Mohd Johan Lee J. Lee & Associates For Kowloon Mosque & Islamic Centre.

Mohd Johan LeeJ. Lee & AssociatesFor Kowloon Mosque & Islamic Centre

Sources of the Shariah Framework of Islamic Finance Shariah, Fiqh & Mu’amalat Necessary Requirements of Islamic

Finance Riba, Gharar, Maysir & Others Essential Contracts in Islamic Finance Products and Instruments

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(c) Mohd Johan Lee 2012

Primary Sources The Holy Quran

Sunnah (the sayings, deeds and endorsements of Prophet Muhammad PBUH)

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• Secondary Sources (mostly by the exercise of Ijtihad (reasoning by the learned))

Ijma (Unanimous decision of the Ulama) Qiyas (analogy) Istishan/ Istihab (equity in Islamic law) Maslahah (necessity of the people) Surdul Dara’ih (Blocking the means) U’ruf (custom)

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In general, the framework of Islamic finance is the same framework used by the conventional finance practices.

These frameworks are, inter alia legal and regulatory framework, taxation framework, accounting and auditing standards, etc.

Might have different or additional framework, such as accounting and auditing standard, etc, due to its peculiarity.

In certain jurisdiction, Islamic banking and finance might be regulated by different sets of regulations, either separate or additional, e.g. IBA 1983

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However, Islamic Finance, as the name suggests, has another framework, which is considered the major element that differentiates IBF from the conventional banking and finance.

Any violation of this framework will definitely effect the validity of Islamic finance itself.

Shariah Compliance Framework

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Three main interrelated terminologies: Shariah, Fiqh & Muamalat

Shariah, when viewed from legal perspective is the fixed elements of Islamic law, i.e. what has been clearly stipulated and mentioned in the text. E.g. five time prayers, prohibition of riba’, etc.

As such, it is revealed in nature

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Shariah, in this sense, is wide and encompassing various branches of Islam

Normally, it comes in its generality and it emphasizes only on the principles and not the detailed rules (not all the time)

It is the duty of the judge (qadi), mufti and jurisconsult (ulama’) to exert their intellectual efforts in deriving and applying these principles on certain given scenarios.

The result of human reasoning and understanding to the shariah is known as fiqh

Fixed v. Flexible Agreements v. Differences

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However, in its general usage, it is called al-syariat al-Islamiyyah (Islamic law).

Islamic commercial law is one of the components of Islamic law

Other components of Islamic law include: Islamic law of purification and worship Islamic family law Islamic criminal law Islamic law of evidence and procedure Islamic law of inheritance, etc

The main subjects of Islamic commercial law are commercial contracts and the rules governing them

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Original rule of permissibility: - Initial legal ruling in commercial contract is

permissibility - Contrary to acts of devotion (Ibadat) - No legal injunction is needed in sanctioning new

contract - Every contract is considered lawful and acceptable

if no principle of shari’ah is violated - Open a very wide door for further innovations

Real Economic Activities Transactions-oriented not loan-based.

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WHAT AMOUNTS TO WHAT AMOUNTS TO SHARIÀH COMPLIANCE?SHARIÀH COMPLIANCE? In Islamic jurisprudence, the main source of law is

the Shariàh or Islamic law as contained in the Quran and Sunnah

Underlying rule: all contracts are deemed permissible except when there is contravention of any established principles of Islamic law / Shariàh

Legal maxim (qaìdah fiqhiyyah):“Al Asl fi al Ùqud al Ibahah” -“the original rule in contracts is permissibility”

The parameter: Avoidance of any contravention of the established principles and prohibitions in Islamic law

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Conclusion of contract by mutual consent

The avoidance of riba’ The avoidance of gharar The avoidance of transactions involving

maysir (gambling) The avoidance of transactions involving

prohibited commodities

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WHAT TO BE AVOIDEDWHAT TO BE AVOIDED

Riba – prohibited in many Quranic verses and sayings of the Prophet s.a.w.

Meaning: riba is every excess in return of which no reward or equivalent counter value is paid, in short, every unjust enrichment is riba

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Literally: excess, expand, increase, growth

Any unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities)

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PROHIBITION OF RIBA IN THE PROHIBITION OF RIBA IN THE QURANQURAN

First StageFirst Stage (30:39) (30:39) First StageFirst Stage (30:39) (30:39)

Second StageSecond Stage(4:160-161) (4:160-161) Second StageSecond Stage(4:160-161) (4:160-161)

Third StageThird Stage(3:130) (3:130)

Third StageThird Stage(3:130) (3:130)

Fourth StageFourth Stage(2:275-281) (2:275-281) Fourth StageFourth Stage(2:275-281) (2:275-281)

• Compare riba with zakat & charity

• Praising zakat & charity, not riba

• Attaching the practice of riba with the Jews

• Consider the practice as an iniquity (zulm)

• Prohibiting the practice of charging double and multiple riba

• Conclusively prohibiting all forms of riba

• Any excess over the capital is disallowed

4 STAGES4 STAGES4 STAGES4 STAGES

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“and that which you give in gift (to others), in order that it may increase (your wealth by expecting to get a better one in return) from other people’s property, has no increase with Allah…”

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“… and their taking of Riba though they were forbidden from taking it and their devouring of men’s substance wrongfully…. and we have prepared... a painful torment.”

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“O you who believe, Eat not Riba doubled or multiplied, but fear Allah that you may be successful.”

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“those who eat riba will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitan leading him to insanity. That is because they say: trading is only like Riba,” whereas Allah has permitted trading and forbidden Riba. So whosoever receives an admonition from his Lord and stops eating Riba, shall not be punished for the passt; his case is for Allah (to judge); but whoever returns (to riba), such are the dwellers of the Fire – they will abide therein forever.

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Allah will destroy riba and will give increase for sadaqat (deeds of charity, alms).

…. O you who believe, be afraid of Allah

and give up what remains (due to you) from Riba (from now onward), if you are really believers

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And if you do not do it, then take a notice of war from Allah and hiss Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than our capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).

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And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay; but if you remit it by way of charity, that is better for you if you did but know.

And be afraid of the Day when you shall be brought back to Allah. Then every person shall be paid what he earned, and they shall not be dealt with unjustly.

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CONT’D…CONT’D…

There are also a number of narrations from the Sunnah on the prohibition of riba

Some of the narrations give general prohibitions of riba, e.g.:“The Prophet of Allah s.a.w. cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt)”.

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Under Islamic law, riba can occur in two main situations, i.e.: riba al duyun (loan): the riba or excess which

occurs in debt and loan transactions because of extension/delay in repayment

riba al buyu` (exchange): the riba or excess which occurs in trading transactions involving the exchange of riba-bearing commodities without observing the required rules

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PROHIBITION OF RIBA (LOAN)PROHIBITION OF RIBA (LOAN)

Interpretative Interpretative EffortsEfforts

What amounts toWhat amounts to

TradeTradeTradeTrade UsuryUsuryUsuryUsury

CriteriaCriteria■Oppressive / unfair distribution

of risk & return■Unjustified enrichment at

expense of others

CriteriaCriteria■ Fair exchange of goods or

value■ Fair distribution of risk &

return

Surah al-Baqarah, ayat 275“ … But Allah hath permitted trade and forbidden usury

Surah al-Baqarah, ayat 275“ … But Allah hath permitted trade and forbidden usury

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PROHIBITION OF RIBA PROHIBITION OF RIBA (EXCHANGE)(EXCHANGE)

Interpretative EffortsInterpretative Efforts

ApplicationApplication

Staple FoodStaple FoodStaple FoodStaple Food

RulesRules■Same Type

■At Par■Spot

■Different Type■Spot

RulesRules■Same denomination

■At Par■Spot

■Different denomination■Spot

CurrencyCurrencyCurrencyCurrency

Sunnah of the Prophet:Gold for gold, silver for silver, wheat for wheat, barley for barley,

dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as

you wish, provided that the exchange is hand-to-hand or spot transaction.”

Sunnah of the Prophet:Gold for gold, silver for silver, wheat for wheat, barley for barley,

dates for dates, salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the commodities differ, then you may sell as

you wish, provided that the exchange is hand-to-hand or spot transaction.”

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SUMMARY OF RULES UNDER THE SUMMARY OF RULES UNDER THE HADITHHADITH

• moneymoney11 + money + money11 =2 conditions:

– Equality– Hand-to-hand

• foodfood11 + food + food11 =2 conditions:

– Equality– Hand-to-hand

• moneymoney11 + money + money22 =1 condition:

– Hand-to-hand

• foodfood11 + food + food22 =1 condition:

– Hand-to-hand

• money + foodmoney + food = No condition – free trading

• others + othersothers + others = No condition – free trading

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In contemporary finance, riba can occur in: All interest-based lending activities (e.g. all

conventional bonds) Fixed return on deposits in conventional banking

(e.g. designated accounts for receivables of the bonds)

In the secondary trading of debt securities – if the transaction is not spot & if there is discounting (according to global Shari`ah standard)

Thus, to be Shari`ah compliant, all contracts in Islamic finance cannot be involved in any of the usurious activities mentioned above

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Literally: excess, expand, increase, growth

Any unjustified excess above and over the capital, whether in loans (between creditor and debtor) or in trade (with similar commodities)

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Riba’ al-Duyun(RIba’ in Loan

Contract)

Riba’ al-buyu’(Riba in exchange Riba in exchange

contractscontracts )

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The debtor borrowed money to be paid in certain time, and the amount is more than the amount borrowed

A creditor gives a periodic loan and takes monthly interest. The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will be charged

Arising out of exchange contract, a buyer must pay a consideration. If he failed to settle on time, the period will be extended by increasing the amount (principle + interest).

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Mainly based on the saying of the Prophet: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is riba’”.

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These commodities can be classified under two main categories which make the illah (ratio decidendi) for their prohibition:

- i- medium of exchange (currency): Gold and Silver

-ii- Staple foods: Wheat, barley, dates and salt

Any other items, even though not mentioned in the hadith but serve the same purpose will be considered as having the same illah by way of qiyas (analogy)

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Riba’ al-duyun in loans and certain controversial contracts (bay’ al-’inah, bay’ al-dayn, etc)

Riba’ al-buyu’ mainly in bay’ al-sarf (exchange of currencies)

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Meaning of gharar: - Literally: risk, uncertainty, hazard - The sale of probable item whose

existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling

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Sale of fish in the sea, birds in the sky Sale of unborn calf in its mother’s womb Sale of runaway animal, slave Involve item which may or may not exist However, the Prophet did not lay down the

principles (qawa’id) for the prohibition of gharar. Examples given in the hadith were some of the

manifestations of the doctrine, but not principles.

This has led to the dispute among jurists on the area and coverage of gharar.

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GHARARGHARAR

Meaning: has a range of negative connotations, such as, uncertainty, deception, risk, hazard, ignorance etc.

If there is gharar, the contracting party/ies do not really understand the attributes / consequence of the contract

Under Islamic law, gharar is prohibited because its existence in the contract may deny the parties of equal bargaining power and they cannot make informed decisions; or if there is risks on deliverability of the object of the contract

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PROHIBITION OF GHARARPROHIBITION OF GHARAR

Interpretative EffortsInterpretative Efforts

What amounts toWhat amounts to

Trade by Mutual Trade by Mutual ConsentConsent

Trade by Mutual Trade by Mutual ConsentConsent

CriteriaCriteria■ Offer & Acceptance,

indicating consent■ Elimination of mistake, fraud

etc

CriteriaCriteria■ All illegal & defective

elements in contracts including gharar & uncertainty

Unjust (batil)Unjust (batil)Unjust (batil)Unjust (batil)

Surah an- Nisa’: ayat 29“ … squander not your property amongst yourself unjustly

(batil) except it be a trade among you by mutual consent…”

Surah an- Nisa’: ayat 29“ … squander not your property amongst yourself unjustly

(batil) except it be a trade among you by mutual consent…”

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PROHIBITION OF GHARAR IN THE PROHIBITION OF GHARAR IN THE SUNNAH SUNNAH

The sunnah uses the word gharar and its derivatives much more extensively than the Qur`an in the sense that several new meanings are added

In relation to commercial transactions, the Prophet s.a.w. in many of his sayings directly prohibited the sale involving gharar (uncertainty) and jahalah (ignorance)

Thus, the prohibition of gharar is made conclusive by the sunnah / hadith of the Prophet s.a.w.

Examples: the prohibition of gharar sale (i.e., the sale contract affected by gharar), the prohibition of the sale of fish in the sea, bird in the air, unborn animals, lost items, etc.

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In Islamic law, gharar can be of two degrees: Excessive or major (gharar fahish) Minor and tolerable (gharar yasir)

Only major /excessive gharar will affect the validity of contracts, where it will render the contract void / voidable, depending on the degree of uncertainty

Gharar affects trading and exchange contracts (mu`awadat); not charitable and unilateral contracts

In banking & finance – gharar can be triggered e.g. – in the sale contract to create the indebtedness if the asset used is uncertain / vaguely identified; the trading of a securitised debt which is unconfirmed / not established, sale of insurance policy

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Broadly speaking, gharar will effect the validity of contract if it occurs in these areas:

- gharar in kind / type / attribute / quantity of the object

- gharar due to delivery time - gharar due to the price/ mode of

payment - doubt over the ability to deliver

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Gharar which is excessive (gharar fahish) occurs in exchange contracts (‘uqud al-mu’awadat)

To prevent gharar, the parties to contract must have adequate knowledge and information on the subject matter:

i- Their existence and deliverability ii- Its quality, quantity and attributes

are known iii- Time –frame for payment and

delivery

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However, gharar is tolerable if: - i) it is trivial (gharar yasir) - ii) It occurs in other than exchange

contracts, such as in gratuitous contracts. -iii) It happens to the ancillary object

(appendages) only (not the principal and main subject matter of contract)

- iv) the economic need for the contract embodying the risk is substantial

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OTHER THINGS TO BE AVOIDED…OTHER THINGS TO BE AVOIDED…

Transactions involving the prohibited commodities, e.g., pork and liquor Surah al Maidah (5:3) Surah al Maidah (5:90)

Transactions involving gambling or maysir/qimar Surah al Maidah (5:90)

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Involves the creation of risk for the sake of risk A combative relationship between two

contracting parties, each of whom undertakes the risk of loss and the loss of one means gain for the other

Apply to all games of pure chance No economic activities are gained in the

practice. The gambler will simply seek to amass wealth without efforts.

Gambling is gharar in its worst scenario. Prohibited by al-Qur’an in Surah al-Maidah (5:90)

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It is also not allowed to conclude contract on illegal commodities such as pork, liquor etc.

Illegality of certain commodities has been spelt out clearly in the texts of al-Qur’an and Sunnah of the Prophet.

E.g. : - Surah al-Maidah (5:3) - Surah al-Maidah (5: 90)

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Underlying principles utilised in devising products of IBF is very important as they separate IBF from conventional products.

Contrary to conventional finance, which is specification driven product, Islamic finance is more structure and principle based product

Rules and regulations will differ from one product to another, depending on the structure employed

In general, various underlying Shariah principles have been utilised in devising products of Islamic Banking and Finance.

They can be summarised as below: - Sale based products - Lease based products - Participatory products - Fee based products

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Banking products IIMM products Capital Market Products

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SHARI`AH COMPLIANCE: MAIN SHARI`AH COMPLIANCE: MAIN PRINCIPLESPRINCIPLES

Mutual consentMutual consentMutual consentMutual consent AvoidAvoidAvoidAvoid

Interest(riba)

Uncertainty(gharar)

Gambling(maysir/qimar)

Other prohibitionse.g. Liquor, pork

Lawful Lawful ContractualContractualObjectiveObjective

Lawful Lawful ContractualContractualObjectiveObjective

CONTRACTS CONTRACTS CONTRACTS CONTRACTS

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ENCOURAGEMENT OF TRADE BY ENCOURAGEMENT OF TRADE BY MUTUAL CONSENTMUTUAL CONSENT

The Quran encourages work and trade The Prophet (s.a.w.) himself was a trader The encouragement of trade is evidenced

by the many instruments of trade available during the Prophet's lifetime and in Islamic history thereafter

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BUSINESS CONTRACTS BUSINESS CONTRACTS RECOGNISED IN ISLAMRECOGNISED IN ISLAM

Contracts of sale and purchase (bay`), including all its subdivisions, like: normal or spot sale mark-up sale (murabahah) deferred payment sale (BBA) sale with advance payment but deferred delivery

(bay` al salam) sale for future delivery of goods with flexible

payment of the price or manufacturing contracts (bay` al istisna`)

sale of currency (sarf), etc.

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Some controversial sales: Sell and buy back (bay’ al `inah) Sale of Sale of debt (bay` al dayn)

Islam recognises partnership contracts which are mainly based on profit and loss sharing (PLS), e.g.: mudharabah musharakah

A relatively new invention in this regard is: Musharakah mutanaqisah

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Islam recognises public and private project financing, e.g.:

Leasing (ijarah) - private; Endowment (waqf) – private/public; State treasury (bayt al mal) – public.

Modern forms of private project financing: Operational lease Financial lease – AITAB (hybrid contract)

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CONT’D…CONT’D… Islam recognises other additional contracts to provide security to the parties in a contract, i.e., the contracts of security (ùqud al tawthiqat), e.g.:

suretyship/guarantee (kafalah): involves three parties

mortgage (rahn): involves two parties These security contracts are normally combined

with other types of contracts, e.g.: the contract of BBA may be secured by a contract of

security involving collateral (rahn) Other contracts recognised in Islamic law:

contracts of trusts (al amanat), e.g.: safe-keeping (wadiàh)

contracts to do a specified task, e.g.: commision (juàlah); agency (wakalah)

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GratuitouGratuitous s

ContractsContracts

GratuitouGratuitous s

ContractsContracts

Trading Trading ContractsContractsTrading Trading

ContractsContracts

InvestmeInvestment nt

ContractsContracts

InvestmeInvestment nt

ContractsContracts

SupportiSupporting ng

ContractsContracts

SupportiSupporting ng

ContractsContracts

LeasingLeasing SaleSale

Bay` Bithaman Ajil (BBA)

Bay` Bithaman Ajil (BBA)

Operational Lease

Operational Lease

Financial Lease

Financial Lease

Murabahah

Murabahah

SalamSalam

WaqfWaqf

LoanLoan

Mudarabah

Mudarabah

Musharakah

Musharakah

KafalahKafalah

RahnRahn

HiwalahHiwalah

WadiahWadiah

WakalahWakalah

JualahJualah

MuqasahMuqasah

Ibra’Ibra’

GiftGift

Istisna’ etc.

Istisna’ etc.

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Islamic Banking

SOURCES OF FUND

APPLICATIONS OF FUND

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EQUITY FINANCING

DEBT FINANCING

Fee Based ServicesWakalahKafalah

Sale based financing BBA / Murabahah‘Inah/Tawaruq/dayn

SalamIstisna

Lease Based Financing-Ijarah-AITAB

Comsumer Banking

MudharabahMusharakah

Corporate Banking

ISLAMIC CAPITAL MARKET

Equity Market

Bond Market

DerivativesMarket?

MusyarakahMudarabah

-Debt Based-ABS-Equity Based

-Future Contract-Options-Swap

Mutual Fund / Islamic REITs

Wakalah / mudarabah / musharakah

Islamic Hedge Fund

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Besides various frameworks applied to banking practices (be it Islamic or conventional), Shariah framework is a framework which is peculiar to Islamic finance alone

Yet, it forms the very substance of Islamic finance, without which Islamic finance will loss its Islamicity

As such, in practicing Islamic finance, the do’s and don’ts must be clearly observed

Islamic commercial law, from the fact that it subjects to human interpretation and understanding admits differences of opinion, as long as these differences are grounded by valid evidence, produced by capable personnel, done according to the right methodology

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Derives from the word Kafalah, a verb, which means to bail, guarantee, warrant or to secure ones need.

Means Joint Guarantee. An arrangement between

members of community to jointly guarantee each other should mishaps befall to any of them


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FOR MORE INFO...

Al Mawrid: A Modern Arabic-English Dictionary, Dar-el-Ilm Lilmalayin, Beirut, Lebanon, 1991

National Fatwa Committee in Malaysia resolved that the present-day life insurance business provided by the conventional insurance companies was not in line with the principles of Shariah as it contains elements which are against Islam such as Riba (Usury), Gharar (uncertainty) and Maisir (Gambling). ~~~ June 1972


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Perak Fatwa Committee subsequently also declared that: “life insurance is not permissible as it is based on riba from which the profits of policyholders are derived. The policyholders must pay premiums for an indeterminate period which lead to the element of gharar (uncertainty)”.


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Takaful started some 30 years ago in the Middle East with the launching of two companies in 1979: The Islamic Arab Insurance Co. (IAIC) in the

UAE and The Islamic Insurance Co. of Sudan

But it took some time for the movement to take shape.

Later in 1984, Malaysia played a pioneering role in setting the first Legal framework specific to Takaful (Takaful Act Malaysia).

This was instrumental in the successful launching of the Takaful movement in Malaysia and in other countries of South East Asia.


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Other markets such as the Sudan and Iran have Islamic regulatory environments and became naturally Takaful markets.

In Pakistan Takaful Act is enacted in 2005.

In the Gulf countries specific Takaful legislations are coming through in Bahrain and in Saudi Arabia


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From a handful of operators two decades ago the Takaful movement has blossomed into a fast growing phenomenon in many Muslim countries with very promising prospects in other countries with a large Muslim community.


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This movement is driven by a strong demand from a public

who would not insure otherwise (because of religious beliefs); and

The successful development of Islamic banking institutions providing capital and Islamic financial instruments for asset management and investment.


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Islamic banks and financial institutions play a strategic and important role in the distribution of Takaful products (especially Life Takaful Products).

Just as Bancassurance played an important role in the distribution of personal lines insurance products Bancatakaful is an important driver for Takaful.


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The number of Takaful operators worldwide is now estimated at:

150 Takaful companies operating in 40 countries

10 Retakaful companies and 6 Conventional Reinsurance companies have established Islamic windows.

Takaful is one of the fastest growing segments in insurance (at around 20% pa. on average)

World Takaful contributions are conservatively estimated at around US$ 3billions, of which: 60% General Takaful 40% Family Takaful


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South& East Asia : 56% Middle East : 36% Africa: 7% Europe, USA & Others: 1%


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Takaful Business is based on the concepts of Mudarabah and Tabarru. Involvement of these two Islamic forms of business eliminates the elements of Riba from insurance contract and convert Gharar into tolerable form.

In Family Takaful each Takaful installment is divided and credited into two separate Accounts namely, the Participants' Account(PA) and the Participants’ Special Account(PSA). A substantial proportion of the installments is credited into the PA solely for the purpose of savings and investment.


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The balance of the installments is credited into the PSA as `tabarru' for Sharikah Takaful Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before the maturity of the contract.

The amount accumulated in the PA is invested in various business according to Islamic financing techniques, and the resultant profits are divided between the company and the participants according to the agreed upon ratio, e.g., 30-70.

The participant's share is calculated according to their individual share in the PA, and credited into their respective accounts, the PA and the PSA.


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Company’s Admin

& Manag. Expenses

Profit Attributed

To Shareholders

PA

PSA

FTF

Investment Profit

PA

PSA

Participant

Company

Takaful Contract

based on Mudarabah

30%

70%

Payment from

PA

Payment from

PSA

Mudarabah Model

Family Takaful


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Should the Participant die or suffer Permanent and Total Disability in the fifth year of participation, Takaful benefit will be paid in the following manner:-

i. From Participant's Account =RM 4,890(RM978 x 5)

profit if any, say RM 400

ii. From Participants Special RM 5,000

Accounts (RM1000 x 5) Total Takaful Benefit Payable RM

10,290


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Should the Participant survive until the maturity of his FTP, payment of Takaful benefit will be made to him as follows:-

i. From his Participant's Account = RM 9,780(RM978 x 10)

profit from investment RM 1,800ii. From Participants Special RM XXXX

AccountTotal Takaful Benefit = RM 11,580 +

surplus determined by Sharikah Takaful.


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PROFITSATTRIBUTABLE TOSHAREHOLDERS

COMPANY'SADMINISTRATION &

MANAGEMENTEXPENSES

INVESTMENT BYCOMPANY

PROFITSFROM

INVESTMENT

TAKAFULCONTRIBUTION PAID BY

PARTICIPANT

GENERALTAKAFUL

FUND

GENERALTAKAFUL

FUND

OPERATIONALCOST OFTAKAFUL

OPERATIONALCOST OF TAKAFUL

OPERATIONALCOST OFTAKAFUL

SHARE OFSURPLUS FOR THE

PARTICIPANT

SURPLUS(PROFIT)

SHARE OFSURPLUS FORTHE COMPANY

40% (Example Only)

60% (Example Only)

COMPANY

TAKAFUL CONTRACTBASED ON PRINCIPLE OF

AL-MUDHARABAH

PARTICIPANT

General Takaful

PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

TAKAFUL ADMIN & MARKETINGEXPENSES 25% TO 35%

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

TAKAFULCONTRIBUTIO

N PAID BYPARTICIPANT

GENERALTAKAFUL

FUND65% TO 75%

GENERALTAKAFUL

FUND

OPERATIONAL COSTOF TAKAFUL /RETAKAFUL

OPERATIONAL COSTOF TAKAFUL

OPERATIONAL COSTOF TAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANT

SURPLUS(PROFIT)

100%

COMPANY

TAKAFULCONTRACT BASEDON PRINCIPLE OF

AL-WAKALAH

PARTICIPANT

60%

SHARE OF PROFITFOR THE COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY


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Waqf Model


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Waqf is an Arabic word and it means to stop to withhold and not to let go.

In technical meaning Waqf means to allocate or donate some property or cash for a specific purpose to get pleasure of Allah and not to let it go through consumption or sale.

The Waqf property comes into ownership of Allah (SWT) and Waqif will have no property rights on it.


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Waqif has right to set the rules for Waqf and manage the Waqf.

Waqf may be general purpose or specific purpose, like Waqf ‘Ala al Aulad or Waqf ‘Ala al Aqarib.

In Islamic Law Waqf is a legal entity


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PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

TAKAFUL OPERATOR FEES FORADMIN & MARKETING EXPENSES

25% TO 35%

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

TAKAFULCONTRIBUTION

PAID BYPARTICIPANT

WAQF FUND65% TO 75%

WAQF FUND

OPERATIONAL COST OFTAKAFUL /RETAKAFUL

OPERATIONAL COST OFTAKAFUL

OPERATIONAL COST OFTAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANT

SURPLUS(PROFIT)

100%

COMPANY

TAKAFULCONTRACT BASEDON PRINCIPLE OF

AL-WAKALAH

PARTICIPANT

60%

SHARE OF PROFITFOR THE COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

Waqf

INITIAL DONATION BYSHAREHOLDERS TOCREATE WAQF FUND

Waqf

PROFIT SHARING ONMUDARABHA BASES


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A Waqf Fund would basically be a separate legal entity to which the Shareholders would initially make a donation to establish the Waqf Fund.

The donation can be of any reasonable amount (Shariah Board may specify such an amount).

The objectives of the Waqf fund would be to provide relief to participants against defined losses as per the rules of the Waqf fund.


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In this modified Wakala Model with Waqf, the relationship of the participants and of the operator is directly with the Waqf fund. The Operator is the Wakeel of the Waqf Fund and the participants pay one sided donation to the WAQF fund (not conditional) which also eliminates the issue of Gharar. The WAQF fund rules may define the sharing of surplus and other rules under which it would operate but there is no obligation to distribute surplus. Further the Qard would be given by the shareholders to the WAQF entity and not to individuals as in the typical Wakalah model.


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Despite the remarkable growth rate recorded by Islamic finance and Takaful industry, penetration is still far below the enormous market potential offered by the Muslim community worldwide (23% of the total world population).


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World Muslim population is estimated at 1.5 billions, of which around 97% are based in Asia and Africa.

A two-digit growth in the range of 15% to 20% can be reasonably sustained for at least the next 10 years in the existing markets (Far and Middle East).


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Markets like Europe, North and Latin America, Central Asia, Australia where large Muslim communities live are huge untapped reservoirs;

The recent opening towards “Islamic windows” in the banking sector in Europe is likely to be followed by “Takaful windows” initiatives.


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Islamic Finance and Takaful Products are not exclusive to Muslims.

Competitively priced and sold through the right channel it could attract any consumer irrespective of their origin or faith.


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Despite the challenges facing this “new” industry, exciting times are ahead once the latent potential is unleashed.

The success of Takaful largely depends on that of Islamic Financial institutions on a global basis.


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Mohd Johan LeeJ. Lee & Associates

A-16-13, Tower A, Menara UOA Bangsar 59000 Kuala Lumpur

Tel:03-22881699 Fax:03-22881799 email:[email protected]

[email protected]

Also at: Kuala Terengganu & Penang


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Mohd Johan Lee J. Lee & Associates For Kowloon Mosque & Islamic Centre.

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Transcript of Mohd Johan Lee J. Lee & Associates For Kowloon Mosque & Islamic Centre.