Misconceptions on cost of Islamic products



Times of Oman is offering an opportunity for our readers to ask questions on Islamic banking to Khalid Yousaf, an expert in Islamic banking and Director (Islamic Finance Advisory Services) of KPMG in Oman.

The readers have to mention their full name and location while sending the questions. The following is the first in the series, which will be carried on a fortnightly basis in the business section.

Q: Could you give me details on interest free loan like if I need to borrow money without paying interest for the purpose of buying a house or a plot? How does it work?
Sharifa Al Touqi (by e-mail)

A: Islamic products and services are currently in the process of being rolled out to the markets by respective Islamic banks and windows, pending the promulgation of Islamic Finance Regulatory Framework (IBRF).  Islamic banking is indeed 'Riba-free' because Riba is Haram in Islam. However, it is a misconception that Islamic banking is free of any costs to the borrowing clients.

There are both the 'operating costs' and 'profits' charged by the banks providing Islamic products and services to their customers. These charges are roughly the same as those charged by the conventional banks for their products and services. The difference is that Islamic banks take the conventional banking products and make their components Sharia-compliant to ensure elimination of 'Riba' in their composition.

It is practically the same way a burger eaten in a non-Muslim country may be 'Haram,' whereas the same burger eaten in a Muslim country is Halal. Both burgers may look the same, taste the same and even may be priced the same, but the burger made in a Muslim country meets the Sharia requirements for Halal meat and absence of alcohol in preservatives to make it Halal.

You can borrow funds from an Islamic bank for the purpose of buying a house, under either a 'Murabaha' or 'Ijara' mode of financing. In the case of 'Murabaha,' the bank will purchase the house from the market, at your choice, add its profit and charges and sell it to you on cost-plus basis. You can then repay the overall cost over the agreed period (normally twenty years), spread over monthly installments.

Under 'Ijara' mode of financing, the bank will purchase the house of your choice and rent it to you. You pay a fixed rental every month, which represents elements of principal repayments as well as profits charged by the bank. For various reasons, banks generally hesitate to finance the purchasing of plot of land for individuals, unless supported by acceptable collateral as security.

Q: I would like to know more about Islamic finance, which is newly started in Oman. I will be grateful to you sir if you provide me with full information about Islamic finance especially with reference to Oman. I also wish to know opportunities and challenges and threat of Islamic finance in Oman?
Samena (by e-mail)

A: Currently in the Sultanate of Oman, the two full-fledged Islamic banks - Bank Nizwa and alizz islamic bank - and Islamic windows of seven conventional banks (Bank Muscat, NBO, Bank Dhofar, Bank Sohar, ahlibank, Oman Arab Bank and NBAD) are waiting to launch their operations as soon as the regulatory framework is promulgated.

These Islamic banks and windows will provide Sharia-compliant 'Riba-free' products and services to their customers, which will mark the formal beginning of Islamic finance in Oman. Two other important components of Islamic finance are takaful (Sharia-compliant insurance) and capital markets (e.g. sukuk) are also waiting for finalisation of respective regulatory framework. Thus, Islamic finance in Oman is in a nascent stage.

Once started, however, it is expected to grow rapidly and achieve sizable proportions relative to conventional banking. The latent demand for Islamic finance in Oman is expected to manifest itself when Sharia-compliant products and services will become available in the market. The biggest opportunity is that it's birth and growth is driven by demand from clients and markets.

The biggest challenge will be for the industry to educate their customers and general public about the essential, basic facts about Islamic finance and the biggest threats may be the shortage of skilled resources as well as the shortage of available products for banks to place their surplus liquidity.  


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