Fixed Return by Islamic Banks

Although Islamic banks cannot provide interest based accounts with fixed incomes, there are products available which provide fixed or quasi-fixed incomes without compromising Shari’ah principles. Islam promotes trade and risk taking in business ventures. The return must be commensurate with the risk and the quality of the venture. There are retired, elderly, and widowers who cannot afford to risk their capital yet require a return. Instead of depositing their money in interest bearing accounts with conventional banks, Islamic banks can offer them lower risk products. Correspondingly, these products have lower returns.

If risk-averse customers demand total protection of the capital then they could deposit their money in current accounts with no return from the banks’ profits. If they can tolerate a small amount of risk, they can invest in Murabaha (cost plus profit mark-up) or leasing funds. The investors buy units in these funds at the market price at the time of purchase and then they can get quasi-fixed return from Murabaha or leasing activities of the bank. In these funds the return is lower than other accounts such as Mudarabah, but the income stream is somewhat fixed. The risk of default is still there in Murabaha or lease but there are protection clauses in contracts which safeguard the bank and the investors to minimize the risk.

With the growth of Islamic Finance, quasi fixed income securities, called Sukuk, are also offered in the financial markets and sold by brokerage houses and Islamic banks. They are similar to bonds but do not pay interest to make them Shari’ah compliant. They are tied to cash flows or returns generated from physical assets. The funds collected from Sukuk can be invested in a project on the basis of Murabaha, Mudarabah, Musharakah, Ijarah, Istisna’a, or any other Shari’ah compliant scheme.