SS 28: Banking Services in Islamic Banks

What this standard is about

Banks do more than lend and take deposits. They move money for customers, collect cheques, keep valuables in safe custody, exchange currency, and issue payment cards. This standard covers these banking services in Islamic banks and the charges a bank may set for them.

The central rule is that a bank may provide any service that does not involve interest-based lending and borrowing, because such services meet a genuine need of customers. The bank may charge a fee for the service. A fee is allowed because it is payment for work actually done, and Shariah (Islamic law) allows a person to be paid for work that benefits others. The fee may be a fixed lump sum or a percentage of the value of the service. Once the percentage is worked out, it amounts to the same as a fixed sum.

Why it exists

Islamic banks must earn income without charging riba (interest). Fee-based services such as transfers, safekeeping, and collection are a legitimate income stream. The standard, adopted in June 2006, gives banks and their Shariah supervisory boards a common basis for offering these services and setting their charges.

The key rules, simply put

• An Islamic bank may provide banking services that do not involve interest-based lending or borrowing.
• The bank may charge a fee for providing a banking service.
• The fee is payment for the work the bank does, such as moving money or keeping valuables safe.
• The fee may be a lump sum or a percentage of the value of the service.
• Fees may be charged for banking services. Typical examples include money transfers, cheque collection, safekeeping of valuables, currency exchange, and payment cards.

An everyday example

A customer asks her Islamic bank to transfer money to a supplier abroad. The bank carries out the transfer and charges a fixed fee of $25. This is allowed, because the fee pays for the transfer service itself. The bank could also charge a percentage of the amount transferred, as long as the fee is for the service done.

Words to know

• Shariah — Islamic law, derived from the Quran and the practice of the Prophet Muhammad
• riba — interest, any extra amount charged on a loan
• Shariah supervisory board — the panel of scholars that checks a bank's compliance with Islamic law
• AAOIFI — the Accounting and Auditing Organization for Islamic Financial Institutions, the body that issues these standards

Source

• AAOIFI Shariah Standard No. 28 — https://islamicmarkets.com/publications/banking-services-in-islamic-banks-appendix-b-the-shariah
• Adoption of Standard 28 — https://islamicmarkets.com/index.php/publications/banking-services-in-islamic-banks-adoption-of-the-standard