Interest-free banking business” refers to a banking business in which mobilizing and advancing of funds are undertaken in a manner consistent with Shariah principles.

Among other things, the interest-free banking business majorly concentrates on the following major Shariah principles.

·       Prohibition of Riba/Interest/usury

·       Transactions should be free from Excessive uncertainty and Gambling /Gharar and Mysir/

·       Avoiding trading in unlawful/Haram goods- Alcohol, tobacco, pork…etc

·       Risk-sharing/profit-loss sharing and Justice and equity-based transactions

The Bank is currently availing Shariah-compliant deposit and financing products.

IFB deposit products include

oWadi’ah Saving Account

oWadi’ah Current Account

oMudarabah Investment Saving Account

oMudarabah Investment Term Deposit

IFB Financing products include

oMurabaha Financing

§  · Domestic Trade and Service

§  · Manufacturing

§  · Import and Export

§  · Building and construction

§  · Quarry and Mining

§  · Project financing

§  · Transport

§  · Diaspora

·       Kafalah/Guarantee/

·       Qard

Financing products on a pipeline

·       Musharakah

·       Istisna

·       Ijarah

·       Salam

IFB Deposit Products

1. Wadi’ah (safekeeping contract)

·       Wadi`ah refers to a contract by which an owned asset is placed with another party based on trusteeship (Amanah) for safekeeping purposes.

·       It is opened by customers for an unspecified period for safekeeping.

·       With the approval of the customer, the Bank utilizes the fund for financing Shariah-compliant business.

·       The Bank will guarantee payment of the principal as demanded by the customer.

·       Clients of under wadi’ah class of account will be provided with passbook or checkbook, ATM card s, mobile banking, internet banking, branch service, etc.

·       There are two types of wadiah accounts offered by our bank, these are:

·       Current Al Wadi’ah

·       Saving Al Wadi’ah

Required documents to open an Account

Individuals

·       Renewed Valid ID card i.e. driver’s license, military ID, kebele ID card, passport, resident permit (for foreigners) and employing organization’s ID.

·       Two recent passport size photographs.

Legal persons (may vary based on the type of organization)

·       Renewed trade license & Principal Registration

·       Registered Article & Memorandum of Association

·       Minute on authorized personals to open and operate accounts

·       a formal letter of a delegation with an official stamp and authorized signature every time a new account signatory is assigned or canceled

2. Mudarabah Investment Saving Account (profit/loss sharing saving account)

This is an investment account where the customer deposits money for an unspecified period and he/she/it will share both the profit and loss based on the pre-agreed ratio. The depositors (rabul-mal/capital provider) authorizes the bank (or appoint the bank as mudharib / entrepreneur) to invest the funds. The customer may withdraw his/her deposit at any time, but the account should have the minimum balance required to be eligible for profit and loss sharing.

3. Mudarabah Fixed Term Deposit

Mudarabah Fixed term deposits are money deposits accepted for a specified period at a specified rate of profit expected from the bank's investment under its interest-free window. Higher deposit amounts with long term deposits will have a higher profit rate. And it can be a short, medium or long term Mudarabah Fixed Term Deposit.

IFB Financing Products

1. Trade-Based Financing

1.1. Murabahah

Murabahah is a contract of sale between a customer and a bank in which a bank purchases the goods needed by a customer and sells the goods to the customer on a cost-plus markup basis. The profit (mark-up), Expenses and the time of payment including the schedule are specified in an initial contract. The bank will own the goods before it sells it to the customer. The bank requires collateral from the customers to secure finance.

Among the services included in Murabahah are the following;

· Murabahah Financing- For purchase of inputs, machinery, finished goods and project financing;

· Murabahah Revolving Financing Facility-renewable facility for the purchase of inputs;

· Murabahah Import Financing-For purchase of inputs and machinery from abroad.

· Murabahah Pre-shipment Financing-For the purchase of goods to be exported.

· Murabahah Diaspora Financing-Personal House & Automobile purchase and working capital financing for Ethiopian Diaspora living abroad.

1.2. Salam

This is a financing service of sale where the price paid in full at the contract's execution and delivery is deferred to a future date. This is a product for working capital purposes to customers engaged in the agricultural sector as per the contract between the Bank and the Customer. It is a sales arrangement whereby the customer shall deliver the type of product she/he produces in accordance with the type, quality, quantity, and given period to the bank. The bank requires collateral from the customers to secure finance.

1.3. Istisna

Istisna financing is a contract for the acquisition of goods manufactured on order whereby the bank places an order to a manufacturer or a contractor to manufacture, assemble or construct, a specific commodity for a purchaser. The agreed price will be set on the initial contracts.

2. Rent Based Financing

2.1. Ijarah

In Ijarah, the bank /lessor/ provides benefits (the right to use) of asset or service to the customer /lessee/ in return for an agreed-upon price or rent. After the completion of the lease period, the bank may transfer ownership to the lessee as per their agreement.

3. Investment Based Financing

3.1. Mudarabah

Mudarabah - is a contract between a capital provider (rabbul-mal) and the bank (mudharib) under which the rabbul-mal provides capital to be managed by the mudharib and any profit generated from the capital is shared between the rabbul-mal and the mudharib according to a mutually agreed profit sharing ratio (PSR) whilst financial losses are borne by the rabbul mal provided that such losses are not due to the mudharib’s misconduct, negligence or breach of specified terms.

Mudarabah is categorized into two types:

(a) Unrestricted Mudarabah

An unrestricted mudarabah is a contract in which the rabbul mal permits the mudharib to manage the mudarabah capital without any specific restriction.

(b) Restricted Mudarabah

A restricted mudarabah is a contract in which the rabbul-mal imposes specific restrictions on the mudarabah terms. The rabbul-mal may specify conditions restricting the mudharib such as the determination of location, period for investment, type of project and commingling of funds.

3.2. Musharakah

Musharakah - is a partnership between the bank and one or more parties to conduct investment or trade. In Musharakah Profit will be distributed according to the pre-agreed terms while losses are shared strictly in the proportion of investment of partners.

4. Loan Financing

4.1. Qard

Qard is a financing in which the bank gives the customer cash that will be paid in the same amount in an agreed future date. Under this type of financing the bank currently is providing the following products:

(a) Qard-Pre-shipment: is a financing product that the bank avails to exporters. It is a pre-shipment facility where the bank finances and accepts the same amount of money i.e. there is no profit to be charged here while the export proceeds will be channeled through the bank.

(b) Qard-Employment Agency: is a financing product provided for individuals and companies engaged in employment agencies to obtain a trade license as per the requirement of the Ministry of Labor & Social Affairs i.e. USD 100,000 equivalent in Birr.

5. IFB Bank Guarantees (Kafalah)

The Bank avails all types of Bank Guarantees parallel with the Conventional Banking and these are:

i. Bid Bond Kafalah

ii. Performance Kafalah

iii. Advance Payment Kafalah

iv. Customs Bond Kafalah…etc

6. Hawalah/Hiwala and Wakalah

The Bank avails service based contracts of Hawalah which is “transfer of a debt liability from the transferor to the payer” for its IFB remittance services both International and local.

The Bank avails service based contracts of Wakalah which is “the act of one party delegating the other to act on its behalf on what can be a subject matter of delegation” for its IFB foreign trade activities.

Moreover, the bank uses the concept of Wakalah in various Islamic products such as Musharakah, Mudarabah, Murabaha, Salam, Istisna and Ijarah.

 

Frequently Asked Questions 

 

Question No. 01) What is Meant By Riba?

Answer: The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any 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.

The meaning of Riba has been clarified in the following verses of Quran (Surah Al Baqarah 2:278-9)

"O those who believe; fear Allah and give up what still remains of the Riba if you are believers. But if you do not do so, then be warned of war from Allah and His Messenger. If you repent even now, you have the right of the return of your principal; neither will you do wrong nor will you be wronged."

Question No. 02) Is Interest free banking meant for Muslims only?

No, Interest free banking is for all individuals regardless of their religious beliefs.

Question No. 03) What is the difference between conventional banking and Interest free banking?

Answer: 
The following are the main differential points between conventional banking and Interest free banking.

Sr. No.

CONVENTIONAL BANKING

INTEREST FREE BANKING

 

 

1

 

Money is treated as 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 treated as 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

 

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.

 

Question No. 04) What are the basic principles of Interest free banking?

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

1. Purity of contract: Before executing any Interest free banking transaction, the counter parties have to satisfy whether the transaction is halal (valid) in the eyes of the Shariah. This means that Interest free bank’s transaction must not be invalid or voidable. An invalid contract is a contract, which by virtue of its nature is invalid according to Sharia rulings. Whereas a voidable contract is a 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.

2. Risk sharing: Islamic jurists have drawn two principles from the saying of prophet Muhammad (SAW). 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 Interest free banking transaction, the financial institution and/or its customer take(s) the risk of ownership of the tangible asset, real services or capital before earning any profit there from.

3. No Riba/interest: Interest free 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 depositors who also take the risk of their capital.

4. Economic purpose/activity: Every Interest free banking transaction has certain economic purpose/activity. Further, Interest free banking transactions are backed by tangible asset or real service.

5. Fairness: Interest free banking inculcates fairness through its operations. Transactions based on uncertain terms and conditions cannot become part of Interest free banking. All the terms and conditions embedded in the transactions are properly disclosed in the contract/agreement.

6. No invalid subject matter: While executing an Interest free banking transaction, it is ensured that no invalid subject matter or activity is financed by the Interest free 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 cannot be financed by an Interest free bank.

Question No. 05) If Interest free banks do not invest in interest based activities then how do they generate profit to pay to their customers?

Answer: The Interest free bank uses its funds in various trade, 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.

Question No. 06) Are not Interest free banks just paying interest and dressing it as profit on trade and investments?

Answer: No, Interest free 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.

 

Question No. 07) What is Murabaha?

Answer: Murabaha is one of the most common modes used by Interest free banks. It refers to a sale where the seller discloses the cost of the commodity and amount of profit charged. Therefore, Murabaha is not a loan given on interest rather it is a sale of a commodity at profit.

The mechanism of Murabaha is that the bank purchases the commodity as per requisition of the client and sells him on cost-plus-profit basis. Under this arrangement, the bank is bound to disclose cost and profit margin to the client. Therefore, the bank, rather than advancing money to a borrower, buys the goods from a third party and sells those goods to the customer on profit.

A question may be raised that selling goods on profit (under Murabaha) and charging interest on the loan (as per the practice of conventional banks) appears to be one of the same things and also produces the same results. The answer to this query is that there is a clear difference between the mechanism/structure of the product. The basic difference lies in the contract being used. Murabaha is a sale contract whereas the conventional finance term loan is an interest based lending agreement and transaction.

Question No. 08) What are the basic rules of a valid Murabaha transaction?

Answer: The following are the rules governing a Murabaha transaction:

  1. The subject matter of sale must exist at the time of the sale. Thus anything that may not exist at the time of sale cannot be sold and its non-existence makes the contract void.
  2. The subject matter should be in the ownership of the seller at the time of sale. If he sells something that he has not acquired himself then the sale becomes void.
  3. The subject matter of sale must be in physical or constructive possession of the seller when he sells it to another person. Constructive possession means a situation where the possessor has not taken physical delivery of the commodity yet it has come into his control and all rights and liabilities of the commodity are passed on to him including the risk of its destruction.
  4. The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. For example, 'A' tells 'B' on 1st January 2020 that he will sell his car on 1st February 2020 to 'B', the sale is void because it is attributed to a future date.
  5.  The subject matter should be a property having value. Thus goods having no value cannot be sold or purchased.
  6. The subject matter of sale should not be a thing used for unlawful /Haram/ purpose.
  7. The subject matter of sale must be specifically known and identified to the buyer. For Example, 'A' owner of an apartment says to 'B' that he will sell an apartment to 'B'. Now the sale is void because the apartment to be sold is not specifically mentioned or identified to the buyer.
  8. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance.
  9. The certainty of price is a necessary condition for the validity of the sale. If the price is uncertain, the sale is void.
  10. The sale must be unconditional. A conditional sale is invalid unless the condition is recognized as a part of the transaction according to the usage of trade.

 

Question No. 09) What are the basic document requirements for Murabaha financing?

Answer: The following are the basic documents for Murabaha financing:

  1. Application Letter
  2. Renewed Trade License
  3. Principal Registration Certificate
  4. Tin No. (Applicant, spouse, guarantor & spouse of guarantor if any)
  5. Marital Status (Applicant & guarantor if any)
  6. Other Bank Account Statements
  7. Proforma Invoice for assets to be purchased
  8. Financial Statements (For at least 2 years, Audited if Request ≥ 5 million)
  9. Title Deed and/or Ownership booklet copy of the collateral
  10. Tax Clearance Certificate (Applicant, spouse, guarantor & spouse if any)
  11. Import document/export document for importer & exporter respectively

And if the borrower is Legal Person the following documents are additional requirements

  1. Articles of association
  2. Memorandum of association
  3. Minutes of meeting
  4. Tin No. (General Manager & Major Shareholders)

For further inquiries please contact our IFB Department at:

Tel: 0114-70-34-20 / 0114-70-50-12

0114-65-52-22 EXT 259

Fax: 0114-70-69-88