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Questions You Might Have on the Participation Banking System

​When comparing Participation Banks with other banks functioning within an interest-based system (conventional banks), investors might have some questions.

Considering that all entities are competing with each other in the banking industry and that they are offering products and services having standards imposed by the same regulatory and supervisory framework, it is inevitable that there are similarities.

However, with regards to their business model, the two systems of banking are based on completely different principles.

Below are some frequently asked questions, and the related replies.

Documents delivered by Participation Banks such as financing payment schedule are similar to those of conventional banks. Why?

  • Both Participation Banks and conventional banks operate under the authority of Banking Regulation and Supervision Agency.
  • The Agency sets the requirements for the documents presented by the banks to their customers, such as agreements and payment schedules.
  • All banks, whether they are interest-free or conventional banks, are obliged to adopt these standards. Therefore, documents are similar to each other.

Why documents stating the purchase of goods do not carry the name of the Participation Bank?

  • After customers request financing support from a participation bank, they go through an assessment process first.
  • If this assessment results positively, the bank issues a power of attorney to the customer, and this is entered in the bank’s systems.
  • This power of attorney enables the customer to make the purchase on behalf of our bank, under the title of an attorney.
  • According to Islamic law, it is sufficient that the documents carry the name of the person acting as the attorney.

How can you explain that profit share rates and interest rates are close to each other?

  • Participation Banks compete within the banking industry, as it is the case for other banks. Therefore, they cannot set a profit margin on the cash purchased good as being irrelevant to the market.
  • To stand out among other similar financial products, other banks’ rates are considered when specifying the profit share rates.
  • Profit obtained by participation banks from murabaha transactions are shared with Participation Account holders.

Participation Accounts are based on the rule of profit and loss sharing. Why there is always profit and never a loss?

  • Participation Account pools include large amounts of money, and also meet the financing requirements of many customers.
  • After customers request financing support from a participation bank, they go through an assessment process first. Financing is provided if this assessment results positively. This procedure minimizes defaulting financing transactions.
  • The big size of Participation Account pools mitigates the loss effects of defaulting financing transactions.​