DECISION NO: 15 Inflation-Indexed Accounts

DECISION OF TKBB ADVISORY BOARD

DECISION DATE : 22.08.2019
DECISION NO : 15
DECISION SUBJECT : Inflation-Indexed Accounts

REFERENCE

REQUEST DATE : 29.07.2019
REQUEST NO : 63862138-804.01-E.13
REQUEST SUBJECT : On Inflation-Indexed Accounts
REQUESTOR : TKBB

REQUEST SUMMARY:

The opinion of the TKBB Advisory Board is requested on whether Participation Banks can carry out inflation-indexed fund collection (participation account, current account, etc.) and fund extension (murabaha, leasing, etc.) transactions.

DECISION:

1. It is legitimate to decide that the inflation difference during the maturity period will be added to the loan amount during repayment when making a loan agreement in an inflationary environment.

For this reason, participation banks can open inflation-indexed loan accounts with a certain maturity as a new fund collection method, where the bank will also pay the inflation difference in addition to the money deposited to the customer when the maturity date comes.

Legitimacy:

Deciding to pay the depreciation due to inflation during the period that lasts until the payment date in loan contracts does not mean to stipulate an unrequited surplus. On the contrary, it is a fairer way as it ensures the amount received at the time of the loan is repaid with the same value. And, this does not mean that the amount to be paid at the end of the maturity is left uncertain, but it ensures that the amount of money received and the amount to be paid is the same and that the money received is returned at its real value.

Since the loan accounts to be created are not based on profit & loss partnership, they are not participation accounts. And they are not private current accounts either. This will be a new account type in participation banking. Because this account does not require a bailment contract unlike private current accounts, it is a loan contract in full sense since its creation. Unlike the private current accounts, the withdrawal of the money is bound to maturity in this account and it has been decided from the beginning that the customer who gives the loan will get their money back at the end of the maturity with the addition of inflation difference.

Here, this account type is differentiating from a standard private current account by the phrase "with a certain maturity".

Although it is not considered legitimate according to some Islamic scholars to make a loan contract over a certain maturity, there are some who see it as legitimate. Considering the loan contract's legitimacy aim and the qard barrower’s need for a certain period of time, this second opinion is considered more appropriate.

This opinion is also more in line with general practice and also with the moral principle of staying true to promises.

2. On the other hand, a wakalah investment or a mudarabah contract account based on inflation difference is not legitimate.

Legitimacy:

In the mudarabah contract and a wakalah investment, which is a kind of mudarabah contract, the profit is decided at the beginning by the parties over certain rates. If the partnership suffers a loss, the capital owner will bear the loss, and the mudarib who serves as the manager will not be able to receive any allowance for his/her labour. The mudarib only bears loss that arises from his/her own malice and/or fault. Since mudarabah is a partnership contract, if a certain amount of payment to one of the parties is guaranteed from the beginning, that party's participation in profit & loss vanishes, and the transaction completely violates the principles of participation banking. What needs to be done in a mudarabah contract is to calculate the profit at certain rates, and in case of a loss, to give no payment guarantee to any party. Wakalah investment is like a mudarabah contract in terms of these provisions. So, it is not legitimate in the wakalah investment to decide that the proxy will compensate all or a certain part of the damage during the contract. Therefore, inflation indexing should be excluded from these two fund collection methods.

3. When extending funds through murabaha, participation banks can offer their customers a new murabaha model, in which they can revise the amount of payments downwards, considering the inflation, as well as the murabaha model, in which a certain price and payment table is issued from the beginning, as in the current practice. When making such a murabaha agreement, if the inflation rate during the payment of the debt is lower than the estimated inflation rate which was used in determining the original price of the goods sold with murabaha, the participation bank may commit to reflect the difference to the customer as a discount. The same discount can be made in leasing contracts as well.

Legitimacy:

Here, the sales price is determined from the beginning, and the contract is terminated on this price under normal conditions. However, the seller can make a discount on the price in favour of the customer after the contract for any reason. The participation bank reflects the low inflation rate to its customer as a discount in this practice. On the other hand, this transaction can be considered as a release from some of the debt.

The first and second decisions were taken unanimously, and the third by majority vote.

Allah knows the best.