Answer
Islamic banking has been defined as banking in consonance with the ethos and value system of Islam
and governed, in addition to the conventional good governance and risk management rules, by the
principles laid down by Islamic Shariah. Interest free banking is a narrow concept denoting a number of
banking instruments or operations, which avoid interest. Islamic banking, the more general term is
expected not only to avoid interest-based transactions, prohibited in the Islamic Shariah, but also to avoid
unethical practices and participate actively in achieving the goals and objectives of an Islamic economy.

Answer

Following are the main modes of Islamic banking and finance:

• MURABAHA
• IJARAH
• IJARAH-WAL-IQTINA
• MUSAWAMAH
• ISTISNA A

Answer

The contemporary Shariah scholars have evolved a consensus that banks are authorized to impose
late fees on the delinquent. But proceeds of such penalty are to be used for charity purposes. Only the
court or any independent body can allocate any part of the penalty as liquidated damages / solatium for the
banks.

Liquidated damages can be given to banks in case of default on the part of banks’ clients provided it is
based on actual financial loss. The court may reasonably adjust the amount of compensation. The ‘actual
financial loss’ cannot be the loss in terms of conventional ‘opportunity cost’. It has to be proved by the
bankers themselves to the satisfaction of the court or any arbitrator. However, some Shariah Boards allow
Islamic banks to charge from the defaulter the rate realized by them on their Murabaha portfolio during a
specific period. They also recommend that the financial condition of the client be taken into account.

Answer
MURABAHA
Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller
declares his cost and profit. Islamic banks have adopted this as a mode of financing. As a financing
technique, it involves a request by the client to the bank to purchase certain goods for him. The bank does
that for a definite profit over the cost, which is stipulated in advance.