Islamic Banking FAQs

What is the difference between conventional banking and Islamic banking?

The following are the main differential points between Conventional Banking and Islamic banking:

Sr CONVENTIONAL BANKING ISLAMIC BANKING
1 Money is a commodity besides medium of exchange and store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out. Money is not a commodity though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out.
2 Time value is the basis for charging interest on capital. Profit on trade of goods or charging on providing service is the basis for earning profit.
3 Interest is charged even in case the organization suffers losses by using bank’s funds. Therefore, it is not based on profit and loss sharing Islamic bank operates on the basis of Profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Mudarabah, Musharakah).
4 While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made. The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts.
5 Conventional banks use money as a commodity which leads to Inflation. Islamic banking tends to create link with the real sectors of the economic system by using trade related activities. Since, the money is linked with the real assets therefore it contributes directly in the economic development.

Does the prohibition of Riba apply equally to the loan obtained from or extended to Muslim as well as Non-Muslim?

With respect to the receipt and payment of interest, there is no distinction between Muslims and non-Muslims or between individuals and states because interest is prohibited not only in Islamic scriptures but also in other religious scriptures of the world. Therefore, prohibitions of interest apply to Muslims as well as to non-Muslims.


Does interest/Riba is related only to consumption loans or it also applies to commercial loans?

The interest is prohibited whether it is consumption loan (loan for meeting day to day human needs) or commercial loan (loan for business purpose). There are quite a number of ahadith which clarify that in the days of Holy prophet (Peace be upon Him), people not only borrowed for consumption purposes but also for productive purposes. A few of the ahadith are given as follows for reference:

  • Ibn Saad has reported that Hazrat Umar (Radi-Allah-anhu), wanted to send a trade caravan to Syriya. He borrowed four thousand dirhams from Sayyidna Abdur Rahman Ibn Awaf (Radi-Allah-anhu) for this purpose
  • Ibn Jarrir has reported that Hind, daughter of Utbah and wife of Abu Sufyan borrowed four thousand dirhams from Sayyidna Umar (Radi-Allah-anhu) for the purpose of her trade. She invested this money in purchasing goods and selling them in the market of the tribe of Kalb.

This is an ample testimony that the commercial loan was in practice when Quranic verses on Riba were revealed and the term Riba covers not only consumption loan but also the commercial loan.


What are the basic principles of Islamic Banking?

There are at least six basic principles which are taken into consideration while executing any Islamic banking transaction. These principles differentiate a financial transaction from a Riba/interest based transaction to an Islamic banking transaction.


  • Sanctity of contract: Before executing any Islamic banking transaction, the counter parties have to satisfy whether the transaction is halal (valid) in the eyes of Islamic Shariah. This means that Islamic bank’s transaction must not be invalid or voidable.
    • An invalid contract: Contract, which by virtue of its nature is invalid according to Shariah rulings.
    • A voidable contract: Contract, which by nature is valid, but some invalid components are inserted in the valid contract. Unless these invalid components are eliminated from the valid contract, the contract will remain voidable.
  • Risk sharing: Islamic jurists have drawn two principles from the saying of Prophet Muhammad (PBUH). These are “Alkhiraj Biddamaan” and “Alghunun Bilghurum”. Both the principles have similar meanings that no profit can be earned from an asset or a capital unless ownership risks have been taken by the earner of that profit. Thus in every Islamic banking transaction, the Islamic financial institution and/or its deposit holder take(s) the risk of ownership of the tangible asset, real services or capital before earning any profit there from.
  • No Riba/interest: Islamic banks cannot involve in riba/interest related transactions. They cannot lend money to earn additional amount on it. However as stated in point No. 2 above, it earns profit by taking risk of tangible assets, real services or capital and passes on this profit/loss to its deposit holders who also take the risk of their capital.
  • Economic purpose/activity: Every Islamic banking transaction has certain economic purpose/activity. Further, Islamic banking transactions are backed by tangible asset or real service.
  • Fairness: Islamic banking inculcates fairness through its operations. Transactions based on dubious terms and conditions cannot become part of Islamic banking. All the terms and conditions embedded in the transactions are properly disclosed in the contract/agreement.
  • No invalid subject matter: While executing an Islamic banking transaction, it is ensured that no invalid subject matter or activity is financed by the Islamic financial transaction. Some subject matter or activities may be allowed by the law of the land but if the same are not allowed by Shariah, these can not be financed by an Islamic bank.

What do you understand by Islamic Banking?

Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. The model of Islamic banking system leads towards the achievement of a system which helps achieve economic prosperity.

According to Islamic Shariah, Islamic banking cannot deal in transactions

  • Involving interest/riba (a stipulated increase sought over the principal of a loan or debt).
  • Having the element of Gharar (uncertainty) or Maiser (Gambling).
  • Subject matter of which is invalid (haram in the eyes of Islam).

Islamic banks focus on generating returns through investment tools which are Shariah compliant. Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk which may arise through trading and investment activities using contracts of various Islamic modes of finance.

The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any stipulated excess compensation without due consideration (consideration does not include time value of money). This definition of Riba is derived from the Quran and is unanimously accepted by all Islamic scholars.


What is meant by Shariah/Islamic Law?

Shariah lexically means a way or path. In Islam Shariah refers to the divine guidance and laws given by the Holy Quran, the Hadith (sayings) of the Prophet Muhammad (Peace Be Upon Him) and supplemented by the juristic interpretations by Islamic scholars. Shariah embodies all aspects of the Islamic faith, including beliefs and practices. Islamic Shariah or the divine law of Islam is derived from the following four sources:


  • The Holy Quran
  • The Sunnah of the Holy Prophet (Peace Be Upon Him)
  • Ijma’ (consensus of the Ummah)
  • Qiyas (Anology)

The end result of Islamic Banking and conventional banking is same. Why do they appear similar?

The validity of a transaction does not depend on the end result but rather the process and activities executed and the sequence thereof in reaching the end. If a transaction is done according to the rules of Islamic Shariah it is halal even if the end result of the product may look similar to conventional banking product.

The Best example in this regards that a person who owns Rs.100 and wants to earn Rs.10 over, so he can opt two cases:

  1. To lend another person for one month with the condition that he will return Rs.110 after one month
  2. To purchase a thing worth Rs.100 and sell it to a person on Rs.110 on credit for one month.

In both the cases he earn Rs.10, however the first case is Haram because it falls into Riba and the second case is Halal because it falls into Bai.

The same is also true for Islamic and conventional banking. Therefore, it can be concluded that it is the underlying transaction that makes something “Halal” (allowed) or “Haram” (prohibited) and not the result itself. Apparently, Islamic banks may look similar to conventional banks, however the contracts and product structures used by Islamic banks are quite different from that of the conventional bank. In the verse 2:275 of the Holy Quran, Allah the Almighty has responded to the apparent similarity between trade and interest by resolutely informing that he has permitted trade and prohibited Riba (though they may look similar to someone).


If Islamic banks do not invest in interest based activities then how do they generate profit to pay to their customers?

The Islamic bank uses its funds in various trades, investment and service related Shariah compliant activities and earns profit thereupon. The profit earned from such activities is passed on to the depositors according to the agreed terms.


Are not Islamic banks just paying interest and dressing it as profit on trade and investments?

No, Islamic banks accept the deposits either on profit and loss sharing basis or on Qard basis. These deposits are deployed in financing, trading or investment activities by using the Shariah compliant modes of finance. The profit so earned by the bank is passed on to the depositors according to the pre-agreed ratio which, therefore, cannot be termed as interest.


Islamic Banks use interest base system KIBOR as benchmark while determining the profit, how Islamic Banking can be said to be Islamic?

Islamic banks should ideally have their own benchmark system for determination of profit. Since, the industry is in its initial stage of development, it is using the available benchmark for the banking industry. It is expected that once it is grown to a sizable level, it would have its own benchmark. However, using Interest Rate benchmark for determining the profit of any permissible transaction does not render the transaction as invalid or haram. It is the nature/mechanism of the transaction that determines its validity or otherwise.

For example Mr. A and Mr. B are two neighbors. Mr. A sells liquor which is totally prohibited in Islam whereas Mr. B, being a practicing Muslim dislikes the business of Mr. A and starts the business of soft drinks. Mr. B wants his business to earn as much profit as Mr. A earns through trading in liquor. Therefore he decides that he will charge the same rate of profit from his customers as Mr. A charges over the sale of liquor. Thus he has tied up his rate of profit with the rate used by Mr. A in his prohibited business.

One may say that Mr. B uses an undesirable benchmark in determining the rate of profit, but obviously no one can say that the profit charged by him is haram because he has used the rate of profit of the business of liquor only as a benchmark.

The same is true for Islamic banks, it is most desirable and preferable that Islamic bank develop their own benchmark however; in the absence of any such alternative, interest rate related benchmark can be used.


Is Islamic Banking only for Muslim?

No, The teachings of Islam are not confined to Muslims only rather these equally address the non-Muslims due to their universal nature. The basis of Islamic banks is laid down on ethical values and socially responsible system. The values like justice, mutual help, fee consent and honesty on the part of the parties to a contract, avoiding fraud, misrepresentation and misstatement of facts and negation of injustice or exploitation form the basic principles of Islamic banking. Therefore, the principles of Islamic banking lead the economic system to achieve the common good and economic prosperity. On this premise, Islamic banking becomes a viable option for everyone irrespective of their religion.


What is Shariah Board?

The Board comprises on Shariah scholars to consider, decide and supervise all Shariah related matters of the bank.

All decisions, rulings, fatawa of the Shariah Board shall be binding on the Bank whereas Shariah Board is responsible and accountable for all its Shariah related decisions.


Shariah Board comprises of how many Shariah Scholars?

Bank AL Habib – Islamic Banking Division Shariah Board comprises of three Shariah Scholars:

  • Chairman Shariah Board
  • Member Shariah Board
  • Resident Shariah Board Member

How to judge the independence of Shariah Board?

The Shariah Board is discharging its duties independently and objectively. The members of the Shariah Board continuously assess their relationships with the Bank to identify any situation where any issue related to independence may actually or potentially arise or can reasonably be inferred.


What do you mean by Shariah Compliance Department (SCD)?

BAHL-IB has a SCD headed by Islamic finance trained and experienced officer recommended by the Shariah Board. The SCD has dedicated and adequate staff as per the advice of the Shariah Board, so as to enable it to discharge its due responsibilities in a proper and timely manner. Further, the SCD is working under the overall guidance and supervision of the Shariah Board and Head report to the Shariah Board.


What are the responsibilities of SCD?

The responsibilities of SCD are as follows:

  • Secretarial support to Shariah Board;
  • Conduit between Management and the Shariah Board;
  • Shariah Compliance Review as per Shariah Board approved plan;
  • Enforcement of Shariah Audit Reports;
  • Manage training on Shariah Compliance.

What are the modes of Islamic banking and finance Bank AL Habib – Islamic Banking Division (BAHL-IBD) offers?

BAHL-IBD offer following modes of Islamic banking and finance to their clients:

  • Financing Products
    • Murabaha
    • Musawama
    • Ijarah
    • Diminishing Musharaka
    • Istisna
    • Islamic Export Re-finance Scheme (IERS)
  • Liability Products
    • Saving Deposit Account
    • Current deposit Account
    • Islamic Term Deposit Certificate / Receipt
  • Fee Base
    • Local Guarantees
    • Financial Guarantees
    • Letter of Credit
      • Sight
      • Usance

What do you mean by financing products?

Financing products are those products offered by the Bank in which Bank takes exposure (Risk) on the client. There are three types of lending products offers by the Bank:

Purchase and sale of goods: The Bank purchases goods on cash basis and sell to client on deferred, on cost plus profit, basis.

Purchase and Lease / Ijarah: The Bank purchase fixed asset, either from market or from client, and leases / makes Ijarah of the same to client for the specified period.

Joint Purchase and Lease / Ijarah: The Bank and client jointly purchase fixed asset and then Bank leases / make Ijarah of its portion of ownership to the client for the specified period.

Funds for manufacturing: The Bank provides financing to client for manufacturing the goods required under confirmed sale order of the client’s client.

Partnership: The Banks provides funds as partner to run the specific segment of business for specific period. The profit and loss will be calculated in agreed manner.

How are Islamic Current Accounts, Saving Accounts and Term Certificates operated?

The operation of All PKR & FCY current accounts is based on the Islamic principle of Qard. The structure of Remunerative Saving & Term Deposits Accounts is based on the principle of Mudarabah and is strictly in conformity with the rules of Islamic Shariah and is approved by the Shariah advisor of BAHL Islamic Banking.

What is Murabaha?

Murabaha is a sale transaction, whereby the seller (Bank) expressly mentions the cost and the profit is charged thereon while quoting the price. Furthermore: “Murabahah” is in fact a term of Islamic Fiqh and it refers to a particular kind of sale having nothing to do with financing in its original sense.

What is the purpose of Murabaha?

The purpose of Murabaha is to cater the short term financing requirements of the customer.

Under Murabaha arrangement BAHL-IBD allows customers to purchase from time to time goods / commodities (raw material/ finished goods etc.) for commercial use up to a specific limit assigned.


What are the basic rules of Murabaha?

  • The subject matter must exist at the time of sale.
  • The subject matter must be in the ownership of seller.
  • The subject matter must be in the possession (absolute or constructive) of seller.
  • The price must be agreed and fixed at the time of sale.
  • The subject matter must have value from Shariah perspective.

The transaction can either be spot or on deferred payment basis.


What is the target market for Murabaha?

The target Market for Murabaha Finance is Corporate/Commercial/ Retail and SME sector to meet their working capital needs. These entities must fulfill BAHL-IBD credit entitlement criteria.


What is the difference between Murabaha and conventional Loan?

Murabaha Conventional loan
Contract A sale contract whereby bank sells asset (goods / commodities) to customer. A loan contract, whereby bank’s lends money to customer.
Relationship The relationship between bank and customer is that of seller and buyer. The relationship between bank and customer is that of lender and borrower.
Income Income on Murabaha is the outcome of sale i.e. profit Income is based on Mark-up on loan.
Delayed Payment In case of delayed payment, the customer undertakes to pay charity Mark-up continues to accrue till the loan is repaid.

What is Istisna Finance?

Istisna is a sale contract which is executed for goods which needs to be manufactured or constructed as per customer’s specification, with the obligation of the seller (manufacturer) to deliver the goods upon completion.


What is the purpose of Istisna Financing?

The purpose is to finance the working capital requirements of the customer.

BAHL-IBD offers Istisna finance to meet entire working capital finance requirements of Corporate and SME sector that manufactures/ constructs assets to be sold in local and international market.


What are the basic rules of Istisna?

  • The description and the quantity of goods must be explicitly defined
  • The price and time of delivery must be fixed.
  • The price may be paid in advance, in installment or at the time of delivery.
  • Manufacturer becomes the owner of the funds disbursed as Istisna price and can use it for all business requirements

What is the target Market in Istisna Transactions?

The Manufacturer in Corporate and SME sector who qualify the BAHL’s minimum credit criteria.


What are the differences between Istisna and Conventional Loan?

Distinguishing Factor Istisna Conventional Loan
Contract A sale contract whereby bank purchase the asset needs to be manufactured for the customer. A loan contract, whereby bank’s lends money to customer.
Relationship The relationship between bank and customer is that of buyer and seller. The relationship between bank and customer is that of lender and borrower.
Financing Financing is created by paying the Istisna Price to customer Financing is created by granting loan
Income Income on Istisna is the outcome of sale i.e. profit Income is based on Mark-up on loan.
Customer’s Liability Customer is liable to deliver the asset at agreed future date Customer is liable to repay the loan at future date.

What is Musawama?

Musawama is a sale transaction, whereby the seller (Bank) quotes the price without any reference to cost or profit.


What is the purpose of Musawama?

To cater the post manufacturing / shipment financing requirement of the client by purchasing the inventory from the customer and subsequently sell the same by appointing the customer as agent.

Under Musawama arrangement BAHL-IBD agrees with customer to purchase goods / commodities (finished goods) from time to time, up to a specific limit assigned.


What are the basic rules of Musawama?

  • The subject matter must exist at the time of sale
  • The subject matter must be in the ownership of seller
  • The subject matter must be in the possession of seller
  • The Price must be certain and agreed at the time of sale
  • The subject matter must have value from Shariah perspective
  • The transaction can either be spot or on deferred payment basis.

What is the target market of Musawama?

The target market for Musawama Finance is Corporate/Commercial/ Retail and SME sector to meet their post manufacturing / shipment financing needs. These entities must fulfill BAHL-IBD credit entitlement criteria.


What are the differences between Musawama & Conventional Loan?

Musawama Conventional Loan
Contract A sale contract whereby bank buys goods from customer. A loan contract, whereby bank’s lends money to customer.
Relationship The relationship between bank and customer is that of buyer and seller.Subsequently principal and agent. The relationship between bank and customer is that of lender and borrower.
Income Income on Musawama is the outcome of sale i.e. profit Income is based on Mark-up on loan.
Financing Financing is created by paying the Musawama Price to customer Financing is created by granting loan

What is Ijarah?

Ijarah is a term of Islamic fiqh and it means “to give something on rent” or “to acquire service”. Ijarah can be defined as “transferring of usufruct of an asset to another person for an agreed period and agreed rent”. The asset should be valuable, identified and quantified.


What is the purpose of Ijarah?

To meet the long term business requirements, such as project financing, BMR activities and fleet financing.


What is the target market for Ijarah?

Corporate, Commercial and SME sector who qualify the BAHL’s minimum credit criteria.


What are the differences between Ijarah and conventional lease?

Ijarah Lease
Ownership and risk The asset is owned by bank and all ownership related risk are assumed by bank No clear demarcation between rights and liabilities of bank and customer
Commencement Rental commenced after the delivery of asset Installment may starts before the delivery of asset
Delayed Payment Customer pays charity in case of delayed payment of rental, which will not be part of Bank’s income In case of delayed payment a penalty is charged and taken to income
Expenses Bank is owner of the asset therefore all expenses in relation to ownership incurred will be borne by Bank Expenses will be borne by the customer

What is Diminishing Musharaka?

According to the concept, a bank and customer participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the bank is further divided into a number of units and it is understood that the client will purchase the units of the share of the bank one by one periodically, thus increasing customer’s own share till all the units of the financier are purchased by the customer so as to become sole owner of the property, or the commercial enterprise.


What is the purpose of Diminishing Musharaka?

To meet the long term business requirements, such as project financing, BMR activities, fleet financing car financing and house financing.


What is the target market for Diminishing Musharaka?

Corporate, Commercial, SME and consumer sector who qualify the BAHL’s minimum credit criteria.


What are the difference between Diminishing Musharaka and conventional lease?

Diminishing Musharaka Conventional Loan
Contract It is a partnership contract It is a loan contract
Commencement Rental commence after the delivery of asset Installment may starts before the delivery of asset
Ownership & Risk Asset is jointly owned and the risk is shared in the proportion of ownership Asset is owned by the customer and all risk are borne by him
Delayed Payment Customer pays charity in case of delayed payment of rental In case of delayed payment a penalty is charged and taken to income
Income Income is generated by renting out the bank’s ownership Income is generated by charging mark-up on loan
Repayment Customer pays the rental and purchases the units Customer pays the installment comprising of mark-up and principal repayment.

How many categories of deposit products BAHL-IBD offers to customer?

BAHL-IBD has classified its deposit products into two categories:


  • Non-Remunerative Accounts
  • Remunerative Accounts

What do you mean by Non-remunerative account?

The funds under these types of accounts are accepted under the concept of Qard. Withdrawals from these accounts can be made on demand. These funds are utilized by BAHL-IBD for sharia compliant financing and investment activities. The following accounts are offered under this category:

  • AL Habib Current Account
  • AL Habib islamic Aasan Current Account

What are the differences between conventional and Islamic Non-remunerative account?

Islamic Non Remunerative Conventional Non-Remunerative
Utilization Funds can only be utilized for Shariah compliant financing and investment activities No Shariah based restriction on utilization of funds
Free Services No free banking services can be offered specifically on current account Free banking services can be offered specifically on current account

What are remunerative Deposits?

The funds under these deposits are invested with the intention to earn returns on invested funds. BAHL-IBD offers remunerative deposits under Mudaraba arrangements. Under the arrangements the depositor is Rab-ul-Maal and bank is Mudarib. The funds generated under this category become the part of Mudaraba pool and are utilized for Shariah compliant financing and investing activities. The profit generated therefrom is shared between the bank and depositors in agreed ratio. In case of loss the Rab-ul-Maal i.e. depositors will bear the loss, provided loss is not due to negligence of Mudarib i.e. Bank.


Please list the checking deposit account offered by BAHL-IBD.


Checking deposits
  • AL Habib Savings Deposit
  • AL Habib Tijarat Account
  • AL Habib Apna Individual Account
  • AL Habib Islamic Senior Citizens Account
  • AL Habib Islamic Aasan Saving Account

Please list the non-checking deposit account offered by BAHL-IBD.


Non-Checking deposits
  • 7 Days term deposit
  • 1 month term deposit
  • 3 months term deposit
  • 6 months term deposit
  • 1 year term deposit
  • 3 years term deposit
  • 5 years term deposit

What are the differences between Islamic Remunerative and Conventional Remunerative accounts?

Islamic Remunerative Conventional Remunerative
Contract Funds are accepted under Mudaraba agreement It is a lending Contract
Relationship Relationship between Bank and Customer is that of Partners Relationship is that of Debtor and Creditor
Return Rate of return is fixed and guaranteed and depositor gets the return even if the bank suffers losses Profit rate are not fixed. Profit from Mudaraba Pool is distributed amongst the depositors.
Restrictions Funds can only be utilized in sharia compliant financing and investment activities No Shariah based restriction on utilization of funds