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Session 1
Overview of Islamic Finance
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AQIDAH
(Faith & Beliefs)
SHARIAH
(Practices & Activities)
AKHLAK
(Moral & Ethics)
IBADAH
(Man-(Worship)
MUAMALAT
(Human Interactions)
Political Activities Economics Social
Banking &
Financial Activities
Islam is a way of Life
There are rules governing the many facets and aspects of life.
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Islamic Finance
It represents an assertion of religious law in the capital market transactions where financing transactions should be free from the involvement of prohibited activities by Islam as well as free from the elements such as :
• Riba• Maisir • Gharar
Islamic Finance revolves around activities carried out in ways that do not conflict with the conscience of Man and Islam.
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Objective of Islamic Banking
• Non-Involvement in Haram Activities
• To Provide Transactions Free from Riba, Gharar and Maisir
• To Provide an Alternative Financing to the Conventional Financing
• To Provide for a More Equitable Financial System
• To Mobilise Muslim Funds Efficiently & Effectively
• Create Viable Islamic Assets
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Granting of Money in Islamic Finance
Arises From:
Financial Transactions In Islam
Fee-based financial services
Contracts of Exchange
Partnership ventures
Lease
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•Sources of Funds are from Permissible Activities and Applied Toward Permissible Activities
•Takes the Role of a Trader
•Financing is Backed by Real Assets
•Real Asset-Owners in the case of Ijarah
•Pricing is based on True Market-Based Mark-Up or Service Rate
•No Penalty Interest
Holistic Approach in Islamic Finance
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•Riba
•Gharar
•Maisir
•Haram Activities
Core Prohibitions in Islamic Finance
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Time Value of Money
• Time value of money has a place in
Islamic Finance.
• The return available to an individual
saver, need not relate to an interest
of riba-based transaction. The return
available on the next best
“permissible” investment (from trade
of otherwise) constitutes time value
of money in Islamic Finance.
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Gharar is the lack of information disclosure, uncertainty, ambiguity, and the presence of
excessive risks.
Gharar
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Maisir
Maisir can be defined as gambling i.e. games of
chance often involving money or belongings.
One More on my side
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Non-Halal Activities
• Financial services based on Riba;
• Gambling and gaming;
• Manufacture or sale of non-halal products or related
products;
• Conventional insurance;
• Entertainment activities that are non-permissible
according to Shariah;
• Manufacture or sale of tobacco-based products or
related products;
• Stockbroking or share trading in Shariah-non compliant
securities
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Musyarakah
Mudharabah
Ijarah
Murabahah
Istisna’
Salam
Pre-Islamic Mode of Financing
•Existed even before the coming of the Holy Prophet Muhammad
Pre Islamic Trading
Pre Islamic Coin
•The Prophet himself practised Mudharabah
•The Prophet endorsed these facilities as acceptable in Islam
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•It was mostly illegal in Christian medieval Europe to charge interest on a loan of money, for much the same reasons Islamic law forbids it: That, as money is intrinsically unproductive, it is ethically wrong to make money from money.
•In Central Europe, those who sought to borrow (interest-based) had to resort to illegitimate borrowing.
The Rise in Usury
• The rise in acceptance of usury began to the time of King Henry VIII when he broke ranks from Rome. Free from Rome’s oversight, the influence of the Church over the State waned. Within two centuries, usury had taken prominence. Interest- based lending became acceptable. •England was the birthplace of formal conventional banking
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The revival of Islamic Finance was mainly fuelled by the
(1) Independence after WW II
(2) Iran Islamic Revolution
(3) new wealth of the Arab Nations arising from the discovery of oil
Islamic Finance Revival
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A successful Islamic savings Institution, albeit set with an objective of enabling depositors to perform their Haj
Lembaga Tabung Haji
•Malaysia’s first Islamic Bank
•Incorporated in 1983 under the
Islamic Banking Act 1983
Bank Islam
Malaysia’s first Takaful Operator Incorporated in 1984 under the Takaful Act 1984
Syarikat Takaful Malaysia
First issuance in 1990Sukuk Market
Evolution of Malaysia’s Islamic Finance
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Evolution of Islamic Capital Markets
1990
2002
1994
2006
Issuance of Bai Bithaman Ajil Islamic Bonds by Shell MDS
• Issuance of Ittikal Fund – an Islamic Unit Trusts by
AmInvestment
• Malaysia’s first full fledge Islamic stock broking company
• The first Global Sukuk by Guthrie - $US395 Million Sukuk Ijarah
• The first Sovereign Global Sukuk by Malaysia - $US600 Million Sukuk Ijarah
In 2006 – MIFC as a one stop Islamic Financial Centre
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Session II
Shariah Commercial Contracts
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Sources of Shariah
Quran
Ijma’ Qiyas
Sunnah
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The Quran
The Book of Revelation and Last Testament
Contains divine guidance and direction for mankind
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Sunnah
The Sunnah is the living example of Prophet Muhammad – the practical example of the implementation of the Qur'anic guidance.
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Is the consensus of Islamic scholars which is legally binding, in a given generation on
particular points of Islamic Law
Ijma’
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Qiyas is the process of analogical reasoning from a known injunction to a
new injunction.
Qiyas
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Qiyas can be applied only when there is no solution to the matter in Quran or in the
Hadith;
Qiyas must not go against the principles of Islam;
Qiyas must not go against the contents of Quran neither must it be in conflict with the
traditions of the Prophet (pbuh); and
It must be a strict Qiyas based on either Quran, Hadith or the Ijma.
QIYAS
– Conditions for Application
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Contracts of Exchange
MurabahahBai’ Bithaman AJilBai’ InnahSalaamIstisna’
Participatory Contracts
MudharabahMusharakah
Islamic Financing Contracts
Lease
Ijarah
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PARTIES
MURABAHAH – Cost Plus Sales
BUYERSELLER FINANCIER
Most popular Islamic financing globally
• because the mechanics of the financing is widely accepted by Syariah scholars
• easy in terms of operations
• low risk and avoids liquidity problem by virtue of it being a short-term financing
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Buyer Financier Seller
2. Financier Pays Seller
3. Seller deliver goods
4. Buyer pays
Financier Selling Price
as per stipulated
period
MURABAHAH
1. Initiationa. Buyer requests Financier to finance purchaseb. Settlement to Financier on deferred termc. Financier quotes order selling price (Cost + Mark-Up)
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Buyer Financier Developer
1. Initiation
a. Buyer requests Financier to finance purchase of property
b. Settlement to Financier on deferred installments
c. Financier quotes order selling price (Cost + Mark-Up)
BAI’ BITHAMAN AJIL
3. Developer hands
over property
2. Financier Pays Developer4. Buyer pays Financier
Selling Price in
Installments as stipulated
Murabahah and BBA
• Rules and application in Murabahah and BBA
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BAI’ INNAH
Financier Borrower Merchandise
1. Financier owns Merchandise
2. Financier sells
Merchandise at RM X.
Settlement to Financier
on deferred terms
3.Buyer resells merchandise to Financier
at RMX - RMY= RMZ
Financier pays Borrower RM Z
immediately.
4. Buyer pays
Financier Selling
Price as per
stipulated period
BAI’ INAH
• Rules and application in Inah
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A contract for the sale of goods where delivery is made in the future.
BAI’ SALAM
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Buyer Financier Seller
3. Seller deliver
goods at the
pre-determined
future date
4. Buyer pays Financier
Selling Price as per
stipulated period
BAI’ SALAM
1. Initiation
a. Buyer requests Financier to finance order with future delivery
b. Settlement to Financier on deferred term
c. Financier quotes order selling price (Cost + Mark-Up)
2. Financier Pays Seller
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BAI’ ISTISNA
A contract for the sale of goods which skilled workman commits himself to manufacture for the buyer.
Contract of SaleSkilled Worker Buyer
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Buyer Financier Craftsman
3. Craftsman
deliver
goods upon
completion
4. Buyer pays Financier
Selling Price as per
stipulated period
BAI’ ISTISNA
1. Initiation
a. Buyer requests Financier to finance manufacturing order
b. Settlement to Financier on deferred term
c. Financier quotes manufacturing order selling price (Cost + Mark-
Up)
2. Financier Pays
Craftsman to
enable to start work
Salam and Istisna’
• Rules and application in Salam and Istisna’
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IJARAH
The right to use and derive benefit from a property with lease rental paid to the Owner
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IJARAH
2. Assets leased to
usufructuary
3. Lessee pays rental
for usufruct
1. Owns Asset
4. Maintains upkeep
of asset
OWNER USUFRUCTUARY
/ LESSEEASSETS
Ijarah
• Rules and application in Ijarah
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PARTIES
Partnership - MUDHARABAH
MUDHARIBRABBUL
MAL
•Provides capital, assets
•Entitled to profit
according to pre-agreed
ratio
•Bears loss of capital
•Entrepreneur-Trustee
•contributes to talent, expertise,
skills or labour
•Holds in trust the capital
•Entitled to profit according to pre-
agreed ratio
•Does not bear any liabilities arising
from losses unless due to his
negligence or breach in fiduciary
duties
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RABBULMAL
MUDHARABAH
MUDHARIB
CAPITAL
RIGHTS
VENTURE
PROFIT LOSS
SKILLS / LABOUR
Pre-
Agree Ratio
Borne
By
Rabbulmal
Pre-Determined
Partnership–MUDHARABAH(cont.)
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•Where two or more persons contribute capital, assets or labour into the partnership.
•Partners enjoy similar rights
• Partners share profit in pre-agreed ratio. It is not necessary to share profit according to ratio of capital contribution.
• Losses shall be borne together.
Partnership - Musharakah
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MUSHARAKAH
PARTNER PARTNER
PARTNER
CAPITAL
OR
LABOUR
VENTURE
PROFIT/ LOSS
Pro-Rated or Equal
RIGHTS
Equal
Partnership–MUSHARAKAH(cont.)
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Buyer Financier Developer
1. Initiation
a. Buyer requests Financier to finance purchase of property
b. Settlement to Financier on diminishing partnership basis
c. Financier quotes its Participatory Value
MUSHARAKAH MUTANAQISAH
3. Developer hands
over property
2. Financier Pays Developer4. Buyer pays Financier
Selling Price in
Installments as stipulated
Mudarabah and Musharakah
• Rules and application in Mudarabah and
Musharakah
Riba, Gharar and Maisir in Insurance
• Insurance
–A contract of buy and sell
–Based on the concept of guarantee by the
insurer to the policy holder
–Premium belongs to insurer
• If amount of premium collected more
than claims, insurer will make a profit
• If it is lesser, it will result in a loss
Riba, Gharar and Maisir in Insurance
• Riba
– Money in exchange for money
• In the event of claims, premium paid is not at par
to the claims - riba
– Investment/savings in interest bearing instruments
• Fixed deposits
• Bonds
• Non-shariah approved investments
Riba, Gharar and Maisir in Insurance
• Gharar
– Uncertainty on
• The subject matter,
– in terms price
»Sale price; how much is the premium?
»Counter value; how much will be the claims
paid?
– in terms of time (when claims will be paid?)
• The event of the insurable risk happening/not
happening
Riba, Gharar and Maisir in Insurance
• Maisir
– Uncertainty that may lead to gambling characteristics; risk transfer is uncertain and based on chance
– Quick money on gambling of the risk covered
• Non-Shariah compliant contract of guarantee
– For a contract of guarantee, there should not be any charge
– It should be a benevolent act
Riba, Gharar and Maisir in Insurance
• Takaful– Contract of tabarru’ (contribution); one sided and need
not to have counter value
– Based on the concepts of guarantee to indemnify among participants
– Contribution belongs to the fund (not the takaful operator); participants are the beneficiaries of the fund
– Takaful operator acts as an agent for the participants and receives fee (based on contract of wakalah)
Wallahua’lam
Thank you