Download - Islamic Finance & PTPTN

Prohibition of Riba in Islamic FinanceA case study on the PTPTN Education Loan

Name : Punithemalar HariaratnamMatrick No. : GP01285Date : 29 July 2012 (Sunday)Lecturers : Prof Madya Dr Jasri Jamal / Dr Ruzian Markom

UK6063 Teori dan Amalan Kewangan Islam

Introduction to Islamic Finance


Shariah

• Literally translated means THE WAY

• And is the Islamic law that governs religious rituals and day to day life in Islam

• Derived from the Quran and the Sunnah

Shariah compliant

• neither pay interest, nor benefit from gambling

• The key difference between Islamic and conventional banking is the prohibition of riba (usury)


Definition of Riba

Riba means usury

(interest obtained by charging money from the lending of money)

Universally condemmned


Riba is prohibited by Islamic Law

Riba is forbidden in Islamic economic jurisprudence and considered as a major sin

Two types of riba are discussed by Islamic jurists:

• an increase in capital without services provided and risk taking

• commodity exchanges in unequal quantities, also prohibited in the Qur'an

In Surah Al-baqarah verse 2: 275, it is quoted that

Those who devour usury will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like usury but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord desist shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the fire: they will abide therein (for ever)

In Surah Al-baqarah verse 2: 275, it is quoted that

To comply with this fundamental principle, Islamic finance has developed practices based on custom and fairness that do not involve the paying and charging of interest

Initially these were restricted to

profit sharing

(musharakah and mudarabah)

Followed by

Equity sharing, and asset trading techniques

(murabahah, bai salam, and ijarah-based finance)

The PTPTN Education Loan

Set up with the aim of providing education loans to students pursuing their studies in local institutions of higher learning (IPT)

Finance students’ tertiary education

Conversition of PTPTN to Ujrah

The Existing PTPTN Study Loan was devised as a way for economically underprivileged families to finance their childrens’ tertiary education

Repayment:

• Automatic deduction from salary• Direct Debit• Lump sum settlement• 3% interest

Mechanism for the conversion (2010) of the existing 3% interest loan to the 1% Ujrah

Definition of Ujrah

Ujrah –

rental or fees for usage of labour and benefits

• Based on fixed fee (fixed interest rate)• Implemented worldwide by the Islamic

financial system

The payment are based on fixed interest rate which differs from other financial system

The Ujrah is based on avoiding riba and at the same time, prevents the lessee from running away from their debt

Characteristics of Ujrah

The contract must state:• The loan amount• The ujrah to be received• The period of payment and etc• Give clear description• must also be sane and able to enter into a

contract (aqil)• must be able to an adult (baligh)

Is PTPTN Ujrah Interest Free

Al Quard Al Hasan is an interest free loan and is the sole type of loan acceptable in Islamic finance• Purpose could be charity• Help or advance for a certain time period• Repayment by the borrower is obligatory • Guaranties such as mortgage or any other

collateral security are allowed.

Is it worth converting?

1% Ujrah conversion reduce the existing

3% interest

Total Ujrah for the Term of 10 Years= Outstanding amount as of Jan 2008 X 1%

X Term of Loan in Years= RM20,000 X 1% X 10 Years= RM2,000

In the existing 3% interest reducing balance, administrative cost is charged on loans as specified in the signed agreement

An annual rate of 3% will be imposed for the repayment period, with a reducing balance

• If the lessee plans to settle the loan earlier than the period specified, there will be a rebate amount, which may end up being less than the 1% Ujrah

Is PTPTN Ujrah Really Islamic

Dr Asyraf Wajdi Dusuki,

Says IT IS NOT

WHY NOT

a study loan scheme must be free of elements prohibited by the Shariah, especially in the context of usury

The service charge must reflect the actual cost and cannot be based on a percentage of the loan

Any profit made by a borrower can be categorised as usury

Conclusion

If you were keeping with your repayments, changing to the new 1% Ujrah loan seems like a good idea with attractive savings.

The example attached saved a total of RM1,999.99 in interest

• Debt payable is fixed and paid• Converting PTPTN from 3% interest to the

1% Ujrah fixed interest should be implemented

• Easier to calculate, and it is based on the Syariah principles.

• Will also encourage the students to pay on time and not run away from debts

Calling it interest has created much conflict

PTPTN should just have a yearly fixed service charge

Those who choose to settle the loan earlier than the due date, should pay less on service charges