Risk at Islamic banks

13-11-2003 | IslamWeb

Question:

I am an Msc student. My question is: How do Islamic banks assess risk when financing a project?

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Answer:

Praise be to Allah, the Lord of the Worlds; and may His blessings and peace be upon our Prophet Muhammad and upon all his Family and Companions. The way in which Islamic banks finance projects differs according to the project itself. One way is Murabaha which means that bank buys the commodity on its name, then sells it to the customer. The bank here is responsible for any defects that befall the commodity during the period the bank has not delivered the commodity to the customer. Another transaction which involves some risk is what the Islamic banks commonly call: "Parallel construction". In such a transaction, the customer or client asks for a building or a house which he describes clearly. Then the bank is responsible for this building or house in all its stages of construction until it delivers it to the client. The risk here is in supporting any extra-charges that result from mishandling or mishap. The same thing is true as far as importing goods is concerned. The bank here is responsible for buying, carrying and delivering goods at the port. The bank is responsible for any accidents that happen during this process. However, the bank has ways of abating such risks. In Murabaha transactions, the bank takes an earnest money from the client to ensure his/her seriousness in buying. So, if the client desists from continuing the transaction the bank substracts an amount that compensates any prejudice it encounters due to this customer's abstention. The bank also ensures the goods it imports so that the insurance company compensates it for any loss. Allah knows best.