chapter 1 - islamic banking principles

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PRINCIPLES AND PRACTICE OF ISLAMIC BANKING

(MIFB 6023)

Assoc. Prof. AHMAD FAUZI IDRIS, PhD

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CHAPTER 1

ISLAMIC BANKING PRINCIPLES

What do you think of the pictures that you are going to see?

What is the car of your dreams ?

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ISLAM, SHARIAH, MUAMALAT, BANKING AND FINANCE

ISLAM

AQIDAH(Faith and Belief)

SHARIAH(Practice & Activities)

AKHLAQ(Moralities & Ethics)

IBADAH(Man to Allah)

ECONOMICACTIVITIES

POLITICACTIVITIES

MUAMALAH(Man-to-man)

SOCIALACTIVITIES

BANKING &FINANCE

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A BIRD EYE VIEW ON…

FINANCIAL SYSTEM IN MALAYSIA

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Structure of Malaysian Financial System

• The Malaysian Financial System is divided into three (3) namely:

- banking system

- non-bank financial institutions / intermediary

- capital /financial markets• The banking system consists of two (2) types:

i). The monetary institutions and ii). The non-monetary institutions.

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THE FUNCTIONS OF BNM (under Section 4 of the Central Bank of Malaysia Ordinance 1958)

• Issuance of currencies.• Keeping of reserves and safe guarding the value of money.• Banker and financial adviser to the government : 1. Management of

govt. a/c., 2. Provision of funds to the govt., 3. Management of national debt.

• Responsibility for monetary policy.• Banker to banks:

a. licensing of banks and non-banksb. banking r/shipc. currency distributiond. inspection of banks and non-bankse. lender of last resort

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Banking System in Malaysia

• The banking system in Malaysia comprises commercial banks, Islamic banks, representative of foreign banks, offshore banks, and investment banks. These institutions are the primary role as financial intermediaries.

• Development financial institutions, Provident, Pension and Insurance Funds, Saving Institutions and other than mentioned earlier play a secondary role as financial intermediaries.

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1. BANKING SYSTEM

Islamic Banks

Commercial Banks

Finance Companies

Discount Houses

Foreign Banks Rep. Offices


BNM

Merchant Banks

Credit Guarantee Corp (CGC)

PriorRestructure

http://www.bnm.gov.my/index.php

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1. BANKING SYSTEM

Islamic Banks

Commercial Banks


BNM

Investment Banks

http://www.bnm.gov.my/index.php

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2. NON-BANK SYSTEM

Development Financial

Institutions

Provident & Pension Funds

Savings Institutions

Insurance Companies including Off-shore

Other Financial

Intermediaries


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3. FINANCIAL MARKET

Derivative Market

Capital MarketMoney Market & Foreign Exchange


http://www.klse.com.my/index.htm

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DEVELOPMENT / PROGRESS OF ISLAMIC BANKING & FINANCE IN MALAYSIA

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Comprehensive Islamic Financial System

Constitute 4 core areas:

1. Islamic Banking

2. Takaful

3. Islamic Capital Market

4. Islamic Money Market

• Given highest regard to Shariah matters• Malaysia adopted an entirely developmental approach – fully

functioning of all segments• Promote innovation in term of market efficiency and

instruments or products creation

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ISLAMIC FINANCIAL SERVICES

BANKING TAKAFULEQUITY

MARKET

DEPOSIT & INVESTMENT

TAKAFULEQUITY MARKET

FINANCING RETAKAFULBOND

MARKET

ISLAMIC FINANCIAL SERVICES

BANK NEGARA MALAYSIA

• Islamic Banking Act ’83• Banking & Financial Institution Act ’89

BANK NEGARA MALAYSIA

Takaful Act ‘ 84

SECURITIES COMMISSION

• Securities Commission Act ’83• Contract Act ‘65

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Number of Islamic Banking and Takaful Players as at 31 March 2007

11 Islamic banks 9 Takaful operators

• 2 domestic Islamic

banks

• 6 Islamic subsidiaries

• 3 foreign banks

Islamic Banking Takaful

1 Retakaful operator

2 recently approved

license

Retakaful

Source: Bank Negara Malaysia Financial Stability and Payment Systems Report 2006

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ISLAMIC BANKING CONVENTIONAL BANKING

5. SHARIAH COUNCIL / ADVISOR

6. SHARIAH COMPLIANT PRODUCTS**

7. DEBT & EQUITY BASED PRODUCTS

8. CIVIL COURT ( ISLAMIC/CIVIL LAW)

5. N/A

6. N/A

7. DEBT BASED PRODUCTS

8. CIVIL COURT ( CIVIL LAW )

ISLAMIC VS CONVENTIONAL BANKING

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PROGRESSIVE FINANCIAL INSTITUTION DEVELOPMENT

• Lembaga Tabung Haji (’69)• Bank Islam Malaysia Berhad (’83)• Syarikat Takaful Malaysia Berhad (’84)

1983-19921983-1992

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• Islamic Banking Scheme (’93)• Islamic Inter- bank Money Market (’94)• Association of Islamic Bank in Malaysia (’95)• Asean Retakaful International (L) Ltd… Labuan (’97)• Bank Muamalat Malaysia Berhad (’99)

• Financial Sector Master Plan (’01)• Islamic Financial Services Board (IFSB) (’02)• Malaysian Takaful Association (’02)

1993-20021993-2002

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FSMP was revealed on 1 March 2001, charts the 10-year course for Islamic banking and Takaful industry in Malaysia.

FINANCIAL SECTOR MASTERPLAN (FSMP)FINANCIAL SECTOR MASTERPLAN (FSMP)

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“The overall objective is to create an

efficient, progressive and comprehensive

Islamic financial system that contributes

significantly to the effectiveness and

efficiency of the Malaysian financial sector

while meeting the economic needs of the

nation….”


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Malaysia as a regional Islamic financial centre

To constitute 20% market

share within the banking system and insurance

industry

Sufficient number of well-trained,

high calibre individuals and

mgmt. teams with the required

expertise

Comprehensive and conducive Syariah, legal and regulatory

framework

VISION

Sufficient number of strong and highly

capitalised IBIs and takaful operators

Comprehensive and complete range of Islamic financial

products and services


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• Issuance of 3 new Islamic bank licenses to foreign IFIs (’04)

• Liberation of Islamic Banking & Takaful industry to allow up to 49% foreign interest (’05)

• 3 new Islamic Banking subsidiaries commence operation (’06)

• 3 new Takaful Operators commence operation

2003-20102003-2010

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EFFECTIVE & CONDUCIVE LEGAL & SHARIAH FRAMEWORK

• Islamic Banking Act ’83• Takaful Act ’84• Amendment to Central Bank of Malaysia Act ’58…to establish Shariah Advisory Council (SAC) at Bank Negara Malaysia (BNM)

1983-19921983-1992

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1993-20021993-2002

• The Banking & Financial Institution Act 89 was amended to allow Islamic Banking window operation (‘93)

• SAC formed at BNM (’97)

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• Dedicated High Court (’03)

• Tax neutrality policy (’03) …amendment to - Income Tax Act 67 - Real Property Gains Tax Act 76 - Stamp Act 49

• Enactment of Malaysian Deposit Insurance Corporation Act 05

2003-20102003-2010

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• First International Shariah Scholars Dialogue

• Issuance of Shariah governance framework

• Establishment of RM200 mil Shariah endowment fund (’05)

• First Regional Shariah Scholars forum/dialogue (’06)

2003-20102003-2010

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• Amendment to Hire Purchase Act 1967 ( to reflect the operations of Islamic HP activities )

• Issuance of 2 standards by IFSB : Capital Adequacy Std and Guiding Principles of Risk Management for Islamic Bank (’06)

2003-20102003-2010

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DEVELOPMENT OF ADEQUATE POOL OF TALENT & RESOURCES

• International Centre for Leadership in Finance (ICLIF) (’03)

• International Centre for Education in Islamic Finance (INCEIF) (’05)

1993-20021993-20021983-19921983-1992

2003-20102003-2010

Islamic Banking & Finance Institute Malaysia ( IBFIM ) (’01)

BIMB Institute of Research & Training (’91)

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• To strengthen Malaysia’s position as an International

financial centre……and to realize its target to become

Islamic financial hub in this region…..it launched MALAYSIA INTERNATIONAL ISLAMIC FINANCIAL CENTRE (MIFC) on

14 Aug 06

• MIFC…?

Diversified range of financial institutions operating from

anywhere in Malaysia offering Islamic financial products

& services in any currency to resident & non-resident

MALAYSIA AS THE ISLAMIC FINANCIAL HUB

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Under MIFC, Malaysia aims to be :

• Centre for origination, distribution as well as trading of Islamic treasury and capital market instruments

• Centre for Islamic fund and wealth management services

• Centre for international currency Islamic financial services ( including deposit & financing )

• Centre for Takaful & Retakaful

• Centre for Islamic finance education, training , consultancy & research

MIFC

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• Strong foundation in Islamic finance – pioneer in global Islamic banking & finance

• Strong economic growth & international trade• Savvy workforce fluent in English• Relatively low cost of living

• Significant attention & resources directed towards human capital development

• Strong support by the government• Strong international connection/communication …currently holds the chair of OIC & IFSB

ISLAMIC FINANCIAL HUB : M’sia’s strengths

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Acts and Ordinances• Central Bank of Malaysia Ordinance 1958• Islamic Banking Act 1983• Banking and Financial Institutions Act 1989• Insurance Act 1963• Takaful Act 1984• Labuan Offshore Business Activity Tax Act 1990• Offshore Companies Act 1990• Offshore Banking Act 1990• Offshore Insurance Act 1990• Labuan Trust Companies Act 1990

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Financial Institutions offer Islamic Banking

Full-fledged Local Islamic Banks:

1. *Bank Islam Malaysia Bhd- 1983

2. *Bank Muamalat Malaysia Bhd- 2000

3. RHB Islamic Bank – 2005

4. Commerce Tijari – 2005

5. Hong Leong Islamic Bank – 2005

6. ?

• There are three (3) full-fledged foreign Islamic Banks since 2005.- ?

• *100% originally are Islamic banks, others just are subsidiaries of conventional banks.

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BARE OUTLINE OF THE ISLAMIC ECONOMIC SYSTEM

• SIASI SECTOR (PUBLIC SECTOR)

• TIJARI SECTOR (PRIVATE SECTOR)

• IJTIMAI SECTOR (SOCIAL WELFARE SECTOR)

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ISLAM, SHARIAH, MUAMALAT, BANKING AND FINANCE

ISLAM

AQIDAH(Faith and Belief)

SHARIAH(Practice & Activities)

AKHLAQ(Moralities & Ethics)

IBADAH(Man to Allah)

ECONOMICACTIVITIES

POLITICACTIVITIES

MUAMALAH(Man-to-man)

SOCIALACTIVITIES

BANKING &FINANCE

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Categories of Fiqh

• Fiqh Ibadat• Fiqh Muamalah• Fiqh Munakahad / Usrah• Fiqh Jinayat

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FORMULATION OF LEGAL RULINGS IN ISLAMIC LAW

Shariàh(Qur’an and Sunnah)

Shariàh(Qur’an and Sunnah)

Decisive textsDecisive texts Non-decisive textsNon-decisive texts

Islamic Law Islamic Law

The primary sources

Secondary sources

Applied directly as legal rulings (hukm shariì)

Applied directly as legal rulings (hukm shariì)

Undergo interpretation (ijtihad) according to recognized methodology (usul al fiqh)

Undergo interpretation (ijtihad) according to recognized methodology (usul al fiqh)

Legal rulings(hukm fiqhi)

Legal rulings(hukm fiqhi)

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SOURCES OF SHARIAH

The Shariah sources can be divided into TWO namely:

1. Primary sources:

- Koran - Ijma’a

- Sunnah - Qiyas

2. Secondary sources:

- Maslahah - Sadd al-Dharai`

- Istihsan - ‘Urf

- Istishab

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SOURCES OF SHARIAH1.PRIMARY SOURCES:• AL-KORAN (REVEALATION FROM ALLAH)• AL-SUNNAH (THE TRADITIONS OF PROPHET –

PEACE BE UPON HIM)• AL-IJMA’ (CONSENSUS OF THE OPINION AMONG

JURISTS OF ISLAMIC LAW)• AL-QIYAS (ANALOGICAL DEDUCTION FROM A

PARTICULAR CASE AND OF A KNOWN THING BY REASON IN RESPECT OF THE EFFECTIVE CAUSES OF ITS LAW)

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SOURCES OF SHARIAH

2. Secondary sources:Maslahah – is defined as a consideration that is proper or it leads

to some kind of benefit or general good or welfare. Maslahah based on innovation which is in line with the general objective of Islamic law. Literally means the seeking of benefit and the repelling of harm with the objectives of the Shariah consisting of protecting;- religion- life- intellect- lineage / ancestor- and property

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Maslahah

• Maslahah is the consideration which secures a benefit or prevents harm but is, in the meantime, harmonious with the aim and objective of the Shari`ah.

• Applications:– Issuance of currency– Tax imposition

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SOURCES OF SHARIAH


Istishab – is concerning the sense of what was happening in the previous years and go along with the present without any interruption of change.

- according to the Shafiis and Hanbalis, Istishab denotes continuation of that which is proven and the abrogation / revocation of that which had not existed.

- means it is the presumption in the laws of evidence that a state of affair known to exist in the past continues to exist until the contrary is proved e.g. a presumption of innocence until the guilt is established or marriage is presumed continued until otherwise.

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Istishab

• Istishab may also indicate that facts, or rules of law and reason, whose existence or non-existence had been proven in the past are presumed to remain so for lack of evidence to establish any change.

• Applications:– A, who is a trading partner to B, claims that he

has made no profit, the presumption of absence will be in A’s favor unless B can prove otherwise.

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Istishab (cont’d…)

– A is known to be indebted to B, A is presumed such until it is proved that he has paid the debt or was acquitted of it. Provided that, B’s loan to A is proven in the first place as a fact.

– Everything is lawful in mu`amalat unless proven otherwise.

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SOURCES OF SHARIAH


Istihsan or Istislah – public interest and it is a method of exercising personal opinion in order to avoid any rigidity and unfairness that might result from the literal enforcement of the existing law

- it is also described as a juristic preference involving settling aside an established qiyas in favor of an alternative ruling which serves the ideals of justice and public interest in a better way.

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SOURCES OF SHARIAH

2. Secondary sources:‘Urf – common phenomenon that is

happening in our daily life. Urf can be divided into two i.e. general Urf and special Urf. Special Urf is a custom in a particular place or locality. E.g. seller and buyer used not to mention method of payment or without agreement but the seller knows and buyer knows when to make payment and how.

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`Urf

• Or it may also mean what is established and practiced by people from their sayings and doings, or not doing".

• Applications:– Currency exchange rate– Standards on banking and finance– Wordings in legal documentations– Some terms and conditions of contracts

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Sadd al-dharai`

It implies blocking the means to an evil which is likely to materialize if the means towards it is not blocked.

• Applications:– Prohibition of a creditor from taking a gift from his

debtor lest i.e. in order to avoid it becomes a means to usury and the gift a substitute to riba.

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Maqasid al- Shariah or Purpose of Islamic Law

There five main purposes of the law:

1. Din (religion),

2. Life,

3. Progeny (may be called the preservation of the family),

4. Intellect, and

5. Wealth.

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The Ashbah /Probable values

HajatDarurat Taysir/Tawassu

Supplementary TahsinatSupplementary

Supplementary Supplementary Tahsinat

Texts TextsTexts

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The five purposes above are designated as;• Darurat – necessities and the primary purposes

of the law,• Hajat – needs• Tawassu’ – seek to establish ease• Taysiir – and facility• Tahsiinaat – complementary values.

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PRINCIPLES OF SHARIAH LAW• Al-fiqh concerns trading and business i.e. AL-

MUAMALAH the Islamic term for civil transactions• Classification of Acts:

- Wajib (obligation)

- deserves reward and its omission entails punishment

- wajib: – ainii (personal wajib) - kifayah (social wajib)

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Cont…

• Sunnah (commendable)- deserves reward- its omission not punishable

• Mubah or Jaiz (permissible)- not rewarded- its omission is also not punishable

• Makruh (improper)- its omission is rewarded- its commission is not punishable

• Haram (prohibited or forbidden)- commission is punishable- its omission is rewarded

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Cont…

• Schools of Islamic laws:

- Hanafi School

- Maliki School

- Shafii School

- Hambali School

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Philosophy of Islamic Banking

Islamic Banking

Philosophy

Revelation in Quran& Hadiths

Forbidden of Riba

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1. Prohibition of interest or riba i.e. any pre-determined guaranteed rate of return regardless of performance of investment.

2. Introduction of levy in the form of zakah, as an instrument for redistribution of wealth.

3. Prohibition of business activities that involve Shariah any form of contradicting the principle of such as gambling, alcohol beverages etc. Can you name some…?

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4. Prohibition of uncertainty or gharar, over subject matter or terms on contract such as selling fish not yet caught or pawning fruit trees or orchard that not yet mature.

5. Provision of Takaful or Islamic insurance.

Islamic bank activities must at all time do not involve in riba and must always abide or adhere to the Islamic business principles as ordained in the Al-Quran and Al-Hadiths. And must always uphold justice and virtue of conduct in managing their business.

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Objectives of Islamic Banking

1. Provide banking facilities and services in accordance with Islamic principles, rules and practices to all Muslims as well as non-Muslims.

2. Prohibit any dealings / transactions that involve with interest or riba.

3. Promote, foster and develop the application of Islamic principles, laws and traditions to the transaction of financial, banking and other related business activities.

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FIVE PRINCIPLES OF ISLAMIC BANKING

1. Risk taking when related to a commercial or productive venture and it is a socially productive activity.

2. Financial must be in line with the Shariah principles or halal in Islam.

3. All loans must finance socially productive activity.

4. Financial risk rests solely with the lender and not with the managers/agents.

5. Does not receive interest nor pay interest because it is forbidden, as it is a predetermined fixed sum due to the owner of loanable funds irrespective of the out of the business venture.

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PROHIBITION OF INTEREST

•Allah has permitted trade and forbidden usury (Al-Baqarah:275, 276, 278 and 279).•That they took usury, though they were forbidden; and their devouring of men’s substance wrongfully, we have prepared for the disbelievers among them a painful torment (Al-Nisa: 161).•Ar-Rum : verse 39…

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Definition of riba/usury/interest

From Al-Quran: chapter 2 ‘the cow or al-baqarah, verse 275 says “those who eat RIBA (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Satan leading him to insanity. That is because they say; “ Trading is only like Riba (usury),” whereas Allah has permitted trading and forbidden Riba (usury). So whosoever receives an admonition from is Lord and stops eating Riba (usury) shall not be punished for the past; his case is for Allah (to judge); but whoever returns (to Riba: usury), such are the dwellers of the Fire – they will abide therein.”

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Definition of riba/usury/interest

•Ibn Hajar al Asqalani defined riba as “excess whether it is in the commodity itself or money”.

•Abu Bakr al’Arabi held that “every excess in return of which no reward is paid is riba”.

•Abu al a’la al Mawdudi defined riba as “a predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period”.

•Ataul Haque defined riba “an increase or excess which, in an exchange or sale of a commodity, accrues to the owner (lender) without giving in return any equivalent counter or recompense to the other party”.

•In Al-Quran the prohibition of riba was mentioned in four stages before its total prohibition.

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Riba/usury/interest from Western Scholars

• Fisher (1974, p.13) defines interest as:...the per cent of premium paid on money at one date in term of money to be in hand one year later.

• Keynes (1978), p.167, 222) states that interest:…being reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it, or…is nothing more than the percentage excess of a sum of money contracted for forward delivery.”

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Cont…

• Riba means increase, addition, expansion or growth.• Nienhaus (1986) defines as “is a positive predetermined

return or guaranteed repayment on capital.”• Cooper (1981) means “to increase to quadruple.”• Early Christians, St. Augustine defines RIBA as “occurring

when a person expects to receive anything more than he has given.”

• Greek philosophers such as Plato, Aristotle and Cato agreed that interest was contrary to nature of things and they considered it as as bad as homicide.

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CONT… Riba in the Sunnah

• Tradition (hadith): “It has come from Abu Hurairah, may Allah be pleased with him, that the Prophet said, on the night of elevation, I passed by a people whose stomachs resembled houses full of snakes from which snakes could be seen coming out. I inquired who they were? Jibrail said: “These are devourers of usury.” (Ahmad & Ibnu Majah)

• “It has come down from Jabir, may Allah be pleased with him, who said, “The Messenger of Allah, on whom be peace, cursed the devourer and the witnesses to it, and said: They are in the degree of sin.” (Muslim)

• The Prophet (pbuh) has cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said ”They are all alike (in guilt)”. (Jabir)

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RIBA (USURY)

BUY/SELL DEBT/LOAN

RIBAAL-FADHLU

RIBAAL-NASIAH/

RIBA AL-YADU

RIBAAL-QARDHU

RIBAAL-JAHILIAH

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A. DEBT USURY

Any extra imposed by the creditor or capital provider onto the debtor for the benefit with regard to the loan given.

Debt usury is divided into two:i. Riba Al-Qardhuii. Riba Al-Jahiliah

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RIBA AL-QARDHU• Loan given with condition or promise to give

extra for the benefit of the creditor.• It is HARAM by Shariah (as stated in

surah/chapter Al-Baqarah verses 278 & 279).• However, if the debtor pays extra on his own

accords either in terms of money or in-kind, it is permissible in Islam and it is considered as Qardhu Hasan.

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EXAMPLE RIBA AL-QARDHU• Loan RM 100 with condition to pay back RM

101.• Pay back RM 100 plus rice.• Pay back RM 100 but lend the debtor’s car for a

day.(loan/financing in Islam is regarded as good deed

or helping those in need, thus in return will receive reward from Allah S.W.T).

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RIBA AL-JAHILIAH• Any extra payment on top of the principal

amount upon expired of the loan.• It was popular in the Jahiliah era.• E.g. the debtor will say to the creditor, extend

the loan period, I will pay extra i.e. interest. Each month the debtor will pay the interest and yet the principal amount remains the same.

• Haram according to the Shariah (surah Ali-Imram, verse 130).

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EXAMPLE RIBA AL-JAHILIAH

• The creditor claims the loan amount from the debtor on the maturity date, however, the debtor is unable to pay and instead says “extend or prolong me the period, I will pay extra.” Each month the creditor collects the interest, but the principal amount remains the same… and so on if the debtor is still unable to pay.

• This interest will be charged daily or monthly during the deferment until the loan is fully settled.

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B. BUY AND SELL USURY

• That is not the same in weighting or measuring or delivery of goods or money.

• As narrated by Saiyidina Umar bin Al-Khattab r.a. Rasulullah s.a.w. says, “Gold for gold is usury except deliver on the spot, wheat for wheat is usury except deliver on the spot, and dates for dates is usury except deliver on the spot, and barley for barley is usury except deliver on the spot.”

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The interpretation of the above hadith refers to:

Foodstuff Non-Foodstuff• Barley Silver• Dates Gold• Salt • Wheat

The above products refer as product RIBAWI i.e. involves usury in selling and buying of the goods if not in accordance to the terms and conditions as spell-out by the shariah.Foodstuff with broad classifications may also include as follows:

- grains of all types- meats- fruits & vegetables

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PRODUCTS RIBAWI

Products Ribawi

Edible Products:i. Wheatii. Barleyiii. Datesiv. salt

Currencies:i. Goldii. silver

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Buying and selling usury is divided into two:

1. Riba Al-Nasiah (clear) – selling or buying of products ribawi of same kind but delivery or exchange not at the same time i.e. defer delivery by either parties. ”From Usamah bin Zaid; The Prophet s.a.w said: “There is no riba except in nasiah (waiting)”.

• Anas bin Malik: The Prophet s.a.w. said: “When one of you grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower offers a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favors mutually”.

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Buying and selling usury is divided into two:

2. Riba Al-Fadhu (hidden) – selling or buying of products ribawi of same kind but not of equal in weight or measurement e.g. 10 grams of gold for 11 grams of gold or 5 kilos of wheat for 6 kilos of wheat etc. Payment and delivery at the same. Is also known as riba al-buyu’. Or- an exchange of two different kinds of ribawi goods e.g. wheat and date involving with an extra quantities. The extra means riba if the exchange is not on the spot but defer into the future. But such transaction takes place immediately or on the spot then it is not riba.- It is prohibited by the 4 schools of jurisprudence. It is not the objective of a person to buy or sell one thing in exchange for the same thing unless there is extra from which each party may benefit. Riba al fadhu according to some hadith has six kinds, Shafiis and Hanbalis considered the edibleness of the item.

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Currencies (As-Sarfu)

Currencies

In nature forms:i. Goldii. silver

Type of currencies:i. Coinsii. Papers/notes

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Shariah opinions:

• Selling or buying or exchanging currency, generally it needs to follow certain terms and conditions, in order to avoid RIBA activities.

• Any selling or buying or exchanging needs to be carried out in the ceremony with equal in weight (any forms of money) or else it is RIBA AL_FADHLU (i.e. if not equal in weight) or RIBA AL-NASIAH I.e. if is not done in the same ceremony or “Majlis”.

• Shafiie and Hanafi: any exchanging from the two parties, so long they are still at the “majlis akad.”

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Shariah opinions:

• Maliki: exchanges must happen on the spot or immediately upon “Ijab/Qabul.” Therefore, any delay by either parties the transaction is void.

• Exchanges of currencies (make from gold or silver) are not RIBAWI products, therefore, according to Shafiee, Hanafi and Hambali school of thoughts that the delivery on the spot is not the condition.

• Any exchanges of currency e.g. gold for silver – the exchange must happen on the spot.

• Any exchanges of foreign currency to local ringgit e.g. USD for RM (to the nearest in value), in Islam it is necessary i.e. “HARUS”.

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Some Prohibitions in Islamic Banking

• Gharar – means risk, hazard, peril and uncertainty in business dealings or undertakes.

• In business we should not undertake anything blindly without sufficient knowledge

• Or oneself should not venture into something not knowing exactly what will the outcome.

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• Gharar – is divided into two, namely:• Gharar Fahish i.e. major or serious gharar.• Gharar Yasir i.e. minor or slight gharar.• Gharar – will cause a contract to be null and void is

major gharar.• E.g. 1) relating to asset such as asset or

merchandize does not exist; asset or merchandize cannot be delivered; or asset or merchandize not according to specifications. 2) relating to price such as two prices in one contract, and mention the amount of ibra’

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IMPLICATIONIN ISLAMIC ECONOMY AND

FINANCE

REASONSFOR

FORBIDDEN

DEFINITION

MAYSIR(GAMBLING)

MAYSIR

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• Maysir – i.e. gambling meaning when someone undertakes certain things or games and winning or gaining it by chance.

• It is so meant of earning without toil / work and exertion / effort.

• Imam Malik r.a says that gambling is two categories: a game of chance that is partaken in with a view of sport (fun) and the game of chance which involves gambling.

• Gambling means all dealings in which people are required to bet and every dealing which involves some aspect of gambling is Maysir.

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• “O ye who believe, verily wine and games of chance (ungodly) shrines, and divining devices are abomination of Satan’s work. Avoid them, that ye may prosper. Only would Satan sow hatred and strife among you, by wine and games of chance, and turn you aside from the remembrance of Allah, and from Prayer; Will you not, therefore. Abstain from them?”(5:90,91)

• The holy Quran mentions “they ask thee (O’ Prophet) about Kharm (intoxicants) and games of chance (gambling). Say: In both of them there is great harm although there is some advantage as well in them for men, but their harm is much greater than their advantages.” (2:29)

• In tradition: The Holy Prophet (pbuh) said: “Whosoever says to his companion: Come let us play a game of haphazard, should give alms (as an atonement).” Bukhari & Muslim.

• Maysir is of various categories such as divinatory arrows, chess, lottery etc.

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IMPLICATIONS TO THE ECONOMY

• It is prohibited for an Islamic bank to give out financing to a company that involves in gambling or any sorts of gambling.

• Thus Securities Commissions has not listed those companies involved in gambling in Bursa Malaysia because it is against the Shariah.

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Differences between RIBA and Profit

Interest/Usury/Riba1. Interest is determined

during offer and acceptance w/out considering the profit or loss.

2. Percentage based on amount of loan or capital provided.

3. Payment of interest is fixed w/out considering whether the project is making profit or not by the borrower.

Profit and loss sharing1. Determine of profit in the

ceremony/majlis ijab/qabul based on profit or loss.

2. Percentage of profit is based on the amount of profit achieved.

3. Sharing of profit is based on the project undertaking, if the project does not make profit then the losses is to be borne by both parties.

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Differences between RIBA and Profit

Interest/Usury/Riba4 Payment of interest

to the depositors is not increased even though making profits.

5 Taking interest and paying interest.

Profit and Loss sharing4 Payment of profit to

the depositors is increased when the co. making more profits.

5 Does not pay neither receive interest but sharing profit – it is Halal.

The wisdom of the prohibition of riba i.e. the elimination of injustice and call for cooperation among the capital provider and needing. Accomplishing the fairness and to reduce fraud.

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Discussion Questions

1.Discuss, does it really matter in an Islamic economy to deal with “time value of money” (TVM) and appreciation or depreciation of money?

2.How far can Islamic banking go without the help of BNM and what really makes us difference from the conventional banking system?

3.Can we call a conventional bank an Islamic bank if the bank applies some or all the Shariah principles and philosophies in its operations?

4. Are we really Islamic, if we are still relying on the current conventional environments? Discuss.

chapter 1 - islamic banking principles

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