PRESENTATION

CONTRACT IN ISLAMIC FINANCE

AND BANKING
Key Charitable Contracts
MUHAMMAD ZAKWAN BIN ZAKARIA 231110
MUHAMAD YUSMAN BIN MOHD YUSOF 231618

Overview

Qard

Hibah

Wadiah

Iarah

Kafalah

Hiwalah

Rahn

Ibra

Qard (Loan)

It is so called because the property (in terms of wealth) of a person(the

lender) is cut off and transferred to a needy person (the borrower)without
expecting any return or profit.The borrower is required to repay onlythe
principal amount to the lender on demand.

It encourages people tocontribute generously to social welfare and helping

the needey in society, and "if the debtor is in difficulty, grant him time till it
is easy for him to repay..

Qard should not be confused with Dayn, which refers to debtarising as result
ofa credit transaction.

Loan underShari'ahcan be classified asSalafandQard, the former being a

loan for a fixed time and the latter on demand. Also see Qard Hasan and
Loans with Service Charge.

HIBAH

Hibahis a gift of asset(s) made voluntarily by a donor during his/her

lifetime to the beneficiary without any consideration.

It is a contract/ agreement of gift of asset(s) made by the donor during

his/her lifetime for the benefit of the beneficiary(ies) without any
consideration and the asset is entrusted to the appointed trustee to be
held for the benefit of the beneficiary(ies) for a certain period of time
under a Hibah Deed executed by the donor and the beneficiary(ies) and a
Trust Deed executed by the beneficiary(ies) and the trustee.

Hibah

* Grant allowed either to family members (beneficiaries) or non-family members, even to

non-Muslims.

* If the property is to be granted to children, Islam encourages it had been fair.

* The four pillars of the grant of the grantor (al-Wahib); Beneficiary (al-Mawhub lahu); goods
or property donated (al-Mawhub) and the sighah and granted consent. Every rule shall also
have specific requirements.

* Grant recipients who have not yet reached puberty, children or the disabled, grants may be
made by the guardian or trustee on his behalf.

* Goods or property shall be hibah halal goods or property.

Wadiah

Al Wadiah refers to a concluded contract between the owner (depositor)

of the goods (the money) and the custodian (Bank) for safekeeping. The
depositor grants the Bank their permission to utilize the money for
whatever purpose permitted by SYARIAH. The Bank in return guarantees
the value of the deposit thus creating a Wadiah Yad-Dhamanah contract.

In practical terms the bank client accepts the usage of the deposit by the
bank but is not entitled to participate in the profits or losses. The deposit
is guaranteed. Some scholars permitted to offer a gift (hibah) for the
usage but not as contractual obligation, simply to the sole discretion of
the depositary. This account type is quite widespread in Malaysia .

Iarah

Ariyah/I`arah is a contract where an owner puts another in possession of

the usufruct of aparticular property without consideration. The borrower
of the property temporarily and gratuitously, owns the usufruct.

This contractis encouraged and recommended as a form of permissible

and charitable deed.

The property is held on trustby the borrower who is there for enotliable
for its destruction, loss, or diminution of value, unless caused in
tentionally or by his fault and negligence.

Conditions of Object of Ariyah

The property should be known and usable the substance of which is not
consumed by ituse.

No condition is allowed which requires there turn of any object other

than the borrowed object.

The borrower may lend the borrowed object to a 3rd party, but he must
not hire it out or give it as a pledge or security.

The borrower is entitled to make use of the loan without consideration or

payment

Kafalah (guarantee)

Kafalah is the responsibility to guarantee the rights of another person or a

person with specific responsibility for action or get a spare part to the party
entitled. Overall responsibility means the ability of a guarantor to take
responsibility for another person (the debtor).

Definition: The agreement between the guarantor and the party receiving the
guarantee where the guarantor accepts the responsibility for paying off the
debts or pay compensation if that should the parties pledged to implement
the debtor or a job that fails to fulfill its responsibilities.

Surety required to sign a letter of agreement as proof power.

Kafalah combine the responsibility of the guarantee by the debtor

Islam encourages mutual responsibility to one another bear.

Secured debt shall be valid and obligatory.

Hiwalah

Hiwalah word comes from the word meaning tahwil intiqal (removal) or from
said ha'aul (change). The Arabs used to say haala 'annealing' Ahdi, namely
innocent of responsibility. Medium according to jurists, experts in
jurisprudence, Hiwalah is the removal of the obligation to pay off debts to
others.

Its a transfer of debt from the person who owes to others who are obliged to
bear. In this case the transfer occurs dependents or the right of one person to
another. In the words of scholars,

Hiwalah is the removal of the debt burden of muhil (the debtor) Muhal
dependents' alaih (person obliged to pay the debt).

Ar-Rahn

Ar-Rahn, ormortgage or collateral, is defined in the Islamic jurisprudence as

possessions offered as security for a debt so that the debt will be taken from
it in case the debtor failed to pay back the due money.

Ar-Rahnis a permissible contract inShariah. It is known from the Sunnah

that when the Prophet of Allah, Muhammad (SAW), passed away, his shield
was with a Jewish man in Medina as a collateral.

The conditions of Ar-Rahn

The indebted party cannot be coerced into putting up a collateral;

An orphans property cannot be put up as a collateral by the trustee, unless

under exceptional circumstances;

The property held as collateral must be liquid;

The property held as collateral must be distinct from other properties;

The ownership does not change, therefore the owner is responsible for the
cost of upkeeping the property even when it is pledged as a collateral.
Likewise, the owner continues to enjoy any secondary benefits to the
property;

There is disagreement among the scholars on whether the property pledged

as a collateral can be used. Many of the scholars say that the property

Ibra (rebate)

Ibra (rebate) is a term used in Islamic banking and finance literature which
denotes the granting of rebate by Islamic banks, at their discretion, to their
customers who settle their debt obligations arising from sale-based contracts
prior to the agreed settlement period.

In line with the need to safeguardmaslahah(public interest) and to ensure

justice to the financiers and customers, Islamic banking institutions are obliged
to grantibra'to customers for early settlement of financing based on buy and
sell contracts (such asbai' bithaman ajilormurabahah). In order to eliminate
uncertainties pertaining to customers' rights in receivingibra'from Islamic
banking institutions, the granting ofibra'must be included as a clause in the
legal documentation of the financing.The determination ofibra'formula will
be standardised by Bank Negara Malaysia.