Page 8 - Islamic Finance Practices

 Benchmarking profit rate against interest rate:
pricing of Islamic debt instruments is set by the

bank using LIBOR as the benchmark rate on

which the credit spread is added to evidence

the risk of the borrower. This shows Islamic

banks carry only risks similar to an interest-

bearing loan, namely, credit risks, market risk

and operational risks. One fundamental

principle of Islamic transaction is that “profit is

accompanied with risk” al-ghormbilghunm
which in a sale (al-bay) constitutes the taking

of business risk by the trader who says, buys

goods at cost, say $10 and intends to sell at a

profit, say $15. Business risk suggests that

there is no guarantee he can sell it at a profit.

In an economic downturn, he may only sell

below cost and thus, make a loss. Business
risk or commercial risk does not exist in

tawaruq and other Murabahas, as it is blocked

by way of speedy sequences of sale and

resale to nullify any price change of

commodity that the program uses, say palm oil

and metals.

 Using Shariah as a defence against default:

that more loan structures have appeared in

Islamic debt instruments is evident by the