Principles of Islamic Banking

7/27/2019 Principles of Islamic Banking

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ISLAMICBANKING AND

FINANCE

Mahyuddin Khalidemkay@

salam.uitm.edu.my

PRINCIPLES OF ISLAMIC BANKING


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CONTENTS

INVESTMENT AND FINANCING OF HALALACTIVITIES

PROFIT AND LOSS SHARING VS LENDER-

BORROWER RELATIONSHIP

TRADE-BASED FINANCING VS INTEREST-

BASED INVESTMENT/LOAN

PROHIBITION OF RIBA, GHARAR AND

MAYSIR

PAYMENT OF ZAKAT

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INVESTMENT AND FINANCING OF HALAL

ACTIVITIES

Impermissible to invest andgive financing to related

activities

Financial serviced based on Riba

Gambling and gaming

Manufacture or sale of non-halal products

Manufacture or sale of tobacco-based orrelated product

Stockbroking or share trading in Shariah non-compliant securities

Other activities that conflicts with Shariah

Entertainment activities that conflicts withShariah

Conventional insurance that containing ofgharar

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PROFIT AND LOSS SHARING VS LENDER-BORROWER

RELATIONSHIP

PROFIT LOSS SHARING

First Tier Between bank and depositor

The depositor are considered to beprovider of the capital (Rabb al mal)

The bank functions as a working partner ormanager of funds (mudarib or amil)

Second Tier

Between bank and entrepreneur

The entrepreneur is the manager of fund

The bank functions as provider of capital

LENDER-BORROWERRELATIONSHIP

The relationship between a lender and aborrower is governed by a loan contractbetween them.

Such a contract would specify all theobligations of the two parties in everypossible future contingency.

With respect to:

The amount of repayment

The interest rate on the remaining debt.

A possible adjustment in the collateralrequired by the lender.

The actions (in particular investmentdecisions) to be undertaken by theborrower.

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TRADE-BASED FINANCING VS INTEREST-BASED

INVESTMENT/LOAN

TRADE-BASED FINANCING CHARACTERISTICS INTEREST-BASED LOAN

The bank has to purchase the

requested commodity before

selling it to the customer.

Legal Nature of

promise

The customer is required to

make a unilateral promise to

buy the commodity from the

bank, before the bank makes

the purchase.

Price includes a known profitor mark-up.

The mark-up in murabahah is

part of the sale price, it is set

only once and then it does not

change overtime.

Profit Rate Profit comes from the interestrates.

Murabaha financing productsare fixed-rate products.

The rate, once determined for

a given contract, is not

allowed to float with changes

in the interest rates or any

other rate.

Fixed and Floatingrate Many conventional bankingproducts are floating-rate

products.

The rates on such loans are

automatically adjusted

upwards or downwards in line

with changes in interest rates.

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TRADE-BASED FINANCING VS INTEREST-BASED

INVESTMENT/LOAN

TRADE-BASED FINANCING CHARACTERISTICS INTEREST-BASED LOAN

Murabaha does not allow

such rescheduling as no

additional amount can be

charged for the same.

The amount of the

murabahah price remainsunchanged.

Rescheduling of

payment

Loan rescheduling is

accompanied by

additional interest charge

for the timing differences.

If it is given voluntarily, it is

allowed.

The rate of discount must

not be pre-specified in the

murabahah contract as a

condition.

It is not a right that the

debtor can claim.

Rebate on early

payment

Conventional financial

system grants the

borrower a discount or

rebate if the customer

decides to pay earlier than

the scheduled time.

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Unlawful gain derived from the quantitativeinequality of the counter-values in any transactionpurporting to effect the exchange of 2 or more

species which belong to the samegenus(category) and are governed by the sameefficient cause(illah)

Definition of Riba on Trade transaction

A predetermined excess or surplus over andabove the loan received by the creditorconditionally in relation to a specified period

Definition of Riba on Loan transaction

PROHIBITION OF RIBA

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Al-QuranAl-Baqarah: 275

EVIDENCE

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Hadith: From Jabir: The Prophet saw cursed the receiver

and the payer of usury, the one who records it

and the two witnesses to the transaction and

said: They are all alike (in guilt and sin). From Abi Said al-Khudri: The Prophet saw said:

gold for gold, silver for silver, wheat for wheat,

barley for barley, dates for dates, salt for salt,

like for like, and hand to hand. Whoever paysmore or takes more has indulged in riba. Take

taker and the giver are alike (in guilt).

EVIDENCE

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ELEMENTS OF RIBA

Excess or surplus over

and above the loancapital

Bargain to beconditional onthe payment of

apredetermined

surplus

Determination ofthis surplus inrelation to time

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REASONS FOR PROHIBITION OF


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REASONS FOR PROHIBITION OF

RIBA

To preventinjusticebetween

contractingparties

Exploit thepoor/

creditors

An exploitations

of peopleignorance over

the types ofcommoditiesinvolved intransaction

An exploitationof people

needs. Thus,they have no

choice but to beinvolved in Riba

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CATEGORIES OF RIBA

Categories ofRiba

Riba al-Buyu`

(Trade Transaction)

Riba al-Fadl

Riba al-Nasiah

Riba al-Dayn

(Loan Transaction)

Riba al-Qard

Riba al-Jahiliyah

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CATEGORIES OF RIBA

RIBA AL-BUYU`

Riba al-Fadl

Also known as Riba al-buyu that is riba by excess.

It applies to six items : gold, silver, date, raisin, wheat

and barley and the like of them.

Riba al-Nasiah

Its occurs whenever the creditor advanced loan onsome monthly interest in addition to the principal sums.Increase due time

On other words, this stipulated interest which thelender takes from the borrower to pay back the capital.

Second opinion- Any delay in the exchange of theribawi items from the same type and category

RIBA AL-DAYN

Riba al-Qard

It is riba in debt or out of lending and borrowing.

It was originated from the transaction of a loan , and it

is interest or payment charged due to the loan given.On the other words, it is the extra amount over theabove principal of the loan.

Riba al-Jahiliyah

It is Riba in loan.It is when a loan contract is made or at rescheduling aprevious debt.

It is take place only in debts created via lending orextended to a new maturity via rescheduling.

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RIBAWI ITEM

RibawiItem

Gold

Salt

Silver

WheatBarley/Oat

Dates

Salt

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ISLAMIC RULINGS ON RIBA IN


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TRADE

Category Type Exchange Quantity Items

1 Same

category

Same

type

Spot

exchange

Equal in

quantity

Regardless of

quality

Gold with Gold,

Wheat with Wheat

2 Samecategory

Differenttype

Spotexchange

Inequalityis

permitted

Equality is not acondition

God with SilverWheat with Rice

Salt with Dates

3 Different

category

Different

type

Delayed is

permitted

Inequality

is

permitted

Time and

Quantity Factor

is not a

condition

Gold with Wheat

RM with Dates



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TRADE

Category Type Exchange Quantity Items

4 Ribawi Items and Non-

Ribawi Items

Delayed is

permitted

Inequality is

permitted

Time and

Quantity

Factor is not a

condition

RM with vehicles

UD with furniture

5 Between 2 Non-

Ribawi Items

Delayed is

permitted

Inequality is

permitted

Time and

Quantity

Factor is not a

condition

Bricks with Sands

Cloth with Patrols


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PROHIBITION OF GHARAR

Literally:Deceit, risk, fraud, uncertainty or hazard that

may be lead to destruction loss.

Technically:

When a matter that is concealed by one party. Occurs when a party undertake venture

blindly without sufficient knowledge

Minor uncertainties can be permitted whenthere is a necessary

Both of contracting parties must have aperfect knowledge regarding to transaction

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PROHIBITION OF GHARAR

Sell good that seller is not in position todeliver.

Sell unknown pages or known goodsagainst unknown price.

Make a contract conditional on aunknown event.

Sell good on basis of false description. Sell good without proper examination.

Gambling.

Examples of Gharar relatedtransaction:

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TYPES OF GHARAR

Gharar Yasir

This type of gharar is tolerate andwill not invalidate a contract.

Gharar yasir may include thefollowing cases:

The uncertainty is slight or trival

Contract is unilateral or charitable(al tabarruat) such as gift orbequest

There is a public need for thetransaction or contract(consideration of maslahah)

Gharar Fahish

This type of gharar is not tolerateand may result in contractvoidability

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PROHIBITION OF MAYSIR

Refers to the easy acquisition of wealth bychance, whether or not it deprives the others

right.

Qimar means the game of chance in which

one gains at the cost of others.

Issues that related to gambling:

Contest using SMS

The prize winning tickets

Horse racing

Lottery

Crossword puzzles

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PAYMENT OF ZAKAT

Meaning of zakat To grow

To purify

To improve

Purpose of Zakat

The foremost and primary is to distribute the wealth of thecommunity among the poor

Removing the love of wealth from ones heart, a spiritualdisease that could be detrimental to ones Iman. Thus, itis a form of Tazkiya (self-purification).

Giving in the path of Allah acknowledging that whateverwealth one possesses is in reality the Almightys, andgiving a monetary sacrifice for ones lord.

Prevention of monopolies in society.

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BENEFIT OF ZAKAT

Enhances Volume of Production

When Zakat is collected and distributed among the poor they spend iton various consumer goods which increase the demand of variousproducts of industries which increases production of goods.

Discourages Hoarding

Zakat discourages hoarding because it is levied on hoarded wealth.

Raises Savings

Zakat is paid out of the accumulated wealth. the wealth owner must insaving ratio, in order to prevent the level of his wealth from decreasing.

Zakat increase level of income

Zakat increase level of income due to circulation of wealth in theeconomy.

Reduces inequality of Wealth Zakat is distributed among the poor from rich people so it reduces

inequality of wealth.

Zakat ends poverty as Zakat is given to poor.

Redistribution of National Income.

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CONDITION OF ZAKAT

Zakat Performer Muslim

Every Muslim who is of a certain age and owns enough assets isrequired to pay zakat.

Zakat Assets

Full ownership. A Muslim only required to pay zakat if he or she hasfull and legal ownership of an asset.

Its payable only on those assets acquired for the purpose of creatingor generate wealth.

Zakat need only be paid on those assets that exceed a minimumvalue.

Minimum value is termed Nisab.

Completion of Haul

Haul is defined as the completion period for zakat asset. The length of time:

One Islamic Hijri year (1 year Hijri=354.5 days, 1 year Solar= 365.25 days)

Zakat only payable on asset that have been held for at least thisperiod.

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TYPES OF ZAKAT

Zakat Fitr

Zakat Fitr is a one off payment that ismade once in every Muslim Hijricalendar year at any time betweenthe first day of the month ofRamadan and the first day of

Shawal. All Muslims are obliged to pay this,

regardless of their age, status orwealth.

The amount of zakat payable isapproximately 3kg of staple food inthe relevant country or an amount of

money that is equivalent to the priceof the food.

Zakat Al-Mal (on wealth)

Zakat al-Mal is an annual paymentbased on the amount of wealthowned by a Muslim individual ororganization.

This payment is obligatory upon any

Muslim individual or organization thathas completed the requirement ofNisab (minimum taxable amount)and Haul (one Muslim Hijri calendaryear).

The payment is 2.5% out of the totalwealth deemed for zakat.

Zakat al-Mal can be subdivided intozakat on:

Business, Rental Income, PersonalIncome, Savings, Gold andSilver, Shares, Livestock, Crop

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BENEFICIARIES OF ZAKAT

1. The poor (Faqir/Fuqara)

2. The needy (Miskeen)

3. The administrators of zakat (Amil)

4. The sympathizer (Muallaf) - Those who are inclined to enteror have already converted to Islam.

5.

To free slaves (Riqab)6. Those who are in debt (Gharimin)

Zakat can be used to pay off the debts of a person who hasborrowed to pay for basic necessities or those on financialproblem.

7. For the causes of Allah (Fisabilillah) Zakat can be use to finance any form of struggle or work for

the love of Allah.

8. Those who are stranded during a journey (Ibnus Sabil) Zakat can be used to help a traveller facing difficulties in

continuing his journey.

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ISLAMIC LEGAL MAXIM ( )

Qawaid fiqhiyyah or Legal maxims are general ruleswhich can be applied in various cases that comeunder common rulings.

Plays great role in the formation of Islamic lawbecause they are uses as principles to deduce rulesof fiqh.

Legal maxims are indeed general rules of fiqh, whichcan be applied in various cases that come under thecommon rulings e.g.. transactions, munakahat,evidence etc.

Have a great role in the formation of Islamic lawbecause they are used as guidelines in finding therules of fiqh but cannot be accepted as sources ofshariah.

These maxims have solved most of the minor rules

of fiqh and without them these minor rules will haveno standing ground which will make it hard to solve

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FIVE MAJOR MAXIMS

Acts Are Judged By The IntentionBehind Them

Certainty Is Not Dispelled ByDoubt

Hardship Begets Facility

Harm Must Be Removed

Custom Is The Basis OfJudgement

ACTS ARE JUDGED BY THE INTENTION BEHIND


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ACTS ARE JUDGED BY THE INTENTION BEHINDTHEM( )

An act of any human being is judged in thelight of intention or the purpose it seeks tohave effects.

This means that the effect to be given to any

particular action or transaction must be inaccordance with the intent underlying suchaction or transaction.

E.g.:

Banks declare their policy of financing customerson non-interest bases it would be necessary todo so and not merely continue the same practiceand seeking to rationalize it in Islamic terms

such as mudharabah etc.

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CERTAINTY IS NOT DISPELLED BY DOUBT


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CERTAINTY IS NOT DISPELLED BY DOUBT( )

It is discusses about the principle that shouldbe followed if there is doubt in any matterparticularly in matters pertaining to Islamiclaw.

This means that a fact established by law orproven with evidence will remain so, untilthere is another certainty that removes it.

E.g.:

A partner has no right to assume a minimum rateof profit earned by his business partner andclaim his share in that profit as different fromamount stated to have been actually earned by

the partner.

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HARDSHIP BEGETS FACILITY


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HARDSHIP BEGETS FACILITY

( )

The maxim indicates that any ruling whichimplementation causes hardship to a person orthe action is unable to be performed by aparticular person for a specific acceptablereason, then there are alternative and ways out

that can be resorted to in order to overcome thedifficulties and hardship.

Hardship- refer to surpass the normal limit andability of a person such as travel/sickness/dharurah etc.

E.g.: If the court orders the sale of assets of a negligent

debtor to pay his creditors, it must begin with thesale of his movable goods if this would suffice toclear his debt, before selling his real property.

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HARM MUST BE REMOVED


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HARM MUST BE REMOVED

( )

The scholars have classified harm into twocategories :

Harm which is inflicted intentionally in order to cause

damage. This kind of harm is forbidden and the

perpetrator shall bear the consequences of hisaction.

Harm which is cause unintentionally without any

intention to cause harm or damages to others.

E.g.:A buyer of perishable goods absents himself without

taking possession of the purchased goods. The

seller , in order to protect himself and the buyer from

loss, has a right to unilaterally revoke the contract ofsale and sell the oods to some other art .

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CUSTOM IS THE BASIS OF JUDGEMENT


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CUSTOM IS THE BASIS OF JUDGEMENT( )

This maxim means the practices of thepeople whether in their actions or sayings,

regardless of whether they are general

practices of the people or the practices of

certain groups of people. E.g.:

A person authorizes another to sell something

on his behalf without laying down conditions asto sale price and unit of currency, the agent will

be treated to be bound by conventional rules of

charging a reasonable price and prevalent

currency.

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END OF CHAPTER33

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