The Basis for Imposition of Fees and Charges in Islamic Banking Products and Services

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As a financial intermediary, an Islamic financial institution (IFI) generates two different types of income, namely (1) funding income and (2) nonfunding income. Funding income refers to income that an IFI generates from its fund-based products that are typically under the portfolio of retail and corporate banking. In these products, the IFI may incur cost of funds because it sources the funds from various parties such as depositors and shareholders. For funds that come with a cost, the utilization of such funds may oblige the IFI to give a dividend or return at an agreed rate, which entails that the IFI has to share this type of income with the fund providers. Unlike funding income, non-funding income refers to income that the IFI generates from its non-fund-based services that are commonly related to corporate advisory and its investment banking portfolio. In this case, the IFI may have to incur direct expenses related to the provision of services to the clients such as the structuring service for which an agreed fee is paid by the clients as income for the IFI. The IFI does not incur any cost of funds in these banking services; it may leverage on its existing infrastructure as well as the expertise and talent of its personnel. Thus, a structuring fee and a fee charged for a money transfer service, as mentioned above, are solely recognized as the IFI’s income without having to share them with the fund providers. On this basis, the IFI may prefer to opt for services that are not fund-based but, rather, feebased. It may want to impose various kinds of fees and charges in both types of products and services. In this regard, there is a dire need to identify the Sharīʿah principles that constitute the Sharīʿah basis for the imposition of fees and charges for different products and services. Furthermore, the Sharīʿah basis will be instrumental in constructing substantive Sharīʿah parameters that govern IFIs in matters pertaining to imposition of fees and charges for its products and services.........


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