Islamic Banking Law Overview
Uploaded by
No OneIslamic Banking Law Overview
Uploaded by
No One9/9/2015
ISLAMIC BANKING LAW
Mohd Johan Lee
LLB, MCL (IIUM), MA (Econs) (KCL)
Advocate & Solicitor (High Court Malaya)
Peguam Syarie
Advocate & Solicitor (Supreme Court Brunei)
Messrs. J. Lee & Associates
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC BANKING AND FINANCE : DEFINITION
AND OBJECTIVES
Islamic banks are to promote, foster and
develop the banking services and products
based on Islamic principles
Islamic banks are also promoting
establishment of investment companies or
business enterprises so long as their
activities are not forbidden by Islam
1
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Sec 2 of the IBA
“Islamic bank means any company which
carries on Islamic Banking business and holds
a valid licence……”
“Islamic banking business means banking
business whose aims and operations do not
involve any element which is not approved by
religion of Islam”
(c) Mohd Johan lee 2015 14 & 15/9/2015
Wide definition allows IB to do all banking
business – commercial, finance, merchant
Opportunity for innovation in the business and
product development
Consistent with the principle of “permissibility
unless otherwise prohibited”
2
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAFIA confined the “banking business” into :
(i) Receiving deposits – CA/SA etc
(ii) Paying or collecting cheques
(iii) To provide loan/finance
(c) Mohd Johan lee 2015 14 & 15/9/2015
Islamic banking business” means the business of—
(a) accepting Islamic deposits on current account,
deposit account, savings account or other similar
accounts, with or without the business of paying or
collecting cheques drawn by or paid in by
customers; or
(b)accepting money under an investment account; and
(c)provision of finance; and
(d)such other business as prescribed under section 3;
3
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SALIENT FEATURES OF IBF
Riba free – money does not create money
Gharar free – uncertainties to be avoided
No Lender – borrower relationship
Trading & leasing relationship
Profit & Loss sharing
Requirement of mutual consent
Prohibition of fraud and deception
(c) Mohd Johan lee 2015 14 & 15/9/2015
There are 2 modes of financing in IBF
Equity financing
Debt financing
4
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
FINANCING NEEDS
Financing needs
Own financing Financing from others
Equity
Debt Financing
Financing
Takes place when the
capital/equity of other The financing is effected by debt
party is taken to Debt is given to the other party for
undertake a commercial specific purpose
project
9
(c) Mohd Johan lee 2015 14 & 15/9/2015
FINANCING NEEDS
Mode of Financing
Equity Financing Debt Financing
Uqud al Istirak Al- Bay/al Ijarah/al dayn
(profit & loss sharing) (exchange/deferred
Al-mudarabah contract)
Al- musharakah BBA
Murabahah
Ijarah
Istina’
10
5
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC BANK VS CONVENTIONAL BANK
No
. ISLAMIC BANKING CO NVENTIONAL BANKING
The functions and operating modes of The functions and operating modes of
1. IBF are based on the principles of conventional banks are based on fully
Islamic Shari’ah manmade principles
It aims at maximizing profit but It aims at maximizing profit without
2.
subject to Shari’ah restriction any restriction
Participation in partnership business Lending money and getting it back
is the fundamental function of the with compounding interest is the
3.
Islamic banks. fundamental function of the
conventional bank.
The status of Islamic bank in relation The status of a conventional bank, in
4. to its clients is that of partners, relation to its client, is that of creditor
investors and trader, buyer, seller and debtors.
11
(c) Mohd Johan lee 2015 14 & 15/9/2015
COMMERCIAL BANKING
Deposits Lending
Depositors
Needs for
fund
FIs
IR@ 4% IR@ 7%
12
6
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC BANKING
Debt financing
Needs for fund
Depositors Wadiah (Numerous principles
/current used
FIs
Depositors
Mudharaba Equity
investment
h financing/Musy/mudh
13
(c) Mohd Johan lee 2015 14 & 15/9/2015
MISCONCEPTION & ISSUES
Banking is prohibited in Islam
Islamic banking is merely change in name
Islamic banking is expensive
Imitation of conventional product
Legal and political reality
Lack of knowledge and information
Technical issues
14
7
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
DEVELOPMENT OF ISLAMIC BANKING
During the time of the Prophet (p.b.u.h)
‘bailtul mal’ (public treasury) – to fund state
responsibilities.
Did not generally accept deposits from public
nor grant loans
Baitul Mal have extended loans to Caliph Umar’
son Abd Allah and Ubayd Allah which were used
for trading.
15
(c) Mohd Johan lee 2015 14 & 15/9/2015
1963 – Mit Ghamr Local Savings Bank (Egypt)
1971 – Nassar Social Bank (Egypt)
1975 – Islamic Development Bank (Jeddah) &
the Dubai Islamic Bank
1977- Faisal Islamic Bank of Sudan & Kuwait
Finance House
1978 – Faisal Islamic Bank of Egypt & the
Islamic Bank of Jordan
16
8
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Malaysia
1969 – Establishment of Pilgrims’ Fund Board
(Lembaga Tabung Haji)
1983 - Bank Islam Malaysia Berhad (public
listed on 17 Jan 1992).
The Islamic Banking Act 1983 (7 April 1983)
supervised and regulated by BNM
1984 - Syarikat Takaful Sdn Bhd (TA 1983)
17
(c) Mohd Johan lee 2015 14 & 15/9/2015
1993 –BNM introduced a scheme known as “Skim
Perbankan Tanpa Faedah” (SPTF) & Islamic banking
window
1996 – amendment to sec 124 of the BAFIA allowing
conventional banks in Malaysia to operate IBF
1997- The establishment of NSAC by the BNM
1998 – Interest- free Banking Scheme (SPTF) was
upgraded to Islamic Banking Scheme – setting up of
Islamic Banking Divisions replacing Islamic Banking
Units to headed by senior level of management
18
9
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
1999 – Second Islamic Bank (BMMB)
2002 – Islamic Financial Services Board
(IFSB) head office in Malaysia
2004 – establishment of Islamic banking
subsidiary for conventional banks
2004 - grant of Islamic banking licenses to 3
other financial institutions (1 foreign & 2
local)
19
(c) Mohd Johan lee 2015 14 & 15/9/2015
2005: Entrance of Kuwait Finance House, Al Rajhi & Asian Finance (a
consortium of Qatar Islamic Bank, RUSD Investment Bank Inc. & Global
Investment House)
2008: International Islamic Banking licenses were issued to Unicorn
International Islamic Bank, First Islamic Investment Bank Ltd (owned by PT.
Bank Muamalat Indonesia) and Deutsche Bank Ag (2010), allow the bank to
provide Islamic commercial and investment services denominated in foreign
currencies.
2010: 5 new Islamic banking licenses to foreign banks (BNP Paribas SA, PT
Bank Mandiri, National Bank of Abu Dhabi, Mizuho Bank and Sumitomo-
Mitsui Banking Corporation) and the establishment of “Mega Islamic Bank”
(to be announced)
2012 – Islamic Financial Services Act
20
10
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
STAGE 1 – (1983 STAGE 2 STAGE 3
-1992) (1993-2000) (2000-2010)
Institutional
Building, activity
generation/market
Vibrancy
Financial Sector
Masterplan (Islamic
Enactment of Legislative financial hub)
dedicated Act for amendment to allow Islamic Financial
Islamic banking window concepts Services Board
Full fledged Islamic NSAC Liberalization Islamic
bank Islamic interbank finance sector
money market Malaysia
International
Financial Centre
21
(c) Mohd Johan lee 2015 14 & 15/9/2015
FRAMEWORK OF ISLAMIC FINANCE
In general, the framework of Islamic finance is the same
framework used by the conventional finance practices.
These frameworks are, inter alia legal and regulatory
framework, taxation framework, accounting and auditing
standards, etc.
Might have different or additional framework, such as
accounting and auditing standard, etc, due to its peculiarity.
In certain jurisdiction, Islamic banking and finance might be
regulated by different sets of regulations, either separate or
additional, e.g. IBA 1983 (Now = IFSA 2013)
22
11
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONT’D
However, Islamic Finance, as the name
suggests, has another framework, which is
considered the major element that
differentiates IBF from the conventional
banking and finance.
Any violation of this framework will definitely
effect the validity of Islamic finance itself.
Shariah Compliance Framework
23
(c) Mohd Johan lee 2015 14 & 15/9/2015
THE SHARI’AH FRAMEWORK OF ISLAMIC BANKING AND
FINANCE
Three main interrelated terminologies: Shariah,
Fiqh & Muamalat
Shariah, when viewed from legal perspective is
the fixed elements of Islamic law, i.e. what has
been clearly stipulated and mentioned in the
text. E.g. five time prayers, prohibition of riba’,
etc.
As such, it is revealed in nature
24
12
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH & FIQH
Shariah, in this sense, is wide and encompassing various
branches of Islam
Normally, it comes in its generality and it emphasizes only
on the principles and not the detailed rules (not all the time)
It is the duty of the judge (qadi), mufti and jurisconsult
(ulama’) to exert their intellectual efforts in deriving and
applying these principles on certain given scenarios.
The result of human reasoning and understanding to the
shariah is known as fiqh
Fixed v. Flexible
Agreements v. Differences
25
(c) Mohd Johan lee 2015 14 & 15/9/2015
FIQH MU’AMALAT (ISLAMIC COMMERCIAL LAW)
However, in its general usage, it is called al-syariat al-Islamiyyah
(Islamic law).
Islamic commercial law is one of the components of Islamic law
Other components of Islamic law include:
Islamic law of purification and worship
Islamic family law
Islamic criminal law
Islamic law of evidence and procedure
Islamic law of inheritance, etc
The main subjects of Islamic commercial law are commercial
contracts and the rules governing them
26
13
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC FINANCE PARADIGM
Original rule of permissibility:
- Initial legal ruling in commercial contract is permissibility
- Contrary to acts of devotion (Ibadat)
- No legal injunction is needed in sanctioning new contract
- Every contract is considered lawful and acceptable if no
principle of shari’ah is violated
- Open a very wide door for further innovations
Real Economic Activities
Transactions-oriented not loan-based.
27
(c) Mohd Johan lee 2015 14 & 15/9/2015
IBF AND SHARI’AH PRINCIPLE
IBF or Islamic commercial law (fiqh al-
muamalat) is part & parcel of Shari’ah
Basic concepts of fiqh al – muamalat:
Wealth is a trust & amanah from God
Prohibition of unjust & oppressive practices
Promotion of honesty, transparency, justice &
fairness
28
14
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
COMPONENT OF SHARI’AH
Divinely revealed principles governing faith, conduct and legal
injunctions.
29
(c) Mohd Johan lee 2015 14 & 15/9/2015
Sources of Shari’ah
• Ijma’(consensus)
Primary • Qiyas (anology)
sources • Istihsan (juristic
• Quran preference)
• Sunnah • ‘Urf (customary practice)
• Maslahah (public
interest)
• Istishab (presumption of
continuity)
30
15
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
FORMULATION OF LEGAL RULINGS IN
ISLAMIC LAW
Shari’ah
Al Quran Sunnah
Decisive text Non-decisive text
Applied as it Judicial interpretations
is (Ijtihad) according to
recognized methodology
(usul al fiqh)
Shari’ah ruling
Fiqh ruling
31
(c) Mohd Johan lee 2015 14 & 15/9/2015
SOURCES OF IJTIHAD & SHARI’AH
Primary sources of
Ijtihad
Quran SUNNAH QIYAS
Divine The tradition of IJMA’ Analogical
revelation that Prophet (in the The unanimous deductions/legal
contains the form of saying, decision of the
reasoning (ratio
practices, & tacit Muslim
basic rules of decidendi) of a ruling –
approval) that scholars (no comparison of a case not
law explains and dissenting covered by the text with a
extends the opinions) case covered by the text
Quranic on account of their
injunctions common Shari’ah value
(‘illah/cause)
32
16
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
IJTIHAD
Ijtihad is the process of a systematic reasoning to reveal
the rule of law
Making use of all one’s liability in the search for the
legal status based on sources of Islamic law
Ijtihad - door to divergent opinions
The scholars may be derived to different ruling on the
same issue due to differences of methodology/sources
utilized in the process of ijtihad.
Resulted to different practices of Islamic Finance (on
detail matters but not the basic principles).
The range of Islamic financial products is open to
further expansion and re-interpretation by the scholars,
as long as they are guided by the Shari’ah
Ijtihad is the impor tant tool need to be utilised to
explore the dynamicity of Islamic law.
33
(c) Mohd Johan lee 2015 14 & 15/9/2015
PROHIBITIONS IN MUA’MALAT CONTRACTS
34
17
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
WHAT TO DO AND WHAT TO AVOID
Conclusion of contract by mutual consent
The avoidance of riba’
The avoidance of gharar
The avoidance of transactions involving maysir
(gambling)
The avoidance of transactions involving
prohibited commodities
35
(c) Mohd Johan lee 2015 14 & 15/9/2015
Literally (lughatan) - excess, increase, expansion, growth
Technically (istilahan):
Definition 1: Every excess in return of which no reward or
equivalent counter value is paid
Definition 2: Predetermined excess above the loan received by the
creditor conditionally in relation to a specified period.
36
18
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
“Those who eat riba will not stand (on the Day of judgment) except
like the standing of Shaitan leading him to insanity. That is because
they say: “Trading is only like riba,” whereas Allah has permitted
trading and forbidden riba. So whosoever receives an admonition
from his God and stops eating riba shall not be punished for the
past; his case is for A llah (to judge). But whoever returns (to riba);
such are the dweller of the Fire – they will abide therein.”
(Surah al-Baqarah: Verse 275)
37
(c) Mohd Johan lee 2015 14 & 15/9/2015
From Jabir RA, he said: “Rasulullah SAW cursed the receiver and the payer of
riba, the one who records it and the two witnesses to the transaction and said:
they are alike (in guilt).”
(Narrated by Muslim)
38
19
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
PROHIBITION OF RIBA
39
(c) Mohd Johan lee 2015 14 & 15/9/2015
The debtor borrowed money to be paid in certain time, and the amount is
more than the amount borrowed – RIBA QARDH
A creditor gives a periodic loan and takes monthly interest. The capital sum
lasts until the expiration of the period. Upon expiry, if the debtor cannot pay,
the period to pay back the capital will be extended and interest will be
charged – RIBA QARD H
Arising out of exc hange contract (‘uqud mu’awadhat), a buyer must pay a
consideration. If he fails to settle on time, the period will be extended by
increasing the amount (principle + interest) – RIBA JAHILIYYAH or RIBA QARDH
based on the agreement
40
20
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Occur out of an exchange between two ribawi materials in the
same kind where the necessary rule(s) is (are) not observed
Guided by the saying of Rasulullah SAW:
‘I LLA H (RATI O
D ECI D ENDI) FOR
PROHIB IT IO N:
o G o ld & silv er
(and o th er
th in g s se rve
sam e pur pose) -
M edium of
exchan ge
Ubadah bin al-Sami t RA nar r ated that Rasulullah SAW said: “Gold fo r g old, (curren cy)
si lver for si lver, w h eat fo r w h eat, barley fo r barley, dates for dates, o Wheat, barley,
salt for salt – li ke fo r li ke, equ al fo r equ al, an d h and-to -h and (spot); i f dates & salt -
th e commodi ties di ffer, th en you may sell as you w i sh, provi ded th at Staple foods
th e exch an ge is h an d-to -h and or spot tran sacti on.”
(Narrated by M us lim)
41
(c) Mohd Johan lee 2015 14 & 15/9/2015
42
21
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LITERA LLY (LUGHATAN):
Deceit/ fraud (khid’ah), uncertainty, TYPES OF GHARAR
danger/ risk, and peril/haz ard
(khatar) that might lead to
destruction and loss.
GHARAR FAHISH (Major/
TECHICA LLY (ISTILAHAN): excessive gharar)
Uncer tainty and ignorance of the
contracting parties over the
substance or attributes of the object
GHARAR YASIR (Minor
of sale, or of doubt over its
existence and availability at the time Gharar)
of contract (majlis al-’aqd).
GHARAR LA YUMKIN
IHTIRAZ ‘ANHU
(Unavoidable Gharar)
43
(c) Mohd Johan lee 2015 14 & 15/9/2015
PROHIBITION OF GHARAR
44
22
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
To avoid any dispute due to unfairness in dealing caused by
the lack of knowledge.
“O believers! Do not eat up your property among
yourselves unjustly; except it be a trade amongst
you, by mutual consent.”
(Surah al-Nisa’: Verse 29)
45
(c) Mohd Johan lee 2015 14 & 15/9/2015
THE AVOIDANCE
OF GHARAR
Meaning of gharar:
- Literally: risk, uncertainty, hazard
- The sale of probable item whose existence
or characteristics are not certain, due to the
risky nature which makes the trade similar to
gambling
46
23
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
GHARAR
Meaning: has a range of negative connotations,
such as, uncertainty, deception, risk, hazard,
ignorance etc.
If there is gharar, the contracting party/ies do not
really understand the attributes / consequence of
the contract
Under Islamic law, gharar is prohibited because its
existence in the contract may deny the par ties of
equal bargaining power and they cannot make
informed decisions; or if there is risks on
deliverability of the object of the contract
47
(c) Mohd Johan lee 2015 14 & 15/9/2015
PROHIBITION OF GHARAR
Surah an- Nisa’: ayat 29
“ … s quander not your property amongst yourself unjustly (batil) except it be a
t rade among you by mutual consent…”
Interpretative Efforts
W hat amounts to
Unjust (batil) Tra de by Mutual Consent
C riteria C riteria
■ All illegal & defective elements in ■ Offer & Acceptance, indicating
contracts including gharar & consent
uncertainty ■ Elimination of mistake, fraud etc
48
24
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
PROHIBITION OF GHARAR IN THE SUNNAH
The sunnah uses the word gharar and its derivatives much
more extensively than the Qur`an in the sense that several
new meanings are added
In relation to commercial transactions, the Prophet s.a.w. in
many of his sayings directly prohibited the sale involving
gharar (uncertainty) and jahalah (ignorance)
Thus, the prohibition of gharar is made conclusive by the
sunnah / hadith of the Prophet s.a.w.
Examples: the prohibition of gharar sale (i.e., the sale
contract affected by gharar), the prohibition of the sale of
fish in the sea, bird in the air, unborn animals, lost items,
etc.
49
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONT’D…
In Islamic law, gharar can be of two degrees:
Excessive or major (gharar fahish)
Minor and tolerable (gharar yasir)
Only major /excessive gharar will affect the validity of contracts,
where it will render the contract void / voidable, depending on the
degree of uncertainty
Gharar affects trading and exchange contracts (mu`awadat); not
charitable and unilateral contracts
In banking & finance – gharar can be triggered e.g. – in the sale
contract to create the indebtedness if the asset used is uncertain /
vaguely identified; the trading of a securitised debt which is
unconfirmed / not established, sale of insurance policy
50
25
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
APPLICATION OF GHARAR
Broadly speaking, gharar will effect the validity
of contract if it occurs in these areas:
- gharar in kind / type / attribute / quantity of
the object
- gharar due to delivery time
- gharar due to the price/ mode of payment
- doubt over the ability to deliver
51
(c) Mohd Johan lee 2015 14 & 15/9/2015
THE BENCHMARK
Gharar is excessive (gharar fahish)
Occurs in exchange contracts (‘uqud al-
mu’awadat)
Effects the subject matter of the contract
directly, not just the appendage
No public need (al-hajah al-’ammah) for the
contract in discussion.
52
26
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONT’D
However, the subjectivity of this benchmark is very
obvious
Demarcation on excessive and trivial gharar
Determining the public need? To what extend
Inevitably, this demarcation will be influenced by
differences in time, societies, individual taste and
preference, technology and the way certain
transaction is conducted as well as regulatory
framework.
53
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONT’D
To prevent gharar, the parties to contract must
have adequate knowledge and information on
the subject matter:
i- Their existence and deliverability
ii- Its quality, quantity and attributes are
known
iii- Time –frame for payment and delivery
54
27
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
TOLERABLE GHARAR
However, gharar is tolerable if:
- i) it is trivial (gharar yasir)
- ii) It occurs in other than exchange
contracts, such as in gratuitous
contracts.
-iii) It happens to the ancillary object
(appendages) only (not the principal
and main subject matter of contract)
- iv) the economic need for the contract
embodying the risk is substantial
55
(c) Mohd Johan lee 2015 14 & 15/9/2015
RIBA GHARAR
FIXED in theory and NO T FIXED in application as its
application application changes with the
quality of knowledge, legal
framework, tec hnology etc.
Very muc h dynamic
Is about mental exerc ise
“These are the main challenges that we are facing,
especially in our product development efforts”
56
28
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
OTHER THINGS TO BE AVOIDED
Transaction involving the prohibited
commodities (e.g pork & liquor)
Surah al Maidah (5:3)
Surah al Maidah (5:90)
Transactions involving gambling (maysir)
Surah al Maidah (5:90)
57
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXAMPLES OF NON-COMPLIANCE
Riba can occur
All interest-based lending activities
Fixed return on deposits in conventional banking
Gharar can be triggered
Asset used in the sale/ lease contract is
uncertain/vaguely identified
Selling price or lease rental is known to the parties upon
entering into the contracts etc
Investment in non-Shariah compliant companies,
conventional bonds, etc.
58
29
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
THEORY OF ‘AQAD
Barbati defined “aqad” in his kitab “Inayah ‘ala Fath al-Qadri”:
“Legal relationship created by the conjunction of
two declarations, from which flow legal
consequences with regard to the subject matter”
Definition defines the essential elements of an ‘aqad:
1. The offer (ijab) and acceptance (qabul) executed are legally
binding on parties in the contract;
2. The contracting parties; and
3. The subject matter of ‘aqad on which the aqad gives the
effect.
‘Aqad can be translated as “contract”
59
(c) Mohd Johan lee 2015 14 & 15/9/2015
“O believers! When you contract
a debt for a fixed period, write
it down. Let a scribe write in
down in justice between you. Let
not the scribe refuse to write, as
Allah has taught him …”
(Surah al-Baqarah: Verse 282)
60
30
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
REQUIREMENT OF MUTUAL CONSENT
Requirement of mutual consent based on al Quran
(4:29):
O you who believe, devour not your property among
yourselves by unlawful means except that it be
trading by your mutual consent.
Manifested through expression of the parties
No certain formalities in concluding contract
In general mutual consent is achieved if it is made
freely by a competent person (puberty and
prudence)
61
(c) Mohd Johan lee 2015 14 & 15/9/2015
PROHIBITION OF FRAUD AND
DECEPTION
The words Khilabah, ghishsh and tatfif has
been used widely in Al Qur’an and the
Sunnah to convey the meaning of fraud and
cheating
It refers to maneuver practiced by one of the
parties to induce a person to a contract
without which he would have not entered it
It also refers to concealing the defects of
and adulteration in merchandise.
62
31
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH CONTRACTS IN ISLAMIC BANKING
63
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH CONTRACTS ACCORDING TO THEIR
PURPOSES
64
32
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC BANKING MARKET SHARE AS AT 2009
Sales
Malaysia
16
29 Bahrain
UK
14
Kuwait
UAE
9 USA
4 Iran
4 6 7
7 Pakistan
4
Saudi Arabia
Others
65
(c) Mohd Johan lee 2015 14 & 15/9/2015
GLOBAL MARKET VIEW
Increasing universal acceptance and popularity of
Islamic financial products and services as well as
continuous innovation to develop globally accepted
and recognized Islamic financial products and
services...estimated 1.6 billion Muslims worldwide
and Islamic assets are set to hit more than USD1.03
trillion by 2012 (“The Banker 2009”).
Islamic finance has expanded at annual rate of 15-
20% with a presence spanning more than 75
countries with more than 300 Islamic financial
institutions... robust growth.
66
33
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
67
(c) Mohd Johan lee 2015 14 & 15/9/2015
LOCAL MARKET
As at June 2010, the country’s Islamic banking
has accumulated a total of RM303 billion in
assets or 19.6 per cent of the total assets of
the banking sector which is RM1.5 trillion.
Islamic Sukuk garnered 57 per cent or RM172
billion of the total bond issuance of RM301.75
billion
68
34
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
UK –
Govt sets an objective to ‘entrench London as a
global gateway for Islamic Finance.
5 FSA-approved Islamic banks and 2 Takaful
operators.
Hong Kong –
aims to become an Islamic finance hub Hang
Seng Islamic China Index Fund in 2007 Shari’ah
Advisory Council formed.
Japan – new law allowing banks to do Islamic
finance.
69
(c) Mohd Johan lee 2015 14 & 15/9/2015
France –
passed rules and regulations to support
Islamic finance activities.
Considering licensing first Islamic bank
Singapore –
established first Islamic bank
Introduced tax neutrality for Islamic finance
Aspiring to be centre for Islamic finance
Issued sukuk
70
35
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Australia –
Islamic cooperative finance and mortgage
established.
Consider to establish Islamic bank.
71
(c) Mohd Johan lee 2015 14 & 15/9/2015
ESSENTIAL CONTRACTS IN ISLAMIC FINANCE
Underlying principles utilised in devising products of IBF
is very important as they separate IBF from conventional
products.
Contrary to conventional finance, which is specification
driven product, Islamic finance is more structure and
principle based product
Rules and regulations will differ from one product to
another, depending on the structure employed
In general, various underlying Shariah principles have
been utilised in devising products of Islamic Banking
and Finance.
They can be summarised as below:
- Sale based products
- Lease based products
- Participatory products
- Fee based products 72
36
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXAMPLES OF THE PRODUCTS AND UNDERLYING
PRINCIPLES
Banking products
IIMM products
Capital Market Products
73
(c) Mohd Johan lee 2015 14 & 15/9/2015
KEY ISLAMIC COMMERCIAL CONTRACTS
G ratuitous Tr ading In vestment Su pporting
Contracts Contracts Contracts Contracts
Gi ft Le asing Sa le Mudarabah Ka falah
Wa qf Musharakah R a hn
Op erational B ay`
Lo an Le ase B i thaman Ajil Hi walah
(B BA)
I bra’ F i nancial Wa diah
Le ase Murabahah
Wakalah
Sa lam
Jualah
I stisna’ etc. Muqasah
74
37
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC BANKING
SOURCES OF APPLICATIONS
FUND OF FUND
75
(c) Mohd Johan lee 2015 14 & 15/9/2015
EQUITY DEBT FINANCING
FINANCING
Sale based financing Lease Based Financing Fee Based Services
Mudharabah
BBA / Murabahah -Ijarah Wakalah
Musharakah
‘Inah/Tawaruq/dayn -AITAB Kafalah
Salam
Istisna
Comsumer Corporate
Banking Banking
76
38
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SALE BASED CONTRACTS IN ISLAMIC BANKING
Sale is a bilateral contract – where the
exchange is made between two subject
matters (asset & price)
The purpose : the transfer of
ownership
Rules of gharar and riba applied
extensively on contract of sale
77
(c) Mohd Johan lee 2015 14 & 15/9/2015
OBJECT OF SALE
Involves the exchange of:
commodity for another commodity
(barter)
Commodity for money (trading)
Money for money (sarf- currency
exchange)
78
39
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
TIME OF DELIVERY OF SUBJECT MATTER
Deferment could either be in subject matter or
price
Deferment in commodity : bay’ al-salam &
Istina’
Deferment in Price : BBA
79
(c) Mohd Johan lee 2015 14 & 15/9/2015
MANNER OF PAYMENT
Cash sale
Sale by immediate payment
The price must be paid during the conclusion of
the contract
Deferred payment sale
by installment basis
Lump sum payment in the future
Periodically
Other method agreed upon the parties
In some contracts, the payment must be spot and
deferment is not allowed, e.g bay’ al-dayn, salam,
bay’ al ‘urbun
80
40
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
REGULAR SALE (BAY’ AL MUSAWAMAH)
Common sale, sat at The seller to correctly
negotiated price reveal the cost price at
No reference to the cost which the acquired the
price of the commodity good (amanah)
The profit (or loss) is only Example of trust sales:
know to the seller Mark-up (murabahah)
At- price sale (bay’
tawliyyah)
TRUST SALE (‘UQUD AL-AMANAH)
81
(c) Mohd Johan lee 2015 14 & 15/9/2015
NATURE AND PURPOSE OF SALE
To finance the producer, manufacturer and the
like
Salam and Istisna’
To finance the customer to own a property
All credit sales/deferred payment sales (bay’ mu’ajjal)
To provide commitment to purchase
Bay’ al – ‘urbun
To obtain cash instead of property
Al Inah & Tawarruq
To get the highest price
Bay’ al –muzayadah (auction)
82
41
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
APPLICATION OF BBA
Classical : can be used to purchase various
commodities as long as the manner of
payment is deferred
Modern application: somehow wider than its
classical application, used to finance various
items such as : houses, land, motor vehicle,
consumer good, share, overdraft facility,
education financing package, personal
financing, refinancing of an asset etc.
83
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION- BBA
Al Bai Bithaman Ajil /Bai al Muajjal= The
sale with subsequent payment i.e.
deferred payment
A transaction where the delivery of the
goods is present yet the consideration
sum is to be paid in the future
However the buyer and the seller must
determine the mechanism of payment
during the aqad
84
42
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION- BBA
The most common practice in Malaysia is over
the buying and selling of property
Seller Buyer
Consideration
in 300
installments
85
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION- BBA
Banking Facility
Instant Payment
Seller/ RM150,000 Buyer/
1
Customer Banker
= buyer
Consideration = Seller
in 300
Back to Back resell –
installments
RM350,000
86
43
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
BBA WITH NOVATION (CONT)
Vendor
1
Novation Payment
Purchaser
Banker
/Customer
3
= buyer
= Seller
Consideration= deferred
payment---monthly
progressive installments
87
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAY' BI THAMAN AJIL (BAY'AL-MUAJJAL)
Sale against deferred payment
It is a trade-deal in which the seller allows the
buyer to pay the price of a commodity at a
future date in lump sum or installments
Need not have reference to the profit margin
88
44
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGALITY OF BBA
It is allowed under the concept of sale (bay')
Issue: whether the deferred price can be
charged more than the spot price in BBA
Majority of Muslim scholars (Hanafis, Shafiis,al-
Shawkani):
89
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAY’ BITHAMAN AJIL (BBA)
BBA refers to sale with deferred payment
In Fiqh perspective:
Any sale,whether it is murabahah (mark-up sale) or
normal sale (musawamah) can use the method of
deferred (BBA) payment
As long as the contract involve the element of
deferred payment of price, then it is called a BBA
90
45
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Permit additional charge
Price of deferred sale could be higher than cash sale
Provided that the following conditions to be fulfilled:
The object of sale must come into the possession of the
financier/bank before being handed over to the other party
In case of default or delay of the payment by the customer,
the price can no longer be raised
If customer in financial difficulty, respite should be given to
him & another date be fixed for the payment of the balance
of the price
91
(c) Mohd Johan lee 2015 14 & 15/9/2015
OTHER CONDITIONS OF BBA
Time for payment must be fixed & known to
parties
The time for payment is calculated from the
time of delivery of the thing sold
Regards should be made to the customary
practice
92
46
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAY’ AL- SALAM
Definition – the sale of a deferred item in exchange
for an immediate (forward) price
Purpose of Salam – original purpose of a Salam was
to meet the needs of small farmers who needed
money to grow their crops and feed their family until
the time of harvest
Salam as mode of financing – Salam has become a
mode of financing used by Islamic banks and
suitable as a mechanism to raise fund
Salam commodities – Salam contract is acceptable
for fungible, generic goods only – not suitable for
unique goods
93
(c) Mohd Johan lee 2015 14 & 15/9/2015
SALAM AS A MODE OF FINANCING
Banks and financial institutions may use Salam as a
mode of financing especially to finance the agricultural
sector.
The bank asked the customer to produce and deliver
certain commodity on the agreed date
The customer may be required to provide security for the
contract (mortgage/guarantee)
In the case of default of delivery, the collateral will be
used either to realize the required commodity by
purchasing it from the market, or to recover the price
advanced by the bank
94
47
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
PARALLEL SALAM
In modern practice, the contract of Salam is
normally done in a parallel way
After concluding the contract with the first
client, the bank then enters into another
contract of Salam with another client
In the first contract, the bank is the buyer, but
in the second contract the bank is the seller
95
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXAMPLE
Bank entered into a contract of Salam (on 31
June 2010) with supplier where supplier will
deliver to the bank on 1 October 2010 – bags
of paddy at a purchase price
The bank then entered into another contract of
Salam with the client where the bank agreed to
deliver 100 bags of paddy on 1 Oct 2010 at a
selling price (purchase price with profit)
96
48
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ILLUSTRATION OF PARALLEL SALAM
Commodity to be
deliver ed by the
customer
Supplier
Bank
Bank paid the price in advance
Commodity to Client paid the selling price
be deliver ed in advance
by the bank
Client
97
(c) Mohd Johan lee 2015 14 & 15/9/2015
SECOND OPTION
Promise to buy from third party
in this arrangement, the bank after the contract of
Salam with supplier, obtain a promise to purchase
from a third party (client)
This promise should be unilateral in nature and it is
not a sale
No advance payment is required
Once the bank requires the commodity, the bank
will sell the commodity to the client at selling price
98
49
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ILLUSTRATION
Commodity to be
delivered by the
customer
Supplier
BANK
Client promise to buy the
Contract of sale is commodity at a selling price
concluded once the
commodity is Client
obtained
99
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAY’ AL – ‘INAH
A financing contract which involves the sale
and buy back transaction of an asset by a
seller
The intention of bay’ al-’Inah is to obtain
liquidity (cash) rather than acquiring the object
of trading.
Bay’ ‘inah is so disputable, because majority of
jurists, regard it illegal, as it is considered as a
legal device (hilah) to taking riba’
100
50
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Property
Property
101
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF SALE (BAI’) – ‘INAH
LEGALITY
SAC of BNM in the Regional Shariah Sc holars Dialogue on 29th June 2006
resolved that:
1. The permissibility of bai’ inah and tawarruq is still a matter of juristic
disagreement among the Shariah scholars backed by their own basis of
justifications.
2. Bai’ Inah contract is still necessary in the context of local Islamic
finance development. However market players are required to
strengthen and enhance the operational processes and documentation
to comply with the features of bai’ inah as permitted; and
3. Sinc e bai’ inah contract is still regarded as a matter of juristic
disagreement among the Shariah scholars, it is more desirable that
Islamic financial institutions to limit its use in products which face
difficulty in structuring them based on other consensually accepted
contracts.
102
51
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF SALE (BAI’) – ‘INAH
103
(c) Mohd Johan lee 2015 14 & 15/9/2015
VIEWS OF SCHOLARS ON ‘INAH
Permissible only if it
Majority
involves a third party Permissible (some of
• Not permissible
& no prior Shafi’ considered it
• It is
agreement to that reprehensible
stipulated/conditio
contract is made (makruh)
nal sale
(tawarruq)
104
52
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
IMAM SHAF’I’S VIEW ON ‘INAH
Bay Inah consists of two sets of sale and
purchase contracts that fulfill all the necessary
requirements of a valid contracts
Total adherence to the external manifestation
of the contract and no investigation to the
inward intention.
105
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH ADVISORY COUNCIL OF BANK NEGARA M ALAYSIA’S RULING ON
BAI’ INAH:
106
53
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAI AL INAH
Banking FacilityInstant Payment
Seller/ RM350,000 Buyer/
1
Banker Customer
= Seller = buyer
Back t o Back Consideration
repurchase – in 300
RM200,000 installment s
107
(c) Mohd Johan lee 2015 14 & 15/9/2015
One party sells his property to another for a higher
price which is to be paid in the future on the condition
that the latter will sell it back to the former on spot (for
a lower price)
Or, one party sells his property to another for a price
which is paid on spot on the condition that the latter
will sell it back to the former for a higher price but to
be paid in the future.
108
54
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
The underlying purpose is to obtain cash
money. Legitimacy:
the Shafiis validated it as it conforms to all
essential elements of a valid sale (though a
number of Shafii jurists also considered it
discouraged - makruh).
The majority disapproved it as it goes against the
hadith (two sales in one) and also a legal trick to
circumvent the prohibition of riba.
The Hanafis have however approved tri-partite Inah
109
(c) Mohd Johan lee 2015 14 & 15/9/2015
TAWARRUQ VS ‘INAH
D i stinguish Factors Al – ‘Inah Al - Tawarruq
Concept Purchase of a commodity Buying a commodity for a
on deferred payment deferred payment and
basis and it is then sold selling it to another
for cash, at a price lower person other than initial
than the purchase price, seller at a lower price for
back to the original seller immediate payment
Purpose To facilitate cash and To facilitate cash and
liquidity shortage liquidity shortage
Parties Two parties involve for two Three parties (at least)
transactions involve for two
transactions (at least)
Subject matter Return back to the original Transferred and
seller possessed by third party
110
55
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF SALE (BAI’) - DAYN
What is “dayn” (debt)
a constructive property (mal hukm) established in the
liability of the debtor
• Sale of debt
Sale of future receivables for cash
Can “debt” be sold?
Yes
It is considered as property of value (mal mutaqawwim)
However, subject to jurists view on whether debt is “money” or
“right”
111
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAY’ AL-DAYN WITH DISCOUNTING
The Malaysian SAC of SC Middle Eastern Scholars
Allowed: Not allowed:
Arguments: Arguments:
Islamic debt is a good as Debt is nothing but a payment
asset as it has haq maliy, as of monetary debt, and as such it
therefore can be sold at remains monetary
whatever price provided it is
sold on spot Money for money exchange
requires spot and equal
Also, the practice of sale of exchange
debt at a discount is
supported by the hadith : The Hadith on “discounting”
“give a discount for early does not apply to a creditor
payment” giving a discount to a third pary.
112
56
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
113
(c) Mohd Johan lee 2015 14 & 15/9/2015
Islamic Accepted Bills
IAB is used as a result of securitizing a debt which
may arise from Islamic financing
IAB is normally used for import or export financing
facilities (IAB import & IAB export)
Bank draws Bill of Exchange on the debt to the
customer
The BOE has its value (the bank’s selling price) &
time of maturity
The BOE can be traded in the secondary market
114
57
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
• Provides BBA financing to customer (RM500k)
• Majority dates 20 yrs
• Confirmed debt – installment payment
Bank Customer
FI may wait until maturity
Bank sell the debt to FI (20 years) & gain RM100k
With discounted price Or FI sells it to other at
(RM400k)
discount price (RN450k)
Profit : RM100K) Financial Institution Profit : RM50k)
115
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF BBA
A deferred payment sale
The subject matter must be owned by
the seller at the time of sale
The parties must clearly identify the
mechanism of payment of the purchase
consideration sum
116
58
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF BBA
The profit margin need not be stated
As a sale, during the aqad
there must be a transfer of ownership &
possession
the purchase consideration must be fixed
117
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF BBA & INAH
A deferred payment sale
The subject matter must be owned by
the seller at the time of sale
The parties must clearly identify the
mechanism of payment of the purchase
consideration sum
118
59
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF BBA & INAH
The profit margin need not be stated
As a sale, during the aqad
there must be a transfer of ownership &
possession
the purchase consideration must be fixed
119
(c) Mohd Johan lee 2015 14 & 15/9/2015
BBA THIRD PARTY FINANCING
Owner(s) Customer(s)
1. A & B 1. A
2. A 2. A & B
3. A or A & B 3. X or X & Y
120
60
9/9/2015
LETTER OF HIBAH
(GIFT)
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION- BBA
Third Paty Banking Facility
Owner(s) 1
Instant Payment
Seller/ RM150,000 Buyer/ 2
4 Customer Banker
Owner(s)
= buyer
Consideration = Seller
in 300
Back to Back resell –
installments
RM350,000
122
61
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
DOCUMENTATION FOR BBA
LO
Facility Agreement
Asset Purchase Agreement
Asset Sale Agreement
123
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL DOCUMENTATION
FOR BAI AL INAH
Sale and Purchase Agreement between the
Customer and the Banker–
Normally = Asset Sale Agreement
Customer purchase from Bank (thus Indebtedness)
Subsequent (back to back) Sale and Purchase
Agreement between the Banker and the Customer
Normally = Asset Purchase Agreement
Charge/ Mortgage/ Lien/ Deed of Assignment
124
62
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Istisna
125
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISTISNA - INTRODUCTION
Customer Manufacturer
126
63
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION
Customer
Istisna’ 1
Financier
Istisna’ 2
Contractor
127
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION
Customer Contractor
Istisna’
Purchase Istisna’
Sale
Financier
128
64
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
This contract is also an exception to the
general rule pertaining to the existence of
the subject matter at the time of contract
This contract involves manufacturable goods
only (commodities that cannot be
manufactured e.g. fruits, grains etc are not
suitable)
Payment of the price is flexible - need not be
advanced at the time of contract only
129
(c) Mohd Johan lee 2015 14 & 15/9/2015
Proper description of the goods ordered should
be made
Time, place and mode of delivery of both the
goods and price should be specified at the time
of contract
This contract is suitable to finance the
purchase of property which is still under
construction
130
65
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Originally the istisna' contract is not binding on
neither party until the goods are made and
accepted by the buyer (majority view in the Hanafi
school)
However, in contemporary Islamic banking, it is
accepted that istisna' is binding on both parties
from the start (minority view in the Hanafi school)
As with other types of sale, parties in istisna' are
free to fix the price as they wish, using e.g., cost-
plus or mark-up approach
131
(c) Mohd Johan lee 2015 14 & 15/9/2015
Payments for the price is flexible and can be
delayed until delivery, or even beyond
However, to make matters easier, a schedule
of progress payment may be agreed between
the parties
In contemporary practice, Islamic banks may
employ istisna' to finance manufacture and
construction contracts - project financing
132
66
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Classical Islamic law also allows the
manufacturing party in an istisna‘ to sub-
contract the manufacturing to a third party
through a second istisna'
This arrangement is known as "back-to-back
istisna"" or "parallel istisna'"
This structure has been used by
contemporary Islamic banks to finance the
purchase of major manufactured goods such
as ships and airplanes
133
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC
One party buys good that the other party
undertakes to manufacture in according with
the specification given in the contract
Subject matter must be manufacturable
goods only (not for commodities)
134
67
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC (CONT.)
Subject matter not in existence at the time
of contract
Subject matter shall be identified by
specification only and not by designation
(because it is not in existence at the time of
contract)
135
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC (CONT.)
Contract to manufacture i.e. hire of person
to do something
Payment can be prompt, deferred or paid in
installments. Normally it will be progressively
in proportionate with the progress of the
work completed
136
68
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC (CONT.)
Manufacturer undertakes to make the goods
with his own material. The buyer doesn’t
have to supply any goods
Ownership of the manufactured good remain
with the manufacturer until and unless
delivered
137
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC (CONT.)
If it is by progressive payment, it is
permissible for the seller to request security
or deposit.
The good need not be manufactured by the
Seller. His obligation is to deliver the good to
the buyer only
138
69
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC (CONT.)
Delivery date does not have to be fixed.
However, the buyer can include a final date
of delivery after which the contract will be
terminated
Penalty for late payment (which is without
prejudice to the termination right after cut
off date) or liquidated damages for late
delivery save in case of force majeure
139
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC (CONT.)
Before the manufacturing or contrsution
process has commenced, either party can
terminate the contract.
However, once the process has commenced,
it is binding on both parties (i.e. irrevocable)
if the constituent conditions and terms are
satisfied
140
70
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISTISNA’
Istisna’ literally ( )ﻟﻐﺔ-
1. I sti sna’ 1 – r equesting Bank to
request to construct. constr uct a specified type of asset
Tec hnically ( )اﺻطﻼﺣﺎ-
2. Under take to constr uct the asset
agreement to sell to or & to deliver it in a specific per iod.
buy from a c ustomer a
non-existent asset
which is to be built 5. Bank deliver the
asset
according to the
ultimate buyer’s
specifications and is to 4. Contr actor deliv er asset to the
Bank
be delivered on a
specified future date at
3. I sti sna’ 2/ Para llel I sti sna’ –
a predetermined selling Bank r equests sub-contr actor to
price. constr uct the asset & to deliver it in
a specific per iod.
141
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF SALE (BAI’) – ISTISNA’
LEGALITY
142
71
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SPECIFIC SHARIAH REQUIREMENTS
An Istisna’ contract is valid if it complies with Shariah requirements
i.e the essential elements (rukn/ )رﻛﻦof the contract and the
necessary conditions (syart/ )ﺷﺮطof rukn.
143
(c) Mohd Johan lee 2015 14 & 15/9/2015
SPECIFIC SHARIAH REQUIREMENTS
144
72
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SPECIFIC SHARIAH REQUIREMENTS
145
(c) Mohd Johan lee 2015 14 & 15/9/2015
SPECIFIC SHARIAH REQUIREMENTS
146
73
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Legal/Security Documents
:
This Letter of Offer
Master Facility Agreement (Overdraft)
Istisna’ Purchase Agreement
Istisna’ Sale Agreement
Deed of Assignment
Power of Attorney
Debenture
147
(c) Mohd Johan lee 2015 14 & 15/9/2015
Murabahah & Tawaruq
148
74
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION - MURABAHAH
Originate from the root word of ribh = to
increase or profit
Sale of commodity at the cost price plus
a known profit
Illustration:
Ibought this commodity for 10 RM and I am
selling it at the profit of 2 dollars;
I am selling the commodity at the profit of
1RM for every 10 RM that I spent for its cost
149
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION - MURABAHAH
= the sale at the cost + a known profit
Seller Buyer
Cos t + Profi t
Rm50 + Rm20
150
75
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL BASIS OF AL MURABAHAH
No dispute among the jurists on the validity of
Bay’ al-murabahah
This is a form of sale (bay’)
Comes under the purview of “Allah has
permitted sale and prohibited riba” (2:275)
The scholar prefer Musawamah over
Murabahah. Why?
151
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONDITIONS
Customer expresses his wish to acquire goods
through the Bank
Transaction between the Bank and Customer
must be genuine
no prior
contractual relationship between the
Customer and the Supplier
the Supplier is not the Customer or the agent of the
Customer
152
76
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
153
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF SALE (BAI’) - MURABAHAH
154
77
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF SALE (BAI’) - MURABAHAH
Prophet Muhammad SAW permitted the sale of goods at a price more t han
its purchase price. He says Gold for gold, silver for silver, wheat for wheat,
barley for barley, dates for dates, salt for salt – like for like, equal for equal
and hand to hand (spot); if the commodities differ, then you may sell as you
wish, provided that the exchange is hand to hand or spot
transaction.”(Narrated by Ahmad and Muslim)
Ijmāc al-fuqahā’ on the permissibility of the Murābahah sale.
Al-Kassāni has pointed out that the people inherited these kinds of sales
(Murābahah) throughout the generations and ages without any protest of
non-acceptance
155
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF SALE (BAI’) - MURABAHAH
156
78
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MODUS OPERANDI
(1) Customer PP - MPO
(3) Bank Sells & Deliver s Asset
CUSTOMER
(4) Pays Price
Deliver y
Option
(2) Bank Buys & Receives Asset @
Customer Buys as the Purchasing Agent
of the Bank - MPO
SELLER
157
(c) Mohd Johan lee 2015 14 & 15/9/2015
158
79
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
159
(c) Mohd Johan lee 2015 14 & 15/9/2015
160
80
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
BAY AL TAWARRUQ (COMMODITY MURABAHAH)
• A contract discussed by the ulama in the past
especially, those of Hambali.
• A transaction to get cash or liquidity through
sale contract
• Similar to Inah
• An arrangement whereby a person who need of
case bought some goods for deferred payment.
• He then sole the goods to another party for
case payment of a lower price.
161
(c) Mohd Johan lee 2015 14 & 15/9/2015
TAWARRUQ – ORIGINAL FORM
Ali Abu
Se l ls Asset on
defe rred Se l ls Asset on cash
pa yment term term
Kassim
162
81
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
• Accepted by majority of the Ulama
• Due to the presumption that parties intended
to circumvent the prohibition of riba was quite
remote in tawarrruq due to its tri-partite nature.
• Yet ulama like Umar Abd Aziz and Shaybani
chose to discourage it.
• Ibn taymiyyah and Ibn Qayyim disallowed it and
dismissed it as legal trick.
163
(c) Mohd Johan lee 2015 14 & 15/9/2015
Different from Inah because the subject matter
that has been sold in Tawarruq will not be
resold back to the original owner.
Thus, Al tawarruq contract will need at least 3
separate parties.
164
82
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTEMPORARY PRACTICE
Dealer A
Purcha se on spot (RM1,000)
Bank Customer
Se l ls Asset on
defe rred Se l ls Asset on spot
pa yment term
Us i ng Murabaha
(RM1100)
Dealer B
165
(c) Mohd Johan lee 2015 14 & 15/9/2015
APPLIED SHARIAH COMPLIANCE PRACTICE
Dealer A
Purcha se on spot (RM1,000) Se l ls Asset on deferred payment term
us i ng Murabaha(RM1100)
Bank Customer
As a ge nt sells Asset on spot on
behalf of the Customer. Money
col l ected banked into
Cus tomer account Dealer B
166
83
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXPLANATION
1) Bank obtains promise to buy from client
2) Bank buys commodities from broker A and
pays cash.
3) Bank sells the commodities to client on
deferred basis.
4) The client authorizes the bank as his agent
to sells the commodities to commodities
broker B on cash.
167
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXPLANATION (CONT)
5)The amount will be deposited into client's
account. Client obtains liquidity and has
liability to pay bank on deferred basis.
6)Client will pay the bank on deferred basis,
according to their agreement
This model has been used by Islamic bank
in Middle East to provide personal
financing (personal loan) to their clients.
E.g. al-Tawarruq al-mubarak finance (Arab
National Bank -Saudi Arabia), al-Khair
financing (Abu Dhabi Islamic Bank- UAE),
Amanah Personal Financing (HSBC
Amanah), tasaheel (al-Manar - Kuwait)
168
84
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXPLANATION
1) Bank obtains promise to buy from client
2) Bank buys commodities from broker A and pays
cash
3) Bank sells the commodities to client on deferred
basis.
4) The client authorises the bank as his agent to sells
the commodities to commodities broker B on cash.
169
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXPLANATION (CONT)
5)The amount will be deposited into client's
account. Client obtains liquidity and has
liability to pay bank on deferred basis.
6)Client will pay the bank on deferred basis,
according to their agreement
This model has been used by Islamic bank in
Middle East to provide personal financing
(personal loan) to their clients.
E.g. al-tawaruq al-mubarak finance (Arab
National Bank -Saudi Arabia), al-Khair
financing (Abu Dhabi Islamic Bank- UAE),
Amanah Personal Financing (HSBC Amanah),
tasaheel (al-Manar - Kuwait)
170
85
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Modern definition
BBA is a contract that refers to the sale and
purchase transactions for the financing of an
asset on a deferred and an installment basis
with a pre-agreed payment period.
The sale price will include a profit margin which
is disclosed to the customer (murabahah.
171
(c) Mohd Johan lee 2015 14 & 15/9/2015
BBA V MURABAHAH
In modern practice BBA & Murabahah contracts
are used in the same manner.
In some countries, the term Murabahah is used
and in some countries the term BBA is used.
Malaysia practice:
Murabahah is designed for short term financing &
the payment is on bullet payment
BBA is for long term financing by installment o
No significant difference in term of modus operandi
172
86
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTEMPORARY PRACTICE OF TAWARRUQ
Liquidity Instrument
Personal financing
Cash line
Overdraft
Creditcard
Working capital financing
etc
173
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTEMPORARY PRACTICE OF TAWARRUQ
Deposit & Investment Instrument
Commodity Murabahah Deposit- i
174
87
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
APPLYING TAWARUQ INTO FINANCING MODE
Step 1
The Customer has desire to purchase an asset i.e
commodity and thus, enter into a binding promise
(Wa'd Mulzim) for asset requisition to purchase the
commodity from the Bank. In the meantime, the
Customer also appointed the Bank as his restricted
agent (in this context, it is referring to the specific
Wakalah concept) to accept the commodity on his
behalf. The Customer will issue a Purchase
Requisition (which is irrevocable on issuance) to the
Bank. The document comprises of the following
elements:
175
(c) Mohd Johan lee 2015 14 & 15/9/2015
a. Purchase Request, to the effect that the
Customer has desire to purchase a commodity and
requests to purchase the Underlying Commodity from
the Bank;
b. Undertaking To Purchase (Wa'd Mulzim), to the
effect that the Customer undertakes to purchase the
Underlying Commodity from the Bank at the Selling
Price upon the Bank having purchased the said
Underlying Commodity from a commodity trader
(i.e 1st Trader); and
c. Agency to Conclude Purchase, to the effect that
the Customer will appoint the Bank as his restricted
agent (under specific Wakalah concept) to conclude
the purchase of the Underlying Commodity from the
Bank and subsequently to enter into the Murabahah
Sale Contract (on his behalf) with the Bank.
176
88
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
The Customer will also execute and deliver a
Letter of Agency to the Bank whereby the
Customer will appoint the Bank as his agent
(under Wakalah concept) to sell the Underlying
Commodity to another commodity trader (i.e
2nd Trader) upon conclusion of the Murabahah
Sale Contract
177
(c) Mohd Johan lee 2015 14 & 15/9/2015
STEP 2
Upon receipt by the Bank of the Purchase
Requisition from the Customer and pursuant to the
Purchase Request, the Bank will purchase the
Underlying Commodity from a commodity trader at
the cost price of the Underlying Commodity which
shall be an amount equivalent to the Financing
Amount.
The commodity trader will deliver the Underlying
Commodity evidenced by the certificate together
with the delivery order as evidence for the transfer
of ownership to the Bank.
178
89
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
STEP 3
Pursuant to the Undertaking To Purchase (Wa'd
Mulzim), the Bank will then sell the Underlying
Commodity to the Customer at the Selling Price based
on the Murabahah concept (Commodity Cost + Profit
Margin) which shall be payable by the Customer to the
Bank by way of installments or deferred payment or
any other method in accordance with the manner as
prescribed by the Bank.
Pursuant also to the Agency To Conclude Purchase,
the Bank (as the Customer's restricted agent to
accept on the Customer's behalf) will then conclude
the purchase of the Underlying Commodity from the
Bank and enter into the Murabahah Sale Contract
179
(c) Mohd Johan lee 2015 14 & 15/9/2015
Step 4
The Murabahah contract concluded and the
Customer appoints the Bank as an agent to
sell the commodity to the second trader.
Step 5
Upon conclusion of Step 3 above and
pursuant to the Letter of Agency, the Bank will
then sell the Underlying Commodity to the
second commodity trader at the Commodity
Cost.
180
90
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Step 6
The Bank will then disburse the sale proceeds,
which will be an amount equivalent to the
Financing Amount, received from such sale,
into Customer's new account and used to
settle the old account.
Underlying Asset = Oleo chemical related
products or any other Shariah compliance
commodities
181
(c) Mohd Johan lee 2015 14 & 15/9/2015
DOCUMENTATION FOR MURABAHAH
Agency Agreement
Waad
LO
Facility Agreement
Murubahah Sale Agreement
182
91
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MURABAHAH COMODITY DEPOSIT -I
Dealer A
Purcha se on spot (RM1,000)
Customer Appoints Bank as
agent Bank
Se l ls Asset on spot
(Rm1000)
Se l ls Asset on
defe rred
pa yment term
Us i ng Murabaha Dealer B
(RM1100)
183
(c) Mohd Johan lee 2015 14 & 15/9/2015
Customer/ Depositor appoints Bank as an
agent to purchase metal commodity from
trader A on cash basis in an established
metal commodity market
Bank as agent to Customer, buys commodity
on spot from Dealer A
Customer then sells the commodities to the
bank for a profit and on deferred payment.
The bank then sells the commodity to Dealer
B on spot basis, which price is credited into
the Islamic Deposit Account.
184
92
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
As agent to purchase the commodity on behalf
of the customer, the bank receives cash from
the customer which is deemed as deposit in the
bank’s account.
By the purchase from Customer, the bank
assumes liability (Cost +Profit of Customer) to
be paid to be customer on maturity.
At the end of the transaction, the customer
effectively gets some profits after investing
money in the spot purchase of the commodities
and selling them to the bank with a mark up on
deferred payment basis.
185
(c) Mohd Johan lee 2015 14 & 15/9/2015
IJARAH
Literal : sale of usufruct (bay’ al manfa’ah)
Technically: the transfer of usufruct for a
consideration – rent or ujrah in the case of
hire, and wages or ujr in the case of
employment
186
93
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGALITY OF IJARAH
Hadith from Said ibn Musayyib
“we used to lease out land for some portion of the
agricultural products, and the Prophet (s.a.w)
prohibited us from such practice. Instead he asked
us to leas it out for gold or money”
Ijma’ of the companions of the Prophet
Legality of Ijarah based on real need for such
transaction
187
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF IJARAH
188
94
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF IJARAH
189
(c) Mohd Johan lee 2015 14 & 15/9/2015
OPERATING LEASE
Purchase of
asset
Lessor Supplier
delivery
Delivery of the leased asset
Payment of the rental Lessee
Delivery of the leased asset at the end of leasing period
190
95
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
FINANCIAL LEASE
2. Client approaches the bank
and obtain AITAB financing
facility
BANK CLIENT
1. Client
3. The bank 4. The bank leases the car to the identifies the
purchases the client at certain rental price with vehicle and
car and pay the an option to purchase at the end pays deposit
remaining of financing period (10%)
purchase price CAR
of the car (90%) DEALER
191
(c) Mohd Johan lee 2015 14 & 15/9/2015
TRANSFER OF ASSET TO LESSEE (CLIENT)
It can be done in various ways:
The bank unilaterally promise to make a gift of
the asset to the client at the end of the period
A promise upon the payment of the remaining
installments
The final payment is considered the price of the
car
A promise to sell for a token or other
consideration (AITAB)
192
96
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
PUT AND CALL OPTION
Two situations
(a) Normal situation
call option (the right of the client to purchase)
Unilateral promise by the bank to sell /give the
leased object to the customer
(b) In the event of default, the bank has two options
Call back the facility and repossess the car
Put option (the right of the bank to sell) – by
requiring the client to purchase the car at an
agreed price
193
(c) Mohd Johan lee 2015 14 & 15/9/2015
194
97
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
195
(c) Mohd Johan lee 2015 14 & 15/9/2015
196
98
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
All liabilities and r isks per taining to the leased asset ar e to be bor ne by the Bank including
oblig ations to r estore any im pair ment and damage to the leased asset ar ising fr om w ear and
tear and natur al causes w hich ar e not due to the lessee’s misconduct or neglig ence.
The lessee should car r y out oper ating or periodical (or dinary) maintenance
The Bank insur es the leased asset (cost to be bor ne by the lessor ) for damages. The takaful/
insur ance cost can be included as par t of the fix ed lease r ental and cannot be char ged
separ ately to the lessee
De spite o f r equir ement in the BNM CAS that the Bank to cover m aintenance co st o f the
le ase d asse t during th e ijar ah te nure, th e BNM allow s th e Bank to follow m arke t practices.
It is per missible for the Bank as lessor to sell the leased asset to a thir d part y without consent of
the lessee.
If the lessee stops using the leased asset or r etur ns it to the Bank w ithout the Bank’s consent,
the r ental will continue to be due in r espect of the r emaining per iod of Ijārah, and the Bank
may not lease the asset to another lessee for this per iod, but must keep it at the disposal of the
cur r ent lessee
197
(c) Mohd Johan lee 2015 14 & 15/9/2015
198
99
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
6) Early Settlement
not permissible for one sided contract termination.
it can be terminated unilaterally in certain circumstances:
the Ijārah contract can also be terminated due to the following event of
default (based on current clause on event of default in the BIMB’s Ijārah
agreement).
7) Transfer of the ownership of the leased asset in IMB
The method of transferring the title: A sale or a gift
The document evidencing a promise of gift or sale should be independent
of the contract of the Ijārah
199
(c) Mohd Johan lee 2015 14 & 15/9/2015
200
100
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
EQUITY FINANCING
201
(c) Mohd Johan lee 2015 14 & 15/9/2015
Applications of fund
EQUITY DEBT FINANCING
F IN ANCING
Sale based financing Lease Based FinancingFee Based Services
Mudharabah
BBA / Murabahah -Ijarah Wakalah
Musharakah
‘Inah / dayn -AITAB Kafalah
Salam
Istisna
Comsumer Corporate
Banking Banking
202
101
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF MUDHARABAH
Definition
An agreement between a capital provider (rabbulmal) and an entrepreneur
(mudharib) whereby the rabbul mal would contribute capital to the business which
is to be managed by the mudharib.
Profits gener ated by the business are shared accordance with the terms of the
mudharabah agreement whilst losses to be borne solely by the rabbul mal unless
the losses are due to the customer’s misconduct, negligence or breach of
contracted terms.
Ty pe of Mudharabah
UnrestrictedMudharabah - where the rabbul mal allows the mudharib to
manage the capital without any restrictions. e.g. current account, savings account
and General Investment Account (GIA)
Restricted
Mudharabah - where the rabbul mal requires the mudharib to make
investments subject to certain restrictions such as type of instrument, sector or
country exposure. e.g. Specific Investment Account (SIA).
203
(c) Mohd Johan lee 2015 14 & 15/9/2015
Owner of Capi tal Entrepreneur
(Rabbul Mal) (Mudhārib)
CONTRACT OF
MUDHĀRABAH
Profit sh ar ed in Y% to
ac cor dan ce to pre -agr eed Ra bbu l Mall
pr opo rtions
(X:Y)
X% to Mudhā rib
Outcome of Invests in Business
Business
Loss bor ne totally
by ra bbu l mal
204
102
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
205
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF MUDHARABAH
LEGALITY
206
103
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SPECIFIC SHARIAH REQUIREMENTS
1. Mudharabah Contrac t
Agreement must be in compliance with the rukn and syart of Mudharabah
2. Capital
Must be in the form of cash and cannot be in the form of debt
The Bank may issue Mudhārabah Investment Cer tificate as a proof of capital
It is not permissible for the Bank to guarantee to the depositor against
losses except by a third party in case of misconduct and negligence.
3. Profit Alloc ation
Interim profit - can be distributed as long as the operation are profitable.
Profita llocation ratio and its calculation methodology must be c learly
known and agreed by the parties
The Bank may use an indicative profit rate in mudhārabah deposit contract
The Bank can take precautionary steps by setting up Profit Equa lisation
Reserve (PER) and Investment Risk Reserve (IRR).
207
(c) Mohd Johan lee 2015 14 & 15/9/2015
4. Losses
Are borne only by the customer. The Bank does not bear a ny portion thereof
unless the loss was due to his misconduct or negligence
5. Duties and Pow ers of the Bank (Mudhārib)
The The Bank must c lear ly exp lain and ensure that customers understand
and accept the mudhārabah contract adopted in the deposit products (BNM
CAS requirement).
The Bank must provide adequate an d timely product transparency and
disclosure to depositors/ investors on risk and return of on profit sharing
investment (PSIA) (BNM CAS requirement).
6. Charges, Profits and Be nefits
The Bank is not entitled to charge a fee in addition to the profit
(Cont radiction between Bank Isla m’s SSC decision an d BNM SAC’s) an d the
Bank cannot impose administrative cost on depositors in mudhārabah deposit
account.
The Bank is a llowed to gr ant any reward or gift to the depositor in addition
to the profit from the use of the fund
208
104
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
7. Termination of the Contract
If
the contract does not stipulate the period of the business venture, it
can be unilaterally terminated.
If
the period of business is explicitly stipulated, the contract can be
terminated upon maturity or if both parties mutually agree or when the
event of defaults occur
8. Dormant Account and Unclaimed Monies
The Bank may close a dormant account which has balance of RM 10 or
less and the RM 10 is considered as service charge (Contradiction
between Bank Islam’s SSC decision and BNM SAC’s)
10. Current Account Based on Combination of Mudharabah and Wadi’ah
The Bank acts as a mudharib and trustee (wadi’), while the depositor
acts as a rabb al-mal and muwaddi’. Both parties must agree on the
profit-sharing ratio at the time of opening the account. The guarantee on
the deposit will only be given if the account balance does not satisfy the
conditions of mudharabah. However, if the account balance complies
with the conditions of mudharabah, the customer will have to bear all
the risks of financial losses.
209
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF MUSHARAKAH
Definition of Mushārakah ( )ﻣﺸﺎرﻛﺔ
Contract
Musharakah Mushārakah literally (lughatan/ ) ﻟﻐﺔ
means sharing. Technically (istilahan/ )اﺻﻄﻼﺣﺎ, it
means a contract between two or more parties to
contribute capital in various proportions to a
partnership.
Profits generated by the partnership are shared in
accordance with the terms of the mushārakah contract
whilst losses are shared in proportion to the respective
contributors’ shares of the capital.
210
105
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Rasūlullāh SAW himself travelled to Syām to trade with other people’s money
including that of Sayyidatunā Khadijah binti Khuwailid RA
Suhayb narrated that Rasulullah SAW said:
“There is blessing in three transactions: credit sales, silent partnership (i.e.
muqāradhah or mudhārabah), and mixing wheat and barley for home, not for trading”
(Narrated by Ibnu Majah)
211
(c) Mohd Johan lee 2015 14 & 15/9/2015
T YPES OF MUSHARAKAH
(i) sharikat al – milk
proprietary partnership
concerned with joint ownership of property
any increase of the property should be shared by
co – owners in proportion of the extent of their ownership
(ii) Sharikat al – aqd
commercial/ contractual partnership
An agreement between two or more persons for common
participation in capital & profits
212
106
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CLASSIFICATION OF SHARIKAT AL AQD
(i) Finance partnership (sharikat al – amwal)
(ii) Labour partnership (sharikat al – a’mal)
(iii) creditworthiness/ reputation partership
(sharikat al –wujuh)
213
(c) Mohd Johan lee 2015 14 & 15/9/2015
NATURE OF SHARIKAT AL AQD
a. Limited (I’nan)
- partners liabilities & rights are subject to
their proportion of investment – as per the
agreement
b. Unlimited (mufawadah)
- Partners enjoy complete equality in the
capital, management & other rights
214
107
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIKAT AL INAN
The most important type of partnership
Mainly used in Islamic banking
Accepted by all Muslim jurists
Flexible – no strict conditions
Practical
Main features:
does not require equality in investment
no equality in personal status, distributions of profit and liabilities
Relationship of partners is based on agency
Gives the freedom to partners to conduct business in the area of
commerce covered by their partnership
215
(c) Mohd Johan lee 2015 14 & 15/9/2015
216
108
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
217
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH & MUDHARABAH IN ISLAMIC
BANKING
Shareholding
Shareholding of company
In the form of equity
• Financing
Islamic banks provide equity financing to
customers
In the form of retail or corporate financing
218
109
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARI’AH PRINCIPLES IN SHAREHOLDING
The share certificate evidences a form of capital
contribution in a company
The investment in the shares can be in the form of
mudharabah 0r musharakah
The shares can be sold at any price as it
represents the assets owned by the company
The profit for the investors can be in the form of
capital profits, or dividends, or both
Shari’ah stock selection must be done to ensure
that companies invested in are only conducting
Shari;ah compliant activities.
219
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH IN SHAREHOLDING
In the setting up of the Bank
Several investors agree to contribute certain
amounts of money for the establishment of the
bank
These shareholders are normally varied in their
capital contributions/rights/liabilities
220
110
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH SHARES
2 types of shareholders in private or public
company:
1. Ordinary shareholder
Musharakah ordinary share
Rights and liabilities are limited to their
shares to the company
2. Preference shareholder
Musharakah preference share
Non-cumulative, irredeemable,
unconvertible
221
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH PROJECT FINANCING
A partnership agreement whereby a business
venture is entered into and managed by both
parties.
However, any or all the parties have the right to
waive that right. In case of waiving of right by
all, a third party will be appointed as an agent
to manage the venture.
Any profit arising will be shared according to
predetermined ratios.
Losses however, will be shared in proportion
with the capital investment contributed by each
party.
222
111
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUDHARABAH PROJECT FINANCING
The financier will provide 100% financing for the
relevant project whilst the initiator of the project
will manage it.
The financier cannot interfere in the management
of the project, but can take up the follow-up and
supervision task.
Both parties agree through negotiation on the ratio
of the distribution of the profits generated from
the project, if any.
If there is a loss in the project, the bank bears all
losses.
223
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC INVESTMENT ACCOUNT
The current practice in Malaysia is to use
partnership (mudarabah) as the underlying
contract in the Islamic investment account.
The customer and the bank will be sharing the
profit according to certain ratio or percentage
agreed at the time of the contract
The financial loss, if any, will be borne by the
customer as capital provider.
224
112
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
T YPES OF ISLAMIC INVESTMENT ACCOUNT
General Investment Account (GIA)
Special Investment Account (SIA)
In GIA, the mudarabah arrangement is of a general
mandate (mudarabah mutlaqah) and the ratio of
profit sharing is more or less uniform/standard,
advertised as a ready package between the bank
and customer
In GIA, the minimum investment amount is lower
than the SIA.
225
(c) Mohd Johan lee 2015 14 & 15/9/2015
In SIA, the mudarabah arrangement is of a
specific mandate (mudarabah muqayyadah) for
e.g., the customer can place restrictions to the
bank as to the type of dealing, or project that
the bank can enter into with the capital
The ratio of profit sharing can be negotiated
between the customer and the bank
The minimum investment amount is higher
than the GIA
226
113
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH MUTANAQISAH
A contract of partnership with declining /
diminishing ownership
A form of Shirkah which creates an avenue for the
capital investor to finally allow its partner to be free
of the joint ownership after the initial investment
period has been satisfied.
A hybrid of three contracts, namely:
Shirkah (partnership)
Ijarah (lease)
Bay’ (Sale)
227
(c) Mohd Johan lee 2015 14 & 15/9/2015
• Customer and the Financier jointly acquire and own the property from the
Developer
1
• The financier purchases the property and leases the property to the
Customer on the basis of Ijarah
2
• The customer pays the rental
• The rental price would be proportionate to the length of repayment
3 required by the Customer and subject to the agreement of the financier
• At the end of the rental, the Customer would acquire the full
ownership of the property as the customer has repaid all of the
4 financier’s share.
228
114
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
DEFINITION
The term used to connote partnership contract is
shirkah Literal meaning: intermingle, thus, the
"intermingling of properties whereby one cannot be
differentiated from the other"
Technical / legal meaning:
Maliki: the permission to transact (tasarruf) with the
partnership property
Hanbali: the amalgamation of rights and freedom to use /
transact (tasarruf)
ShafFi: the confirmation of the rights of two persons / more
over a common property
Hanafi: a contract between two parties in relation to capital
and profit
229
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH LEGALITY
Surah al Nisa' (4:12):"... but if more than two,
they share in a third...“
Surah Sad (38:24):".. Truly many are partners
(in business) who wrong each other; not so do
those who believe and work deeds of
righteousness, and how few are they?
230
115
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH LEGALITY
Hadith Qudsi.
" I am the third of two partners so long as a partner
does not betray his companion; if one of the
partners does betray the other, I cease to be a
partner to them."
Sunnah taqririyyah:
the Prophet was reported to have approved some
of the partnership contracts practiced by the
people of his time
Ijma':
the legality of shirkah in general is agreed by ijma'
of the jurists; though they differ regarding the types
and conditions of the permissible shirkah
231
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL ASPECT OF SHIRKAH
Majority/ Jumhur: shirkah is not a binding
contract, i.e., the partners have the option to
terminate the contract as and when they wish
to (‘aqd ghair lazim)
Shirkah entails that the partners hold a
fiduciary position (amanah) in relation to the
partnership property & capital; whereby, the
exercise of necessary prudence and the
avoidance of harm (darar) is the overriding
principle
232
116
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ESSENTIAL ELEMENTS & CONDITIONS OF
SHIRKAH
Offer & Acceptance
Made in the contract meeting (majlis al 'aqd)
Free from any defect due to mistake, cheating or
coercion
Contracting parties
Capacity to contract {ahliyyah al ada'), e.g. sanity,
puberty & prudence
233
(c) Mohd Johan lee 2015 14 & 15/9/2015
ESSENTIAL ELEMENTS & CONDITIONS OF
SHIRKAH
Subject matter of Shirkah
•Capital & labour as agreed in the contract
Capital - in cash, except for Maliki who allows capital in
the form of circulating or fixed assets
Capital - ready property (mal hadir), not absent-property
{mal ghaib) - not immediately available for use by the
partnership upon its commencement of business
Labour can be considered as capital by jumhur, except
Shafi'I who considers capital to be limited to property
{mal) only
Additional condition: purpose of shirkah should be
lawful, not immoral / against public order
234
117
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
OTHER GENERAL CONDITIONS FOR SHIRKAH
Capacity to accept agency (wakalah):
• Partners must be capable of being agents to their
colleagues
• The fixing of ratio of profit sharing:
• Ratio of profit sharing must be fixed in advance, since
distribution of profit is part of the subject matter of the
contract;
• Ignorance of the subject matter may render the contract
void, thus, ratio of profit sharing must be known by all
partners
Fixing of profit must be in ratio, not fixed amount
• Because the actual profit to be gained is not yet known
• To fix the profit at a certain amount is incompatible with the
very nature of shirkah (risk taking justifies gain taking)
235
(c) Mohd Johan lee 2015 14 & 15/9/2015
TYPES OF SHIRKAH
Many ways of classification
Generally, two broad classification:
• Shirkah al milk (proprietary partnership) - joint
ownership of property
• Shirkah al 'aqd (contractual partnership):
• joint ownership is not necessary;
• the emphasis is the joint exploitation of
capital, and joint par ticipation in profits and
losses; based on the terms of the par tnership
contract
236
118
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
TYPES (CONT)
Based on type of capital, shirkah al 'aqd can be
further subdivided into:
Shirkah al amwal (monetary capital)
Shirkah al a'mal (labour capital)
Shirkah al wujuh (reputation/creditworthiness as
capital)
Based on terms of partnership contract:
Shirkah al mufawadah (unlimited investment
partnership) - fuJL and equal authority to transact with
partnership capital & property
Shirkah al "inan (limited investment partnership) - each
partner may only transact with the capital according to
the partnership agreement and to the extent of the joint
capital
237
(c) Mohd Johan lee 2015 14 & 15/9/2015
APPLICATION OF SHIRKAH
From the many forms of shirkah, the commonly
used types are:
Shirkahal 'inan with monetary capital (amwal) -
commonly / commercially referred to as
"musharakah"
Mudarabah/ qirad/ muqaradah
238
119
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MEANINGS
Meaning of "musharakah":
"an arrangement whereby two or more persons
contribute to the capital with their property for the
purpose of trading with the joint capital, the profit of
which, shall be shared among the partners"
Meaning of “mudarabah”:
"an arrangement whereby the owner of some property
(termed as rabb al mat) gives a specified amount of
capital to another person (termed as mudarib) who is to
act as the entrepreneur to trade with the capital, the
profit of which will be shared between the two parties
according to the terms of their agreement. The losses
will be borne by the rabb al mal as the financier, whilst
the mudarib suffers the frustration of a fruitless effort"
239
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION
Musharakah = joint venture/ partnership
= different from mudharabah because in
Musharakah, both party shall contribute jointly
in term of costs and effort whereas in
Mudharabah, one party is the cost provider
(rabb mal) while the other one is the worker
(mudharib)
Both parties have the rights to receive the profit
made
240
120
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Musharakah = Joint participation (even 1%)
Mudharabah = Sponsored partnership
Equity Financing = the core and heart of
islamic finance (mu’amalat)
241
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION
Musharakah
Kassim
Ali
Joint Venture 70%
30%
Mudharabah Kassim
Ali Expertise
100% Partnership
242
121
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUDARABAH
Note: Shafii and Maliki prefer the term qirad or
muqaradah to connote mudarabah
Jurists differ whether mudarabah is a form of shirkah
or not
Maliki and Hanbali consider mudarabah as a type of
shirkah
Hanafi and Shafi'i consider mudarabah as an
independent category of its own
All jurists unanimously agree on the legality of
mudarabah based on evidences in the Quran, sunnah
and ijma'
243
(c) Mohd Johan lee 2015 14 & 15/9/2015
ELEMENTS & TYPES OF MUDARABAH
Elements of Mudarabah
The two contracting parties:
rabb al mal & mudarib
The subject matter:
capital, labour & profit
The offer & acceptance
Types of Mudarabah
Unlimited mandate mudarabah (mudarabah
mutlaqah)
Limited mandate mudarabah (mudarabah
muqayyadah
244
122
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
GENERAL PRINCIPLES IN MUSHARAKAH &
MUDARABAH
Both contracts presuppose:
contribution to
capital,
the subsequent sharing of the profits and losses
The relationship between the partners is mainly
based on the principle of agency (wakalah)
The distribution of profits and losses can be
made based on the ratio of capital contribution
245
(c) Mohd Johan lee 2015 14 & 15/9/2015
GENERAL PRINCIPLES IN MUSHARAKAH &
MUDARABAH
Alternatively, the profits can also be shared
according to a ratio agreed in the contract
between the parties
However, losses must always be based on the
ratio of capital contribution
The maxim says: "profits are shared according
to what has been agreed upon by the parties at
the time of the contract, and losses are to be
borne according to the ratio of capital
contribution".
246
123
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
OBSERVATIONS
Mudarabah and musharakah are in line with
the Shari'ah principles of justice, fairness and
cooperation.
Mudarabah and musharakah also reaffirms the
Islamic legal maxim (qa’idah fiqhiyyah) - "profit
is with the undertaking of liability" (al ghunmu
bil ghurmi)
247
(c) Mohd Johan lee 2015 14 & 15/9/2015
SOME COMMON APPLICATIONS OF MUSHARAKAH &
MUDARABAH
Islamic investment account – mudarabah
Shareholding:
Private companies –musharakah/ mudarabah
Public companies – mudarabah/ musharakah
Unit trusts — musharakah / wakalah
Takaful (some model): between the takaful
company and takaful participant - mudarabah
Asset financing - musharakah mutanaqisah
248
124
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
PROJECT FINANCING (EQUITY-BASED)
The most suitable contracts for project financing in meeting Shari`ah
compliance requirements and contractual requirements, are equity
based financing, e.g. mudarabah & musharakah
Both contracts are designed to mobilise capital, for later utilisation in
specified project/s and according to contractually agreed terms
All parties may then share the profits generated according to the ratio
of capital contribution or other contractually agreed ratio
All parties also bear the risk of losses, whether in monetary form (for
capital providers), or in term of loss of expected income (on the part
of the manager)
Both mudarabah & musharakah also allocate and distribute the
resources in the best and efficient manner, compared to lending with
interest
249
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUDARABAH PROJECT FINANCING
Contract of Mudarabah
Financier Profit Sharing ratio – X:Y Company
(Rabb al Mal) (Amil / Mudarib)
Y% to
rabb al
mal CAPITAL
Profit shared
in accordance
to pre-agreed
proportions
(X:Y) X% to mudarib
Project Invests in
Revenue project
Loss borne
Totally by
rabb al m al
250
125
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH PROJECT FINANCING
Contract of Musharakah
Capital contribution – X:Y
Financier / Bank Company
• Prof it: shared
according to
agreed ratio or
X%
according to ratio Capital
of capital
contribution
• Loss shared
according to ratio
of capital Y%
contribution
Project Invests in
Revenue project
251
(c) Mohd Johan lee 2015 14 & 15/9/2015
FEATURES OF EQUITY-BASED ISLAMIC PROJECT
FINANCING
Capital contribution from both or one of the parties,
as the case may be (musharakah viz-a-viz
mudarabah)
Profit is neither certain nor fixed
Sharing in the profit and loss - equitable
Management of the running of the projects
Credit risk as well as business/performance risk
(managing partner’s role)
Moral hazard and collateral-free
No issue of default payment
252
126
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
OBSERVATIONS
Unfortunately, both mudarabah and musharakah have
so far failed to woo the choice of most financiers and
investors because of the potentially higher risks born by
the parties in the event of losses
Most financiers and investors are also not equipped
with the skill and expertise needed to effectively
manage a mudarabah / musharakah venture, nor are
they familiar with the risk management techniques for
the two contracts
253
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHALLENGES FOR MUDARABAH /
MUSHARAKAH IN PROJECT FINANCING
Moral hazard
Investors’ appetite and preference
Lack of expertise and skill in equity investment and
management
Unfriendly accounting and taxation framework
254
127
9/9/2015
MUSHARAKAH MUTANAQISAH FINANCING
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH MUTANAQISAH (DIMINSHING
PARTNERSHIP )
This method of asset financing combines a number of
contracts, i.e., partnership, leasing and sale contracts
The modus operandi of the product is as illustrated below:-
256
128
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH MUTANAQISAH
(MODUS OPERANDI)
Financier Customer
Provides Provides
mos t of Asset to be acquired som e
financing financing
e.g. 90% e.g. 10%
Both financier + customer become partners in the
ow nership of asset (Shirkah al Milk)
STEP ONE
257
(c) Mohd Johan lee 2015 14 & 15/9/2015
MUSHARAKAH MUTANAQISAH
(MODUS OPERANDI)
Financier Customer
Pay m onthly ins tallment partly
as rental and partly as gradual
90% purchase price of part of 100%
financier’s share in the Asset
Financier’s Cus tomer’s
share Share
de creasing increasing
0% 10%
Asset
STEP TWO
258
129
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION
Musharakah Mutanaqisah = a type of
musharakah
Naqish = to diminish
Mutanaqisah = diminishable or redeemable
Musharakah Mutanaqisah = Joint venture
where one partner has given the other partner
the right to redeem/ diminish his share in the
JV in such a way that in the end of the day, the
shareholding will be 100% owned by the latter
259
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION
Prop erty M M
Ali Kassim
10% 90%
100% 0%
260
130
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
INTRODUCTION
Business M M
Ali Kassim
10% 90%
Co XYZ
100% 0%
261
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH LEGALITY
It is acceptable by virtue of various Quranic
injunction and hadith as well as the practise of
the Companions.
262
131
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF
MUSHARAKAH MUTANAQISAH
There must be a joint venture where the
parties have contributed jointly into the
venture
The contribution need not be equal. It could
even be 1%:99%
The venture could be one where both parties
will contribute their expertise/ labour. What
about one where one party= of mere
sleeping partner/ monetary partnership?
263
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF
MUSHARAKAH MUTANAQISAH
It could be over property ownership (in which
case it is a Shirkah al Mulk) or over commercial
or contractual transaction (in which case it is a
Shirkah al ‘aqad)
One of the partner must be given the right to
redeem the entire ownership over the property
or transaction from the other party
264
132
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF
MUSHARAKAH MUTANAQISAH
The redemption sum or formula shall be fixed
in advance
The timeframe to call on this option can be
fixed or flexible
Both parties will have the right to the property
or venture until and unless the property or
venture has been fully redeemed.
265
(c) Mohd Johan lee 2015 14 & 15/9/2015
CHARACTERISTIC OF
MUSHARAKAH MUTANAQISAH
In case of a property MM, the occupying party
shall bear the upkeep and maintenance of the
property
In case of a business venture MM, the parties
shall also be entitles to receive their salary for
the parts and roles they play in the
management of the business
266
133
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
PAST STRUCTURE (UNI)
Staff Financing
Ali Uni
10% 90%
100% 0%
Prop erty = Uni Trust = in favour of Uni
Tenancy is by Uni for unsp ecified date (Month2 M onth) No Charge
Rental≠Redemption Indebtedness=on rental arrears
267
(c) Mohd Johan lee 2015 14 & 15/9/2015
PAST STRUCTURE
(SEMI GOVERNMENT BODY)
ABC SCHEME
Ali ABC
10% 90%
Co XYZ
100% 0%
ABC = Preferential Shares and Special Shares
268
134
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CURRENT STRUCTURE
Housing Facility
Ali Banker
10% 90%
100% 0%
Prop erty = Co-Prop rietors but… Trust = in favour of Banker
Tenancy is by the Partnership for facility duration With/ Without Charge
Rental = Redemption Indebtedness=Defaults of instalment
269
(c) Mohd Johan lee 2015 14 & 15/9/2015
ILLUSTRATION ON CURRENT STRUCTURE
Banker & purchaser (P) as owner of the property.
P will give give his waad/promise (that he agrees
Banker 's shares to diminish from time to time)
Banker’s shares will diminish with
payment/installment received from P until end of
tenure.
to avoid hassle of co-ownership, both parties will
be the registered owner, but Banker stands as
trustee for the partnership. (trust deed to be
registered)
270
135
9/9/2015
ILLUSTRATION ON CURRENT STRUCTURE (c) Mohd Johan lee 2015 14 & 15/9/2015
(CONT)
why trustee? in order to secure Banker in event of default
as trustee of the partnership and also owner of the
property, Banker has the right to sell off the property to
3rd party by way of private treaty or auction etc.
that's why neither charge nor assignment needed under
this scheme! (however, some bankers still required
charge as additional security)
so, what will be the P right on the property?-right to utilise
the property by a lease/ijarah agt.
271
(c) Mohd Johan lee 2015 14 & 15/9/2015
ILLUSTRATION ON CURRENT STRUCTURE (CONT)
event of default?
a)in the MM agt, there's a clause on "purchase
undertakings" i.e P undertakes to purchase Banker 's
shares (as the whole) in the event of default.
failure of P to perform his u'taking will result in the
Banker exercising its right to sell off the property to 3rd
party.
b) indebtedness?
will occur in the event of default
Banker may opt for selling off the property to 3rd party.
c) however, Banker may exercise its rights as trustee to
sell off the property (even no indebtedness occurred!)
and the proceeds/loss should be divided between
partners according to shares ratio.
Banker has obtained blanket approval from FIC to
acquire property.
272
136
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
STRUCTURE PA
Bank as PA to the
MM Master partners hip
Facility Financing
Agreement Ali Bank
10% 90%
Waad
Ijarah
Waad given by the
Customer rent
Customer to buy all
the property of the bank’s share
from the in the property
partners hip/ 100% 0%
bank for the Trust Deed
entire duration
Trust given by the
Charge of transfer
partners hip to whoever
form or lien
regis tered as the
(caveat)
proprietor
273
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL DOCUMENTATION
Property MM
Musharakah Mutanaqisah Partnership/ Facility Agreement
Trust deed
Ijarah/ Lease/ Tenancy Agreement, if applicable
Waad/ Promise
Charge (Form 16A), if applicable
Pre-executed Discharge (Form 16N) and Transfer form (Form
14A), if applicable
274
137
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF WAKALAH (AGENCY)
The term wakalah literally (lughatan) means “preservation” and
“delegation of one’s affair to another
Wakalah consists of one person empowering other person to perform
some acts for him, whereby the latter stands in the stead of the former
in regard to such act.
The first person is called the principal (muwakk il/ )ﻣوﻛل, the person who
stands in his stead is called the agent (wakil/ ) وﻛﯾل, and the act is called
the authorised act (muwakk al fihi/ )ﻣوﻛل ﻓﯾﮫ.
Unrestricted wakalah (wakalah mutlaqah/ ) وﻛﺎﻟﺔ ﻣﻄﻠﻘﺔ
Restricted wakalah (wakalah muqayyadah/ ) وﻛﺎﻟﺔ ﻣﻘﯿﺪة
275
(c) Mohd Johan lee 2015 14 & 15/9/2015
MODUS OPERANDI
In Islamic banking business, the wak alah contract may be formed in the
following forms:
i. Bank is appointed by a customer to act as his agent (eg. LC)
ii. Bank appoints its cus tomer as its agent. (MPO)
276
138
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
1. Wakalah Contract
The wakalah contracts must be separate and independence from the main
contract (e.g. sale contract) on which it is required.
2. Reference to the Principal
Must In the case of sale and leasing, the contract concluded by an agent need
not to be made by reference to his principal. However, should the contract be
made without reference to the principal, the rights and liabilities under the
contract belong to the contracting party i.e. the agent.
3. Duties of Age nt Towards Principal
Carry out the authorized act with ordinary skill and diligence.
Do not use his position for his personal interest and to the detriment of his
principal
Must keep proper accounts of all transactions connected with the wakalah
Must not accept bribes or secret profit.
must act on trust (amanah).
He must not take the principal’s property or any confidential he has acquired
in the course of his appointment as an agent for his own benefit
277
(c) Mohd Johan lee 2015 14 & 15/9/2015
4. Remuneration and Reimbursement
Where there is an express or implied agreement to pay, the agent can claim
remuneration.
In the case where he acts voluntarily, it is considered that he acts out of courtesy
for the principal
The remuneration can only be claimed when the authorized act has been
completed. If the agent relinquished his agency without completing his duty, no
payment needs to be paid by the principal
The agent reserves the right to be reimbursed for all expense and indemnified
against all losses and liabilities incurred by him whilst acting within the scope of
the agency, even though there is no clause referring to it in the contract.
5. Ac tion By Unauthorized Person/ Agent (Fuduli)
Action of an unauthorized agent is dependent upon the ratification of the principal.
When the unauthorized act is properly ratified, the ratification dated back to the
time when
278
139
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
6. Termination of Wakalah Contract
The agent has fulfilled his duties or when the fixed period of the wakalah has
expired
Dismissal of the agent by the principal and the dismissal will not be effective until
information thereof has been given to the agent
Upon the agent giving up the agency.
The death of either principal or the agent
The agent or the principal becomes insane or bankrupt
The destruction of the subject matter or the authorized act
279
(c) Mohd Johan lee 2015 14 & 15/9/2015
APPLICATION OF CONTRACT OF AGENCY IN
ISLAMIC BANKING
Deposit taking based on wakalah
• Bank acts a wakil to manage customers’ investment
Letter of credit (LC) based on wakalah
Bank as wakil to make payment to the negotiating bank\
Private banking investment
Bank as wakil to manage investment (wealth management)
In murabahah financing
Bank as wakil to buy asset from vendor
In tawarruq financing
Bank as wakil to sell and buy the commodity through the brokers
280
140
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
EXPORTER IMPORTER
1. Applies for LC and places 100%
deposit 7 . Client receive
4. Client provides doc
3. Advice LC documents
and receives payment
2. Issues LC
ISSUING
Advising/Negotiating BANK
5. Forwards Doc
6. Payment reimbursement
281
(c) Mohd Johan lee 2015 14 & 15/9/2015
CONTRACT OF KAFALAH (GUARANTEE)
282
141
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGALITY
Quranic verse indicates the per missibility of the kafalah contr act. ‘Abdullah bin ‘Abbas RA
states that za’im is another wor d for kāfil i.e. guar antor:
“They s aid: We have lost the (golden) bowl of the king and for him who produces it is (the reward
of) a camel load an d I will be bound by it (za’im).”
(Surah Yus uf: Verse 72)
Al-Bukhari nar r ated that Salamah bin al-Akwa’ said:
“We were with the Rasulullah SAW when a deceased person was brought. They s aid: “Ya Rasulullah,
perform prayers on him?” He said: “Has the deceased left anything?” They s aid: “No”. He said: “Is he
in debt?” They s aid: “Three dinars.” He said: “Perform prayer on him” (while Rasulullah SAW did not
perform the prayer). Abu Qutadah said: “Perform prayers on him Ya Rasulullah and I guarantee for
his debt.” Then Rasulullah SAW performed prayers on him.”
283
(c) Mohd Johan lee 2015 14 & 15/9/2015
284
142
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Kafālah (Guarantee) Contract
Permissible to incorporate a kafālah contract into the original contract
(e.g. sale contract) or to be designated in a separate contract.
Permissible to include securities together with the kafālah in one
contract.
Permissible
to fix the duration of a guarantee or to set a ceiling on the
amount to be guaranteed or to be restricted by a condition
Not permissible to issue a bank guarantee for customer who will use it
to:
Acquire a non-Shariah compliant asset,
Acquire an asset to be used in non-Shariah compliant activities,
Perform non Shariah complianc e activities,
Conclude non-Shariah compliant transaction.
285
(c) Mohd Johan lee 2015 14 & 15/9/2015
The Effect of Kafālah Contract
The Kafālah contract is binding on the guarantor.
The creditor/ beneficiary is entitled to claim the amount of his debt/
right from either the debtor/ guaranteed person or the guarantor and he
has the choice of claiming his debt/ right from either of them
It
is not permissible for the guarantor to seek compensation from the
debtor/ guaranteed person prior to paying the guaranteed amount.
If
the guarantor fulfils his obligations, he has a right to recourse from
the debtor/ guaranteed person unless the guarantee is offered without
the debtor’s request or consent
Ifthe creditor discharges the debtor/ guaranteed person from his debt/
right, the guarantor is also discharged automatically from his liability.
286
143
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Several Guarantees
If a group of people jointly indebted under one particular account
guarantees each other, it is permissible to take action against any one of
them for the whole amount of the debt
If there are several guarantors of one debt who have become guarantors for
such debt separately, action can be taken against any one of them for the
whole amount of the debt.
If they become guarantors at one and the same time, action shall be taken
against eac h one for his proportion of the debt.
Guarantee Fee
It is permissible for the guarantor to take payment for the guarantee
287
(c) Mohd Johan lee 2015 14 & 15/9/2015
Termination of Guarantee Contract
If the debt/ right is paid/ performed to the beneficiary/ creditor either by
the principal or guarantor.
If the beneficiary/ creditor absolves either the principal or the guarantor of
the debt
If the original contract in which the guarantee is required becomes null and
void.
In the case where a guarantee is given to the creditor to secure payment for
the purchase of a property, the contract is considered terminated if the
creditor grants the property as a gift to the principal debtor
If either the debtor or guarantor transfers the liability for the debt through
hiwalah to a third party, both parties are then absolved of the debt.
288
144
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
WADĪ’AH CONTRACT
Definition of Wadī’ah ( ) اﻟﻮدﻳﻌﺔContract
There are tw o categories of Wadī’ah contracts:
Wadī’ah Yad Amānah (safe keeping / ) اﻟﻮدﻳﻌﺔ ﻳﺪ أﻣﺎﻧﺔ. It ref ers to the contract of
depositing goods or moneys (known as `deposits’) with another person (custodian),
w ho is not the ow ner, for safekeeping. It involves the follow ing conditions:
The deposits are segregated physically according to depositors / account holders
and they are not mingled.
The deposits are not utilized by the depositary
The depositary or the custodian does not impose any service charge / fee to the
depositor.
The role of the depositary is to act as a trustee to the deposits. If the deposits
under custody is accidentally missing or destroyed, the depositary is not
obligated to replace or compensate it.
289
(c) Mohd Johan lee 2015 14 & 15/9/2015
Wadī’ah Yad Dhamānah (guaranteed deposits / ) اﻟﻮدﻳﻌﺔ ﻳﺪ ﺿﻤﺎﻧﺔ. It refers to the
deposits as above mentioned but followed with any or combination of the
followings :
Deposits are pooled together and not physically segregated according to
depositors/ account holders
The deposits are utilized or used by the depositary, such as for inves tment or
financing.
Service charge/ fee is im posed by the depositary on the deposits
In addition, the depositary must promise/ guarantee to return the deposits to
the depositor upon request.
290
145
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
The Wadī’ah contract is permissibl e based on Qur’ān, Hadīth and consensus of fuqahā’
() إﺟﻤﺎع اﻟﻔﻘﮫﺎء:
Al lah SWT says:
ھﻠِﮫَﺎ ْ ن ا ّ َ ﻳ َْﺄ ُﻣ ﺮ ُُﻛ
ْ َ ﻢ أَن ﺗُﺆدﱡ واْ اﻷَﻣَﺎﻧ َﺎتِ إِﻟَﻰ أ إِ ﱠ
“Verily, Allah commands that you should render back the trusts to those,
to w homthey are due…”
(Sūrah al-Nisā’: 58)
Prophet Muhammad SAW said:
أد اﻷﻣﺎﻧﺔ إﻟﻰ اﺋﺘﻤﻨﻚ وﻻ ﺗﺨﻦ ﺧﺎﻧﻚ
“Return trusts to the one who entrusted you, but do not betray the one
w ho betrayed you.”
(Narrated by Abu Daw ūd and al-Tirmidhī)
Ijmāc al-fuqahā’ is also of the view that the deposit contract is permissible based on
the need of asking others to hold one’s property/ money for safekeeping.
291
(c) Mohd Johan lee 2015 14 & 15/9/2015
Modus Operandi
The customer places his money in the Bank for safe keeping.
The Bank guarantees that the money is available to be
withdrawn by the customer at any time.
The Bank utilizes the money for its business activities such
as financing or investment. Profit derived from the utilisation
of the customer’s money belongs wholly to the Bank.
The Bank at its sole discretion may shared the profit and pay
to the depositor under the contract of hibah / () اﻟﮫﺒﺔ.
The following diagram shows the modus operandi of Wadī’ah
contract in the deposit based products:
292
146
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MODUS OPERANDI
Owner of fund CUSTODIAN
Contract
Customer
permission
Financing and
Inv estment
Profit
o Discretion
o Not
promised
293
(c) Mohd Johan lee 2015 14 & 15/9/2015
R u kn (Tenet) Syart (Condition)
Depositor () اﻟﻤﻮدع Mus t be capable of accepting
res pons ibilities:
Sane (cāqil / ) ﻋﺎﻗﻞ.
Discerning (rāsyed / ) راﺷﺪ
Legal age (b āligh / ) ﺑﺎﻟﻎ.
Not prohibited from entering
into agreement such as a
bankrupt.
294
147
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
R u kn (Tenet) Syart (Condition)
Depositary () اﻟﻮدﻳﻊ The conditions are similar with
depositor except depositary can be
individual (syakhsiyyah ţabī ciyyah/
اﻟﻄﺒﯿﻌﯿﺔ ) اﻟﺸﺨﺼﯿﺔ or
organization (syakhsiyyah
citib āriyyah /
) اﻟﺸﺨﺼﯿﺔاﻹﻋﺘﺒﺎرﻳﺔ including
bank.
295
(c) Mohd Johan lee 2015 14 & 15/9/2015
R u kn (Tenet) Syart (Condition)
Deposited object () اﻟﻮدﻳﻌﺔ i. Mus t be capable of being
possessed and delivered.
ii. Mus t have value.
R u kn (Tenet) Syart (Condition)
The contract; offer and i. The offer must be absolute
acceptance ( :اﻟﺼﯿﻐﺔ and decis ive.
) اﻹﻳﺠﺎب واﻟﻘﺒﻮل. ii. Acceptance must match with
the offer. The aacceptance
may be verbal or may be
implied through physical
receipt or silence.
296
148
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Right of Safekeeping
The Wadī’ah contract makes it binding to the Bank to safe keep the
deposited object.
If the money under cus tody is accidentally lost or destroyed, the Bank is
obligated to replace or com pens ate it.
Utilisation of Funds
The Bank must ensure that the customer have given permission to the
Bank to utilis e the deposited funds.
The Bank mus t return the fund as and when requested by the depositor.
If two or more depositors make a joint deposit and then one of them
demands withdrawal of the deposit, the Bank shall honour the demand
subject to conditions determined earlier in the contract.
297
(c) Mohd Johan lee 2015 14 & 15/9/2015
Charges, Profits and Benefits
The Bank is entitled to charge a safekeeping fee to the depositor
The Bank is prohibited from promising any profit / reward to the depositor
from the use of the deposits. Promising profit, reward or gift (hib ah / )اﻟﮫﺒﺔ
will tantam ount to rib ā qardh () رﺑﺎ اﻟﻘﺮض.
The depositor is prohibited from demanding any rewards for the safekeeping
of the moneys with the Bank.
Profits generated from the utilis ation of the fund belong to the Bank.
The Bank at its absolute discretion may reward (hibah) the depositors with a
portion of the profits generated from the utilisation of the fund. The Bank
may also reward the depositor in the form of benefits or gift.
The gift includes souvenirs such as um brella, diary, pen and others.
298
149
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Termination of the Contract
Either the Bank or depositors may cancel the contract at any time they w ish
The contract can be terminated through any of the follow ing events:
Bank returns the deposits to the depositor irrespective of whether the latter requests it
or not.
Death of the depositor or upon w inding up of the depositary.
If depositor becomes insane or coma. The contract is terminated since he/ she would
lose his eligibility to continue the contract.
If legal restrictions (hajr/ ) اﻟﮫﺠﺮare imposed on the depositor due to mental
incompetence, bankruptcy and other legal restriction such as Anti Money Laundering
Act (AMLA) and Biro Maklumat Cek (BMC) offender.
If the depositor transfers ownership of the deposits to other party.
If the outstanding balance transferred to the Registrar of Unclaimed Monies after
being classif ied as Unclaimed Monies (inactive for a period of seven years) as
required under the Unclaimed Monies Act 1985.
299
(c) Mohd Johan lee 2015 14 & 15/9/2015
HIWALAH
Literal meaning : transfer/change
Legal definition:
Hanafi – the transfer of debt from the dhimmah
of the principal creditor to the dhimmah of the
transferee of debt (new creditor) by way of trust
with him
Jumhur : the transfer of debt from one
dhimmah to the other
AAOIFI – a transfer of debt from the transferor
(muhil) to the payer (muhal ‘alayh) (Standard
No 2)
300
150
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL BASIS
Sunnah : “the delay to pay debt by the rich is a
form of injustice. So, if somebody wealthy is
asked to accept the transfer of debt, he should
accept it”.
Majority interpret the hadith to mean
recommendation of the acceptance of hawalah
by the transferee
301
(c) Mohd Johan lee 2015 14 & 15/9/2015
Parties to Hawalah
Transferor (muhil/orginal debtor) who makes the
offer
Acceptance by both
transferee (muhal)
Beneficiary of the transfer (muhal ‘alayhi/payer)
AAOIFI - All consent of all parties
The debt must be known, valid and binding
302
151
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MODUS OPERANDI
Two ways:
Starts with offer from the principal creditor –
transfer of right to the debt (hawalah al haq)
Most common form and allowed by jurists
Results in the change in the creditor
Comparable with sale of debt at par though most jurists regard hawalah
as an independent contract not a form of sale of debt
Starts with the offer from the principal debtor –
transfer of the debt (hawalah al dayn)
No change in the creditor but change in the debtor
Less common
303
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL EFFECT
Once the transfer of debt is completed,
the transferor would be released from any
obligation. The creditor can now claim his
debt only from the transferee.
The transfer of debt establishes the
creditor’s right to demand payment of the
debt from the consignee.
304
152
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
MODERN APPLICATION OF HAWALAH
Issuance of a cheque against a current
account – the transferor (issuer of cheque) +
the transferee (the bank) + beneficiary (the
creditor of the cheque).
Travelers' cheques
Remittance (transfer of money)
305
(c) Mohd Johan lee 2015 14 & 15/9/2015
TERMINATION OF HIWALAH
When the hiwalah is cancelled before it
becomes effective
When the transferee pays the debt to the
creditor
When the creditor gives the debt as a gift to the
transferee and the latter accepts it
When the creditor releases the transferee from
the debt
306
153
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
QARD HASSAN
Hanafi & Shafi’ – a transfer of ownership of
mithli property from one party to another in
exchange for a later payment of an equivalent
amount
Malikis – a loan of something valuable granted
only as a favour to be recovered back in the
form in which it was granted.
307
(c) Mohd Johan lee 2015 14 & 15/9/2015
Qard – a kind of gratuitous loan given to the
needy people for a fixed period without
requiring the payment interest, profit or reward.
The receiver of qard is only required to repay
the original amount of the loan.
Hasan – an act which benefits person other
than those from whom the act precedes without
any obligation.
Qard al-hasan – beneficial loan or benevolent
loan, gratuitous loan, interest free loan,
beautiful loan.
308
154
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGALITY OF QARD
In the Qur’an Allah says :
“who is he who that will lend to All a goodly loan so
that He may multiply it to him many times” And it is
Allah that decreases or increases (your provisions),
and unto Him you shall return” (al Baqarah (2) : 245
“Verily, those who give sadaqat, men and women,
and lend Allah a goodly loan, it shall be increased
manifold, and theirs shall be an honourable good
reward (i.e. paradise)” (Al Hadid (57) : 18
309
(c) Mohd Johan lee 2015 14 & 15/9/2015
REQUIREMENTS
1. Parties Same as
murabahah
2. Ijab & Qabul
3. The loan contract should be written down –
majority : not obligatory but strongly
recommended
4. Getting two witness –
to avoid dispute (‘and get two wintnesses out of
your own men and if there are not two men, then a
man and two women”)
Majority - recommended
310
155
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
QARD : MODERN PRACTICE
Overdraft facilities
Current account
Qard or benevolent loan by depositor
311
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISSUES
Administrative and services charge – actual cost
of giving the loan AAOIFI; Book cheque, ATM card;
Not include indirect cost
Early demand to pay back : majority - the creditor
can demand as the loan is voluntary
Guarantors
Liquidity management instrument based on
qard – hibah – sole discretion of the borrower
& no pre-condition clause
312
156
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC FLOOR ARRANGEMENT (CAR)
Car
manufacturer/
distributor
3. Send
invoice 2.Place order
4. Bank disburses
Bank
Authorize dealer/agent
1. Appoint agent
313
(c) Mohd Johan lee 2015 14 & 15/9/2015
HOUSE FINANCING WITH NOVATION AGREEMENT
Vendor
1. S&P
3. The financier be “in the
Customer shoes” of the customer
2. Novation
agreement
Financier
314
157
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
BBA FINANCING (WITHOUT NOVATION
AGREEMENT)
2. Customer comes to the bank for
financing
-bank purchases the house from the
customer
BANK CUSTOMER
3. Subsequently
Bank sells the
house to customer 1.Customer purchases
a house from the
developer
4. Customer pays the
selling price by
installment
DEVELOPER
315
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC DEPOSIT BASED ON TAWARRUQ
BROKER A BROKER B
6. Pays
5. Sells
purchase price
1. Sells 2. Pays the purchase metal “X”
of Metal “X” at
Metal price at cost (RM100) at cost
cost price
“X” on spot price
(RM100) on
(RM100)
spot
4. Pays the purchase price at cost plus
profit (deferred)
Depositor Islamic Bank
3. Sells metal “X” at cost plus profit
(deferred)
316
158
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL & REGULATORY FRAMEWORK OF IBF
Jurisdiction of Courts
Legal infrastructure
Islamic Banking Act 1983
Banking and Financial Institutions Act 1989
Central Bank of Malaysia Act 1958
Stamp Duty Act 1949
Real Property Gains Tax Act 1979
Government Investment Act 1983
Takaful Act
317
(c) Mohd Johan lee 2015 14 & 15/9/2015
JURISDICTION OF COURTS IN IBF
Courts jurisdiction is governed by Federal
Constitutions of Malaysia
Art 121 : civil courts have no jurisdiction over
matters within the jurisdiction of Shariah courts
318
159
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
JURISDICTION OF CIVIL COURTS
List I (Federal list) of 9th Schedule
Civil & criminal procedures
Administration of justice
Contracts & mercantile laws
Arbitration
Etc
319
(c) Mohd Johan lee 2015 14 & 15/9/2015
JURISDICTIONS OF SHARIAH COURTS
Para 1 of List II (State List) of 9th Schedule
Organization & procedures of Shariah Courts
Islamic Law
Personal law
Family law
No jurisdiction over criminal matters
Jurisdiction over person professing Islam
320
160
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
JURISDICTION ON IBF
Lies in the Civil Court
Because of the following reasons:
IBF comes under contract & mercantile matters
provided in Federal List (List I of 9th Schedule)
Islamic law (as provided in Para I, List II of 9th
Shc) is limited only to persons professing
religion of Islam, thus exclude other persons &
“legal person” such as banks & FI
Legislation of IBF are all federal legislations
321
(c) Mohd Johan lee 2015 14 & 15/9/2015
LEGAL INFRASTRUCTURE
Islamic Banking Act 1983
Banking and Financial Institutions Act 1989
Central Bank of Malaysia Act 1958
Islamic Financial Services Act
322
161
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC BANKING ACT 1983
Brief Act of 60 sections & 8 parts
Provides licensing & regulation of Islamic Banks
Establishment of BIMB & BMMB
Amendment in 2003
Important provisions – salient features of IBA:
Definition – sec 2
Licensing – sec 3
SAC – sec 13
Financial requirements – part III
323
(c) Mohd Johan lee 2015 14 & 15/9/2015
Limitation of sec 2
No substantive laws on Islamic banking
Ambiguities in the definition – no
guideline/detail explanation on transaction that
is considered as IBF
The term “religion of Islam” is not defined –
what mazhab to follow
324
162
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
LICENSING OF IB (SEC 3)
Regulates IBs – grant license to carry on
Islamic banking business
IB must be company having license from
Minister of Finance
Company registered under Companies Act
325
(c) Mohd Johan lee 2015 14 & 15/9/2015
Licensing requirements
Must carry Shariah compliant activities
Must establish Shariah Advisory Board to
advice on its operations
326
163
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SHARIAH ADVISORY COUNCIL
License will not be granted if no SAC
Bank shall comply with the advice of SAC
SAC to seek advice of SAC of BNM
Uniformity of standard practice & product
development between IBS.
SAC to ensure adherence of Shariah principles
in the operation & product innovations
327
(c) Mohd Johan lee 2015 14 & 15/9/2015
FINANCIAL REQUIREMENTS & DUTIES (PART III)
The IBA complies with prudential &financial
requirements similar with conventional banks
Eg., capital adequacy framework, statutory
reserves, liquidity framework, statistical
reporting, audited financial reports, ownership
control & management restriction on business.
328
164
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
BANKING & FINANCIAL INSTITUTION ACT 1989
Provides laws for licensing & regulation of
institutions carrying banking & finance, merchant
banking, discount house etc
In 1993, BNM allows conventional banking
institutions to participate in IBF using existing
structure
As a result, BAFIA was amended (sec 124) to :
i formalize the carrying on of Islamic banking
business by conventional bank
Establishment of SAC to advise Islamic product
329
(c) Mohd Johan lee 2015 14 & 15/9/2015
Sec 124
124 (1) licensed institution may carry Islamic banking business
124 (2) conventional bank carrying on Islamic banking business
is subject to this Act
124 (3) – the institution must seek advisee of SAC
124 (4) – must comply with any written regulation & guidelines
from BNM or other regulatory bodies
124 (5) the institution shall not be deemed an Islamic bank
124 (6) BAFIA shall not apply to Islamic Bank
124 (7) related terms:
SAC refers to SAC of BM
Islamic banking business – same with IBA
Islamic financial business – any financial business which the aim
& operations do not involve any element against Shariah
330
165
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
CENTRAL BANK OF MALAYSIA ACT 1958
CBMA was amended in 1989 to facilitate IBF
Establishment of NSAC at BNM (sec 16B)
NSAC as the authority for ascertainment of
Islamic law on IBF
Court may refer to NSAC of BNM in arbitration
proceeding involving shariah issues
Decision of NSAC can be considered by court &
binding on arbitrator
331
(c) Mohd Johan lee 2015 14 & 15/9/2015
PART VII (SEC 51-58)
Legal establishment of SAC as the authority for
ascertainment of Islamic law on IBF
Member of SAC may be appointed by Minister,
on recommendation of the Bank
Qualification – people who have knowledge or
experience in both Shariah, banking & finance
other related disciplines
No member of the SAC shall become member
of any Shariah advisory board of other banks
332
166
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
EFFECT OF SAC’S DECISION
Bank shall consult SAC on IBF matters
IFI may refer to SAC for a ruling or advice
Court or arbitrator shall take into
consideration of SAC decision
Decision of SAC are binding on court and
arbitrator
Bank may establish a secretariat to assist
SAC
333
(c) Mohd Johan lee 2015 14 & 15/9/2015
CENTRAL BANK MALAYSIA ACT 2009
Part VII (Section 51 till Section 60)
51. (1) The Bank may establish a Shariah Advisory Council on
Islamic Finance which shall be the authority for the
ascertainment of Islamic law for the purposes of Islamic
financial business.
334
167
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
55. (1) The Bank shall consult the Shariah
Advisory Council on any matter relating to Islamic
financial business
56. (1) Where in any proceedings relating to
Islamic financial business before any court or
arbitrator any question arisesconcerning a
Shariah matter, the court or the arbitrator, as the
case may be, shall—
(a) take into consideration any published rulings
of the Shariah Advisory Council; or
(b) refer such question to the Shariah Advisory
Council for its ruling.
335
(c) Mohd Johan lee 2015 14 & 15/9/2015
57. Any ruling made by the Shariah Advisory
Council pursuant to a reference made under
this Part shall be binding on the Islamic
financial institutions under section 55 and
the court or arbitrator making a reference
under section 56.
58. Where the ruling given by a Shariah body
or committee constituted in Malaysia by an
Islamic financial institution is different from
the ruling given by the Shariah Advisory
Council, the ruling of the Shariah Advisory
Council shall prevail.
336
168
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
IFSA 2013: AN IMPACT ON SHARIAH
GOVERNANCE FRAMEWORK & SHARIAH
COMMITTEE
Codification of key elements of Shariah
Governance Framework to promote compliance
with Shariah:
Shariah Committee
Legislated establishment of Shariah Committee
to advice Islamic financial institutions in
ensuring its business affairs & activities comply
with Shariah
Bank may approve single Shariah Committee
for financial group if can establish it is capable
of performing its functions effectively
337
(c) Mohd Johan lee 2015 14 & 15/9/2015
Codification of duty on Islamic financial
institutions to ensure its aims, operations,
business, affairs and activities are in
compliance with Shariah at all times
Compliance with rulings of Shariah Advisory
Council a determinant of “compliance with
Shariah”
Reporting obligations on non-Shariah
compliances imposed on Islamic financial
institutions
Bank empowered to assess rectification plan to
address non-compliances
Backed by comprehensive enforcement tools to
address non-compliances
338
169
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SECTION 28
28. Duty of institution to ensure compliance
with Shariah.
(1) An institution shall at all times ensure that its
aims and operations, business, affairs and
activities are in compliance with Shariah.
(2) For the purposes of this Act, a compliance with
any ruling of the Shariah Advisory Council in
respect of any particular aim and operation,
business, affair or activity shall be deemed to be a
compliance with Shariah in respect of that aims
and operations, business, affair or activity.
339
(c) Mohd Johan lee 2015 14 & 15/9/2015
(3) Where an institution becomes
aware that it is carrying on any of
its business, affair or activity in a
manner which is not in compliance
with Shariah or the advice of its
Shariah committee or the advice or
ruling of the Shariah Advisory
Council, the institution shall—
(a) immediately notify the and its
Shariah committee of the fact;
(b) immediately cease from 340
carrying on such business, affair or
170
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
(4) The Bank may carry out an
assessment as it thinks necessary to
determine whether the institution has
rectified the non-compliance referred
to in subsection (3).
(5) Any person who contravenes
subsection (1) or (3) commits an
offence and shall, on conviction, be
liable to imprisonment for a term not
exceeding eight years or to a fine not
exceeding twenty-five million ringgit or
to both.
341
(c) Mohd Johan lee 2015 14 & 15/9/2015
Du ty of institution to ensure compliance with Shariah
(s .28, IFSA)
Where an institution becomes aware that it is carrying
on any of its business, affair or activity in a manner
which is not in compliance with Shariah or the advice of
its Shariah committee or the advice or ruling of the SAC,
the institution shall —
(a) immediately notify BNM and its Shariah committee
of the fact;
(b) immediately cease from carrying on such business,
affair or activity and from taking on any other similar
business, affair or activity; and
(c) with in 30 days of becoming aware of such non-
compliance or such further period as may be specified
by BNM, s ubmit to BNM a plan on the rectification of
the non-compliance.
342
171
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
The Bank may carry out an assessment to
determine whether the institution has rectified
the non-compliance.
343
(c) Mohd Johan lee 2015 14 & 15/9/2015
SECTION 29
29. Power of Bank to specify standards on
Shariah matters.
(1) The Bank may, in accordance with the advice
or ruling of the Shariah Advisory Council, specify
standards—
(a) on Shariah matters in respect of the carrying
on of business, affair or activity by an institution
which requires the ascertainment of Islamic law by
the Shariah Advisory Council; and
(b) to give effect to the advice or rulings of the
Shariah Advisory Council.
344
172
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
29(2)(a)(ii)
(2) In addition, the Bank may also specify standards
relating to any of the following matters which does not
require the ascertainment of Islamic law:
(a) Shariah governance including—
(i) functions and duties of the board of directors, senior
officers and members of the Shariah committee of an
institution in relation to compliance with Shariah;
Need to be read together with Shariah Governance
Framework
345
(c) Mohd Johan lee 2015 14 & 15/9/2015
(ii) fit and proper requirements or
disqualifications of a member of a Shariah
committee; and
(iii) internal Shariah compliance functions; and
(b) any other matter in relation to the business,
affair and activity of an institution for the
purposes of compliance with Shariah.
346
173
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
(3) Every institution, its director, chief executive
officer, senior officer or member of a Shariah
committee shall at all times comply with the
standards specified by the Bank under
subsections (1) and (2) which are applicable to
such person.
(4) Every institution shall at all times —
(a) ensure that its internal policies and
procedures on Shariah governance are
consistent with the standards specified by the
Bank under this section; and
(b) whether or not standards have been
specified by the Bank under this section,
manage its business, affairs and activities in a
manner which is not contrary to Shariah.
347
(c) Mohd Johan lee 2015 14 & 15/9/2015
(5) Every director, officer or a member of a
Shariah committee of an institution shall at all
times comply with the internal policies and
procedures adopted by such institution to
implement the standards specified by the Bank
under subsection (1) or (2).
(6) Any person who fails to comply with any
standards specified under subsection (1),
commits an offence and shall, on conviction, be
liable to imprisonment for a term not exceeding
eight years or to a fine not exceeding twenty-five
million ringgit or to both.
348
174
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
SECTION 29
It empowers the Bank Negara to specify, in
accordance with the advice of the Shariah
Advisory Council, standards on Shariah matters
which require the ascertainment of Islamic law
by the Shariah Advisory Council or to give effect
to the advice on rulings of the Shariah Advisory
Council.
This Section also empowers the Bank Negara
to specify standards on, Shariah governance
such as functions and duties of key
functionaries, fit and proper requirements or
disqualification of a member of a Shariah
committee, and on any other matters, for
purposes of compliance with Shariah by the
institution.
349
(c) Mohd Johan lee 2015 14 & 15/9/2015
Further, an institution is also required to ensure
that its internal policies and procedures on
Shariah.
Subsection (5) further emphasize that the duty
to ensure compliance with Shariah not only
applicable to the directors and Shariah
committees but also extended to all officers of
the institution.
350
175
9/9/2015
S. 29 (6) (c) Mohd Johan lee 2015 14 & 15/9/2015
Any person fails to comply with any standard
fixed by BNM has committed an offence and
shall be punishable with
Imprisonment of not more than 8 years;
or
Fine not more than 25 million Ringgit Malaysia
or both.
351
(c) Mohd Johan lee 2015 14 & 15/9/2015
“standards” includes any
obligation or requirement as
specified by the Bank under this
Act and such standards may
contain any interpretative,
incidental, supplemental,
consequential and transitional
provisions as the Bank considers
appropriate.
352
176
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
RELEVANT STATUS ON IBF
Stamp Act 1949
Real Property Gains Tax Act 1976
Government Funding Act 2005
Takaful Act 1983
353
(c) Mohd Johan lee 2015 14 & 15/9/2015
1989 – amendment to sec 14A – to avoid
double stamp duty for Islamic financing
documents.
Sec 14A – “where it is shown that a principal or
primary security secures the repayment of moneys
provided under a scheme of financing made
according to the Syariah, duty chargeable thereon
shall be calculated on the principal amount
provided by the financier or financing body”
354
177
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
Stamp Duty (Exemption) (No. 5) Order 1984
(effective 1 st Oct 1983)
All instruments for purchase of property
under Murabahah & BBA – is subject to
exemption of stamp duty
PPA – (property purchase agreement) –
exempted (subsidiary)
PSA – on principle amount – not total selling
price (cost + profit)
355
(c) Mohd Johan lee 2015 14 & 15/9/2015
REAL PROPERTY GAINS TAX 1979
RPGTA – provides for imposition, assessment &
collection of tax or gains/profits derived from
disposal or acquisition of real property/shares
in real property companies
Since BBA & Murabahah involve purchase &
sale between bank & customer (legally the
transaction amounts to acquisition & disposal)
1985 : amendment to sec 3 – avoid double
taxation on IBF transactions.
356
178
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
GOVERNMENT FUND ACT 2005
Act to confer power to Government to receive
moneys from Islamic banks for a fixed period
How?
By issuing Investment Certificates (MGIC)
No fixed return (unlike interest)
Government will give back profit in the form of:
Hibah/gift – qard hasan
Profit – sale (murabahah, BBA/bay’ inah)
357
(c) Mohd Johan lee 2015 14 & 15/9/2015
ISLAMIC FINANCIAL SERVICES ACT 2013
Objective:
“to provide for the regulation and supervision of
Islamic financial institutions, payment systems
and other relevant entities, and the oversight of
the Islamic money market and Islamic foreign
exchange market to promote financial stability
and compliance with Shariah and for related,
consequential and incidental matters”.
358
179
9/9/2015
(c) Mohd Johan lee 2015 14 & 15/9/2015
THANK YOU & WASSALAM
Mohd Johan Lee
mohdjohanlee@yahoo.co.uk
jlee-kl@jlee-associates.com
J. Lee & As sociates
A-16-13, Tower A,16th Floor, Menara UOA Bangs ar,
5, Jalan Bangs ar Utama 1, 59000 Kuala Lumpur
Tel:+603-22881699
Fax:+603-22881799
Also at Kuala Terengganu & Penang
359
180
You might also like
- Topic 2: An Introduction To Islamic Finance & Banking: ESC Rennes School of Business 2009/2010 DR Khalid ElbadraouiNo ratings yetTopic 2: An Introduction To Islamic Finance & Banking: ESC Rennes School of Business 2009/2010 DR Khalid Elbadraoui120 pages
- Part 4-Shariah Framwork of Islamic BankingNo ratings yetPart 4-Shariah Framwork of Islamic Banking35 pages
- 1 - Introduction To Islamic Banking and Finance Principles and Practice Lecture-SlidesNo ratings yet1 - Introduction To Islamic Banking and Finance Principles and Practice Lecture-Slides241 pages
- Developments in Islamic Finance and Opportunities For Hong KongNo ratings yetDevelopments in Islamic Finance and Opportunities For Hong Kong18 pages
- Chapter 1 - History and Development of Islamic Banking and Finance Around The World100% (1)Chapter 1 - History and Development of Islamic Banking and Finance Around The World54 pages
- Corporate Governance in Islamic Financial InstitutionsNo ratings yetCorporate Governance in Islamic Financial Institutions28 pages
- Chap 3 - Concept and Theory of Islamic BankNo ratings yetChap 3 - Concept and Theory of Islamic Bank63 pages
- Relevance of Islamic Banking.: Presented By:-Abhinav Singh Nadeem Haidar Mukesh PandeyNo ratings yetRelevance of Islamic Banking.: Presented By:-Abhinav Singh Nadeem Haidar Mukesh Pandey9 pages
- 001 BFIN402 Islamic Banking Spring 2019 Chapter 01No ratings yet001 BFIN402 Islamic Banking Spring 2019 Chapter 0142 pages
- Development of The Malaysian Islamic Financial SystemNo ratings yetDevelopment of The Malaysian Islamic Financial System42 pages
- Islamic Economics Course (GIFT Spring 2013)No ratings yetIslamic Economics Course (GIFT Spring 2013)197 pages
- Legal Framework and Regulatory Issues in Islamic Banking0% (1)Legal Framework and Regulatory Issues in Islamic Banking106 pages
- Islamic Banking Products & Services: Emirates Institute For Banking & Financial StudiesNo ratings yetIslamic Banking Products & Services: Emirates Institute For Banking & Financial Studies72 pages
- Fundamentals of Islamic Banking and Finance: Day OneNo ratings yetFundamentals of Islamic Banking and Finance: Day One5 pages
- Topic 1 - Intro To Islamic Banking and Finance LawNo ratings yetTopic 1 - Intro To Islamic Banking and Finance Law34 pages
- Title: Islamic Banking Lecturer Name: Mardziyah Mohd ISA PROVIDE BY: Muhammad Luqman Aidiel Bin AdnanNo ratings yetTitle: Islamic Banking Lecturer Name: Mardziyah Mohd ISA PROVIDE BY: Muhammad Luqman Aidiel Bin Adnan13 pages
- What Is A Journey in Islam When Is One Considered To Be A Traveller and For How Long Shortening and CNo ratings yetWhat Is A Journey in Islam When Is One Considered To Be A Traveller and For How Long Shortening and C14 pages
- Religion Extremism and Violence in South Asia 1st Edition Imran Ahmed Download100% (3)Religion Extremism and Violence in South Asia 1st Edition Imran Ahmed Download90 pages
- Grade 8 Islamiyat 2ND Term Practice WorksheetNo ratings yetGrade 8 Islamiyat 2ND Term Practice Worksheet20 pages
- FBISE HSSC 1 Pakistan Culture Theory Revision Notes - ZNotes 3No ratings yetFBISE HSSC 1 Pakistan Culture Theory Revision Notes - ZNotes 31 page
- Soal PAT Fiqih Kelas X IPA-IPS-BHS Kedu 2021No ratings yetSoal PAT Fiqih Kelas X IPA-IPS-BHS Kedu 20217 pages
- SP6303 Presentation (1) - Difference Between Syariah and Civil LawNo ratings yetSP6303 Presentation (1) - Difference Between Syariah and Civil Law12 pages