Islamic banking or financing, what’s in it?
Malawi is for the first time set to formally have a feel of Islamic banking courtesy of FDH Bank plc which has announced plans to roll out a special window in response to demand for the service in the country.
During an investors’ meeting the home-grown Malawi Stock Exchange-listed commercial bank hosted in Blantyre on Friday, FDH Bank plc managing director Noel Mkulichi said they seek to capture part of the economy which is interested in the Islamic financing model. It is a response to demand by a section of society, so he said.
Much has been said, albeit informally, about Islamic banking. I also recall in 2012 or thereabouts when the Reserve Bank of Malawi (RBM) rejected an application by Shariâ Investments Limited for an Islamic Bank of Malawi on the grounds that the model had Sharia elements embedded in it.
What is Islamic banking and how different is it from the conventional banking models many of us have grown with? Well, it has the same purpose as conventional banking in that the bank has to make money through lending. It also strictly adheres to Islamic law, Sharia, by ensuring fair play is at the core of Islamic banking.
Yet another key principle of Islamic finance is that banks do not collect interest on loans, but instead share profits as well as losses. The arrangement is more or less like the “village bank” or banki m’khonde model, only that the “village banks” charge interest on loans.
So how does the Islamic banking model earn or generate profits? During trading, the banks invest the deposits so mobilised in non-speculative and risk-averse investments. They use equity participation systems and share profits as well as losses. Many Muslim countries practise Islamic finance.
But Islamic financing or banking does not come easy. There are restrictions in terms of where one can invest the loans obtained under the arrangement. For instance, in case of trading, customers are not allowed to engage in gambling and high-risk transactions or investments are prohibited as is speculation.
When a customer is seeking to invest, the bank also undertakes a due diligence to verify compliance with the Sharia to ensure they do not invest in illegal or forbidden activities. You cannot open a liquor shop, the popular business
venture in town, with funds obtained under the Islamic banking arrangement.
There are several models of Islamic banking, including Murabaha and Ijarah. Under Murabaha, the bank purchases property on behalf of a client who agrees to make deferred payments and pledges to deliver a sure profit to the bank. Full ownership is transferred on completing the costs.
On the other hand, the Ijarah model refers to a leasing contract where the bank will purchase property or capital goods such as machinery or equipment and leases the same to the client. In turn, as a customer, you pay rent to the bank. Better still, the bank invests in a customer’s business and gets a share of the profit.
There is also the Musharaka model where a customer and the bank enter into a contract and work as partners, raising capital together and share profits at a pre-agreed ratio. The main objective of Islamic banking and finance is that all participants should create wealth and benefit from the same.
Proponents of Islamic banking and finance argue that in conventional banking, some parties tend to benefit more at the expense of others.
In Africa, countries such as South Africa, Nigeria, Kenya, Senegal, Djibouti, Uganda and Morocco have legal and regulatory frameworks governing the operations of Islamic finance products.
Has Malawi been missing out by not embracing the Islamic banking model? Time will tell as we wait to see how RBM, as the regulator of financial services, will handle the FDH Bank plc application for this special window.
