Islamic banking is fundamentally different from conventional banking. Based on Shariah laws, it has a list of do’s and don’ts which make it a unique financial proposition. Let’s take a look at what sets them apart:
|Islamic banking operates on the basis of profit and loss sharing. In case, the borrower suffers losses, the bank shares these losses based on the mode of finance used.
||Interest is charged even if the borrower suffers losses by using the bank’s funds. It is not based on profit and loss sharing.
|It tries to create a link with the economic system by using trade related activities. It helps contribute directly to the economic development.
||It uses money as a commodity which eventually leads to rise in prices.
|Profit on trade of goods or service charges are the major avenues of earning money by Islamic banks.
||Time is the factor considered while charging interest on the principal loaned amount. This is how the bank makes money.
|Repayments of sums for deposit accounts are only guaranteed in Islamic banks if the account was based on the principle of Al-Wadiah. If not, the depositor will share the losses of the bank’s investment in accordance with the Mudharabah concept.
||Maturity amount is guaranteed in conventional banking. The bank has a liability to pay the depositor at the agreed rate of interest.
Let’s look at some Islamic accounts offered in the UAE.
- Islamic Savings Account : Most banks offer Islamic savings accounts to their customers. The funds deposited in these accounts are invested in Shariah-compliant assets and the profits/losses are shared between the account holder and the bank.
- Islamic Current Account : Under Islamic banking, funds deposited in current accounts are interest-free loans given by the account holder to the bank. The bank can invest these funds and the customer has no share in the profits or losses made by these investments.
- Islamic Fixed Deposit : While Riba (interest) is prohibited under Sharia laws, making returns on your investment is permitted. The funds deposited in an Islamic fixed deposit are utilized by the bank to buy a Sharia-compliant asset/commodity. This asset is then sold back to the bank at a pre-agreed marked-up price.
Apart from these, Islamic personal loans, car loans, home loans and business loans are also available for customers.
Apart from being Sharia-compliant, Islamic accounts have some or most of the following features:
- Usually, Islamic Savings and/or Current accounts come bundled with a host of free services like
- Debit card
- Internet banking
- Phone banking
- SMS banking
- Mobile banking
- Most banks offer these accounts in AED and USD currencies. Some banks might accept accounts in other foreign currencies too.
- Islamic fixed deposits offer an indicative profit rate unlike the interest in conventional fixed deposits. Usually, they have a pre-specified tenure and don’t allow premature withdrawal of funds.
- Being interest-averse, Islamic loans (personal/car/home/business) have a cooperative structure encouraging profit-sharing and fair trade. They follow the Islamic principles of banking.
Each type of account and bank will have its own eligibility criteria which needs to be checked individually. Some common eligibility criteria are:
Age : Usually, any financial transaction requires the applicant to be at least 18 years of age. Minors can open some accounts jointly with a guardian.
Nationality : Most of the accounts offered by banks are available for UAE residents and non residents. The documentation required and charges applicable may vary.
Type of Entity : Depending on the type of account and bank you apply to, certain entities are permitted to open accounts in UAE. Some commonly accepted entities are :
- Resident Individual
- Sole trader businesses
- Hindu undivided family
- Private and public limited companies
- Non-governmental organizations (NGO)
- Public corporations
- Registered societies/associations/clubs, trusts
- Government/semi-government bodies/departments
As is the case with eligibility, every bank can have its own requirement of documents to process your account application. Apart from the application form, some basic documents needed are:
- Original passport for verification along with a copy
- Copy of the visa
- Proof of address
- ID proof