CALCULATIONS:
GOODS FINANCE BASED ON MUSAWWAMAH
Basic Assumptions
Alphabetical Equations and Formulas
ParticularsUnit
Value
Cost of the Goods
USD
200,000 C
Down Payment from customer
USD
0
D
Amount Financed (100%)
USD
200,000 F=C-D
Profit Margin (Fixed Rate) % p.a.)
%
10%
R
Term of Financing
Months 36
T
Total Profit Amount
USD
60,000 P=F*R*(T/12)
Total Murabaha Sale Price
USD
260,000 SP = F+P
Monthly Installment
USD
7,222
I=SP/T
There are three main categories
of accounts, namely Islamic
current account, Islamic savings
account and Islamic investment
account.
1.
Let us look at an example of Musawamah Goods Finance
transaction. Total cost of the goods is USD 200,000.
2. The customer makes zero down-payment and requires 100%
financing.
3. The bank agrees to finance 100% cost of the Goods which is USD
200,000.
4. Bank purchases the Goods and sells it to the customer on
Murabaha (deferred sale) basis repayable in 3 years i.e. 36
months.
5. The total Murabaha Sale Price will be USD 260,000; this is made
up of amount financed by bank which is USD 200,000 plus
Bank’s total Profit Margin which is USD 60,000.
6. The profit amount of USD 60,000 is arrived as below:
Profit= [Amount Financed (F) * Profit Rate(R) * Term of
financing]
Profit= [200,000*10%*36/12] = 60,000
7. The monthly Installment of USD7,222 is arrived as below:
MonthlyInstallment = [(Amount Financed (F) + Profit
Amount (P))]/ Term of financing
Installment= (200,000+60,000)/36 = 7,222. - Installment
is rounded off for ease of calculation.
8. The customer would pay the total amount of USD 260,000 (i.e.
7,222 *36) in 36 installments.
9. However, it is to be noted that in Musawamah, the Islamic bank
would not disclose the actual cost or the profit margin to the
customer.
CREDIT CARDS
A credit card authorises the holder to buy goods and services on
credit without having to use cash. The issuer of the card grants a
line of credit to the consumer from which the user can withdraw
cash money and can pay to the merchant for the purchases. The
introduction of Islamic credit cards happened to be one of the most
challenging tasks, as the mechanism of modern credit card facility
works on the principle of Interest which is clearly prohibited in
Islam. This is where the Islamic product development was required to
create something as flexible as the conventional credit card without
involving interest. The Islamic finance institutions have adopted two
structures to develop Islamic credit cards. They are as follows:
i. Ujrah based Credit Card
ii. Tawarruq based Credit Card
UJRAH-BASED CREDIT CARD:
Ujrah (Ajr) means payment for services rendered. A person or an
institution can render services for a wage.
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Islamic Banking and Finance: Principles & Practices
The Ujrah Card is based on the Islamic principle of “Qardh Al Hasan”
or benevolent loans as well as a bunch of services are made available
to the customer. Under this structure the credit amount lent as
Qardh to the customer is repaid by the customer in installments
without any premium.
The bank charges a flat monthly fee which is for the services which it
provides along with the Ujrah Card such as vehicle recovery services,
discounts at restaurants as well as access to airport lounges etc.
In the event of a delay in payment of the Qardh amount, the bank
cannot charge the customer any extra amount. Also in the event of
a default the customer will still be able to avail the services that are
provided with the Ujrah Card and therefore the flat monthly fee can
continue to be charged.
The monthly fixed fee cannot be applicable differently on different
categories of the card due to the difference in their credit limits
unless the services package tagged on to any category of the card is
different from the other.
STRUCTURE OF UJRAH BASED CREDIT CARD:
TRANSACTION PROCEDURE AND CALCULATIONS:
1.
2.
3.
4.
The Islamic Bank makes the credit amount USD 10,000 available
as Qard to the customer.
The Islamic bank issues the plastic where the relevant services
are made accessible to the cardholder under the Service Ijarah
agreement.
The customer pays a fixed monthly fee, say, USD 100 towards
the services rendered by the Islamic bank.
The customer repays in full or a part of the utilized credit
amount or Qardh on monthly basis to the Islamic bank.
TAWARRUQ BASED CREDIT CARD:
Monetisation (Tawarruq) refers to purchase of a commodity for
a deferred price determined through bargaining (Musawama) or
markup sale (Murabaha), and selling it to a third party for a spot
price so as to obtain cash.
After the credit assessment the Islamic bank approves the credit
limit for its customer which is made available to the customer
through Commodity Murabaha (Tawarruq) transaction.
In Tawarruq based credit card the amount equal to the total
Murabaha profit paid by the customer is spread over the period of
the Murabaha Agreement tenor on a monthly basis. The amount of
the Cost Price is paid by the customer to the bank at the end of the
Murabaha Agreement period which coincidence with the expiry of
the Credit Card.
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The sale proceeds generated through Tawarruq is placed in a special
Mudaraba account as a security against the deferred sale price of
above mentioned commodity Murabaha and thus earns a profit for
the customer on the monthly average or minimum balance available
in that account. The Bank at its own discretion may pay a certain
profit amount as a gift to the customer on monthly basis or otherwise
as it so desires but not as an obligatory practice. This way bank
satisfies the customer’s requirement not to be charged the higher
profit under the Murabaha sale on an unutilized amount.
It is to be noted that in order the card holders should not use the
Islamic Credit Card for non-Shariah compliant products and services,
the Islamic Banks block all the MMCs (Merchant Category Codes)
which are assigned to those products and services not in compliance
with Shariah principles. Moreover, the general terms and conditions
of the Islamic card should explicitly state that using this card for any
non-Sharia compliant product and services is not allowed otherwise
bank will have the right to cancel the card.
STRUCTURE OF TAWARRUQ BASED CREDIT CARD:
Transaction Procedure and Calculations:
1. An Islamic bank buys bulk commodities (Metals) from the Market
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Islamic Banking and Finance: Principles & Practices
2.
3.
4.
5.
6.
7.
8.
9.
and takes the constructive possession.
A customer wishes to apply for a Credit Card and requires USD
10,000 amount as a credit limit along with 24 months validity
approaches the Islamic Bank.
The Islamic bank assesses the customer credit credibility for
approval and sells the commodity to the customer at cost price
plus profit (“Total Murabaha Amount”) which is USD 11,000 (10,000
+10% p.a profit margin) for deferred payment for two years.
After executing the commodity Murabaha agreement, the
customer sells the purchased commodity to a third party and
collects the sale proceeds which is equal to the initial Cost price
of the commodity.
The sale proceeds which is USD 10,000 is credited to the
customer’s Mudarba account with the Islamic bank.
The Customer is allowed, however to deposited in the above
account on the condition that the customer can withdraw and
use the money only through a credit card issued by the Bank
and shall pay back certain amount, say at least 5% of the utilized
amount, every month.
The total Murabaha profit which is USD 1,000 will be paid by
the customer over the tenor on a monthly basis which comes
to USD 41.67. While the cost price which is USD 10,000 will be
paid at the end.
Along with the normal mudaraba profit in the mudaraba savings
account the Islamic bank, at its own discretion may give the
customer some additional profit as a gift on monthly basis
available in the Mudaraba account.
Suppose the customer has utilised USD 5,000 through the card
then he is obliged to pay an amount approximately equal to 292
which consists of 5% of the utilized credit amount plus the
Murabaha profit.
ISLAMIC BANK ACCOUNTS
Having given a brief introduction to the mechanism of Islamic credit
cards, let us now discuss the Islamic bank accounts. There are three
main categories of accounts, namely Islamic current account, Islamic
savings account and Islamic investment account.
CURRENT ACCOUNT:
An Islamic current account provides the account holder with a
guarantee on the principal amount deposited. The account holders
are not entitled to receive any profits, but do not bear any losses
either. This type of account is designed specifically to meet the needs
of customers who want to deposit or withdraw funds by cheques,
through cash tellers at bank branches or through the ATM machines.
The Islamic current account is structured using the wadia or Qard
contract. Wadia in the legal sense signifies a thing entrusted to
the care of another. The proprietor of the item is known as Mudi
(depositor), the person entrusted with it is known as ‘Wadi’ or
Mustawda (custodian) and the deposited asset is Wadia. A depositor,
by depositing their money with a bank for safe custody purposes,
has entered into a Wadiah contract. In this case, the bank will give
its undertaking to be liable for any loss to the deposited item as
a custodian. This is necessary to allow using the monies for their
investment and financing activities. And a Qard contract is an
interest-free loan given by the depositor to the bank. In this case
also the bank can utilise the monies lent by the customer as creditor,
but the bank is obliged to return the principal on demand or as per
the contract.
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