Pule asks: When you take a loan with the Islamic Banks, they charge profit mark-up instead of interest. Can you please explain how this profit mark-up is calculated?
Maya replies: Islamic Banks do not engage in lending or borrowing, but rather in the financing of assets and Islamic Finance is widely regarded as an entrepreneurial form of banking.
Amman Muhammad, managing executive of Absa Islamic Bank explains:
Islamic Banks calculate their profit mark-up by using certain benchmarks.
Benchmarks in this sense could include the CPI, a rental index and also could include interest based benchmarks.
While interest in its conventional sense is frowned upon, using any interest based benchmark for the pricing of goods or their usufruct is regarded as permissible under certain circumstances by Islamic scholars as long as the other conditions of trade or leasing are adhered to.
Scholars have mentioned that the prohibition of interest lies not in the quantum of the financial return or its similarity or equality with something else, but rather in the method of its generation. If the financial return is not self- generating (money on money), it is permitted regardless of its equality with any other financial return e.g. LIBOR, JIBAR.
If the financial return is self-generating, it is prohibited even if it is not equivalent to any financial return.
Banks globally have initiated discussions regarding the development of an Islamic benchmark. Implementation of such innovation will require an eventual global economic metamorphosis.
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