VAP (Value-Added Participation)

Definition of "VAP (Value-Added Participation)"

This concept has been given by some economists to replace PLS as a basis for Islamic banking. It is contended that VAP would be nearer to justice and would give greater stability to the profits of the banks. However, its permissibility under the shari‘ah is doubtful, because under this concept the bank would be able to get a return in any case. VAP means that the bank would provide funds for a business on the condition that the bank would get a fixed percentage of the value added by the borrower as a return. The value added would be calculated by: (i) gross turnover less purchases and services; or (ii) wages, salaries and pensions plus interest on capital plus taxes plus dividends plus depreciation plus retained profits. Thus, value added can never be a negative figure. The bank would always get a return. The concept has only changed the predetermined rate of interest to a variable rate of interest.