.

Takaful (Islamic Insurance) is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual...
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