1) INTRODUCTION
Islamic banking system refers to a banking system which is consistent with the
syariah law. This means that all banking operation systems including saving,
borrowing, bank draft, letter of credit and all banking transactions shall be based
on syariah compliance in its application.
Islamic banking system concerns on mutual relationship and profit sharing
between banker and customer which is difference from the conventional banking
system that always regards customer as debtor and the bank as the creditor.
This principle will assure fairness for both bankers and customers.
In Malaysia, Islamic banking has been in existence for over 30 years. The first
act enacted to facilitate the framework and operation of Islamic Banking was the
introduction of Islamic Banking Act 1983 (IBA 1983).
All Islamic banking activities and its structures are governed by this 1983 Act.
Since the promulgation of IBA 1983, the operational system of Islamic banking is
very well established and it is being accepted by both Muslims and the non-
Muslims. The enactment of IBA 1983 has caused more Islamic Financial
Institutions to be developed in Malaysia and more Islamic products are available.
Islamic banking operation must be free from any interest or riba. Prohibition on
interest is expressly mentioned in the Qur’an1 and the Hadith2. Allah has warned
those who disregard the prohibition of interest to be the enemy of Allah and the
prophet. This shows that, those who apply interest in every transaction shall not
get Allah’s blessings.
1
“o believers fear Allah and give up what is still due to you from interest (usury), if you are true believers”
Al-Baqarah:278
2
The Prophet said, “Cursed is the receiver and the payer of interest, the one who records it and the two
witnesses to the transaction. They are all alike in guilt”. Jabirin Abdalla (Muslim/Tirmidhi)
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 1
Riba means increase, addition, expansion or growth. Islamic law classifies riba in
two types:
i) Firstly, Riba al-Nasiah3 that refers to repayment period or additional
payment of money when the time of payment is deferred. The additional
amount is determined in relation to the amount of debt and the period of
loan. Any gain that comes from any loan transaction is called usurious.4
ii) Secondly, riba al- Fadl means the excess in term of quantity which is
taken in exchange of commodities.5 Usury in sale takes place when there
is an exchange of unequal amount of the same commodity or when the
amount is equal but one of the counter values is delivered later.
Examples of a commodity which has effects on riba are gold, silver,
wheat, barley, dates and salt.
According to syariah law, interest can arise when there is an exchange of two
similar usurious items or assets such as money for money.
In banking, riba or interest is the predetermined interest collected by a banker,
which the banker receives over and above the principal amount that has been
lent out to the borrower.
The conventional bank normally will charge a different amount from what has
been lent out. Example being, a fixed deposit where the interest is paid to the
depositors and at the same time interest rate is also charged on the borrowers.
Gharar means uncertainty, ambiguity, danger or peril that may lead to destruction
to the parties in a contract.
The contract which involves gharar would cause the party to the contract
uncertainties over the result or outcome of the contract.
It makes the parties unaware of what they will receive when they enter into the
contract. The Qur’an prohibits all transactions that lead to deceiving another
party where Allah says that Muslims cannot devour one another’s property
wrongly.6
Muslim jurists have laid down various conditions to avoid gharar in a contract.
In Islam, to make the contract valid and certain without gharar, all the pillars of a
syariah transaction must be in existence such as offer, acceptance, parties and
subject matter. Depending on what contract involved between the parties, the
quantity and the quality of the subject matter to a contract, the price, the date of
payment and date of delivery of the subject matter must be made known to the
parties involved. For instance if the contract relates to an ijarah contract, the
3
It is also called as riba jahiliyyah during pre-islam time.
4
Saleem, M. Y. (2009). An Introduction To The Theoretical Foundations Of Islamic Transaction . Selangor:
Ilmiah Publishers Sdn Bhd.
5
Bakar, M. D. (2008). Riba in Islamic Banking and finance. Kuala Lumpur: Mashi Publication Sdn Bhd.
6
4: 29
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 2
service and the usufruct7, rent and wages must be detailed and clearly explained
to the parties in order to eliminate the element of gharar in the contract.
Gharar may also arise in the contract which involves risks. Risks refer to
uncertainties on the amount of profit or loss. For an example in the context of
Islamic finance, a customer cannot be advised to buy shares in a company that is
the subject of a takeover bid, on the ground that the share price is likely to
increase and high.8
Maysir refers to an easy method used in order to obtain something with the least
effort. It includes all kinds of gambling.
A contract which involves maysir shall cause unfairness and it gives rise to
hostility and hatred amongst the parties in the contract. The maysir contract shall
lead to the dissatisfactions from either the loser or/and the winner on the
outcome of the contract.
3) Aims at maximizing profit without any Aims at maximizing profit but subject to shariah
restriction. restrictions.
4) Does not deal with zakat. Islamic banking system has become one of the service-
oriented functions to be a zakat Collection Centre, also
paying out their zakat.
7
in Roman-based legal systems, the temporary right to the use and enjoyment of the property of another, without
changing the character of the property
8
Saleem, M. Y. (2009).
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 3
CONVENTIONAL BANKING ISLAMIC BANKING
6) Can charge additional money in case of Has no provision to charge any extra money from the
defaults. defaulters. Small amount of compensation and the
proceeds is given to charity. Rebates are given for early
settlement at the bank’s discretion.
7) For interest-based commercial banks, For the Islamic banks, it must be based on a shariah
borrowing from the money market is approved underlying transaction.
relatively easier.
8) Since income from the advances is fixed, Since it shares profit and loss, the Islamic banks pay
it gives little importance to developing greater attention to develop project appraisal and
expertise in project appraisal and evaluations.
evaluations.
9) A conventional bank has to guarantee all Islamic bank can only guarantee deposits for deposit
its deposits. account, based on the principle of al-wadiah. The
depositors are guaranteed repayment of their funds. If
based on mudarabah concept, they have to share the
loss too.
a) Bai’Bithaman Ajil
b) Ijarah
c) Istisna’
d) Bai’Salam
e) Bai’ al Inah
f) Wakalah
g) Mudarabah
h) Murabahah
i) Musharakah
j) Qard Hassan
k) Takaful
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 4
NO ISLAMIC MEANING AND FACTS
BANKING
PRODUCT
BBA is the first Islamic banking product introduced since the
1 BAI’BITHAMAN emergence of Islamic banking in Malaysia
AJIL It is introduced in order to help the public to purchase of a residential
(BBA) property on a deferred payment which is based on the Shariah
(Deferred Payment concept.
Sale) It can be regarded as a contract of exchange, whereby the
commodity exchanged is delivered immediately and the price is paid
by instalments.
This facility is not different from the common sale and purchase
agreement whereby the vendor allows the purchaser to purchase
property and pay the price by instalments.
Under this facility, the customer as a borrower is allowed to
postpone the payment of the goods financed by the bank within a
period agreed and in accordance with the methods agreed between
both parties.
Among the properties or items which can be financed by using this
BBA are houses, land, motor vehicles, consumer goods and
overdraft facility.
There are two steps used in this facility.
(i) First, after the purchaser has determined the property that is
going to be financed, the purchaser is required to sell the
property to the bank. In this step the purchaser is required to sign
a Property Purchase Agreement with the bank.
(ii) Next, the bank will sell the same property to the purchaser and
the purchaser is required to sign the Property Sale Agreement.
The bank selling price will include a profit margin as agreed
between the parties. The bank normally will ask for a security in
its financing. For this purpose the purchaser must execute a
charge document for the property financed.
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 5
b) The usufruct of the goods or service must have value in the eyes
of shariah law
c) The rental payment must be fixed and specified
d) The usufruct must be specified.
e) The usufruct must be lawful
f) The lessor must have legal ownership over the goods.
4 BAI’SALAM Bai Salam means a contract in which advance payment is made for
9
Nik Nazrul Thani, A. M. (2010). Law and Practice of Islamic Banking and Finance. Selangor: Sweet & Maxwell Asia
10
Bank Muamalat, Real Estate Financing. Retrieved 7 22, 2014, from Muamalat.com:
http://www.muamalat.com.my/business-banking/corporate-banking/financing/al-istisna.html
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 6
goods to be delivered later on.
The seller undertakes to supply some specific goods to the buyer at
a future date in exchange of an advance price fully paid at the time
of contract.
It is necessary that the quality, quantity, the date and place of
delivery of the commodity intended to be purchased is fully specified
leaving no ambiguity leading to dispute. The objects of this sale are
goods and cannot be gold, silver, or currencies based on these
metals.
Barring this, Bai Salam covers almost everything that is capable of
being definitely described as to quantity, quality, and workmanship.
Basic conditions and features are:-
(i) The transaction is considered Salam if the buyer has paid the
purchase price to the seller in full at the time of sale. This is
necessary so that the buyer can show that they are not entering
into debt with a second party in order to eliminate the debt with
the first party, an act prohibited under Sharia. The idea of Salam
is normally different from the other either in its quality or in its
size or weight and their exact specification is not generally
possible.
(ii) Salam cannot be effected on a particular commodity or on a
product of a particular field or farm. For example, if the seller
undertakes to supply the wheat of a particular field, or the fruit of
a particular tree, the salam will not be valid, because there is a
possibility that the crop of that particular field or the fruit of that
tree is destroyed before delivery, and, given such possibility, the
delivery remains uncertain. The same rule is applicable to every
commodity the supply of which is not certain.
(iii) It is necessary that the quality of the commodity (intended to be
purchased through salam) is fully specified leaving no ambiguity
which may lead to a dispute. All the possible details in this
respect must be expressly mentioned.
(iv) It is also necessary that the quantity of the commodity is agreed
upon in unequivocal terms. If the commodity is quantified in
weights according to the usage of its traders, its weight must be
determined, and if it is quantified through measures, its exact
measure should be known. What is normally weighed cannot be
quantified in measures and vice versa.
(v) The exact date and place of delivery must be specified in the
contract.
(vi) Salam cannot be effected in respect of things which must be
delivered at spot. For example, if gold is purchased in exchange
of silver, it is necessary, according to Shari'ah, that the delivery
of both be simultaneous. Here, salam cannot work. Similarly, if
wheat is bartered for barley, the simultaneous delivery of both is
necessary for the validity of sale. Therefore the contract of salam
in this case is not allowed.
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 7
Bai' al ‘inah is a financing facility with the underlying buy and sell
5 BAI’ AL ‘INAH transactions between the financier and the customer.
(sale & buy back The financier buys an asset from the customer on the spot basis.
agreement) The price paid by the financier constitutes the disbursement under
the facility.
Subsequently the asset is sold to the customer on a deferred-
payment basis and the price is payable in instalments.
The second sale serves to create the obligation on the part of the
customer under the facility. There are differences of opinion
amongst the scholars on the permissibility of Bai' al 'inah, however
this is practised in Malaysia and the like jurisdictions.
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 8
addition to worldly penalties). This has important implications for
the moral hazard problem.
iii) The liability of the rabb al-mal is limited to the extent of his
contribution to the capital.
iv) The mudarib is not allowed to commit the mudarabah business
for any sum greater than the capital contributed by the rabb al-
mal.
v) All normal expenses related to mudarabah business, but not the
personal expenses of the mudarib, can be charged to
the mudarabah account.
vi) The contract of mudarabah can be terminated at any time by
either of the two parties on giving a reasonable notice. (This
condition may create serious problems in the context of modern
commercial enterprises. However, using the Golden Principle of
Free Choice the parties can agree on any conditions in the
contract that will regulate the termination so as not to cause any
damage to the enterprise).
vii) No profit distribution can take place (except as an ad hoc
arrangement, and subject to final settlement), unless all liabilities
have been settled and the equity of the rabb al-mal restored.
Notes courtesy of Puan Marziana & Puan Yuhanza (edited by Puan Mimi) Page 9
Musharakah is a relationship between two parties or more that
9 MUSHARAKAH
contribute capital to a business and divide the net profit and loss pro
(Joint Venture)
rata. This is often used in investment projects, letters of credit, and
the purchase or real estate or property.
In the case of real estate or property, the bank assesses an imputed
rent and will share it as agreed in advance.
All providers of capital are entitled to participate in management, but
not necessarily required to do so. The profit is distributed among the
partners in pre-agreed ratios, while the loss is borne by each partner
strictly in proportion to respective capital contributions. This concept
is distinct from fixed-income investing (i.e. issuance of loans).
The basic rules governing the musharakah contract include:
i) Profit of the enterprise can be distributed in any proportion by
mutual consent. However, it is not permissible to fix a lump
sum profit for anyone.
ii) In case of loss, it has to be shared strictly in proportion to the
capital contributions.
iii) As a general rule all partners contribute both capital and
management. However, it is possible for any partner to be
exempted from contributing labour/management. In that
case, the share of profit of the sleeping partner has to be in
strict proportion of his capital contribution.
iv) The liability of all the partners is unlimited.
Qard hassan is a loan extended on a goodwill basis, with the debtor
10 QARD HASSAN only required to repay the amount borrowed. However, the debtor
(Good/ may, at his or her discretion, pay an extra amount beyond the
Benevolent principal amount of the loan (without promising it) as a token of
Loan) appreciation to the creditor.
In the case that the debtor does not pay an extra amount to the
creditor, this transaction is a true interest-free loan. Some Muslims
consider this to be the only type of loan that does not violate the
prohibition on 'riba, for it alone is a loan that truly does not
compensate the creditor for the time value of money.
Takaful is an alternative form of cover that a Muslim can avail
11 TAKAFUL
himself against the risk of loss due to misfortunes.
Takaful is based on the idea that what is uncertain with respect to an
individual may cease to be uncertain with respect to a very large
number of similar individuals.
Insurance by combining the risks of many people enables each
individual to enjoy the advantage provided by the law of large
numbers.
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