Comparable services of Participation Banks and the banks operating in the interest-based system may create question marks in the minds of investors.
Considering the facts that all institutions compete in the banking market, and offer products and services regulated by the same regulation and supervision mechanisms, similarities between the two systems are inevitable.
However, these two systems operate by completely different principles regarding their ways of doing business.
Please find below the frequently asked questions about this matter and the replies to these questions.
Why the documents issued by Participation Banks, such as repayment schemes, are similar to those of the banks operating under the interest-based system?
Participation Banks, like other types of banks, are regulated by the Banking Regulation and Supervision Agency.
The contents of bank-issued documents, such as contacts and repayment schemes, are determined by the Banking Regulation and Supervision Agency.
Any bank, whether it operates under interest-based or interest-free system, must observe these standards. That is why these documents are similar.
Why is the name of the Participation Bank not put on the documents governing purchase of goods?
Customers who make a financing request from a participation bank will first go through an evaluation process.
If the results of the evaluation are affirmative, the bank will issue a system-registered power of attorney to the customer.
This power of attorney allows the customer to conclude the purchase transaction on behalf of and as an agent of our bank.
Under Islamic jurisprudence, putting only the agent’s name on documents is sufficient.
Why are profit sharing and interest rates so close to each other?
Like other types of banks, Participation Banks compete in the Banking market. And for this reason, they must take market rates into account as they set a profit rate for cash purchase of goods.
To be preferable among comparable finance products, profit rates are determined in light of the rates applied by other banks.
The profits derived by participation banks from murabaha transactions are shared with Participation Account owners.
Why do Participation Accounts, which are actually based on Profit/Loss Partnership, not make any loss?
Participation Account pools are made up of very large amounts of funds, and cover financing needs of a huge number of customers.
Customers who make a financing request from a participation bank will first go through an evaluation process. The requests that are found feasible will receive financing support. This way, the number of potentially bad financing requests is minimized.
Since each one of Participation Account pools are very large in volume, the potential loss from bad financing is quite low.