SS 47 · General

SS 47: Rules for Calculating Profit in Financial Transactions

What this standard is about

Profit is the amount earned above the original capital or cost. This standard explains which profits are permissible, how profit rates may be set, and how profits must be disclosed to customers. It covers the financing and investment activities of Islamic banks — but not investment-account profit distribution, which has its own standard (No. 40).

Why it exists

Customers need to know exactly what they are paying and why. Without rules, a bank could hide the true cost of financing, quietly raise charges for late payment, or use benchmarks in misleading ways. The standard keeps profit calculation honest and transparent.

The key rules, simply put

Permissible profit comes from permissible deals — sales, leases, and partnerships done the Islamic way. Profit from interest-based contracts, forbidden goods, or invalid contracts is forbidden.
There is no maximum limit on profit, as long as both sides agree freely.
Regulators should not cap profits, except in monopolies, emergencies, or clear public interest — and even then, not unfairly.
A credit (deferred-payment) sale may carry a higher profit than a cash sale, as long as the higher amount is fixed in the price. Late payment must never increase the debt.
In murabahah, profit may be a fixed amount or a percentage of the cost.
A market benchmark may be used to set the profit at the promise stage or when signing — but the final price and payment schedule must be fixed and must not move with the benchmark afterward.
In mudarabah financing, different profit ratios may apply to different periods, and hurdle rates are allowed — but no partner may be left with zero profit, and neither capital nor profit may be guaranteed.
The bank must disclose how it calculates profit, in contracts and in advertising, so customers can ask questions and compare.
Standard accounting methods may be used if they comply with Shariah; misleading calculations are forbidden.
The bank may give a voluntary discount (rebate) to a customer who pays early.

An everyday example

A bank offers a customer a car for $20,000 cash or $23,000 paid over three years (murabahah). The $3,000 profit is fixed in the contract. If the customer pays late, the debt stays $23,000 — no extra charge is added. If he pays early, the bank may voluntarily reduce the amount as a goodwill rebate.

Words to know

Murabahah — a cost-plus sale: the bank buys an item and sells it to the customer at a disclosed cost plus an agreed profit, paid later.
Mudarabah — a partnership where one side provides money and the other provides work; profits are shared.
Benchmark — a public market rate or index used as a reference for pricing.
Hurdle rate — a minimum profit level that triggers a different sharing ratio.
Halal — permissible under Islamic rules.

Source

AAOIFI Shariah Standard No. 47 — https://aaoifi.com/wp-content/uploads/2020/08/SS-47-Rules-for-Calculating-Profit-in-Financial-Transactions.pdf