Islamic contracts in the Loan Product Builder: from credit lines to Solar Hijri installment schedules

Many banking software products were built around the interest-based loan model, with Islamic contracts added on later. The usual result is that calculations for some contracts are done in separate spreadsheets and only the final figure is entered into the system. In Dara, the contract is part of the product definition from the outset, and its calculations run inside the system itself.

The credit line, where the product is defined

Every financing product starts with a credit line. In the credit line, the product specialist sets:

• the contract the product is based on
• the profit rate, penalty rate and origination fee
• the minimum and maximum amount
• the installment start policy
• the permitted collateral types and the required document categories
• the branches allowed to disburse this product
• the instrument the funds are paid into, either a wallet or a card

With this definition in place, launching a new scheme, such as a marriage loan for fund members or goods-purchase financing, is a matter of configuration and needs no code changes.

Fifteen contracts, fifteen calculators

Dara supports fifteen Islamic contracts, each with its own calculator. Murabaha, Qard al-Hasan, Ijara and Mudaraba are among them. Each contract's behavior is defined by a few attributes: whether it is profit-bearing, whether it requires collateral, and whether late payment incurs a penalty. A credit line can refine the details, but the contract's attributes take precedence. Under a Qard al-Hasan contract the profit rate is zero, and the system will not accept any other rate.

Every case number also encodes the contract. It is made up of the branch code, the contract code, the customer code and a sequential number, so a staff member can tell at a glance which branch and which contract a case belongs to.

Installment schedules on the Solar Hijri calendar

The installment schedule is generated when the loan is disbursed. Due dates follow the Solar Hijri calendar and a fixed day of the month: if the first installment is due on the 10th, every later installment is also due on the 10th of each Solar Hijri month. To the customer this is obvious, yet systems that calculate due dates on the Gregorian calendar often go wrong at exactly this point.

Depending on how the credit line is defined, profit enters the schedule in one of three ways:

1. collected as a single cash payment, separate from the installments
2. added in full to the first installment
3. spread evenly across the installments, with any rounding remainder added to the last one

Repayment and allocation order

When a customer pays an installment, the amount is allocated in the order set by the Central Bank of Iran: penalty first, then profit, and finally principal. If the contract is not profit-bearing, the profit share is zero, and if the contract does not allow a late-payment penalty, the penalty share stays at zero as well.

The late-payment penalty accrues daily and is calculated every night for past-due installments. A credit line can include a grace period; if the delay is shorter than that period, no penalty is recorded.

From past due to written off

Unpaid installments move a case through the arrears classification: past due, overdue, doubtful and finally written off. For the delinquent classes, loan-loss provisions are made at rates of 2%, 25% and 100%. Classification runs as a batch across all cases, so nobody has to compile the arrears list by hand.

The credit contract

One of the fifteen is the credit contract, designed for buy now, pay later purchases. Throughout the period, the customer makes purchases against their credit, and a usage statement is issued at the end of the period. A nightly process converts the period's usage into installment financing with a Solar Hijri schedule and posts the corresponding voucher to the Financial Core. A fixed fee applies during the grace period, and a daily penalty after it.

Collateral

Sixteen standard collateral types are defined in the system, from gold, promissory notes and Sayad cheques to real estate, vehicles, shares and third-party guarantors. The valuation of each collateral item is versioned, so a new appraisal does not erase the record of earlier ones. Collateral is released only when the case status allows it, and if the system cannot determine that status with certainty, the release request is rejected.

When the collateral is a deposit, all or part of its balance is placed on hold, and the hold references the financing contract's number. A teller can see on the account page how much is on hold and for which case.