Models of Personal Finance in Islamic Banking: An Attempt to Engineer Shari'ah-Compliant Instruments

Personal finance, from Shari’ah perspective, is a benevolent provision that should not be offered by Islamic financial institutions for a profit. There are different motives for PF whether on individual, corporate, financial institution or government levels and genuine needs for cash may arise under specific circumstances. Current instruments used by Islamic banks to provide PF have Shari’ah issues and serious implications and effects on the economy apart from the resulting reputational risk for the industry. This thesis is an attempt to explore and present Shari’ah-compliant alternative instruments that fulfil the needs for which PF is usually given. Four profit-based instruments are discussed: (1) Service Ijarah, (2) Murabahah/Service Ijarah Line-of-Credit with Wakalah, (3) Musharakah Line-of-Credit and (4) Murabahah/Service Ijarah Credit Card. Through these instruments, most cash needs are fulfilled whether for individuals, corporations, financial institutions or governments. Cash Waqf fund should be activated as a non-profit based instrument for PF. The study investigates lending cash through operationalization of cash as a PF instrument, especially for individuals, within a banking context and its potential advantages and disadvantages are examined. The Cash Waqf instrument is restricted to fulfill only those needs which cannot be met through other Shari’ah compliant profit-based contracts. IBs have adequate tools to provide PF within the boundaries of Shari’ah particularly for retail customers and corporates and they do not need to resort to controversial tools that only mimic interest-based loans. Enhanced research and development initiatives will help the IF industry come up with innovative solutions within Shari’ah boundaries.