fundamental of islamic banking - principles of islamic banking

33
ISLAMIC BANKING AND FINANCE Mahyuddin Khalid e m k a y @ s a l a m . u i t m . e d u . m y PRINCIPLES OF ISLAMIC BANKING

Upload: mahyuddin-khalid

Post on 08-May-2015

5.257 views

Category:

Education


12 download

DESCRIPTION

Fundamental of Islamic Banking - Principles of Islamic Banking

TRANSCRIPT

Page 1: Fundamental of Islamic Banking - Principles of Islamic Banking

ISLAMIC BANKING AND FINANCE

Mahyuddin Khalid

em

kay@

sala

m.u

itm.e

du.m

y

PRINCIPLES OF ISLAMIC BANKING

Page 2: Fundamental of Islamic Banking - Principles of Islamic Banking

2

CONTENTS

INVESTMENT AND FINANCING OF HALAL ACTIVITIES

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

Page 3: Fundamental of Islamic Banking - Principles of Islamic Banking

3

INVESTMENT AND FINANCING OF HALAL ACTIVITIES

Impermissible to invest and give 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 or related product

Stockbroking or share trading in Shariah non-compliant securities

Other activities that conflicts with Shariah

Entertainment activities that conflicts with Shariah

Conventional insurance that containing of gharar

Page 4: Fundamental of Islamic Banking - Principles of Islamic Banking

4

PROFIT AND LOSS SHARING VS LENDER-BORROWER RELATIONSHIP

PROFIT LOSS SHARING• First Tier• Between bank and depositor• The depositor are considered to be

provider of the capital (Rabb al mal)

• The bank functions as a working partner or manager 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-BORROWER RELATIONSHIP• The relationship between a lender

and a borrower is governed by a loan contract between them.

• Such a contract would specify all the obligations of the two parties in every possible future contingency.

• With respect to:• The amount of repayment• The interest rate on the remaining

debt.• A possible adjustment in the

collateral required by the lender.• The actions (in particular

investment decisions) to be undertaken by the borrower.

Page 5: Fundamental of Islamic Banking - Principles of Islamic Banking

5

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 profit or 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 interest rates.

Murabaha financing products are 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 Floating rate

Many conventional banking products are floating-rate products. The rates on such loans are automatically adjusted upwards or downwards in line with changes in interest rates.

Page 6: Fundamental of Islamic Banking - Principles of Islamic Banking

6

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 remains unchanged.

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.

Page 7: Fundamental of Islamic Banking - Principles of Islamic Banking

• Unlawful gain derived from the quantitative inequality of the counter-values in any transaction purporting to effect the exchange of 2 or more species which belong to the same genus(category) and are governed by the same efficient cause(illah)

Definition of Riba on Trade transaction

• A predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period

Definition of Riba on Loan transaction

PROHIBITION OF RIBA

7

Page 8: Fundamental of Islamic Banking - Principles of Islamic Banking

Al-Quran Al-Baqarah: 275

EVIDENCE

8

Page 9: Fundamental of Islamic Banking - Principles of Islamic Banking

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 pays more or takes more has indulged in riba. Take taker and the giver are alike (in guilt).

EVIDENCE

9

Page 10: Fundamental of Islamic Banking - Principles of Islamic Banking

10

ELEMENTS OF RIBA

Excess or surplus over and above the

loan capital

Bargain to be

conditional on the

payment of a

predetermined surplus

Determination of this

surplus in relation to

time

Page 11: Fundamental of Islamic Banking - Principles of Islamic Banking

11

REASONS FOR PROHIBITION OF RIBA

To prevent injustice between

contracting parties

Exploit the poor/ creditors

An exploitations

of people ignorance over the types of

commodities involved in transaction

An exploitation of people

needs. Thus, they have no choice but to be involved

in Riba

Page 12: Fundamental of Islamic Banking - Principles of Islamic Banking

12

CATEGORIES OF RIBA

Categories of Riba

Riba al-Buyu` (Trade

Transaction)

Riba al-Fadl

Riba al-Nasiah

Riba al-Dayn (Loan

Transaction)

Riba al-Qard

Riba al-Jahiliyah

Page 13: Fundamental of Islamic Banking - Principles of Islamic Banking

13

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 on some monthly interest in addition to the principal sums.

• Increase due time• On other words, this stipulated interest

which the lender takes from the borrower to pay back the capital.

• Second opinion- Any delay in the exchange of the ribawi 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 the above principal of the loan.

Riba al-Jahiliyah • It is Riba in loan.• It is when a loan contract is made or at

rescheduling a previous debt.• It is take place only in debts created via

lending or extended to a new maturity via rescheduling.

Page 14: Fundamental of Islamic Banking - Principles of Islamic Banking

14

RIBAWI ITEM

Ribawi

Item

Gold

Salt

Silver

Wheat Barley/Oat

Dates

Salt

Page 15: Fundamental of Islamic Banking - Principles of Islamic Banking

15

ISLAMIC RULINGS ON RIBA IN 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 Same category 

Different type

Spot exchange

Inequality is permitted

Equality is not a condition

God with Silver Wheat with RiceSalt with Dates

 3 Different category

Different type

Delayed is permitted

Inequality is permitted

Time and Quantity Factor is not a condition

Gold with WheatRM with Dates

Page 16: Fundamental of Islamic Banking - Principles of Islamic Banking

16

ISLAMIC RULINGS ON RIBA IN 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 vehiclesUD with furniture

 5 Between 2 Non-Ribawi Items

Delayed is permitted

Inequality is permitted

Time and Quantity Factor is not a condition

Bricks with SandsCloth with Patrols’

Page 17: Fundamental of Islamic Banking - Principles of Islamic Banking

17

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 when

there is a necessary Both of contracting parties must have a

perfect knowledge regarding to transaction

Page 18: Fundamental of Islamic Banking - Principles of Islamic Banking

18

PROHIBITION OF GHARAR

• Sell good that seller is not in position to deliver.

• Sell unknown pages or known goods against unknown price.

• Make a contract conditional on a unknown event.

• Sell good on basis of false description.

• Sell good without proper examination.

• Gambling.

Examples of Gharar related transaction:

Page 19: Fundamental of Islamic Banking - Principles of Islamic Banking

19

TYPES OF GHARAR

Gharar Yasir• This type of gharar is

tolerate and will not invalidate a contract.

• Gharar yasir may include the following cases:• The uncertainty is slight

or trival• Contract is unilateral or

charitable (al tabarru’at) such as gift or bequest

• There is a public need for the transaction or contract (consideration of maslahah)

Gharar Fahish• This type of gharar is not

tolerate and may result in contract voidability

Page 20: Fundamental of Islamic Banking - Principles of Islamic Banking

20

PROHIBITION OF MAYSIR

Refers to the easy acquisition of wealth by chance, whether or not it deprives the other’s 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

Page 21: Fundamental of Islamic Banking - Principles of Islamic Banking

21

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

the community among the poor Removing the love of wealth from one’s heart, a

spiritual disease that could be detrimental to one’s Iman. Thus, it is a form of Tazkiya (self-purification).

Giving in the path of Allah acknowledging that whatever wealth one possesses is in reality the Almighty’s, and giving a monetary sacrifice for one’s lord.

Prevention of monopolies in society.

Page 22: Fundamental of Islamic Banking - Principles of Islamic Banking

22

BENEFIT OF ZAKAT

Enhances Volume of Production When Zakat is collected and distributed among the poor they spend it

on various consumer goods which increase the demand of various products 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 in

saving 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 the

economy. 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.

Page 23: Fundamental of Islamic Banking - Principles of Islamic Banking

23

CONDITION OF ZAKAT

Zakat Performer Muslim Every Muslim who is of a certain age and owns enough assets is

required to pay zakat. Zakat Assets

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

It’s payable only on those assets acquired for the purpose of creating or generate wealth.

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

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 this period.

Page 24: Fundamental of Islamic Banking - Principles of Islamic Banking

24

TYPES OF ZAKAT

Zakat Fitr

• Zakat Fitr is a one off payment that is made once in every Muslim Hijri calendar year at any time between the first day of the month of Ramadan and the first day of Shawal.

• All Muslims are obliged to pay this, regardless of their age, status or wealth.

• The amount of zakat payable is approximately 3kg of staple food in the relevant country or an amount of money that is equivalent to the price of the food.

Zakat Al-Mal (on wealth)

• Zakat al-Mal is an annual payment based on the amount of wealth owned by a Muslim individual or organization.

• This payment is obligatory upon any Muslim individual or organization that has completed the requirement of Nisab (minimum taxable amount) and Haul (one Muslim Hijri calendar year).

• The payment is 2.5% out of the total wealth deemed for zakat.

• Zakat al-Mal can be subdivided into zakat on:• Business, Rental Income,

Personal Income, Savings, Gold and Silver,  Shares, Livestock, Crop

Page 25: Fundamental of Islamic Banking - Principles of Islamic Banking

25

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 enter

or 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 has borrowed to pay for basic necessities or those on financial problem.

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.

Page 26: Fundamental of Islamic Banking - Principles of Islamic Banking

26

ISLAMIC LEGAL MAXIM ( القواعد(الفقهية

Qawaid fiqhiyyah or Legal maxims are general rules which can be applied in various cases that come under common rulings.

Plays great role in the formation of Islamic law because they are uses as principles to deduce rules of fiqh.

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

Have a great role in the formation of Islamic law because they are used as guidelines in finding the rules of fiqh but cannot be accepted as sources of shariah.

These maxims have solved most of the minor rules of fiqh and without them these minor rules will have no standing ground which will make it hard to solve them.

Page 27: Fundamental of Islamic Banking - Principles of Islamic Banking

27

FIVE MAJOR MAXIMS

Acts Are Judged By The Intention Behind Them

األمور بمقاصدها

Certainty Is Not Dispelled By Doubt

ال اليقينبالشك يزال

Hardship Begets Facility

المشقة تجلب التيسير

Harm Must Be Removed يزال الضرار

Custom Is The Basis Of Judgement

العادة محكمة

Page 28: Fundamental of Islamic Banking - Principles of Islamic Banking

28

ACTS ARE JUDGED BY THE INTENTION BEHIND THEM( بمقاصدها (األمور

An act of any human being is judged in the light of intention or the purpose it seeks to have effects.

This means that the effect to be given to any particular action or transaction must be in accordance with the intent underlying such action or transaction.

E.g.: Banks declare their policy of financing customers

on non-interest bases it would be necessary to do so and not merely continue the same practice and seeking to rationalize it in Islamic terms such as mudharabah etc.

Page 29: Fundamental of Islamic Banking - Principles of Islamic Banking

29

CERTAINTY IS NOT DISPELLED BY DOUBTبالشك ) يزول ال (اليقين

It is discusses about the principle that should be followed if there is doubt in any matter particularly in matters pertaining to Islamic law.

This means that a fact established by law or proven with evidence will remain so, until there is another certainty that removes it.

E.g.: A partner has no right to assume a minimum rate

of profit earned by his business partner and claim his share in that profit as different from amount stated to have been actually earned by the partner.

Page 30: Fundamental of Islamic Banking - Principles of Islamic Banking

30

HARDSHIP BEGETS FACILITY( المحظورات تبيح (الضرورات

The maxim indicates that any ruling which implementation causes hardship to a person or the action is unable to be performed by a particular person for a specific acceptable reason, then there are alternative and ways out that can be resorted to in order to overcome the difficulties and hardship.

Hardship- refer to surpass the normal limit and ability 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 the sale of his movable goods if this would suffice to clear his debt, before selling his real property.

Page 31: Fundamental of Islamic Banking - Principles of Islamic Banking

31

HARM MUST BE REMOVED( يزال (الضرار

The scholars have classified harm into two categories : Harm which is inflicted intentionally in order to cause

damage. This kind of harm is forbidden and the perpetrator shall bear the consequences of his action.

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 of sale and sell the goods to some other party.

Page 32: Fundamental of Islamic Banking - Principles of Islamic Banking

32

CUSTOM IS THE BASIS OF JUDGEMENTمحكمة ) (العادة

This maxim means the practices of the people 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 as to 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.

Page 33: Fundamental of Islamic Banking - Principles of Islamic Banking

33 END OF CHAPTER