1 journal of islamic banking and finance oct dec...
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Journal of Islamic Banking and Finance Oct – Dec 2019 1
2 Journal of Islamic Banking and Finance Oct – Dec 2019
Journal of Islamic Banking and Finance Oct – Dec 2019 3
In The Name of Allah,
The most Beneficent, The most Merciful
“O Believers: devour not Riba, doubled and redoubled;
and fear Allah, in the hope that you may get prosperity.”
Sura Ale-Imran (verse No. 130)
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The articles published in this Journal contain references from the
sacred verses of Holy Qur’an and Traditions of the prophet
(p.b.u.h) printed for the understanding and the benefit of our
readers. Please maintain their due sanctity and ensure that the
pages on which these are printed should be disposed of in the
proper Islamic manner
4 Journal of Islamic Banking and Finance Oct – Dec 2019
Journal of Islamic Banking and Finance
Volume 36 Oct – Dec, 2019 No. 4
Founding Chairman Muazzam Ali (Late) Former –Vice Chairman Dar Al-Maal Al-Islami Trust, Geneva, Switzerland
Chairman Basheer Ahmed Chowdry
Shariah Advisor Uzair Ashraf Usmani
Editorial Board
Ahmed Ali Siddiqui Mufti Bilal Qazi S. A. Q. Haqqani Altaf Noor Ali (ACA)
Chief Editor Aftab Ahmad Siddiqi
Associate Editor Dr. Salman Ahmed Shaikh Seemin Shafi
Manager Publication
Mohammad Farhan
Published by: International Association of Islamic Banks Karachi, Pakistan. Ph: +92 (021) 35837315 Fax: +92 (021) 35837315 Email: ia _ ib @ yahoo.com
[email protected] Registration No. 0154 Printed at M/S Maaz Prints, Karachi Website: www.islamicbanking.asia
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Academic Advisory Board
Dr. Mohammad Kabir Hassan Professor of Economics & Finance University of New Orleans, USA.
Dr. M. Ishaq Bhatti Associate Professor of Finance and Financial Economics, LA TROBE University, Australia.
Dr. Riham Rizk, Associate Professor in Accounting Durham University Business School, UK
Dr. Zubair Hasan, Professor Emeritus INCEIF Global University of Islamic Finance, Malaysia.
Dr. Rodney Wilson Professor Emeritus, INCEIF, Lorong Universiti A Malaysia/France.
Dr. S. Nazim Ali, Professor and Director, Center for Islamic Economics and Finance, Hamad Bin Khalifa University, Doha, Qatar.
Dr. Mohd. Ma’sum Billah Professor IEI, King Abdul Aziz University, Kingdom of Saudi Arabia.
Dr. Mehboob ul Hassan Professor, Department of Economics, (CBA) King Saud University, Saudi Arabia.
Dr, R. Ibrahim Adebayo Department of Religions, University of Ilorin, Nigeria.
Dr. Huud Shittu Department of Religion and Philosophy, Faculty of Art University of Jos – Plateau State, Nigeria.
Dr. Manzoor Ahmed Al-Azhari, Associate Professor (Islamic Law) Ph.D, Legal Policy, Fac. Shariah & Law. Alazhar University, Egypt. Post Doc. Fac. of Law, Univ.of Oxford, UK.
Dr. Waheed Akhtar Assistant Professor, Comsats Institute of Information Technology (CIIT), Lahore, Pakistan.
Dr. Muhammad Zubair Usmani Jamia Daraluloom Karachi.
Journal of Islamic Banking and Finance Oct – Dec 2019 5
Journal of Islamic Banking and Finance
Volume 36 Oct – Dec, 2019 No. 4
C O N T E N T S
1. Editor’s Note …………………………………………………………………….. .. 07
2. Regulatory Paradigm of Non-Banking Sectors The Case of Saudi Arabia ..... ... 11 By Dr. Faisal M. Atabani
3. Money Creation Concept and Monetary Policy in Islamic Economic: …........... 24 The Role of Malaysian Regulator By Dr. Hafiza Harun
4. Analysis of the Types of Interest (Riba) in Islamic Law …................................ .. 33 By Dr. Mohammad Nawaz Al Hassani
5. Fixed Income Assets of Islamic Banks: Moving Forward …............................. 47
To Adapt A New Role as A Trading House
By Muhammad Ali Shaikh
6. Factors Motivating The Establishment Of Waqf Institution Alleviation …… ... 62
Towards Among Poverty Muslim Ummah in Oyo State, South West, Nigeria
By Ibraheem Alani Abdul Kareem & Dr. AhamadFaosiyOgunbado
7. The Impact of Dividend Policy on Shareholders’ Wealth: A Case Study…… ... 84 of Syariah Compliance Companies
By BalqisMohd Idris, Nadia Farah IzzatiNazri, Syukriah Ali,
HasniAbd Rahim and KartiniKasim
8. Bay’ al-Wafa Repo [BW Repo-i]: {A Proposed Shariah ……………………. .. 97 Liquidity Management Instrument from the Classical Perspective By Abdul-Azeez Maruf Olayemi
9. Book Review:
(Islamic Finance, Principles and Practices)……………………………… ......... 106
By Prof. Dr. Mohd Ma'Sum Billah
6 Journal of Islamic Banking and Finance Oct – Dec 2019
Journal of Islamic Banking and Finance Oct – Dec 2019 7
Editor’s Note
Islamic banking is now one of the fastest growing sectors of the financial market
place and is being practiced as an alternative mode of financial intermediation in many
countries including non-Muslim countries of the world. Conventional banks (CBs) have
also started Islamic windows to offer Shariah compliant financial products, to fulfill the
demand of their customers. Most of the countries, including Pakistan are following a
parallel system where Islamic banks (IBs) operate along with CBs. Being new there are
many questions about the legitimacy of and about people wanting to shift to this system
of banking. People must be sure that the new system being offered is really Shariah
compliant and not an eyewash. Having passed the initial phase successfully which was
necessary for financial sustainability, the industry has now moved towards consolidation
and addressing the issues necessary to maintain separate identity of IBs.
To begin with major portion of the asset portfolio of Islamic banks (IBs) consisted
of Fixed Income (FI) assets. The reason for keeping higher share of FI assets based on
Murabahah, Ijarah and Diminishing Musharaka was obvious. The return paid to
depositors depends on the earning potential of the asset portfolio. Profit and Loss Sharing
(PLS) assets involve investment risk while fixed income (FI) assets based on trading or
ijarah involve credit risk which is considered less risky and easier to manage. Some
failures of PLS financing in the first phase of Islamic banking in Pakistan, in the eighties
also created this impression without going in to the reason of their failure. Therefore the
initial structure of the asset portfolio had a negligible proportion of PLS assets. Although
in sharp contrast with the theoretical model, this reflected the level of risk which the
Islamic banking industry was prepared to take. Continuous criticism from all corners has
brought a change in the trend which is reflected by the recent data and the share of PLS
assets has shown improvement but it is still far from being the main component of asset
portfolio.
Since the portfolio risk is an important element in deciding the structure the journey
towards desired structural change may be longer than expected. Even when all issues
hindering adaption of PLS assets are resolved, complete switch over to PLS assets may
not be practically possible because there are many situations where FI assets are a
requirement. Therefore Fixed Income assets will remain in the portfolio of Islamic banks.
Due to apparent similarity with conventional loans such as fixing of profits and
final liability, credit and collateral based structure etc. these products have drawn
criticism regarding their Shariah compliant status which may question separate identity of
Islamic Banks although when examined closely it can be shown that these similarities are
partly by default and partly as business strategy to keep the stakeholders concerns within
limits.
8 Journal of Islamic Banking and Finance Oct – Dec 2019
But it is not all about similarities. Many structural differences such as restrictions in
cases of rescheduling, rollovers, securitization of the credits etc explain the differences
between conventional methods and trade based financing even though these methods
have a credit and collateral based structure. Research has proved that these restrictions
also offer specific advantages with its different structure and underlying legal contracts.
The real issues emerge from the practice and implementation methodology within
the ambit of Shariah approvals such as: use of interest rate indices as reference points for
fixing of prices and procurement methods which need to be addressed. Addressing the
operational issues will improve risk mitigation, remove operational similarities and
increase confidence of the stake holders (like regulators and depositors) about Shariah
compliance and help retain separate identity of Islamic bank.
The procurement methods adapted by Islamic banks for example in case of
Murabaha are a major source of criticism. The banks do not purchase goods themselves
but complete this requirement by appointing the customer as their agent through an
agency agreement. This meets minimum requirements to qualify for Shariah compliance
status but limits the Islamic bank’s role to disbursing money at the completion of
documentation which is not different from the role of conventional banks, the different
nature of documentation notwithstanding.
Murabaha financing increases bank’s control on the use of funds as compared to a
loan but this advantage is compromised to a great extent by appointing the customer as
agent. Purchasing through the client gives rise to additional risks commonly ignored such
as showing procurement of goods already purchased with fake invoices or over pricing
the goods to keep whole or part of the cash which may turn the transaction non Shariah
compliant besides diluting the collateral as well. These things can also happen in
conventional financing but there is no issue of Shariah compliance.
Islamic Banks have few options to replace purchasing through the client such as
hiring the services of consulting firms or individual consultants specializing in their
respective areas to act as agents, setting up in house procurement department to perform
the purchasing function or to jointly sponsor a subsidiary company owned by the Islamic
banks for this purpose. The size of procurement business with the Islamic banks at
present justifies either of the last two options. Better quality and prices as a result of more
professionally administered and transparent purchases and elimination of costs involved
in monitoring the agency arrangement will more than offset the additional costs of
establishing the procurement department or a subsidiary company. Besides resolving
conflict of interest this arrangement will substantially mitigate default risk and Shariah
risk.
Procurement is not limited to Murabaha. Diminishing Musharaka and ijarah also
involve procurement. In case of Salam and Istisna banks have to sell goods bought from
the customer. Therefore the Islamic bank is practically a trading house. This new role has
to be assumed by the Islamic banks, sooner the better and cannot be avoided any longer.
They have to move forward from a dealer in money and monetary assets to a trader.
Journal of Islamic Banking and Finance Oct – Dec 2019 9
We must remember that even in case of Murabaha procurement through the client
was allowed by Shariah experts for a limited time. Since the Islamic Banking industry
has now grown up this limited approval should be revisited. Time has come that the IBs
now move towards their actual role as a trader in case of trade based financing.
This issue of Journal of Islamic Banking & Finance documents scholarly
contributions from authors around the globe. Contributions in this current issue
discuss the theoretical underpinnings of an Islamic economy, contemporary issues in
Islamic finance and performance based empirical studies on Islamic banking and
finance. Below, we introduce the research contributions with their key findings that
are selected for inclusion in this issue.
The article “Regulatory Paradigm of Non-Banking Sectors the Case of Saudi
Arabia” written by Dr. Faisal M. Atabani, says that Saudi Arabia is one of the main
emerging economy in the world that participating in the G22. Saudi Arabia has been
moving to a very fast towards legal, social and economic reforms. This study aims to
focus on this issue by studying its legal background as well as its implications on the
financial system.
The article “Money Creation Concept and Monetary Policy in Islamic
Economy: The Role of Malaysian Regulator” written by Dr. Hafiza Harun, says that
this research paper applies the literature review based methodology that deliberates the
money status in Islam, Islamic monetary policy and the significant procedures and
financial regulations for monetary policy in Malaysia. Developing a dedicated Islamic
monetary policy has been progressing through continuous effort in embarking in-depth
research on this area besides the existence of Islamic Interbank Money Market which
focuses on absorbing surplus liquidity.
The article “Analysis of the Types of Interest (Riba) in Islamic Law”, Dr.
Mohammad Nawaz, Professor of Islamic Law at The University of Lahore, attempts to
explain Riba, its types and why each type is prohibited with examples from Quran and
Hadith. He presents a differentiation between Qard-e-Hasan and Riba al Nasiyah and
between Riba in general and over pricing.
The article “Fixed Income Assets Of Islamic Banks: Moving Forward To
Adapt A New Role As A Trading House” written by Muhammad Ali Shaikh, says that
this paper deals in detail with issues involved in the practice of FI products particularly
with reference to banks’ new role as a trading house and explains the ways how this role
can be adapted by the Islamic Banks to make FI assets as undisputed viable Shariah
compliant asset creation alternative.
The paper entitles “ Factors Motivating The Establishment Of Waqf Institution
Towards Poverty Alleviation Among Muslim Ummah In Oyo State, South West,
Nigeria” contributed by Ibraheem Alani Abdul Kareem, Faculty of Economics and
Management Sciences Universiti Sultan Zainal Abidin, Terrengganu, Malaysia and Dr.
Ahamad Faosiy Ogunbado, Faculty of Islamic Development Management, Universiti
10 Journal of Islamic Banking and Finance Oct – Dec 2019
Islam Sultan Sharif Ali (UNISSA). Brunei Darssalam is based on a survey they
conducted to determine how widely certain factors influenced the adoption of the
institution of Waqf for poverty alleviation in South west Nigeria. These factors being
attitude, subjective norms and perceived behavioural control.
The article “The Impact of Dividend Policy on Shareholders’ Wealth: A Case
Study of Syariah Compliance Companies” written by BalqisMohd Idris, Nadia Farah
IzzatiNazri, Syukriah Ali, HasniAbd Rahim and KartiniKasim, The market price per
share (MPS) was used as the dependent variable. The dividend policy such as Earnings
per Share (EPS), Dividend per Share (DPS), Return on Equity (ROE), and Retained
Earnings (RE) were used as a proxy of dividend policy and represent as independent
variables. This study used a multiple linear regression analysis at a significance level of
5% processed by Eviews version 9.5 and 10. From the results, it showed that all the
variables proxies of the dividend policy has positive effect on shareholders’ wealth
(MPS).
Abdul Azeez Maruf Olayemi, Ph.D Law, IIUM, Malaysia, Post-Doctoral Fellow,
University of Malaya, Malaysia, Asst. Prof. Jumeira University, UAE, Academic, Ibn
Batut African Institute, Republic of Benin in his paper “Bay’ al-Wafa Repo [BW
Repo-i]: {A Proposed Shariah Compliant Liquidity Management Instrument from
the Classical Perspective” proposes a new instrument for the Islamic Finance money
market which according to him would be tradable and serve to invest excess funds in a
Shariah compliant manner. He goes on to discuss the differences of opinion in various
schools of thought on the permissibility of such an instrument and why.
Disclaimer
The authors themselves are responsible for the views and opinions
expressed by them in their articles published in this Journal.
The opinions, suggestions from our worthy readers are welcome, may be communicated
on
e-mail: [email protected] / facebook link: http://www.facebook.com/JIBFK
Readers Comments
• Professor Abdul Gafoor, The Netherlands.
“I am glad to see that the Journal has greatly improved since I saw a copy
some ten years ago. Congratulations and best wishes. The contents have
increased and the quality of the articles too. Alhamdulillah”.
Journal of Islamic Banking and Finance Oct – Dec 2019 11
Regulatory Paradigm of Non-Banking Sectors the Case of Saudi Arabia
By
Dr. Faisal M. Atabani *
Abstract
Banking system is considered as the main part of a financial system of
any country. A fully regulated financial system is an indicator of stability of the economy. Saudi Arabia is one of the main emerging
economy in the world that participating in the G22. Saudi Arabia has been moving to a very fast towards legal, social and economic reforms.
It has created its famous vision 2030, which is considered the most
constrictive tool to change its future. Moreover, it promulgates several laws and regulations to implement and enforce its vision. Hitherto, some
conventional practices by the society may be considered as against the government developing trends. One of the most critical issue that could
be considered as outside the government control is the Non-Banking
Finance Solutions. This conventional transaction practiced by individuals and commercial entities without a full control from the
financial regulator. This study aims to focus on this issue by studying its
legal background as well as its implications on the financial system. Also, the study will suggest some legal solution to enhance regulatory
supervision that may control such business.
Keywords: Law, Financial Regulation, Non-banking, Experiences,
Saudi Arabia
JEL Classification Code: K11, G18, G23, G 28
Introduction
The Contemporary life is full with responsibilities and entertainments. Thus, people
in all segments demand fund to satisfy their needs. Businessmen looking for fund to
* Author: Dr. Faisal M. Atabani is an Assistant Professor of law, Islamic Economics Institute,
King Abdulaziz. University, Jeddah. [email protected]
12 Journal of Islamic Banking and Finance Oct – Dec 2019
enlarge their businesses, employees require cash-money to pay for housing and other
assets. Most of those have less ability to pay cash for their needs, but they can pay short
to mid-term installments. Legally, fund can be provided only from recognized financial
institutions that are regulated by central banks, such as traditional banks and financing
companies. However, not all people can get the required fund for some regulatory and
risky issues. This is because the requirements demanded by such institutions are
unattainable by all clients. Therefore, clients usually look for alternative methods to
satisfy their needs. The solutions vary, but could come from intuitions or individuals who
are operating out of the central bank of a country. They are known as: non-banking
institutions, leasing companies, shadow banking and individual financiers. Although
these methods of financing are unregulated and in some cases are illegal, but have got a
huge demand from the public attributable to its flexibility in process of payment and
maybe as a result of its low cost.
This paper aims to focus on the issue of non-banking solutions provided by
individual financier. This issue has been expanded widely throughout Saudi Arabia for
several reasons. Funding via individuals as a means of non-banking finance solution has
become a major method of transferring cash from lenders to borrowers. This issue
required an attention from the regulator not to ban it, but to regulate it as long as it
benefits the national economy.
Central Idea
Financial institution refers to any "establishment that focuses on dealing with
financial transactions, such as investments, loans and deposits"1. A financial institution is
an organization that normally takes a form of a company such as banks, trust companies,
insurance companies or investment dealers. Legally, everything related to cash or cash
alike such as depositing money, loans and currency exchanges must be carried out
through the financial institution of a country. Thus, a bank is a financial institution that is
licensed and operates under the supervision of the central bank of a country. It could be:
commercial bank or investment banks. A commercial bank supplies consumer loans to
individuals and investing loans to businesses2. In addition, finance company is an
organization that originates loans for both businesses and consumers3. However, all those
institutions are regulated and operated under the supervision of central banks. Never the
less, the unofficial financial institutions that operate out of the financial systems, such as
non-banking institutions and shadow banking, also provide fund to their clients. They
could be companies or individuals who practice the activity of financing or facilitating
people with cash to satisfy their needs. Non-banking financial companies are financial
institutions that provide banking services, without holding a banking license
authorization. They are not permitted to collect deposits from the public4.
1 Online Dictionary, http://www.investopedia.com/terms/f/financialinstitution.asp 2 Online Dictionary, http://www.investopedia.com/terms/f/financialinstitution.asp 3 Online Dictionary, http://www.investopedia.com/terms/f/financialinstitution.asp 4 Online Dictionary http://www.investopedia.com/terms/n/nbfcs.asp
Journal of Islamic Banking and Finance Oct – Dec 2019 13
Saudi Financial Law:
The central bank of the Kingdom of Saudi Arabia, so called the Saudi Arabian
Monetary Authority (SAMA), was established in 1952. It is a regulatory agency on
monetary area and has been assigned to perform many functions in accordance with laws
and regulations. It has many fundamental functions related to the financial system and its
stability, chiefly, it maintains the strengthening the Saudi currency and stabilizing its
external and internal value, in addition to strengthening the currency’s coverage. It deals
and manages the banking affairs of the government. Moreover, it is responsible for
monetizing and printing the national currency (the Saudi Riyal). Furthermore, it manages
and controls the Kingdom’s foreign exchange reserves and maintains the stability of
prices and exchange rate. Likewise, it promotes the growth of the financial system and
ensuring its soundness. It supervises and regulates commercial banks, exchange dealers,
finance companies, cooperative insurance companies, self-employment professions
relating to the insurance industry and credit information companies. The Saudi Arabian
Monetary Authority is empowered to issue regulations and policies to perform the above
functions and to achieve its goals5.
The Saudi financial law includes many codified laws and regulations including;
Banking Control Law, Currency Law, Credit Information Law, Anti-Money Laundering
Law, Anti -Forgery Law, Regulations for Consumer Financing, Regulatory Rules for
Prepaid Payment Services in the Kingdom of Saudi Arabia, Finance Companies Control
Law, Finance Lease Law, Implementing Regulation of the Finance Companies Control
Law, Insurance Corporate Governance Regulations, Investment Regulations, Online
Insurance Activities Regulation, Insurance Intermediaries Regulation, The Regulation of
Reinsurance Activities6. However, SAMA is entitled to manage and control the financial
system by implementing and enforcing these laws and regulations among the financial
industry operators, mainly, commercial banks, finance companies, insurance companies
and other financial institutions7. Therefore, the circulation of money in the country must
be operated within the financial system and its licensed financial institutions as restricted
by the law “No person, natural or juristic, unlicensed in accordance with the provisions
of this Law, shall carry on basically any of the banking business”8. Obviously, it is
criminal offence to breach the rules of this law “Any person who contravenes the
provisions of para 1 of Article 2, Article 5 and items a, b and c of para 1 of Article 11,
Article 12 and Article 18, shall be liable to imprisonment for a term not exceeding two
years and to a fine not exceeding SAR 5,000 for every day the offense continues or to
either of these penalties”9. Hence, any circulation of money as credit or for investment
purposes or even for the aim of charity performed outside the financial system is
considered illegal and lead to punishment.
5 See SAMA official website: http://www.sama.gov.sa/en-US/About/Pages/SAMAFunction.aspx. 6 See SAMA official website: http://www.sama.gov.sa/en-US/Laws/Pages/default.aspx. 7 Art. (1) Banking Control Law issued by the Royal Decree No. M/5 Dated 22.2.1386. 8 Art. (2) Banking Control Law (1386). 9 Art. (23) Banking Control Law (1386).
Regulatory Paradigm of Non-Banking Sectors The Case of Saudi Arabia
14 Journal of Islamic Banking and Finance Oct – Dec 2019
The concept of Non-banking Activities:
A banking system is a structural network of financial entities that operate as
financial intermediation by offering financial services within a state. These entities
include (1) commercial banks, which take deposits and make loans, (2) investment banks,
which specialize in capital market issues and trading, and (3) national central banks,
which issue currency and set monetary policy10. Banks mainly assist in maintaining an
effective payment and credit system. Moreover, these financial intermediation entities are
fully regulated throughout the financial system by the central banks. A non-banking
company may be defined as “a company which receives any deposit under any scheme of
arrangement, by whatever name called, in one lump sum or in installments or in any other
manner and which is not an equipment leasing company, hire purchase company, a
housing finance company, an insurance company, an investment company, a loan
company, mutual benefits financial company or a miscellaneous non-banking
company”11. On other side, non-banking finance could be interpreted as informal finance,
where money funded informally, not within banks, neither through official finance
companies. Basically, money funded to individuals and maybe to entities through normal
persons, such as moneylenders, or legal persons, such as devices and electronic shops.
They utilize Shariah complied contracts (i.e. installments sale contract) to provide fund to
those who need it. In this regard, a view considers that informal financial institutions play
a complementary role to the formal financial system by servicing the lower end of the
market12. It is difficult to broadcast the volume of money funded through this
mechanism, but some indications can be monitored from disputes lawsuits arising before
the court as a result of failures of repayment. Of course, these sale operations concluded
between parties aiming cash fund rather than the product itself, which is called Tawaruq
contract. Thus, the dilemma in this case is that it is so difficult to distinguish between sale
and finance contracts as well as to classified this type of transaction whether within trade
or finance transitions. These distinction and classification should affect the regulatory
supervision as well as the jurisdiction of litigation. For example, in case of finance
transactions, the main regulatory supervision performed by SAMA and the jurisdiction of
litigation should be within the Committees of Banking and Finance Disputes and
Violations13. Moreover, non-banking financial services can be called shadow banking,
which refers to "financial intermediaries that conduct maturity, credit, and liquidity
transformation without access to central bank liquidity or public sector credit
10 See the Business Dictionary, http://www.businessdictionary. com/ definition/ banking-
system.html 11 Perumal, A and Satheeskumar, L. “NON-BANKING FINANCIAL COMPANIES” ‘Asia
Pacific Journal of Research’ August 2013, Volume: II, Issue: VIII,
http://apjor.com/files/1376927577.pdf. 12 Ayyagari, M., Demirgüç-Kunt, A and Maksimovic, V. “Formal versus Informal Finance:
Evidence from China” The Review of Financial Studies, Vol. 23, No. 8 (August 2010), pp.
3048-3097, https://www.jstor.org/stable/40782976?seq=1&cid=pdf-
reference#references_tab_contents 13 http://www.bfc.gov.sa/ar-sa/Aboutus/BankingDisputesCommittees/Pages/default.aspx
Journal of Islamic Banking and Finance Oct – Dec 2019 15
guarantees14." The aim of these activities is to provide fund or liquidty to those who
donot fulfil the legal and financial requirements to get their financial needs from official
banks. This section of community is essential, as nearer to 72% of adults in the
developing world do not have accounts15.
Non-banking Solutions: An Experience in Saudi Arabia
Although Saudi Arabian Monetary Agency (SAMA) regulates banks and other
finance companies, still unregulated finance activities are taken place widely in the
country. The regulatory requirements are considered as the main reason that why
borrower prefer to borrow from outside the financial system. For example, SAMA has
issued restriction by which banks are not allowed to lend a borrower a loan that its total
monthly installments shall not exceed one-third of the net monthly salary of the borrower.
Moreover, the maturity of loans for consumption use (excluding real estate loans) shall
not exceed five years to be paid. Obviously, clients will go to unregulated finance sector
to satisfy their needs that are not satisfied under the regulated finance sector. This
rationale leads to an increase in the unregulated finance sector. In this respect, it is
counted that unregulated personal loans outside the banking sector has rapidly increased.
Basically, numbers of commercial agencies and debt collection offices as well as
individuals who have the ability to finance the purchases of others, all have constitute the
unregulated market that provide cash money for individuals and small businesses with
less restrictions on requirements. Moreover, in addition to such tolerance, these
institutions adopt the Shariah principles, which mean that these transactions are free from
Riba as they are loans based on installment sale contract.
Financing transactions in this environment can be described as purchasing and
reselling products instrument, which means that money is transferred from lenders and
borrowers through real trade. Basically, a lender who has instant liquidity can buy
whatever products a borrower requires on a base of the market price. He will sell such
products to the borrower on installments base for a certain future period of time. Of
course the selling price is higher than the instant cash payment. Then as the borrower
intended to acquire cash, he will resell this product on the market with less amount of its
original price to have the cash he needs. Therefore, the lender has got the profit, which is
the deference between the delayed installments and the cash prices. The borrower
satisfied his need by liquidating the product into cash and the lender got profit over his
capital. In Islamic finance this is called "Tawarruq" by which the lender sells a property
to the borrower for deferred payment at cost plus profit. The borrower then sells the
14 Schwarcz, S. L. (2011-2012). Regulating Shadow Banking, Review of Banking & Financial
Law, 619-642,
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3121&context=faculty_scholars
hip&sei-
redir=1&referer=http%3A%2F%2Fscholar.google.com%2Fscholar%3Fq%3DRegulating%2
BShadow%2BBanking%26btnG%3D%26hl%3Den%26as_sdt%3D0%252C5%26as_vis%3
D1#search=%22Regulating%20Shadow%20Banking%22 15 Kendall, Jake & Mylenko, Nataliya & Ponce, Alejandro. (2010). “Measuring Financial
Access Around the World”. The World Bank, Policy Research Working Paper Series.
Regulatory Paradigm of Non-Banking Sectors The Case of Saudi Arabia
16 Journal of Islamic Banking and Finance Oct – Dec 2019
same property on the market to a third party on spot basis and gets instant cash. So he can
use this cash to his satisfy need. According to Islamic law, the borrower must not resell
the property back to the lender, otherwise it will be Riba concealed on sale transaction
which is prohibited.
However, the lender will require collaterals to assure that the borrower will pay all
installments on time. The most important collaterals required by the lender are: to present
signed checks dated according to the installments dates, and to provide sponsor guarantor
who will be committed to repay in case of failure.
Legal Framework of Finance Activities in Saudi Arabia
Finance activity is regulated by Saudi Arabian Monetary Agency (SAMA). In
addition to banking control law that regulates banks in Saudi Arabia, SAMA has issued
several laws to regulate finance activity. These laws are applicable to banks as well other
finance companies. The most important laws are: the law on supervision of finance
companies and its implementing regulations, the financial lease law and its implementing
regulations, and real estate finance law and its implementing regulations16. According to
the law on supervision of finance companies, article (4) restricts practicing finance
activity and permits this activity only to those who holds a finance license from SAMA.
Thus, licensees are subject to all requirements that control this activity and protect rights
of all parties.
Definitely, finance activity regulated under these laws is considered part of Saudi
financial system in spite of that it is practiced through non-banking institutions. This is
because SAMA allows finance companies to provide Islamic finance to loans seekers.
The above laws cover all aspect of this activity to stabilize the Saudi financial system. By
these laws, SAMA aims to establish a regulated secondary market for finance activity in
order to ensure the successful comprehensive financial system. Moreover, the aim of
these laws is to control financial risks that could be resulted from finance transactions.
The finance laws seek to preserve the rights of the parties involved: the lender and
the borrower or beneficiary. This can be executed through clear control process, and
provide greater transparency and disclosure that enables each party to access the required
data and information s/he need. For example, as the finance should include a property
such as a land, both parties should have access to the Land Registry at the Ministry of
Justice and the mortgage market, which will help them to take the right decision to
preserve the rights and provide them with the best alternatives.
In this respect, it is important to make a clear explanation that finance activity
involved two dimensions. The first one is the process of finance, which involves
providing liquidity to satisfy the client need. However, to comely with Islamic principles,
clients will not get cash money, but a property of his need or a property to be liquidated
afterward via himself. This process totally will be controlled by SAMA. Secondly, there
is the mortgage law, which regulates mortgage process, such as real estate registration.
16 Saudi Arabian Monetary Agency, http://www.sama.gov.sa/sites/samaen/ Finance/
Pages/Laws.aspx
Journal of Islamic Banking and Finance Oct – Dec 2019 17
ATTN: This is regulated and managed by the Ministry of Justice. Similarly, if the process
involved other properties such as vehicles or machines, then Ministry of Commerce will
be involve as a regulator applying the law of installment sale. The most important issue
negatively affecting this activity is the lack of information exchange between these
ministries, which is likely to affect the smoothness of finance activity. Moreover, the
regulator enforce that each finance transaction shall be insured by a Saudi insurance
company to protect parties in case of payment failure.
Legal Base of Unregulated Finance Activities
If we exclude banks and regulated finance companies, there will be individual
financiers, vehicle dealers and other machines traders, who provide loans via selling
assets. Although they are not regulated, they can be considered as self-regulated
intuitions. This is because individual investors of this filed want to secure their capital,
businesses and reputation. They mentor the market and try to implement the best practice.
Although they seek profit, they also maintain their transactions from any fraud.
Moreover, they lend their money via installment sale, so they are exposed to capital risk.
Therefore, their arrangement is an indicator of self-regulatory institutions. Definitely,
there could be some failure of complying with the norms and standards of some relative
laws, so the last resort is arbitration or lawsuit at a court.
These intuitions and individuals do not have organized union or membership in an
entity, but it is sort of normal business. For individuals, they may not have a commercial
identity, but they practice buying and selling according to their capacity as normal
persons. Therefore, individual financiers deal in such transactions in their civil capacity,
which allows them to buy, sell as well as issuing checks. It is legal for anyone to buy and
sell real estate properties or vehicles, without being a traders or holding commercial
license. Therefore, buying any of these properties in cash and reselling them on
installments is valid.
However, although this activity is practiced out of the financial system, it is
practiced within the law of sale by installments, which has been issued by ministry of
commerce17. This law is considered as the base of non-banking solutions in Saudi
Arabia. It is a law that legalizes the installment sale transactions. Most players in the
unregulated finance market depend on the law of installment sale and invest their capital
according to this law. Therefore, they are practicing legal transactions, but apart from the
supervision of SAMA. If we look at the transactions, they are installment sale
transactions, but in reality, they are finance transactions through installment sale
contracts.
According to the law of sale by installments, installment sale transactions are
restricted to practitioners who have a company or an institution that is licensed from
17 Ministry of Commerce and Industry, the law of sale by installments, No. (M/13) dated
(13/4/2005).
http://www.mci.gov.sa/en/LawsRegulations/SystemsAndRegulations/SystemOfRetail/Pages
/default.aspx
Regulatory Paradigm of Non-Banking Sectors The Case of Saudi Arabia
18 Journal of Islamic Banking and Finance Oct – Dec 2019
Ministry of Commerce. Moreover, the law sets down several restrictions and standards
that must be complied with. Nevertheless, many individuals practice finance transactions
without holding legal entity as prescribed by the law. They invest their own fund simply
by providing products to cash seekers who buys these products in installments and then
resells them on the market to get cash. Thus, the nature of this transaction is legal under
the general principles of Shariah law, particularly, rules of contract of sale.
In addition, the transaction of installment sale requires the implementation of
commercial papers law18. The buyer (borrower) has to present checks that are dated
according to the installments payable dates. According to the commercial paper law, "the
check is due paid once viewed and every statement in violation of that is considered
none. And if the check is presented for payment before the day of its issuance date, it
shall be paid on the day of its presentation"19. Thus, the borrower (the drawer) has no
way to evade from payments. In this case, the lender (the drawee) insures that his money
is guaranteed. The only risk he bears is the risk of proceedings in case of failure, although
it is straightforward case. In case of disputes or failure to withdraw a check, the lender
(the drawee) will litigate against the borrower (the drawer). This will take some steps
with normal procedures. Commercial Papers Law is issued to protect checks beneficiaries
from being deceived. So, from the lender (seller) viewpoint, it is profitable business with
low risk. Usually the lender will implement short or medium contracts of installment sale,
as they are more controllable than long-term contract.
However, in July 2019, “the law of sale by installments” was abolished and
deactivated by the decision of the Council of Ministers for regulatory reasons. One reason
is that the law was a legal cover to practice finance outside the banking system.
Moreover, this action will give more power to finance companies to practice their
activities through the Finance Companies Control Law. However, the cancelation of “the
law of sale by installments” will not affect licensed finance companies to operate until the
expiry of their licenses and then such licenses will not be renewed. The government
decides penalties for any violation committed to in this regard20.
Shari'ah Principles of Finance Activities
It is agreed upon majority of Muslim scholars that exchange money with money
with extra profit or any advantage because of time is prohibited21. Islamic finance is
based on the prohibition of transactions that involve interest or usury, known as Riba.
Consequently, Muslim scholars agreed on some alternative methods to operate interest-
free financial institutions. To avoid interest, Islamic financial system mainly depends on
the profit-loss sharing (PLS) as a mode of finance, which depends highly on trade. In
addition, Islamic finance prohibits businesses dealing with alcohol, gambling, drugs or
18 Commercial Papers Law, http://www.mci.gov.sa/en/LawsRegulations/ SystemsAnd
Regulations/ CommericalPapersSystem/Pages/default.aspx 19 Commercial Paper Law, art. 102. 20 Decision No. (646) dated 16/7/2019, see the official governmental journal,
https://www.uqn.gov.sa/articles/1564007133147079900/ 21 M. Lewis, L. Algaoud "Islamic Banking" Edward Elgar, Cheltenham, 2001.
Journal of Islamic Banking and Finance Oct – Dec 2019 19
anything else that the Shariah considers unlawful. Moreover, it prohibits any transaction
involving Maysir (speculation or gambling). Finally, finance transaction must be free
from Gharar, or uncertainty concerning the subject-matter and terms of contracts – this
includes a prohibition on selling something that one does not own22.
Therefore, considering these principles, practicing finance through trade and avoiding unlawful elements is a legal and is to be in compliance with Islamic law. In spite of that, governmental regulatory supervision cannot be ignored from Islamic legal system. This issue should come in line with Islamic rules and principles. The legal base for this issue is the verse "O ye who believe! Obey Allah, and obey the Messenger, and
those charged with authority among you".23
The Economics of Non-banking Solutions
It is estimated by the Saudi Bureau (SIMAH) that amount of the financing transactions outside the banking sector is to be between 100 and 120 billion Saudi Riyals. This amount comprises both capitals invested by individuals, as well commercial entities that operate in the retail trade, such as vehicles, machines, and jewelry etc24. In fact, this market exists globally, but is growing rapidly in Saudi Arabia as a result of involving contracts of installment sale, which are different from interest-based loans.
The economic aspect of non-banking finance activity is generated from several factors. These factors almost concern with the national economy. This includes: capitals investment, providing finance individuals and small businesses, market effectiveness, as well as labor power. First factor is to provide investment vehicle for those who have capital and want to invest it with rescannable return and low risk. The term investment vehicle refers to "any method by which individuals or businesses can invest and, ideally,
grow their money"25. According to Islamic law, saved money if not invested, it will be
slowly diminished by the religious tax (Zakat). This is because the system of Zakat deducts a percentage of 2.5% annually from the whole deposited money. That is why investment is a must to avoid paying Zakat on the net capital. However, Zakat will be accounted differently in case of investment. Therefore, non-businessmen (i.e. cash owners) need to invest their saving to avoid direct Zakat on the savings. Thus, they aim to increase it as well as to have extra income through investment. Second factor is to provide cash for those who want to start new business. This type of finance mainly benefits small businesses and is considered as a microfinance tool. Supporting microfinance for small businesses is an important tool for national economies. It is
proved that microfinance helps to promote economic growth and development26. It is
agreed that businesses by young entrepreneurs positively affect economic growth; by the
22 Atbani, Faisal "the prevention of financial crime within an Islamic legal framework", in
'Institute of Economic Affairs' 2007. Published by Blackwell Publishing, Oxford,
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0270.2007.00706.x/abstract . 23 The Holy Quran, 4 (59). 24 SIMAH report, see http://www.aleqt.com/2013/05/26/article_758624.html 25 Online Dictionary, http://www.investopedia.com/terms/i/investmentvehicle.asp 26 Sadegh Bakhtiari, 'Microfinance And Poverty Reduction: Some International Evidence'
"International Business & Economics Research Journal" Vol 5, Number 12, December 2006.
Regulatory Paradigm of Non-Banking Sectors The Case of Saudi Arabia
20 Journal of Islamic Banking and Finance Oct – Dec 2019
way that entrepreneurship plays a different role in countries in different stages of
economic development27. Therefore, all talent youngsters, who have skills but are lack of
fund ability, will have an opportunity to start their own businesses and will be able to get fund and execute their ideas. Mostly, young entrepreneurs want to demonstrate themselves and are willing to discharge their debts of the borrowing in order to totally own the businesses and confirm success. However, the overall of microfinance aspect is to support the wide range segment of society who has no direct access to banks by finding alternative solution to start their businesses. This might fill up an important gap in a society by utilizing different skills in the society. Third factor is to provide liquidity for those who need cash to fulfill their need. Surely, such needs are mainly consumption, but definitely consuming products will enhance production process and consequently empower the market force of supply and demand. Both supply and demand determine a market’s equilibrium, which in turn affects the price and quantity of the good that is
purchased and produced28. Indeed, the behavior of some consumers that they borrow
money to meet their consumption needs, such as entertainment. Thus, it is obvious that a
boost in the ratio income will have to carry with it a boost in the ratio of consumption29.
This is a normal of the behavior of a society30. Fourth factor, there is the factor of
employment, which is a major player in the national economy. Employment factor is a consequence of the above factors. Therefore, more investment, effective market of supply and demand as well as creating a wide base of small businesses, will enlarge the employment force. Microfinance creates small businesses which lead to self-employment. This will entitle self-employees to earn an income as if they were formally
fully employed31. However, all the above economic factors of non-banking solutions
require legal environment and regulatory supervision. Of course, sometimes regulatory supervision is to be harsh and disliked by investors as it makes things complicated. Indeed, most investors prefer to secure their investment in smooth legal and healthy environment, but not complicated.
27 Andre Stel, Martin Carree and Roy Thurik, "The Effect of Entrepreneurial Activity on
National Economic" Growth, http://www.econstor.eu/dspace/bitstream/10419/ 19995/
1/2005-04.pdf 28 Nicholas G. Mankiw, 'The Market Forces of Supply and Demand',
http://www.cengage.com/economics/mankiw/samplechapter/Mankiw6e_Econ_Ch04.pdf 29 James Heckman, ' Life Cycle Consumption and Labor Supply: An Explanation of the
Relationship betweenIncome and Consumption over the Life Cycle' The American
Economic Review, Vol. 64, No. 1 (Mar., 1974), pp. 188-194.
http://www.cenet.org.cn/editor/userfiles/other/2012-06/2012060911181740697625.pdf 30 John Maynard Keynes, The General Theory of Employment, Interest and Money,
http://www.marxists.org/reference/subject/economics/keynes/general-theory/index.htm 31 Beatriz Armendáriz, ' Microfinance for Self-Employment Activities in the European Urban
Areas: Contrasting Crédal in Belgium and Adie in France' "Centre Emile Bernheim"
Working Paper N° 09/041 October 2009.
Journal of Islamic Banking and Finance Oct – Dec 2019 21
Conclusion
Financial services can be described as the human body; if any part of it suffers, the
rest of the body will also suffer32. This example illustrates the significance of a financial
system to all commercial and non-commercial transactions in a country. Definitely,
without a strong and stable financial system, society cannot operate properly. However,
any leak of this system could cause harm if not be dealt properly. Thus, all financial
transactions that are operated out the financial system should be noticed. The discussion
of this paper shows that individual financiers are widely investing their saved fund
through Islamic mode of finance, particularly Tawarruq contract. This trend is not
regulated, but at the same time, from Shariah perspective, is not illegal transaction as
such transactions are operated under the general principles of Islamic law. Considering
the economic aspect of this activity as well as its legal background, it not sensible to
prohibit such activity, but prudential regulation is required. In this case, regulation could
indirectly reduce fragmentation, interconnectedness and opacity33. So, more transparency
and market discipline will be enhanced for all parties involved. However, by abolishing
“the law of sale by installments”, all registered entities operating such business will be
enforced to stop and terminated.
Yet, indeed, individual parties engaged in this activity, whether the financiers or the
beneficiaries will privately continue, as there is no restrictions to buy and sell on the open
market. Clearly, moneylenders can easy practice such business without the need to
change their identity by becoming an official trader under commercial identity, as the
commercial identity is an obstacle for most private financiers.
However, in order to reach a good level of reasonable regulation for private
financiers performed informally by non-banks, this study suggests that such activity
(personal finance) can be self-regulated. Self-regulation is a control and management of
certain behavior by members of a group apart from governmental involvement34. It refers
to "a regime of collective rulemaking, whereby an industry-level entity develops and
enforces rules and standards governing behavior of all industry members"35. This
suggestion requires further research and empirical investigation to prove its validity.
32 Faisal Atbani, 'Financial Risks in Islamic Banking System and the Regulatory Implications
of the Basel II Accord' PhD thesis, University of London, 2007. 33 Schwarcz, see footnote 5. 34 R Baldwin and M Cave Understanding Regulation: Theory, Strategy, and Practice
(University Press, Oxford 1999) 125 -126 35 Saule T. Omarova, Wall Street as Community of Fate: Toward Financial Industry Self-
Regulation, vol. 159 U. PA. L. REV. 411 (2011).
Regulatory Paradigm of Non-Banking Sectors The Case of Saudi Arabia
22 Journal of Islamic Banking and Finance Oct – Dec 2019
References:
Articles:
Perumal, A and Satheeskumar, L. “NON-BANKING FINANCIAL COMPANIES” ‘Asia
Pacific Journal of Research’ August 2013, Volume: II, Issue: VIII,
http://apjor.com/files/1376927577.pdf.
Ayyagari, M., Demirgüç-Kunt, A and Maksimovic, V. “Formal versus Informal Finance:
Evidence from China” The Review of Financial Studies, Vol. 23, No. 8 (August
2010), pp. 3048-3097, https://www.jstor.org/stable/40782976?seq=1&cid=pdf-
reference#references_tab_contents
Schwarcz, S. L. (2011-2012). Regulating Shadow Banking, Review of Banking &
Financial Law, 619-642,
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3121&context=faculty
_scholarship&sei-
redir=1&referer=http%3A%2F%2Fscholar.google.com%2Fscholar%3Fq%3DRegu
lating%2BShadow%2BBanking%26btnG%3D%26hl%3Den%26as_sdt%3D0%25
2C5%26as_vis%3D1#search=%22Regulating%20Shadow%20Banking%22
Kendall, Jake & Mylenko, Nataliya & Ponce, Alejandro. (2010). “Measuring Financial
Access Around the World”. The World Bank, Policy Research Working Paper
Series.
Atbani, Faisal "the prevention of financial crime within an Islamic legal framework", in
'Institute of Economic Affairs' 2007. Published by Blackwell Publishing, Oxford,
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0270.2007.00706.x/abstract .
SIMAH report, see http://www.aleqt.com/2013/05/26/article_758624.html
Sadegh Bakhtiari, 'Microfinance and Poverty Reduction: Some International Evidence'
"International Business & Economics Research Journal" Vol 5, Number 12,
December 2006.
Andre Stel, Martin Carree and Roy Thurik, "The Effect of Entrepreneurial Activity on
National Economic" Growth,
http://www.econstor.eu/dspace/bitstream/10419/19995/1/2005-04.pdf
Nicholas G. Mankiw, 'The Market Forces of Supply and Demand',
http://www.cengage.com/economics/mankiw/samplechapter/Mankiw6e_Econ_Ch0
4.pdf
James Heckman, ' Life Cycle Consumption and Labor Supply: An Explanation of the
Relationship betweenIncome and Consumption over the Life Cycle' The American
Economic Review, Vol. 64, No. 1 (Mar., 1974), pp. 188-194.
http://www.cenet.org.cn/editor/userfiles/other/2012-
06/2012060911181740697625.pdf
John Maynard Keynes, The General Theory of Employment, Interest and Money,
http://www.marxists.org/reference/subject/economics/keynes/general-
theory/index.htm
Beatriz Armendáriz, ' Microfinance for Self-Employment Activities in the European
Urban Areas: Contrasting Crédal in Belgium and Adie in France' "Centre Emile
Bernheim" Working Paper N° 09/041 October 2009.
Saule T. Omarova, Wall Street as Community of Fate: Toward Financial Industry Self-
Regulation, vol. 159 U. PA. L. REV. 411 (2011).
Journal of Islamic Banking and Finance Oct – Dec 2019 23
Books:
The Holy Quran.
M. Lewis, L. Algaoud "Islamic Banking" Edward Elgar, Cheltenham, 2001.
R Baldwin and M Cave Understanding Regulation: Theory, Strategy, and Practice
(University Press, Oxford 1999) 125 -126
Faisal Atbani, 'Financial Risks in Islamic Banking System and the Regulatory
Implications of the Basel II Accord' PhD thesis, University of London, 2007.
Websites:
1. Online Dictionary, http://www.investopedia.com/terms/f/financialinstitution.asp
2. Official website of Saudi Arabian Monetary Agency (SAMA):
http://www.sama.gov.sa/en-US/About/Pages/SAMAFunction.aspx.
3. The Business Dictionary,
http://www.businessdictionary.com/definition/banking-system.html
4. Official website of Committees of Banking and Finance Disputes and Violations:
http://www.bfc.gov.sa/ar-
sa/Aboutus/BankingDisputesCommittees/Pages/default.aspx
5. Official website of Ministry of Commerce and Industry,
http://www.mci.gov.sa/en/
6. Official website of the official governmental journal,
https://www.uqn.gov.sa/articles/1564007133147079900/
Legislations:
7. The Law of Sale by Installments, No. (M/13) dated (13/4/2005).
8. Banking Control Law issued by the Royal Decree No. M/5 Dated (11/5/1966).
9. The Law on Supervision of Finance Companies issued by the Royal Decree No
M/51 dated (3/7/2012).
10. The Real Estate Finance Law issued by the Royal Decree No M/50 dated
(3/7/2012).
11. The Law of Commercial Papers issued by the Royal Decree No. M/37 dated
(24/3/1964).
Regulatory Paradigm of Non-Banking Sectors The Case of Saudi Arabia
24 Journal of Islamic Banking and Finance Oct – Dec 2019
Money Creation Concept and Monetary Policy in Islamic Economy: The Role of
Malaysian Regulator By
Dr. Hafiza Harun
Abstract:
The uniqueness of Islamic economics system lies on its underlying principles and philosophies. Islamic principles stand as the guiding rules in ensuring all mechanisms and relevant activities of economics are in compliance with Shariah. Undoubtedly, the creation of money requires for a meticulous process as the observation of any elements of non-compliance with Shariah must be put in place. The involvement of ethical foundation is also exclusive and worth to be emphasized as a reflection of Islam and a perfect religion. By focusing to Malaysian monetary policy and economics jurisdiction, indeed, the role of regulator is very crucial and being stressed in this discussion. This research paper applies the literature review based methodology that deliberates the money status in Islam, Islamic monetary policy and the significant procedures and financial regulations for monetary policy in Malaysia. Developing a dedicated Islamic monetary policy has been progressing through continuous effort in embarking in-depth research on this area besides the existence of Islamic Interbank Money Market which focuses on absorbing surplus liquidity.
Keywords: Money, Islamic monetary, Malaysia
JEL Code: E52
1.0 Introduction
Islamic financial system is based on the principle Shariah or Islamic law. The
major enemy for this system is directed to the interest creation or riba which
Author: Dr. Hafiza Harun is a Vice President/Head, Shariah Management Department,
Export-Import Bank of Malaysia. Email: [email protected]
Money Creation Concept and Monetary Policy in Islamic Economy: The.........
Journal of Islamic Banking and Finance Oct – Dec 2019 25
serves to be the foundation in conventional regime. In catering this matter, Islamic
financial system emphasizes on the justice which lies on the existence of equivalent
counter value (iwad) to justify any profit gained. “Three elements of iwadh that should
exist are risk (ghorm), work and effort (ikhtiar) and liability (daman).” (Paldi, 2014). The
existence of equivalent counter value validates any profit gained from the respective
transaction. Within a justifiable and consistent with Shariah law, “Islam prohibits
Muslims from taking or giving interest (riba) regardless of the purpose for which such
loans are made and regardless of the rates at which interest is charged”. (Ariff, 1988).
Obviously, the implication of riba application tarnishes economic system by impeding
community to grow by pushing defaulters into enslavement of unresolved compounding
debt. (Kuran, 1995). This basis serves to be one of its prohibition evidences as clearly
stated in the sources of Shariah, namely Al- Quran and the hadith of Prophet Muhammad
(pbuh).The focal deliberation on economic system is inevitable from monetary related
discussion. Monetary policy, creation processes and procedures are among the anticipated
topic which always invite for debate and intellectual discourse. The status of money from
conventional setting is obviously different from Islamic point of view. Based on Parguez
(2011), his experiment on the core process of money creation reveals “that in a monetary
economy money cannot be a “reserve of value” because it would imply that it has some
“intrinsic” permanent value. The law of circulation imposes that money has a pure
“extrinsic” value which is the net real wealth resulting from expenditures generating its
creation.” Worth to further consider, the ideology of interest based system comes along
with money creation. Irrefutably, the nature of conventional financial system focuses on
generating revenue besides considering other impactful elements due to it. Capitalism is
of the view that there is a rampant right in capital which does not require for a vindicated
risk for any return gained for the lender. The application of interest and its components is
used by conventional financial institutions in providing loans to public. Hanif (2014)
reiterates “As the bank is dealer of money; and reward for using money is interest
according to capitalist system; so the prime source of revenue and cost of funds to
conventional banks is charging interest through lending and accepting deposits for
interest respectively”. On another point of view, McLeay, Radia and Thomas (2014)
clarify on the misconception about money creation in modern economy. Some advocates
were raised are on the own creation deposits by commercial bank and central bank’s
strategies in managing money creation for the nation. Responding to this issue, a robust
monetary policy is the key solution to ensure that money growth is consistent with its
objective of low and stable inflation. By implementing Islamic banking system, the
respective regulatory in Malaysia has its own mechanism in handling this process.
Therefore, for this purpose, this paper examines the roles played Malaysian regulators in
ensuring the effectiveness of policy execution within the ambit of money creation. In
reflecting the discussion of the research, the organization of this paper shall be as follows.
Next section starts with literature reviews on the status of money in Islam, money
creation process in Islam and roles of Malaysian regulators in money creation. This
section is followed by the research methodology and finally, the paper ends with the
conclusion.
Money Creation Concept and Monetary Policy in Islamic Economy
26 Journal of Islamic Banking and Finance Oct – Dec 2019
2.0 Literature Review
2.1 The Status of Money in Islam
Money is basically defined as a tool to facilitate a transaction. Therefore, in simple
understanding, money does not have its own value to function by itself in
generating any profit. Khan and Mirakhor (1994) emphasize that “early Muslim
scholars considered money as a medium of exchange, a standard of value, and a unit of
account but rejected its function as a store of value for which money could be sought as
an end in itself”. In the event of exchanging money, there are 2 significant guidelines
which must be observed to ensure compliance with Shariah. Firstly, money has to be only
a medium of exchange. Secondly, any exchange of money must be done on spot and at
the par value. (Ismail, 2005). In other words, it is permissible to trade money for
commodity, commodity for commodity, however, not money for money as this would
lead riba creation. (Paldi, 2014). Considering money is not a capital, it is an effort to be
taken by an individual (owner of money) to transform the potentiality into actuality.
(Khan and Mirakhor, 1994). This circumstance is strictly important to mitigate and
disallow riba with its related elements. At the same time, the role of money needs to be
acknowledged based on Islamic principles and precepts as well as fulfilling the Maqasid
of Shariah (Santoso, 2012).
The discussion under this section is concentrated on the status of money from the
primary sources of Shariah, namely Al-Quran and Hadith of Prophet Muhammad (pbuh).
It is defined in classical fiqh that money is being referred to the one and only object, i.e.:
coins. According to Choudhury (2005), “money in Islam is seen as a highly significant
carrier of values that span real market exchange, justice, security, growth and
organization as also the realm of mankind's medium that links existence between this
world and the Hereafter (Akhira).” As the emphasis put by Islam is on justice and
cooperation, hence it serves to protect the rights of contracting parties in order to mitigate
further discrepancies that may arise in future. Allah says in Surah An-Nahl, verse 90
which mentions:
“Indeed Allah enjoins justice and kindness and generosity towards relatives, and
He forbids indecency, wrong, and aggression. He advises you, so that you may take
admonition.”
Financial dealings in Islam emphasize on the fairness as no one could intervene
others’ rights and obligations discriminatorily. “In the case of money, debasement can
occur either by excess supply or shortage of supply.” (Choudhury, 2005). The arguments
of Islamic scholars on issues related to money lies more on the implementation of
fractional reserve banking and interest charging mechanism. (Santoso, 2012; Meera and
Larbani, 2009). In simple definition, fractional reserve banking would possibly allow the
bank to create more fiat money which is not backed by gold or other things that have
intrinsic values. Subsequently, without a proper mechanism to back the issuance of fiat
money, it leads to argument on its validity from Shariah point view. Another argument is
pointed by Meera and Larbani (2009) on the principle of ownership in the fractional
3
Journal of Islamic Banking and Finance Oct – Dec 2019 27
reserve banking system. It has been discovered “that FRB creates ownership out of
nothing, neither with legitimate work nor taking on commensurable risks; thereby
transferring ownership wrongfully.
Conventionally, it is deliberated that the amount of money created in the economy
ultimately depends on the monetary policy of the central bank. In normal times, this is
carried out by setting interest rates. The central bank can also affect the amount of money
directly through purchasing assets or ‘quantitative easing’. (McLeay, Radia and Thomas
2014). This mechanism decisively does not correspond to the nature of Shariah precept
which bans the interest in any means. Besides this reason, Ricks (2011) has suggested on
alternative solution in handling issues related to money creation. “It starts by trying to
build a theory—a model that captures essential features of reality. From the vantage point
of that theory, it seeks to explain, specifically, how government intervention might be
expected to improve upon lais-sez-faire outcomes. Implicitly, this approach recognizes
that not all social problems have policy solutions.
There are numerous of Prophet Muhammad (pbuh) ahadith which laid discussions
on money related matter. One of them specifies on the position of Ribawi items which
need to meet its rules in avoidance the presence of riba. “Ubida b. al-Simit (Allah be
pleased with him) reported Allah’s Messenger (may peace be upon him) as saying: Gold
is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by
dates, and salt by salt, like for like and equal for equal, payment being made hand to
hand. If these classes differ, then sell as you wish if payment is made hand to hand
(Muslim, book 10, number 3853)”. (Paldi, 2014). The gist of the hadith stipulates on the
role of equality of exchanged commodity to ensure no party will be in lost condition. The
principles applied is crucial to adhere such as fair play in spot transactions as well as the
price and the counter value should be just in all transactions where cash payment
(irrespective of what constitutes money) is made by one party and the commodity or
service is delivered communally by the other. (Chapra, 1985). Choudhury (2005)
explains on the existence of Prophet’s hadith which reiterates on the problems of
stability, social equity, well-being and economic activities associated with the balanced
concept of money as currency.
In another perspective, Santoso (2012) mentions that “in the Prophetic eras, there
were two types of currency used in the period. The first type was the dinar currency that
came from the Roman. Roman dinar used at that time was only one and it had a weight of
one mitsqal.” This fact serves as the evidence to support on the existence of monetary
system in authorizing daily business transactions.
2.2 Money Creation and Monetary Policy in Islam
Historically, money in Islam has been started by Roman Byzantine through dinar,
dirham and copper. (Brugnoni, 2009, Siegfried, 2001). The barter system which does not
in discussion from the ambit of Islamic history serves to prove on the advancement of
Muslim world in monetary matters. Unluckily, such empowerment is not being
highlighted which is equally important to be considered in the effort to make a comeback
for dinar and dirham same as in their glorious era.
4
Money Creation Concept and Monetary Policy in Islamic Economy
28 Journal of Islamic Banking and Finance Oct – Dec 2019
It is worth to note on the times change reflects the development of money which
basically only to coins from classical Islamic jurisprudence point of view. The evolution
of trade transaction invites for innovation on the paper money such as suftaja. Strict rules
need to be observed to ensure its compliance with Shariah requirements. “Paper money
can be viewed as a bond on the deposit of gold or silver and this view is held by several
‘ulama. The rules for exchange of debts apply and the full back of the currency issued by
the Central bank must be observed critically. Secondly, paper money can be viewed as a
replacement for the value of silver and gold (as suftaja).Thereby, paper money itself
attracts the characteristics of the respective precious metal. Subsequently, the issue of
debts exchange is avoidable. Thirdly, the applicability of paper money as deliberated by
classical legal scholars as ‘fulus’ which may only be circulated locally. Fourthly, paper
money is considered as the measure of value by only benchmarking to the strength of the
economy as its back up element. (Brugnoni, 2009).
The principles of Islamic muamalat is to ensure diligence in which there is no room
of oppression and injustice. Nevertheless, it is found this critical requirement is absent in
fractional banking system which is practiced today. Money is not backed by or equivalent
for gold and hence the term fiat money. Subsequently, this condition leads to the issue of
seigniorage, which is the benefit where the money itself is issued without the backing of
gold or anything with intrinsic value. (Meera and Larbani, 2009). It is emphasized by
McLeay, Radia and Thomas (2014) on the meticulous monetary policy of money creation
in conventional banking system such as through ‘quantitative easing’ rather than
multiplying up process, the stuck is evidenced on its benchmarking to interest rates.
Islamic monetary system works along with the principles of harmonizing the vital
components such as consumption, production and distribution. (Choudhury, 2005). In
meeting this harmonization, strategic planning and execution that are parallel with
Shariah precepts must be vitally observed. Additionally, regulator or central bank must
put in place the framework that governs the adequacy of money supply in the market.
Monetary policy applied by Islamic bank focuses on ensuring sustainability of economy,
equality of wealth distribution as well as the stability of money’s value. Therefore,
Islamic monetary instruments should be inclusive of:
a) target growth in M and Mo
b) public share of 25 percent of demand deposits
c) a statutory reserve requirement of 10-20 percent
d) credit ceilings on commercial bank credit, and
e) value-oriented allocation of credit.
The first three instruments aim at enhancing the central bank's authority to control
the expansion in high-powered money. The last two instruments determine the
appropriate amount of credit and its allocation to lead to optimum production and
distribution of goods and services and to allocate the benefit of credit among an optimum
number of businesses. The discount rate instrument is excluded entirely from the set of
monetary policy instruments since interest is abolished from the Islamic economy.”
5
Journal of Islamic Banking and Finance Oct – Dec 2019 29
(Chapra, 1985). In considering the fiat nature which is possessed by most of national
currencies in this modern day, Meera and Larbani (2009) suggest for a close monitoring
the money supply by regulating the statutory reserve ratio provides monetary policy
flexibility.
Conventionally, “the money multiplier (m) says something about the efficiency of
the infrastructure of the financial intermediary sector. The conventional money multiplier
m is defined as the ratio of total monetary liabilities and the monetary base. The monetary
base is comprised of central bank monetary liabilities, that is, currency and central bank
depository liabilities. These central bank liabilities (legal tender) are the most liquid
assets in the economy.” Realizing this existence of risk of instability that follows from a
maturity mismatch of assets and liabilities in monetary system, Lengnick, Krug and
Wohltmann (2013) develop a model known as agent-based and stock flow consistent.
2.3 Roles of Malaysian Regulator in Money Creation
The implementation of dual banking system in Malaysia has both its pros and cons
that are interesting to be acknowledged. The strength of Malaysian economy is backed by
the government in terms of providing support on legal and infrastructure agendas. (Rod,
ALHussan, and Beal, 2015). Islamic finance in Malaysia has gone through its three
decades of growing pains and success. The development of Islamic financial institutions
(IFIs) are well supported by the regulatory body with an effective supervision (Berkem,
2014). This direction goes along with the objectives to protect the public interest,
promote fairness and equity, foster competence and play a developmental role. The key
highlights on regulations in Islamic banking’s ambient is directed to some of them,
namely; Shariah Governance Framework (SGF), Islamic Financial Services Act (IFSA)
and Value-Based Intermediation (VBI). Since 2009, the Central Bank of Malaysia or
Bank Negara Malaysia (BNM), through Prudential Regulation and Supervisory
Framework reiterated their formulation of new SGF which finally took effect on 1st
January 2011. “A two-tiered Shariah governance structure has been established,
comprising an apex Shariah advisory body at the Bank and a supervisory Shariah
committee formed at the respective Islamic financial institutions” (BNM, p. 99).
Comparing SG system applied by Gulf Cooperation Countries (GCC) and Malaysia,
Hamza (2013) concluded the centralized SG system as being practiced in this country
found to be efficient and conducive in enhancing IFIs system and control. The objective
BNM in strengthening IFIs’ governance is vividly mentioned in paragraph 1.5 as below:
“The Bank has developed the Shariah governance framework for IFIs with the
primary objective of enhancing the role of the board, the Shariah Committee and the
management in relation to Shariah matters, including enhancing the relevant key organs
having the responsibility to execute the Shariah compliance and research functions aimed
at the attainment of a Shariah-based operating environment” (SGF, 2011).
Back to the case at hand, Malaysian monetary policy serves to both conventional
and Islamic. As a central bank, BNM has its own functions including to ensure stability
through monetary policy. BNM’s monetary operations set to ensure sufficient liquidity to
support the orderly functioning of money and foreign exchange markets and
Money Creation Concept and Monetary Policy in Islamic Economy
30 Journal of Islamic Banking and Finance Oct – Dec 2019
intermediation activity. Monetary policy aims at achieving sustainable growth in an
environment of price stability. The policy rate is Overnight Policy Rate, currently at
3.25% implemented in the conventional money market. Importantly, the objectives of
monetary operations in Malaysia are indicated as follows:
a) meet the overnight operating target
b) reinforce monetary policy intention
c) manage liquidity in the interbank market
Monetary operations in both conventional and Islamic money markets focus on
absorbing surplus liquidity, hence liquidity management operation. (BNM, 2014).
Liquidity management is maintained separately in supporting both conventional and
Islamic financial system. It is indicated by Islamic Interbank Money Market (IIMM) on
its key function as below:
"The Islamic money market is integral to the functioning of the Islamic banking
system, firstly, in providing the Islamic financial institutions with the facility for funding
and adjusting portfolios over the short-term, and secondly, serving as a channel for the
transmission of monetary policy. Financial instruments and interbank investment would
allow surplus banks to channel funds to deficit banks, thereby maintaining the funding
and liquidity mechanism necessary to promote stability in the system.”
The different baseline between conventional and Islamic monetary operating
system is focused on its operational target and standing facility as shown in Figure 1.
Source:http://BNM_Liquidity_Mgmt_Malaysian_Islamic_Money_Market.pdf
Figure 1: Conventional and Islamic Monetary Operating Framework
3.0 Methodology
Money Creation Concept and Monetary Policy in Islamic Economy
Journal of Islamic Banking and Finance Oct – Dec 2019 31
This research paper adopts the qualitative research methodology by examining
works of literature related to the money in Islam as well as Islamic monetary principles.
Based on Greene (2006), this methodology allows for “a coherent foundation for inquiry
with a tightly interconnected logic of justification, positioning, procedures, and
rationales” (as cited in Onwuegbuzie and Frels, 2016). In order to gather information
related to regulatory purview on Islamic monetary system, the researcher has conducted a
telephone interview the respective expert from BNM on 22 January 2019. “Interviewing
by telephone has become increasingly common. The telephone as an appropriate mode
for qualitative interviewing has gained in popularity as evidenced through the relevant
literature, in which there are scores of articles based on telephone interviewing (as well as
other modes, such as Skype, VoIP [Voice over internet protocol], and e-mail).”
(Oltmann, 2016). Additionally, this telephone interview “may allow respondents to
disclose sensitive information more freely, and telephone conversation has been reported
to contain several features that render it particularly suitable for research interviews. “
(Hopper, 1992)
4.0 Conclusion
In conclusion, the money creation in Islam has its own standard which is strict to
the requirements of Shariah. The most pertinent observation is on the absence of interest
based elements as well the underlying assets to back the issuance of fiat money for the
country. As a prominent country supporting the movement of Islamic finance, Malaysia,
through its regulator play its legislative roles in ensuring the monetary policy is line with
the needs of Shariah. It is noted on the drawbacks of dual banking system in catering the
needs of ensuring the liquidity management is free from being tainted with Shariah non-
complaint elements. It was a useful recommended highlighted by Ismath Bacha (2008) in
enhancing the transmission of fund to Islamic bank without possible commingling with
interest. “There are at least 3 additional channels of transmission with an IIMM. These
are; (i) through the pricing in interbank rates, (ii) through the pricing of Islamic money
market instruments and (iii) through the central bank’s money market operations.” At the
same time, it is a serious take by Malaysian regulator to embark on in depth research,
studies as well as the implication strategies in structuring an independent monetary policy
to cater Islamic transactions in future.
Reference
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Produced for the International Centre for Research in Islamic Economics, King
Abdul Aziz University, Jeddah by Institute of Policy Studies.
Ariff, M. (1988). Islamic banking. Asian‐Pacific Economic Literature, 2(2), 48-64.
Brugnoni, A. G. (2009, November). The case for the gold dinar and Islamic complementary
currencies. Business Islamica, 52–54. Retrieved from
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Chapra, M. U. (1985). Towards a just monetary system: a discussion of money, banking
and monetary policy in the light of Islamic teaching. Leicester: The Islamic
Foundation.
Choudhury, M. A. (2005). Money in Islam: a study in Islamic political economy.
Routledge. Hanif, M. (2014). Differences and similarities in Islamic and
conventional banking.
Hassan, A. (2009). The global financial crisis and Islamic banking. UK: The Islamic
Foundation, UK.
Hopper, R. (1992). Conversation. Bloomington, IN: Indiana University Press.
Ismail, S. (2005). Why Islam has prohibited Interest and Islamic alternatives for
financing. 1st Ethical (www. 1stethical. com/downloads/TheproblemswithInterest.
pdf).
Ismath Bacha, O. (2008). The Islamic Inter-bank money market and a dual banking
system: The Malaysian Experience. International Journal of Islamic and Middle
Eastern Finance and Management, 1(3), 210-226.
Kameel Mydin Meera, A., & Larbani, M. (2009). Ownership effects of fractional reserve
banking: an Islamic perspective. Humanomics, 25(2), 101-116.
Khan, M., & Mirakhor, A. (1994). Monetary management in an Islamic economy.
Kuran, T. (1995). Islamic economics and the Islamic subeconomy. Journal of Economic
perspectives, 9(4), 155-173.
Lengnick, M., Krug, S., & Wohltmann, H. W. (2013). Money creation and financial
instability: An agent-based credit network approach. Economics: The Open-Access,
Open-Assessment E- Journal, 7(2013-32), 1-44.
McLeay, M., Radia, A., & Thomas, R. (2014). Money creation in the modern economy.
Oltmann, S. M. (2016). Qualitative interviews: A methodological discussion of the
interviewer and respondent contexts. In Forum: Qualitative Social Research (Vol.
17, No. 2, p. 1).
Paldi, C. (2014). Understanding Riba and Gharar in Islamic Finance. Journal of Islamic
Banking and Finance, 2(1), 249-259.
Parguez, A. (2011). Money creation, employment and economic stability: The monetary
theory of unemployment and inflation. Credit, Money and Macroeconomic Policy:
A Post-Keynesian Approach, 71.
Ricks, M. (2011). Regulating Money Creation after the Crisis. Harv. Bus. L. Rev., 1, 75.
Rod, M., ALHussan, F. B., & Beal, T. (2015). Conventional and Islamic banking:
perspectives from Malaysian Islamic bank managers. International Journal of
Islamic Marketing and Branding, 1(1), 36-54.
Santoso, B. (2012). Money in Islam: The Siyasah Shar ‘iyyah’ Perspective and
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15 (4), 319-332. Retrieved from
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Humanomics, 25(4), 241-253.
10
Journal of Islamic Banking and Finance Oct – Dec 2019 33
Analysis of the Types of Interest {Riba} in Islamic Law
By
Dr Mohammed Nawaz [al Hasani]
Abstract
The basic difference between the conventional and the Islamic systems of transaction is riba which is the main source of income in
conventional system of transactions but is prohibited in the Islamic
theory of contract and is also declared harmful for the economy in Islamic law.
As riba is prohibited, it is declared unlawful in its different forms. This
article analyzes the different types of riba that are relevant, aims at defining each type of interest [riba]and explaining the difference
between these types with examples. The article gives a comprehensive and exclusive definition of interest
[riba] but avoids to elaborate it because it is the topic of another
article. It also does not discuss the underlying causes of riba though some relevant matters are discussed here.
This article explains the Shariah standard of riba and its parameters. It also answers some questions related to riba and its definition being not
exhaustive.
The article will make it clear that riba is absolutely prohibited in the Islamic law and nobody is allowed to suggest that there are two types of
riba, one of which is prohibited and the other is permitted.
Key words: types of riba, definition, Shariah standard, Parameter,
objections and answers.
This article is going to define each type of interest riba and distinguish between them,
so it is appropriate to introduce these types for attention of scholars going to study it.
Author: Dr. Mohammed Nawaz [al Hasani] , Professor of Islamic law, The University of
Lahore. E-mail: [email protected]
Analysis of the Types of Interest {Riba} in Islamic Law
34 Journal of Islamic Banking and Finance Oct – Dec 2019
Introduction:
Riba is a very controversial economic issue, and it is the basic difference between
the Islamic theory of transactions and conventional theory of transaction. The Islamic
theory of transaction declares riba prohibited because it destroys the economy. On the
other hand the conventional theory of transaction considers interest {riba} as the back
bone of the economy. Islam declares riba harmful for the economy, whereas interest is an
important element for the development of economies according to conventional theory of
transactions. Here, riba is defined along with its types and some relevant issues
explained.
Definition of Riba:
As we attempt to discuss the different types of riba, it is necessary to define riba in
general, so as to explain the concept of riba.
Al Haskfi defined riba and said: الربا هوفضل خال عن العوض على المعيارالشرعي، مشروط ألحد
1المتعاقدين في مبادلة المال بالمال.
Riba is defined as an excess without consideration according to Sharia standard,
stipulated for one party in exchange of properties.2
Definition of Riba made by al Haskafi and also by Muhammad Amin Iban-e-
Abidin is best definition from all other definitions made by other Hanfi scholars because
1 al HaskafiAlaud Din/ al Durr-e- al Mukhtar with marginal note of Ibn-e- A’abdin
Muhammad Amin/ Istanbul: Dar Qahrman/ 1984/ 5:168-170. 2 la Durr-e- al Mukhtar with marginal noteof Ibn Abidin Mohammad Amin/5:168- 170. also
Ibn al Hummam Abdul Wahid/Fath al Qadir with other marginal notes/Beirut: Dar Ihya al
Turath al Arabi/ 6: 146, al Baberti Akmal al Din Muhmmad Mahmud/al Inayah with Sharh
Fath al Qadir/ 6: 146, Afindi Sadullah bin Easa /marginal note ala al Inayayah/ 6: 146, al
Kasani Ala ud Din Abu bakr Ibn Masaud / al Baday wa al Sanay/ Beirut: Dar al Kitab al
Arabi /Second edition/1401-1981/ 5: 183, al Sarkhasi Shams al Aimmah Abu Bakr
Mohammad bin Abi al Fadle / al Mabsut/ Beirut: Dar al Marifah/ 1406- 1986/12: 109, al
Zailai Fakhar al Din Uthman bin Ali /Tabyeen al Haqaiq/ Egypt: al Maktabah al Kubra al
Amiriyyah/ First Edition/1314/ 4: 87, al Aini Bader ud Din Mahmud bin Ahmad/al Binayah
sharh al Hidayah/ Dar al Fikr/ First edition/ 1401-1981/ 6: 524, al Marghinani Abu Baker
Burhan al Din/ al Hidayah with Fath al Qadir/Beirut: Dar Ihya al Turath al Ilmi/ 6: 146, and
Ibn Abdin Muhammad Amin/ Radd al Muhtar/ Istanbul / Dar Qahraman/ 5: 168.
See also Al Adavi/marginal note on Sharh al khurshi/ 5: 56, Ibn Rushd Muhammad bin
Muhammad/ Bidayyat al Mujtahid/ Agypt: Maktabah Mustafa al Babi al Halbi/ Fifth
edition/1401-1981/2:129, al Dasuqi Ibn Arafah/marginal note by al Dasuqi/ 3: 47, al Hattab/
Mawahib al Jalil/ 4: 346, Qalyubi wa Umairah/ Hashyatan ala al Minhaj/ 2: 166, al Bajuri/
Hashyah ala Sharh Ibn al Qasim/1: 344, al Sharbini al Khateeb Muhammad/ Mughni al
Muhtaj/ Agypt: Maktabah Mustafa al Babi al Halbi/1377-1958/2: 21,al Ramli, Nihayat al
Muhtaj/ 3: 39, al Subki/Takmilat al Majmua /10: 48, Ibn Quadamah Abdullah bin Ahmad/
al Mughni/Beirut:Dar al Kitab al Arabi/1392-1972/ 4: 122, Ibn al Qayyim/ Ialam al
Muwaqqein/ 2: 135.
Journal of Islamic Banking and Finance Oct – Dec 2019 35
it is exclusive and comprehensive and all other definitions of riba are objected and
rejected.
Illustration:
1- According to Hanafi and Hanbli view, Riba is an increase which is without consideration according to Sharia standard. However, according to Malki and Shafei view-point it is contract of exchange of property with other property with excess without consideration.
2- Such a contract is vitiated according to the Hanfi jurists while it is void contract according to the Malki and Shafei jurists because it has the element of riba.
3- If the condition of excess is revoked, this contract becomes valid according to Hanfi jurists but it remains void unless it is concluded again without the condition of excess according to Malki and Shafei.
The above mention definition is given for the general riba. Now, the definition of each type is mentioned.
Types of Riba:
There are two types of interest ( riba)and these are as:1-Riba al Fadl. 2- Riba al Nasia. Each one is defined below:
Definition of Riba Al Fadl:
ربا الفضل هوفضل مال خال عن العوض على المعيارالشرعي، مشروط ألحد المتعاقدين في مبادلة - المال الموزون اوالمكيل بجنسه.
It is an excess of property without consideration according to Shariah standard, stipulated for one party in exchange of weighable or measureable property of homogenous nature.
b- The definition of riba al fadl covers all types of riba al fadl and it is comprehensive as well as exhaustive and exclusive.
RIBA AL NASIA: ربا النسيئة هوفضل وقت خال عن العوض على المعيارالشرعي، مشروط ألحد المتعاقدين في مبادلة المال
بجنسه اومبادلة المال بمثله في الوزن اوالكيل.3
a- Riba al Nasia is an excess of time without consideration according to Shariah standard, stipulated for one party in exchange of property by homogenous or
homo-estimation in weight or in measurement.4
3 Definition of riba al fadl and riba al nasia in both English and Arabic language is made by
me and I am sure that these definitions in both languages are comprehensive and exclusive
If somebody has objection agaist any one of these or both he will be <[جامع و مانع]apraciated.by providing information about it.
4 The definitions of Riba al Fadl and Ribaal Nasia are derived from the general riba defined
by Hanfi and Hanbali jurists.
Analysis of the Types of Interest {Riba} in Islamic Law
36 Journal of Islamic Banking and Finance Oct – Dec 2019
b- The definition of riba al nasia covers all types of riba al nasia and excludes all
other matters where riba al nasia is not involved.
Explanation:
The Illustration of definition of interest is given in my article titled: Analysis of
interest in Islamic law. Here we will explain some terms related to each type of interest.
1- The word ‘excess’ means: the increase on Shariah standard. If it is excess of
property, then it is riba al fadl. If it is excess of time, it is riba al nasia.
a- Shariah Standard for Riba Al Fadl:
Shariah standard for riba al fadl is an exchange of weighable or measurable
property by homogenous property with excess of property on Shariah standard, stipulated
for either of the contracting party. The Shariah standard for riba al fadl is exchange
of{weighable or measureable property + homogeneous} or exchange of {Homo-
estimation in weight or measurement+homogenous.5
Condition of shariah standard for riba al fadl:
There are two conditions for Shariah standard of riba al fadl. 1- The property must
be weighable or measureable {Both exchanged properties are homo-estimation in weight
or measurement}. It means the riba al fadl is not involved in any non weighable and non
measureable property.
2- Both exchanged properties must be homogenous. If these are not homogenous,
then there is no riba al fadl.
Examples:
It is appropriate to clarify the concept of riba al fadl by examples, and there are two
types of examples given below.
Positive examples:
Positive examples are those where riba al fadl is involved. Wherever homo-
estimation properties in weight or in measurement are exchanged by homogeneous ones
with stipulated excess of property there is riba al fadl. For instance,
1- Exchange of gold by gold. These both exchanged properties are weighable plus
homogeneous. It means: {homo-estimation in weight plus homogeneous} so if there is an
excess of property, it is riba fadl.
5 Al Haskafi/ al Durr al Mukhtar with Rad al Muhtar/ 5: 168
Riba is the name of excess without corresponding consideration on Shariah standard,
stipulated for either of the contracting parties according to Hanafi jurists.According to Malki
and Shafei viewpointriba is a contract of exchange of two homogenous properties and
homo-estimation in weigh or measurement with stipulated excess for any one party.
Thus,riba is a contract and it is not name of a simple increase.
Journal of Islamic Banking and Finance Oct – Dec 2019 37
2- Exchange of wheat by wheat. Both exchanged properties are measureable plus
homogeneous. It means: {homo-estimation in measurement plus homogeneous} so if
there is excess of property, it is riba al fadl.
Negative Examples:
Negative examples are the examples where riba al fadl is not involved
1- Exchange of gold by silver. Both exchanged properties are homo-estimation
in weight but not homogeneous, so excess of property is not riba al fadl.
2- Exchange of wheat by barley. These properties are homo-estimation in
measurement but not homogeneous, so excess of property is not riba al fadl.
3- Exchange of wheat by gold. These properties are not homo-estimation
{because one of these is measureable while the other is weighable} and these
both properties are not homogeneous also, so excess of property is not riba al
fadl.
4- Exchange of one buffalo by two buffaloes. Both properties are homogeneous
but these are neither weighable nor measureable, so the excess of property is
not riba al fadl.
b- Shariah Standard For Riba Al Nasia:
It has been mentioned earlier that if there is excess of time on Shariah standard it is
riba al Nasia and the Shariah standard for riba al Nasia is an exchange of property by
homogenous or by homo-estimation in weight or in measurement. If there is excess of
time for either of the contracting party, it is riba al nasia.
Shariah Standard for Riba Al Nasia:
The Shariah standard for riba al fadl is Exchange of homo-estimation properties in
weight or in measurement plus homogeneous. This Shariah standard of riba al fadl has
two attributes {homo-estimation in weight or in measurement plus homogeneous} while
Shariah standard of riba al nasia has one of these two attributes: 1- Homo-estimation in
weight or in measurement. 2- Homogeneous.
Wherever either of these two attributes is found, the stipulated excess of time is
considered riba al Nasia.
Examples of Riba Al Nasia:
It is appropriate to explain the Shariah standard of riba al Nasia by its examples.
There are two types of examples given below.
Positive Examples:
The positive examples are those in which riba al Nasia is involved. a- When two
homo-estimation properties in weight or in measurement are exchanged together and
there is stipulated excess of time, it is riba al Nasia such as:
Analysis of the Types of Interest {Riba} in Islamic Law
38 Journal of Islamic Banking and Finance Oct – Dec 2019
i- Exchange of gold by silver. If there is stipulated excess of time, it is riba al nasia.
ii- Exchange of wheat by barley. If there is stipulated excess of time, it is riba al nasia.
b- Wherever two homogenous properties are exchanged and there is stipulated excess of time it is riba a Nasia such as:
a- Exchange of gold by gold. If there is stipulated excess of time, it is riba al nasia.
b- Exchange of wheat by wheat. If there is stipulated excess of time, it is riba al nasia.
c- Exchange of buffalo by one or two buffalos. If there is stipulated excess of time, it is riba al nasia.6
Negative Examples:
Negative examples are those where riba al nasia is not involved.
a- Exchange of wheat by gold or by any paper currency. If there is stipulated excess of time, it is not riba al nasia because both properties are neither homo-estimation nor homogenous.
b- Buying a buffalo by fifty thousand rupees. If there is stipulated excess of time, it is not riba al nasia because both properties are neither homo-estimation nor homogenous.
2- The word ‘stipulated’means the excess of time is stipulated for either of the contracting party or the excess of property is demanded by the creditor in case of delay in the payment of debt without prior condition and it is against the delay in the payment.
There are two reasons for this addition:
i- The first reason: It is due to the attitude of the ignorant Arab people before the revelation of the Islamic law, as stated below.
a- Sometimes, they stipulated an excess on the amount of loan or debt while concluding a contract of loan and the amount of excess was agreed upon at the beginning as a contractual obligation.7
b- Sometimes, they demanded an excess {riba} at the time of payment of loan as the borrower was unable to pay the loan within the specified time and the creditor demanded an excess over the amount of loan due to the increase in the time of payment.8
6 It is according to Hanfi jurists and not according to Malki and Shafei jurists. 7 Abu Bakr al Jassas / Ahkam al Quran/ Beirut: Dar al kitab al Arabi / 1: 65 8 Al Qurtabi Muhammad bin Ahmad / al Jamey le-Ahkam al Quran / Beirut: Dar Ihya al
Turath al Islami/ 4:130, and al Imam al Razi / al Tafsir al Kabir/ Beirut: Dar al fikr/ 9: 2 and
Ibn al Kathir / Tafsir al Quran al Azim /1 : 404.
Journal of Islamic Banking and Finance Oct – Dec 2019 39
c- Sometimes, a man purchased a commodity on deferred payment and the seller
demanded his debt at the time of maturity but the debtor was not in position to pay
upon which the seller increased in the amount of debt against the delay in the
period of payment.9
So, it is not necessary that the demand of an excess is made at the time of entering
into a contract and such a demand can be made at the time of payment of loan as narrated
by Zaid bin Aslam {May Allah be pleased with him} and he said “ Riba was taken in the
era of ignorance, and one person had given a loan to another person for a specified
period, and when the fixed period of payment is over, he demands his debt from the
debtor, and he says: either you pay debt now or you increase the amount against more
time. If he does not pay at the maturity of time, then he was compelled to pay an excess
amount against increase the time of payment”.10
ii- The second reason for this addition is an excess paid to creditor without prior
stipulation and without any demand from creditor and it is valid because
Prophet{blessing of Allah and peace be upon him} sometimes, paid more to creditor for
his good behavior. As narrated by Abu Hurairah {MayAllah be pleased with him}”a
person came to Prophet {blessing of Allah and peace be upon him} and asked for loan
and Prophet {blessing of Allah and peace be upon him} gave him a loan half of Wasaq
equaling 30 kg. Meanwhile other person came to Prophet {blessing of Allah and peace be
upon him} and he demanded the payment of his debt taken by Prophet {blessing of Allah
and peace be upon him}and it was also half of Wasaq equaling 30 kg and Prophet
{blessing of Allah and peace be upon him} gave him 60 kg and said: half of wasaq is
against your debt and the other half is a gift from me”.11
It was without any prior stipulation or contractual obligation and it is valid in the
light of the verse of Holy Quran: “Is there any reward for good other than the good”. 12
NOTE: The purchases on bank’s credit card are also like the practice of the people
at the time of ignorance, because if the price of commodity bought on credit card is not
paid within the specified time, the bank charges extra amount.
Occurrence of Riba:
There are three different situations involving riba al nasia as follows:
a- Both the exchanged properties are homo-estimation in weight or in
measurement as well as homogenous such as 10 gram gold is exchanged by
ten gram of gold but one is delivered at the time of contract and the other will
be handed over after six months.
9 Jalal al Din al Sayuti/ al Durr al Manthur / Beirut /2 : 72 10 It is narrated by al Imam Malik and al Baihaqi, See: al Muwatta / hadith no: 1367 and al
Sunan al Kubra / 5: 275 11 It is narrated by al Baihaqi / al Sunan al Kubra / 5: 351/ hadith no: 10722 12 Surah al Rahman: 60
Analysis of the Types of Interest {Riba} in Islamic Law
40 Journal of Islamic Banking and Finance Oct – Dec 2019
b- Both exchanged properties are homo-estimation in weight or in measurement
but not homogenous. For instance, ten grams of gold is exchanged by one
hundred gram of silver but one of those is handed over at the time of contract
while the other is to be delivered after six months.
C- Both exchanged properties are homogenous but not homo-estimation in
weight or in measurement such as one cow is exchanged by two cows but one
of these is deferred, when both properties are homogenous the excess of time
is riba al nasia according to Hanafi jurists.
NOTE: There is neither riba fadl nor riba nasia in a sale contract in which both
exchanged properties are neither homogenous nor homo-estimation in weight or
measurement as {bay al muajjal} deferred payment sale and advance payment sale {bay
al salam}.
Why Riba Al Nasia is Prohibited?
Riba al nasia means the excess of time in exchange of homogenous properties or
exchange of homo-estimation properties in weight or measurement and it is prohibited.
The reason is given below:
1- Time is money in the modern new financing theories and it is considered
valuable in the Islamic classical law as well.13 Imam al Shafei said: “Food stuff
deliverable in the near future is more costly than the price of food stuff payable on
additional future date”.14
Al Nowi said: “Five paid in cash is equal to six payable on a future date”.15
b: It mostly encourages a creditor to demand excess in the property and there is
legal maxim: What is most likely to happen is taken as the actual occurrence { المظنة تقوم
16.{مقام المئنة
QUESTION: A question may arise that the definition of riba al nasia covers Qard
Hassan because it is also exchange of property by homogenous with excess of time. For
example:
A man gave one sack of wheat to other as a loan and the other person is to return
the sack of wheat after six months. This is an exchange of measureable property by
homogenous with an excess of time and this excess of time is riba al nasia and riba is
13 See: al Sarkhasi/ al Mabsut/12: 111, al Kasani/ Badaye al Sanaye/ 5: 225 /al Zalayi
/Tabyeen al Haqaiq/4: 78, Ibn Abidin/ Radd al Muhtar/ 4: 258, al Dusuqi Ibn Arafah /
marginal noteby al Dusuqi/ 3: 165, al Zarqani/marginal note by al Zarqani ala Khalil/ 5: 176,
al Shatbi Abu Ishaq/ al Muwfaqat/ 4: 41-42, Ibn Juzay/ al Qawanin al Fiqhiyyah/ 174, al
Nowi/ al Majmu/ 6: 22/ al Sharbini al Khateeb/ Mughni al Muhtaj/ 2: 78, Tuhfahtul Muhtaj/
4: 432, Ibn Taimiyyah/ Majmu al Fatawa / 29: 413,499, 525. 14 Al Imam al Shafei / al Umm/ 3: 12 15 Al Nowi/ al Majmu/ 6: 22 16 Abdul Wahab Khallaf/ Ilm Usool al Fiqh/Cairo: Dar al Qakam/ 1972/ 67.
Journal of Islamic Banking and Finance Oct – Dec 2019 41
prohibited whereas Qard Hassan is permitted. The Quran says:16{ من الذي يقرض هللا قرضا حسنا
Who is it that will offer up unto God a goodly loan, which He will{فيضاعفه له أضعافا كثيرة
amply repay, with manifold increase?
There is another verse of Holy Quran says: 17{ من ذا الذي يقرض هللا قرضا حسنا فيضاعفه له
كريموله أجر } Who is it will offer up unto God a goodly loan that gives goodly loan, which
He will amply repay?
b- Another example of Qard Hassan: A person gives 10,000 to other person as a
loan, which is to be returned after six months. Both properties are homogenous and there
is also an excess of time and it is a case of riba al nasia and riba is prohibited while Qard
Hassan is permitted. So the definition of riba in general and definition of riba al nasia in
particular is not hurdle {Maney} in Qard Hassan.
Answer:
Muslim jurists are divided into two groups due to difference of opinion and each
one of them has answered the question as follows:
a- Hanfi jurists hold that: The stipulation of excess of time period in exchange of
weighable or measureable properties by homogenous as in Qard Hassan is not valid and
the condition of time stipulated in Qard Hasan is unlawful while Qard itself is valid. The
creditor can demand his loan {qard} from debtor at any time though loan is taken or
given for a specific time because Qard Hasan is similar to borrowing a commodity
{Ariyyah}and creditor can demand the article at any time though the borrower had
borrowed this commodity for a specific time.18 The reason is that the contract of loan and
contract of borrowing both are not binding, and can be terminated at any time.19
Loan {Qard Hassan} is not covered in the definition of riba because riba is an
increase stipulated or demanded though it is excess of property or excess of time and this
stipulation of the excess of time in Qard Hasan is void as it is vitiated in borrowing
property {Ariyyah}.
Now the definition of riba al nasia does not cover Qard Hassan because riba al
nasis is exchange of property by homogenous or by homo-estimation in weight or
16 Sura al Baqarah/ 245 17 Sura al Hadid/ 11 18 Al Kasani / Badayewa al Sanaye /5: 225 and 6: 215 IbnAbdin/ Radd al Muhtar/4: 170, al
MarghinaniBurhan al Din/ al Hidayah/3: 60, al Sarkhasi / al Mabsut/ 12: 11 and 22: 45, al
Zalai / Tabyeen al Haqaiq/ 4: 78, and it is discussed by other jurists such as al Savi/ Bulugh
al Salik/4: 41-42, al Dusuqi/ Hashayah al Dusuqi/3: 165 al Zarqani/ Hashyah al Zarqani/ 5:
176, IbnJuzay / al Qawanin al Fiqhiyyah / 290, Shatabi/ al Muwafaqat/ 2: 79 and Shafei
Jurists as al Imam al Shafei/ al Umm/ 3: 62 and 88, al Nowi / al Majmu /6: 22, al Sharbini/
Mughni al Muhtaj/ 2:79, and Hanbli Jurists such as IbnQudamah/ al Mughni/ 4: 349,
IbnTaimiyyah / Mujmu al Fatawa/ 20: 629, 29: 413, 499, 525 19 al Majmu al Fatawa /6: 215
Analysis of the Types of Interest {Riba} in Islamic Law
42 Journal of Islamic Banking and Finance Oct – Dec 2019
measurement with excess of time stipulated for either party while Qard Hassan is
exchange of property by homogenous without stipulation of time period.
OBJECTION: A question arises against the Hanfi view point that Qard Hassan is
validated to solve the problems of the needy and their problems are not solved without
the condition of time period. If the time condition is void, how can their problems be
solved by Qard Hassan?
ANSWER: It is stated that: the condition of time is void and the creditor can
demand his loan from the borrower but when the creditor demands the return of his loan
and borrower says: I have expended it on my need and I do not have any money to return.
At this, the creditor can extend the time period for the payment of loan in the light of the
verse: { ظرة إلى ميسرة وأن تصدقوا خيرلكم إن كنتم تعلمونوإن كان ذوعسرة فن }
“If, however, [the debtor] is in straitened circumstances, [grant him] a delay until a
time of ease; it would be for your own good- if you but knew it – to remit [the debt
entirely] by way of charity.”20
b- Majority of Muslim jurists have answered this question in different ways as
follows:
1- Goodly loan {Qard Hassan} is permitted, even recommended, as an exceptional
case to fulfill the need of the deserving persons and this exemption is given by the
lawgiver. The Quran says: who is he that will lend to Almighty Allah a goodly loan
{Qard Hassan}21,22 and exemptions are not objected, so it is not under the provision of
general rule {عزيمة}of the prohibition of riba.23
2- The excess of time is a gift to the beneficiary by the creditor in Qard Hassan.
3- The creditor intends to get reward from Almighty Allah against the time period
granted to borrower and the difference between both contracts is the intention of credit
sale and intention of goodly loan {Qard Hassan} and if the contract is concluded with the
intention of goodly loan {Qard Hassan} then it is permitted and it is recommended also.
But if this contract is concluded with the intention of credit sale, then it is prohibited
because of an excess in the time in exchange of property by homogenous or by homo-
estimation in weight or measurement and this excess is riba al nasia.24 It is based on the
verse of Holy Quran:25{فآتاهم هللا ثواب الدنيا وحسن ثواب اآلخرة وهللا يحب المحسنين}Whereupon God
granted them the rewards of this world as well as the goodliest rewards of the life to
20 Sura al Baqarah/ 280 21 Surah al Hadid / verse: 11 22 Ibn Hazam al Zahiri / al Muhalla / 8:494. 23 Abdu al Wahab al Baghdadi al Malki/ al Israf ala Masail al Khilaf/ Tunis: Mataba al Iradah
/1: 262, Ibn Taimiyyah/ Majmu al Fatawa/ 29: 49, Ibn Taimiyyah/ al Masail al Mardiniyyah/
Damascus: al Maktab al Islami/ 1399h / 99. 24 It was explained by Dr Abdul al Latif Amir, a former Dean, faculty of Shariah and Law,
International Islamic University, Islamabad. 25 Surah Al-e- Imran/148
Journal of Islamic Banking and Finance Oct – Dec 2019 43
come: for God loves doers of good. Another verse of Holy Quran says: { من كان يريد ثواب
If one desires the rewards of this world, [let him remember {26الدنيا فعند هللا ثواب الدنيا واآلخرة.
that] with God are the rewards of [both] this world and the life to come and God is indeed
All – hearing, All- seeing.
Question:
A question may arise against the majority viewpoint that: if one person commits a
prohibited act with a good intention, does this intention convert the prohibited act into
valid act as in the case of goodly loan {Qard Hasan} which is under the provision of riba
al nasia and riba is prohibited while Qard Hasan is declared valid due to good intention,
according to the majority.
ANSWER: It can be concluded that: mere intention cannot validate a contract nor
it can invalidate anything unless it is in conformity with the intention of the lawgiver and
the intention of the lawgiver is known by the text of Quran and Sunnah. It means if this
intention is according to text of the Quran and Sunnah, then it is valid otherwise it is
invalid. Qard Hasan is validated by lawgiver as the Quran says: who is he that gives the
Qard Hasan to Almighty Allah.27
Al Shatibi said: the intention of person must be in harmony with the intention of the
law giver otherwise it is rejected.28
The intention of the lawgiver is known by His rules revealed in the Quran or
Hadith. Therefore intention of an individual does not play any role in the validity or
invalidity of contract unless it allowed by Almighty Allah in the Quran or in the Sunnah
of his Prophet {blessing of Allah and peace be upon him}
IbnHazam said: Qard is permissible in all types of fungible properties and in other
properties {…} and there is no riba except a situation in which the stipulation of more or
less than what he borrowed or better than he borrowed or inferior than he borrowed and it
is agreed upon.29
QUESTION: A question may arise: if creditor demands an excess at any time on
the QardHasan given to anybody, will it be valid?
ANSWER: If the creditor demands increase of the property in Qard Hasan, it is no
more Qard Hasan and becomes riba which is prohibited, and the evidence is the tradition
of the Prophet {blessing of Allah and peace be upon him}: Every loan carrying benefit is
riba30
26 Surah al Nisa/ 134 27 Surah al Baqarah/245 28 Al Shatibi Abu Ishaq / al .Muwafaqat/ 1: 2. 29 Mohammad Ali Ibn Hzam/ al Muhalla/ 8: 494 30 It is narrated by al Baihaqi and Jalal al ud Din al Sayuti: See: Al Sunan al Kubra/5: 350 and
al Jamie al Saghir/ 4:153/ Hadith Number: 4249.
Analysis of the Types of Interest {Riba} in Islamic Law
44 Journal of Islamic Banking and Finance Oct – Dec 2019
The benefit mentioned in the tradition, is the benefit demanded by the creditor.
Shams al Aimm al Sarkhasi said: if the benefit is stipulated in Qard, then it is
prohibited but if the benefit is not stipulated in Qard, then it is not objectionable. If the
debtor returns debt in a better form, it is praiseworthy and recommend in Islamic law.31
The Quran says: There is no reward for good except good.32
QUESTION:A question may arise: If usurious property is exchanged by
homogenous as date by date or rice by rice and one of these is of superior quality and
other is inferior, then excess in one of these is valid or not?
ANSWER:
It is riba though the value of two sacks of inferior date is equal to one sack of
superior date, and it is forbidden by Prophet {blessing of Allah and peace be upon
him}.33 There is no difference of opinion among the jurists on this point because the
equality in quantity is required in exchange of usurious properties by homogenous in the
light of the tradition of the Prophet {blessing of Allah and peace be upon him} who said:
equal to equal, hand to hand and the excess is riba.34
It is suggested to this man to sell his inferior date by cash and then purchase a
superior quality of date and it is approved by Holy Prophet {blessing of Allah and peace
be upon him}. Once, Syedna Bilal, the companion of the Prophet {blessing of Allah and
peace be upon him} came to Holy Prophet and asked: Can I exchange my inferior quality
date with single quantity of superior quality of date.?The Holy Prophet {blessing of Allah
and peace be upon him} answered: No, but you can sell your inferior quality of date by
cash and then purchase superior quality of date with this cash.35
QUESTION: A question may arise: What type of equality is required in exchange
of homo-estimation in weight or measurement by homogenous?
ANSWER: The answer is: Equality is of three types: 1- Equality in quantity of
exchanged properties. 2- Equality in the time of delivery.3- Equality in value.
Equality of quantity is stipulated for exchange of homo-estimation in weight or
measurement properties by homogenous to avoid the element of riba. If this equality is
not maintained, and there is an excess of property, this is a case of riba al fadl and it is
prohibited.
31 al Sarkhasi/ al Mabsut/ 14:35 32 Sura al Rahman/ 60 33 It is narrated by Imam al Bukhari and it is stated by Mohammad Ali Showkani / Nail al
Aowtar/5: 207 34 It is narrated by al Bukhari and Muslim. Sahih al Bukhari/ hadith: 2175, Sahih Muslim/
hadith:4063. 35 It is narrated by Imam al Bukhari as stated by Muhammad Ali Shawkani / Nail al Aawtar/5:
207
Journal of Islamic Banking and Finance Oct – Dec 2019 45
Equality in the time of delivery must also be maintained in the exchange of such
property by homogenous or by homo-estimation in weight or measurement, and if there is
an excess of time in the delivery of either commodity it is riba al nasia though both are
homogenous or both are simple homo- estimation in weight or measurement, such as
exchanging barley with wheat.36
Equality of value should be maintained in exchange of properties which are neither
homogenous nor homo-estimation in weight or measurement. However this value always
varies due to evaluation by different persons.
The excess of riba is always without consideration while excess of ghabn al fahishf
is not without consideration but it is considered exploitation of the other.
Conclusion:
We may conclude that:
Qard Hassan is permissible according to majority as an exceptional case to fulfil
the needs of the needy and it is Istihsan and it is allowed according to Hanfi jurists
provided it is without any prior condition of time period. But if there is a condition of
time, then it is unlawful.
The excess of riba al fadl is found in exchange of weighable or measureable
property by homogenous and the excess of riba al nasia is found in exchange of property
by homogenous or by homo-estimation in weight or measurement while the excess of
ghabn al fahishis found where there is no exchange of property by homogenous in weight
or measurement.
Prohibition of riba is agreed upon whereas prohibition of ghabn al fahish is
disputed.
The equality in quantity is essential in exchange of weighable or measureable
properties by homogenous ones whereas equality in value between the two is not
necessary.
Shariah standard for riba al fadl is exchange of weighable or measureable property
by homogenous one with excess of property.
Shariah standard of riba al nasia is exchange of property by homogenous or by
homo-estimate in weight or measurement with excess of time.
36 It is according to Hanfi and Hanbli jurists while Malki and Shafei jurists holdAnd
[remember:] whatever you may give out in usury so that it might increase through [other]
people’s possessions will bring [you] no increase in the sight of God- Whereas all that you
give out in charity, seeking God’s countenance, [will be blessed by Him] for it is they, they
[who thus seek His countenance] that shall have their recompense multiplied.thatequality in
delivery is essential between exchange of two foodstuffs and exchange of two currencies.
Analysis of the Types of Interest {Riba} in Islamic Law
46 Journal of Islamic Banking and Finance Oct – Dec 2019
If the excess mentioned above is stipulated, then it is riba and if it is not stipulated
in contract, then it is not interest [riba]
Interest [riba] is prohibited though the excess of it is less or more.
The stipulated excess of time in loan [qard hasan] contract is valid according to
majority of Muslim jurists as an exceptional case while this condition is vitiated in loan
contract according to Hanfi jurists.
Journal of Islamic Banking and Finance Oct – Dec 2019 47
Fixed Income Assets of Islamic Banks: Moving Forward To Adapt a New Role as a
Trading House
By
Muhammad Ali Shaikh
1. Introduction
Major portion of the asset portfolio of Islamic banks (IBs) consists of Fixed Income (FI) assets. The reason for keeping higher share of FI
assets (e.g. Murabahah, Ijarah and Diminishing Musharaka) is obvious.
The return paid to depositors depends on the earning potential of the
asset portfolio. Risk perception about investment risk in PLS assets is
high as compared to fixed income (FI) assets based on trading or Ijarah involving credit risk which is considered lower and easier to manage.
Some failures of PLS financing in the first phase of Islamic banking in
Pakistan in the eighties also created this impression without going in to the reasons of their failure. Islamic bankers coming from the traditional
background of conventional banks were more familiar with credit and collateral based financing and related risk. Therefore, despite criticism
regarding credit and collateral structure which creates similarity with
conventional methods and questions about socioeconomic impact the initial structure of the asset portfolio of IBs mainly consisted of FI
assets. However recent data shows a change in the trend showing improvement in the share of PLS assets but FI assets are still the main
component of asset portfolio.
Since the portfolio risk is an important factor besides the requirement of
halal income in deciding the asset structure the journey towards desired
structural change may be longer than expected. It is not only the debate
Author: Muhammad Ali Shaikh is a retired banker and ex-Professor of engineering
economics, NED University of Engineering and Technology. Email address
48 Journal of Islamic Banking and Finance Oct – Dec 2019
of PLS vs FI assets. Some situations like infrastructure financing and
consumer financing may not be suitable for PLS financing leaving the fixed income type as the only choice. Even when all issues hindering
adaption of PLS assets are resolved (apparently a distant possibility)
complete switch over to PLS assets may not be practically possible. Therefore, FI assets will remain in the portfolio of Islamic banks
although the percentage share may come down in the coming years.
This paper deals in detail with issues involved in the practice of FI
products particularly with reference to banks’ new role as a trading
house and explains the ways how this role can be adapted by the Islamic
Banks to make FI assets as undisputed viable Shariah compliant asset
creation alternative.
Key Words: Islamic Banks, FI assets, PLS assets, Ijarah,
2. Literature review
FI instruments are not new phenomena. Murabaha was used during the period of
Khilafat e Usmania and profits were subject to state regulation (Usmani, 2009).
According to a study (Iqbal, et.al, 1998), Mudarabah was used on the liability side while
Murabahah and other fixed-income methods accounted for 75% of total financing of IBs
in the ME region. IDB study (Husain, 2004 ) concludes that in Bahrain a variety of
products is offered, using FI instruments like Murabaha, Ijara, Salam and Istisna,
although PLS contracts are also used.
In spite of discouraging government policy for Murabaha and promotion of
Musharaka in Sudan the banks could achieve only a share of about 35% of the total
transactions for Musharaka with matching share of Murabaha (Stainsen, 2005). This
shows the resilience of Murabaha and suggests that replacement of FI methods with PLS
methods is not easy. Kuwait Finance House (KFH) was the first to make a shift in the
asset structure by investing in real estate, automobiles and other products thus moving
towards the role as a trading house (Smith 2005).
Studies by Loughborough University (2000) and Chong and Liu (2009)
also suggest that credit sale is the most important instrument in the asset
portfolio of IBs while PLS instruments are used only for deposit mobilization.
Ayub (nd), concludes that PLS modes have a role to play in developing an Islamic
economic system but trading modes also have a part as well. The former makes the
capital risk-bearing and encourage entrepreneurship; the latter are viable and just criteria
for deferred payment.
Siddiqui, M.N. (1999) observed that creation of close linkage between real
economy and finance is not limited to PLS methods. FI methods based on Murabahah,
etc. also have such capability because these methods can only be used when there is real
buying / selling which means that financial payments are the result of and subordinate to
real economic activity.
Journal of Islamic Banking and Finance Oct – Dec 2019 49
According to Uzair (1979) conventional banks provide finance for consumer
products on interest. The Islamic banks are using various commercial contracts for this
purpose. Obviously PLS methods cannot be used here.
Trade based financing is based on deferring the payment of price or the delivery of
goods in a genuine trading transaction which enables the parties to fulfil their business
requirements and is allowed by all schools of thought. Makkans also used this as a source
of income indicating that wealth generation was also a motive for financing. (Kahf and
Khan, 1992)
The criticism against FI instruments has centred around risk avoidance and
structural similarities with the conventional methods. Farooq (2006) has termed this as an
attitude of avoiding risk to enjoy comfortable returns1. Siddiqui, S. H. (nd) terms PLS
financing as the real Islamic financing. According to him FI instruments cannot achieve
the same socio-economic objectives of an Islamic system based on PLS methods. The use
of fixed income instruments such as Murabaha and Ijara was allowed as a temporary
measure till issues preventing the use of PLS methods are resolved. According to
Tanzillu Rahman (1999) it is trust gap between the banks and customers, fear of losing
business secrecy on the part of businessman, tax systems etc which discourage adaption
PLS methods.
The practice of IBs in Pakistan also has remained in line with the global practice.
FI assets have remained a major portion of the asset portfolio (SBP 2008 and 2014). For
example, in March 2010 the share of PLS assets was only 1.9% which increased to 21.2
% in March 2018. FI products still form about 79% of the total financing. (SBP, March
2011 and March, 2108).
3. Methodology
Our problem is multidimensional. Historical evidence and other factors as
discussed above show that FI assets will remain on the balance sheets of IBs. At the same
time in spite of the fact that FI instruments have relevant Sharaih approvals there is
criticism due to structural similarities with conventional methods such as the pricing
mechanism for profit and interest, credit and collateral structure, socio economic effects
etc. Therefore, an objective appraisal is required to resolve this issue of similarities.
1 This view point is however disputable. For example, Murabahah with debt like
structure does not become risk free. Its risk profile adds new risks commonly ignored
such as: Promise risk, Ownership risk and Shariah compliance risk. The credit risk is
common to both but has different dimensions. In its present form when procurement is
done through client as agent agency risk is also added besides creation of conflict of
interest.
Fixed Income Assets of Islamic Banks:Moving Forward To........
50 Journal of Islamic Banking and Finance Oct – Dec 2019
Yet another dimension is the adaption of the mandatory role as a trading partner
demanded by the structure of the underlying legal contracts which define specific role for
the parties to contracts. Present practice of delegating this function by the banks to
customers through agency agreements is the main point of concern. Therefore, a detailed
analysis of the bank’s role as a trading partner is necessary to suggest ways for adapting it
by the IBs.
4 Relevance of FI instruments
There are few situations like consumer financing, infrastructure financing etc that
are more suited to FI financing instead of PLS financing such as Ijarah for car financing,
DM for house financing and a package of Murabaha/ijarah/istisna in case of
infrastructure projects.
In cases where both options are available the tendency is towards FI assets.
Besides the uncomfortable issue of risk of loss which is related with the rate of return on
deposits other factors such as moral hazards, tax structure, unwillingness of businessmen
to share real profits, management autonomy and the approach of stakeholders have
encouraged the use of FI financing in the past.
According to Yousef (2005) like other fields evolution of financial systems also
depend on the enabling legal and economic environment and regulatory systems. Hence,
the Murabahah-dominated practice of Islamic banks in jurisdictions where law
enforcement is not quick and traditions of fair business dealing are weak is not something
which is unexpected.
In addition to law enforcement PLS systems require more preparations to develop
capacity and a sound base to enable the industry to adapt PLS options. The 10-year
master plan developed by IRTI / IFSB in 2005 and SBP strategic plans prepared in 2008
and 2014 also confirm this. The data available in Pakistan also substantiate this point.
(Table 1 and 2)
Therefore, instead of engaging in the debate PLS vs FI product research should be
directed to remove the impediments.
5. Appraisal of structural similarities
5.1 Method of generating income and Pricing mechanism
The centre point of the controversy regarding similar structure is the method of
generating income and pricing mechanism which looks arithmetically similar.
The trade based financing is based on charging a fixed income as profit in a
genuine sale transaction. Therefore, income such a capital gain in the sale of property or
profit in a trading transaction are different from getting an income in a transaction of loan
which is a charge for using money. There must be a genuine sale transaction following
the rules of sale and purchase prescribed by Shari’ah to generate profit where as in case
of a loan no such transaction is necessary as it is only a borrowing/lending transaction.
Journal of Islamic Banking and Finance Oct – Dec 2019 51
Profit is a onetime charge in a sale transaction which yields a variable rate of return to the bank and interest is usually a time related charge at a fixed rate of interest2 which provides variable total income.
In trade based financing credit sale is the most common method. While charging
the profit, the bank can take into account its cost and payment date of sale price and can
determine the price using the following equation:
SP= Cost + Profit= Cost + Cost *r*T= Cost (1+r*T) --------------(1)
r is its desired annual rate of return and T is the time period in years for which the
facility is given by the bank. If C=Rs. 2,000, r=10% and T=1 year then the profit will be
Rs 200 and the selling price will be Rs 2200.
In case of a loan of Rs 2000 given for one year at 10% pa interest the amount
payable will be Rs. 2200 as per the following equation:
A= Pr + Interest=Pr +Pr*i*t =Pr (1+i*t) ---------------------(2)
A is total amount, Pr is principal, i is interest rate and t is the maturity period.
Both equations are similar rather these cannot be different. That is why some
people mistakenly assume that there is no difference between the two methods which is
not true.
In case of goods sold at a price of Rs 2200 the price will not change due to earlier
or late payment because the goods have already been sold for Rs 2200 and no new sale is
being contracted at the time of payment of sale price. It is a financial liability for the
customer and a financial asset for the bank. If the amount receivable is changed in
relation to time or even without reference to time it will constitute interest and will not be
permissible.
Therefore, if the sale price is paid actually in one year the actual return earned by
the bank is 10% p.a. as projected. But if the price is paid in 2 years the actual return on
the transaction will be 5%. Likewise, if the price is paid earlier the rate of return will be
higher than 10%.
In case of loan the borrower will pay Rs. 2200 at the end of tenure. If he pays after
2 or 3 years his liability will grow to Rs 2400 and to Rs 2600 respectively because
interest is a charge for using money which will continue till the loan is paid. Therefore, in
case of loan the rate of return will remain at 10% although total interest income will vary
according to the time of payment.
2 In case of bank loans, it is a time related charge. It can also be without reference to time
such as fixed penalty in case of delayed utility bill. The interest rate can be fixed or variable
but for calculating interest for a given period a particular value will be used in the equation
which remains fixed for that period.
Fixed Income Assets of Islamic Banks:Moving Forward To........
52 Journal of Islamic Banking and Finance Oct – Dec 2019
Besides mathematical similarity, the symbols in the equations defining the
variables have different meaning and interpretation. The interest on loans is charged
against money for the time till loan amount remains outstanding, while profit is charged
for the assets sold and remains fixed after the sale. Although the profit is added to the
cost at a negotiated rate but it is only a one-time charge related to the sale transaction.
The projected time of payment can be considered by the seller while fixing his price at
the time of sale but it cannot change afterwards. Profit does not remain as a variable
component but becomes a fixed term in the above equation. In case of loan interest
remains a variable term in the equation. Therefore, the loan is a fixed rate instrument
where bank’s interest income varies with time. A credit sale is FI instrument where
bank’s income remains fixed and rate of return varies inversely with the time of payment
of price. Therefore, the pricing mechanism, although looks similar, is actually different.
Based on these arguments an Islamic bank will reschedule the sale price only when
a lower return on the transaction is acceptable or is the only way out. A conventional
bank can reschedule the loan without affecting its income and rate. Similarly, a loan can
be rolled over but it is not possible in case of credit sale which would require a new
transaction. The IBs can face situation of intentional delays. To face this situation method
such as charity payment, enforcement of collateral and recalling the facility in case of
instalments are available. Charity payment increases the cost of the defaulter but does not
increase bank’s income and is used as deterrent to avoid intentional default.
Practically however rescheduling or rollovers in loans have served only as a
window dressing device in most cases. Experience3 shows that rescheduling is the first
stage of default which finally materializes when such methods cannot be adapted
repeatedly. Aljarhi (nd) also argues that practices like rollover and rescheduling are not
sustainable.
An Islamic bank, keeping in view the restrictions on rescheduling and rollovers of
credit sale price will have no option but to adapt quick recovery methods reducing the
chances of impairment of collateral and increasing chances of recovery rather than
delaying it to a time when it becomes impossible or at least very difficult to do so.
5.2 Use of interest based index
Related to the pricing issue is the use of interest rate indices and charging of profit
in line with the interest rates. If the profit is earned in a genuine trade transaction4 it
cannot be Haram because the profit rate is in line with the interest rate. In order to ensure
that profits being charged are reasonable (and not exploitative), there must be some
mechanism to ensure transparency. Otherwise any stray case of overcharging will
discredit the whole industry. The ideal situation will be that the IB industry develops its
own reference index but until the industry becomes large enough to have its own
interbank market and indices, the use of indices like KIBOR will be an operational
3 Authors experience of handling loan defaults for about 20 years 4 A transaction by fulfilling all Shari'ah requirements such as ownership and assumption of
risk with the bank.
Journal of Islamic Banking and Finance Oct – Dec 2019 53
necessity. Therefore use of reference indices does not turn the transaction prohibited
(haram) which is otherwise permitted / halal5.
5.3 Economic development
Due to the credit and collateral structure the economic impact of FI instruments is
usually questioned which is partly incorrect. The loans can be used to finance over heads
and non productive expenditure particularly in case of state borrowing which induces
inefficiency and misapplication. Trade based financing cannot take place unless new
assets are created. Apart from increasing financier’s control on fund utilization it ensures
value addition and reduces chances of default. Also as argued by (Aljarhi, nd) and
Usmani (2010), trade receivables cannot be securitized like conventional loans and
therefore cannot effect money supply in the same way as conventional loans do and
therefore destabilizing effects on the economy will not be similar
Although PLS methods are ideal for economic development FI financing
techniques are also important and development oriented by default. Loans if used for
asset acquisition will have similar effects as far as backward linkages are concerned. The
economic impact can further be improved if Islamic banks move towards their real role as
a trading house which will increase economic activity by providing additional linkages.
5.4. Socioeconomic effects
Yet another criticism against trade based financing is its similarity with the socio
economic effects of interest based loans such as exploitation of poor. Conventional banks
provide credits on the basis of collateral rather than profitability. Credit pricing takes into
account the size of business and overall income provided by the borrower to a bank.6
This criterion applies equally to trade or Ijarah based financing by the IBs. The terms and
conditions and rates of profit although negotiable are determined by the same factors as
explained above in case of conventional loans.
Similarly, in case of credit allocation which is collateral based, the ability to get
access to it is limited to the big ones at the cost of poor. However, this argument lacks
full justification on the grounds that although collateral is relevant but profitability cannot
be ignored because these instruments are fixed income and bank’s rate of return will be
effected in case poor profitability ends in a default.
5 Usmani, Muhammad Taqi., 1998. An Introduction to Islamic Finance, Karachi:
Idaaratul Maarif. P.82 6 The credit pricing takes in to account prime cost of funds, plus a premium for credit
default losses, adjusted with other incidental income e.g. L/C business etc and the size
of deposits provided. The customer’s need for funds and demand/supply position in the
market are other factors which will influence the ability of the parties to negotiate rates
in their favor. Generally large size customers are able to negotiate better deals.
Fixed Income Assets of Islamic Banks:Moving Forward To........
54 Journal of Islamic Banking and Finance Oct – Dec 2019
6. IBs role as a trading house
The role as a trading partner is not optional or desirable but compulsory. Presently
this requirement of Shari’ah law is being fulfilled by appointing the customer as agent.
Various dimension of this role are discussed below.
6.1 The requirements of product structure
The product structures require the IBs to buy, own and posses the goods before
selling to the customer in case of Murabaha / Musawama. In case of Salam and Istisna
goods bought from the customer have to be sold to third parties. The role of a trader is
therefore mandatory for the bank. This is not a requirement for the conventional banks.
They disburse the loans either directly to the borrower or on his behalf and as per his
instructions when pre disbursement formalities are complete irrespective of the purpose
for which loans are granted. In case the loans are granted to buy assets, these are bought
by the borrower although there may be some monitoring by the banks to ensure
utilization of the loan for the purpose it was granted.7 In case of trade based financing the
funds are disbursed to the supplier of goods as a sale price by the bank on its own behalf.
Such a crucial part of the transaction if handed over to customers will invite troubles. In
case of car Ijarah of course the banks mostly buy the asset themselves because buying
cars from the manufacturers is simple. But nothing prevents the banks from building
capacity for doing things which is little more elaborate.
6.2 Rationales for the adaption of new role
Since buying is an essential component of the whole transaction it must be
performed by the banks themselves. Delegating the banks’ role of a trading partner to the
customer through agency arrangement may fulfil the minimum legal requirements but
kills the real purpose besides creating conflict of interest and additional risks commonly
ignored. This discussed in more detail in the following sections.
6.2.1 Financing under Murabaha
In case of Murabaha/Musawama this conflict of interest may give rise to additional
risks commonly ignored such as use of goods by the agent/customer before these are
actually sold to him. There is also possibility of showing fake purchases for assets
already existing with the customer by producing invoices or over pricing the purchases to
keep whole or part of the cash. Such fictitious deals may turn the transaction non shariah
compliant besides diluting the collateral as well. These things can also happen in
conventional financing but there is no issue of Shari’ah compliance. The advantage of
better control on the use of funds as compared to a loan is also compromised to a great
extent in case of agency arrangement.
Since goods bought by the customer as agent lay at his premises the bank would
like to sale the goods to the customer as soon as possible to reduce risk of loss to the
goods. Risk mitigation by reducing the time of ownership is permissible but eliminating it
7 The banks can, subject to mutual agreement, monitor the use of borrowed funds which is not
a necessary condition for the validity of the transaction.
Journal of Islamic Banking and Finance Oct – Dec 2019 55
will render the transaction invalid. The sequence in the transactions i.e. buying goods on
bank’s behalf and subsequent purchase from the bank may also be easily violated through
back dated documentation that will turn the transaction non Shari’ah compliant and look
proper on papers. The requirement of a third party supplier of goods can also be by
passed and hidden in the documents. Lot depends on the integrity and behaviour of the
agent who wears two hats one after the other.
Measures such as direct disbursement, inspection of goods, obtaining invoices etc.
have been taken by banks to mitigate these risks. It can be further reinforced through Pre-
shipment inspection (PSI) and external Shari’ah audit. However, purchasing by the bank
is the only way to manage these risks.
6.2.3 Financing based on Salam and Istisna
In case of Salam buying goods from the customer and paying price in
cash presents no problem because it requires only certain documentation to be
followed by disbursement of price. The procurement activity here is simple.
Similarly, in case of Istisna for financing the manufacture of goods the bank
will disburse the price in a manner suited to both parties.
The problem arises when the banks receive goods from their clients
which need to be sold in the market. Here it calls for the banks’ actual role
from a dealer in money to a dealer in real goods. As argued by Usmani (1998)
who can be called the father of modern Islamic banking the concept of the
financial institutions dealing in money only is foreign to Islamic Shari’ah.
Therefore, the IBs will have to deal in commodities and adapt this role of
dealer in commodities instead of dealer in money and monetary assets as no
profit is allowed in Shari’ah through dealing in money only. “Therefore, the
establishment of an Islamic economy requires a basic change in the approach
and in the outlook of the financial institutions. They shall have to establish a
special cell for dealing in commodities.”8
If the requirement of a special cell is dispensed with by selling through
parallel contract of salam or selling goods through a promise to sale on the
date on of delivery, additional risks will emerge must be managed. For
example, in case of parallel Salam if the bank’s supplier defaults then the bank
will have to buy goods from the market. In case of goods to be sold against a
promise the bank will have to sale these goods in the market if the promisor
defaults. In case of Istisna financing again the banks rely on the customers’
8 Usmani, Muhammad Taqi., 1998 An Introduction to Islamic Finance Karachi: Idaaratul
Maarif. P 133
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56 Journal of Islamic Banking and Finance Oct – Dec 2019
distribution and marketing channels by appointing them as agents to sale these
goods in the market which may create the situation of Shari’ah incompliance
if the agency contract and constructive delivery of goods are not properly
done.
So the requirement of a cell or a department cannot be practically avoided.
Reluctance to accept this role has resulted in selective use of Salam and Istisna financing
depending on the banks’ comfort level with the clients.
6.2.4 Financing on the basis of Ijarah
Yet another FI product, Ijarah is an alternative to conventional finance lease
requiring purchase of assets before leasing to customers. The asset to be leased is
purchased as per request of the client. However, the banks are not using agency in
purchase of vehicles which are bought directly from the vendor. The asset remains at
vendor’s premises who holds it on bank’s behalf and is handed over to the customer for
use after an Ijarah contract is signed. Buying vehicles is simple but in case of assets of
special nature agency with customer is the option. This shows that the only issue is the
preparedness or capacity building.
6.3 The Shari’ah approval
The role of trading partners is mandatory. Therefore, as discussed earlier this
function cannot be delegated to customers. According to Tahir (2003) if FI financing
works as at present, separate identity of IBs may be questioned in future. Usmani9
recommends that the financier, as a first choice, should himself purchase the commodity.
He terms purchases through the client as agent a dubious arrangement and the very
reason for some Shari’ah boards to forbid the appointment of client as agent except when
purchasing by the bank is impossible.
Therefore, appointment of customer as agent cannot be a matter of routine or first
choice. It was allowed as temporary arrangement and must now be given up. The
Shari’ah approval for this arrangement may also be revisited.
6.4 The road map
In order to perform the function of buying and selling goods themselves, the IBs in
the initial stage can hire the services of consultants to perform these functions on their
behalf. These firms or individuals specializing in their respective areas may provide this
service in a better manner and will enable the banks to discontinue agency with the
customers.
However, this will be an interim measure to give up agency arrangement. On a
permanent basis the banks should move forward to set up their own supply chain
department. Alternatively, the banks can jointly set up separate company for this purpose.
This arrangement will yield the following benefits.
9 Ibid, p 107.
Journal of Islamic Banking and Finance Oct – Dec 2019 57
1. Better quality and prices as a result of more professionally administered and
transparent purchases in case of Murabaha/Musawama and elimination of costs
involved in monitoring the agency arrangement will more than offset the additional
costs of engaging in any of the aforementioned methods of procurement by the
banks themselves.
2. Besides resolving conflict of interest this arrangement will substantially mitigate
other risks due to agency arrangement and will also reduce default risk and Shariah
risk.
3. The same department can be used to purchase vehicles for Ijarah. The massive
negotiating power due to purchasing volume will enable the banks to obtain
discounts which can absorb the operating costs and lower the net cost of vehicles.
4. Goods purchased under Salam and Istisna arrangement can also be sold through the
same department saving the agency costs in Istisna financing and the risks in the
present procedures of selling goods in the market as discussed above. Of course
some time will be taken to establish channels and procedures.
5. Above all it will open up new era for Islamic banks. The leaders have to move first.
6.5 Banks’ Concerns
In the adaption of the new role, the banks may have some concerns. However these
concerns can be addressed very easily as explained below:-
1. Banks may consider procurement as a new activity and may feel uncomfortable
with this departure from their traditional role. In fact, the present role of
sanctioning and disbursing money only without indulging in real trade activity is a
departure from their real role. So they must now prepare to come back to their
originally envisaged role.
2. Incidentally this is not something new or strange as it is assumed to be.
International financing institutions and conventional commercial banks at home
and abroad are performing this activity as part of long term financing and in all
cases of project financing. Since buying and selling of goods by the banks is not a
requirement for lending, these banks supervise the procurement activities of their
borrowers to exercise control on borrowed funds for efficient and specific
utilization. Some banks have their own procurement department with specialized
staff and procedures that must be observed by their clients in the procurement of
goods. These procedures require competitive bidding, bid evaluation, selection of
Fixed Income Assets of Islamic Banks:Moving Forward To........
58 Journal of Islamic Banking and Finance Oct – Dec 2019
suppliers and contractors. Final selection of the bidders and the contracts to be
executed are approved by the banks on the recommendation of borrowers. The
procedures developed by local DFIs in Pakistan have international acceptability
and can be adapted by IBs when their own supply chain departments are
established10.
3. The client’s appointment as agent, although a disliked activity, is partly due to
convenience and partly due to risk of client’s refusal to buy goods after their
purchase. It may be argued that the client if not involved in the activity may find an
excuse if he otherwise wants to default on his commitment. However, it is not
difficult to design procedures to ensure customer’s participation in procurement
decisions while retaining the actual activity with the banks. In fact, the procurement
procedures followed by DFIs and banks as discussed above take care of this risk
and ensure involvement of the customer at all stages.
7. Conclusion
The IB industry has shown impressive growth rates in the recent years. The
tendency to keep up the growth rates and corresponding risk averse attitude is natural. As
evidenced by the data in Table 1 and 2 major shift in favour of PLS instruments may be a
rare possibility at least in the near future. Even in the long run complete switch over to
PLS instruments will not be possible. The overall asset portfolio will have FI products in
a sizable manner. FI assets also provide a Shari’ah compliant alternative where PLS
instruments cannot be used. Prohibitions like rescheduling, rollovers, securitization of the
credits etc not only offer specific advantages over conventional methods but also prove
that FI assets are different, their credit and collateral structure notwithstanding.
Exploitation of poor is likely but its intensity can be reduced by emphasizing profitability
of projects in the credit decisions. Issues pertaining to the current practice and
implementation methodology of Islamic banks such as procurement practices etc have
impaired the real role of IBs and introduced additional risks which need to be addressed.
This research has proved that establishment of a supply chain department to replace
agency with the clients is essential. It has many benefits and is not difficult to implement
keeping in view the available established procedures which can be adapted. This will
improve risk mitigation, remove operational similarities and increase confidence of the
stake holders (like regulators and depositors) about Shari’ah compliance and help retain
separate identity of Islamic banks.
10 The author himself has the experience of establishing and running such departments in
banks. He has authored procurement procedures and regulations as well.
Journal of Islamic Banking and Finance Oct – Dec 2019 59
Table 1
Financing mix of Islamic banks in Pakistan
Percentage share
March 10 March 11
Murabaha 37.5
45.4
Ijarah 14 12.4
Musharaka n
Modaraba
1.9 3.1
Diminishing
Musharaka
31.6 29.4
Salam 4 2.5
Istisna 6.5 4
Others 4.3 3.1
Total 100% 100%
Source: State bank of Pakistan: Islamic banking bulletin March 2011
Table 2
Financing mix of Islamic banks in Pakistan Percentage share
March 17 March 18
Murabaha 16.4
13.1
Ijarah 6.4 6.4
Musharaka 16.3 21.2
Diminishing
Musharaka
32.3 32.4
Salam 5.2 2.5
Istisna 8.9 7.7
Others 14.5 16.7
Total 100% 100%
Source: State bank of Pakistan: Islamic banking bulletin March 2018
Fixed Income Assets of Islamic Banks:Moving Forward To........
60 Journal of Islamic Banking and Finance Oct – Dec 2019
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62 Journal of Islamic Banking and Finance Oct – Dec 2019
Factors Motivating the Establishment of Waqf Institution towards Poverty Alleviation among Muslim Ummah in Oyo State, South
West, Nigeria By
Ibraheem Alani Abdul Kareem
Dr. AhamadFaosiyOgunbado
Abstract This article explores the factors motivating the establishment of waqf institution towards poverty alleviation among Muslim Ummah in Oyo state, South West, Nigeria, considering the importance of waqf institutions in taking care of the needs of the less privileged in the society. To achieve the objective of this study, the theory planned behavior (TPB) was selected to accommodate such variables as attitude, subjective norm and perceived behavioural control as predictors of waqf institutions establishment in Oyo state, Nigeria. Based on this, three hypotheses were formulated for the study. This study adopts a quantitative research where a sample was drawn from the population of Islamic scholar (Alfa) Oyo state, Nigeria. A number of 218 Islamic scholars were randomly selected to respond to the survey which was designed to examine the relationship between the predictors (attitude, subjective norm and perceived behavioural control) and the establishment of waqf institution as a way of poverty alleviation. Data was analysed using statistical package for social science (SPSS) version 22 software and statistical analyses like Pearson correlation and Regression were used to achieve the objective of this study. The findings supported the three formulated hypotheses, indicate that attitude, subjective norm and
Authors: Ibraheem Alani Abdul Kareem, Faculty of Economics and Management Sciences
Universiti Sultan Zainal Abidin, Terrengganu, Malaysia. E-mail:
Dr. AhamadFaosiyOgunbado, Faculty of Islamic Development Management, Universiti
Islam Sultan Sharif Ali (UNISSA). Simpang 347, Jalan Pasar Baharu, Godong. BE 1310.
Negara Brunei Darssalam E-mail: [email protected]
Journal of Islamic Banking and Finance Oct – Dec 2019 63
perceived behavioural control have a positive significant relationship towards the establishment of waqf institution as a way of poverty alleviation. This study adds to the existing literature of waqf and suggests opportunities for future research.
Keywords: Theory Planned Behaviour (TPB), establishment of waqf institution, poverty alleviation, an Islamic scholar.
1. Introduction
The increasing rate of poverty in the world especially in the developing countries
like Nigeria calls for concern. The concern is great in Nigeria with an average Nigerian
described as a poor man (Okoroafor & Nwaeze, 2013). This ravaging phenomenon of
poverty has attracted the attention of different scholars and authorities to seek different
perspectives of combating the menace. Scholars are yet to agree on the definition of
poverty (John & Bright, 2012). The United Nation Educational Scientific and Cultural
Organization (UNESCO) (2016) describes poverty from the economic point of view as
being a condition when a family's income fails to meet a federally established threshold
that differs across countries. According to John and Bright (2012), such condition leads
to a sense of helplessness, dependence, and lack of opportunity, self-confidence, and self-
respect on the part of the poor.
Literature and documentary evidence have shown that Waqf is one of the important
mechanisms for the alleviation of poverty. The concept of waqf is derived from an Arabic
wordوقف: الوقوف"” meaning stall in place, (Lisan al-Arab, 630-711H). Etymologically, it
implies “causing a thing to stop and standstill”. It also implies to make it dependent on,
detention, holding, stop and keeping (Baalbaki, 1988). From Islamic law point of view,
waqf implies holding properties, assets or belongings in the custody of an Islamic entity
meant specifically to see to the needs of the poor and needy. Having identified the
problem of poverty by the government of Nigeria, different measures have been taken in
the past to curb the menace. However, these measures have not yielded fruitful result. For
instance, the poverty rate in Nigeria has been relatively increasing from the 1980s. World
Bank reports have further rated Nigeria as third on world poverty index (Vanguard
newspaper, April 11, 2014); with over 100m Nigerians living below poverty line”
(Vanguard newspaper, August 20, 2015); and “85 percent of Nigerians live in poverty”
(The Nation newspaper, April 26, 2016).
Extreme poverty was 53.5 percent in 2009 in light of the latest authority household survey, the HNLSS. All subsequent estimate of poverty are projecting this authority’s survey. Poverty is estimating to have fallen moderately to 46.8 percent by 2015. Consequently, almost 85 ml person lived below the international poverty line of $1.90 (2011ppp) every day. The economic contraction in 2016 led to a projected increase in poverty by nearly 2% points and reached 48.4 percent. Poverty is probably to continue to rise in 2017 unless economic development resumes. Poverty in Nigeria as per the projections based on NLSS 2009/10, is evaluated to have increased alongside negative economic progress in all fourth quarters of 2016 and the first quarter of 2017.
Factors Motivating the Establishment of Waqf Institution......
64 Journal of Islamic Banking and Finance Oct – Dec 2019
The rate in 2010, as indicated in Table 1.1, was 69% which translated into 112.47
million Nigerians as living in poverty.
Nigeria poverty rate 2017
Table 1.1 Poverty rate in Nigeria from 1980-2010
Year Estimated
population
(Million)
Moderately
poor (%)
Extremely
poor (%)
Total
(%)
Population in
poverty (Million)
1980 65 21.0 6.2 27.2 17.1
1985 75 34.2 12.1 46.3 34.7
1992 91.5 28.9 13.9 42.8 39.2
1996 102.3 36.3 29.3 65.6 67.1
2004 126.3 32.4 22.0 54.4 68.7
2010
2015
2016
163
30.3 38.7 69
46.8
48.4
112.47
Source: National Bureau of Statistics (NBS, 2010).
Despite its huge oil riches and moving economic development, Nigeria has
struggled to kick its people out of poverty over the years. That detail was pointed out in
the world bank’s 2017 Atlas of Sustainable Development Goals, which indicates that 35
million more Nigerians were breathing in extreme poverty in 2013 which is higher than
in 1990. The Atlas tracks the advances nations are making to meet 17 improvement
objectives set out by the United Nations, for example, decreasing economic imbalance,
the utilization of clean energy, and literacy rates. Among the 10 most crowded nations for
which information is available, only Nigeria recorded an increase in the number of citizen
who live in extreme poverty over the time of the study. The Atlas describes "extreme
poverty" as living on under $1.90 per day.
People Living in Extreme Poverty (less than $1.90 per day)
Source: World Bank 2017 Atlas of Sustainable Development Goals
Journal of Islamic Banking and Finance Oct – Dec 2019 65
N/S Poverty
1 Income share held by highest 20%
49 %
2 Income share held by second 20%
9.7 %
3 Population living in slums (% of urban population)
50.2 %
4 Income share held by third 20%
14.4 %
5 Poverty headcount ratio at national poverty line (% of population)
46 %
6 Number of poor at $1.90 a day (2011 PPP) (millions) 84.8% 7 Poverty headcount ratio at $2 a day (PPP) (% of population)
76.46 %
8 Number of poor at $3.10 a day (2011 PPP) (millions)
122
AbulHasan (2002) posits that Waqf as a long-lasting form of charity characterised
by perpetuity is capable of reducing poverty problem. He further argues that the
institution of waqf is such a perpetual charity in the Islamic ethical system that alleviates
poverty menace. In a like manner, Yusuff & Noor Aziza (2013) state that poverty
alleviation requires a financial system in form of small, medium and large-scale
enterprises, investment, partnership, micro-financing, interest-free loan among others.
They argue that poverty can be alleviated through waqf properties. This implies that, if
the donors are well prepared, committed, dedicated and wish to donate part of their assets
for waqf in taking care of the needy, irrespective of their tribe, gender, sect, and colour,
poverty will reduce.
As reported by Monzer (2003), another area to note is that the action to performing
waqf is not compulsory as compared to zakat, which becomes compulsory on a Muslim
when his or her assets or wealth reaches a certain amount (Nisab). The institution of Waqf
may play a good role to bridges the gap between those who are in need and those who are
capable to give through contribution in cash or kind or movable and immovable assets,
and the aggregate contribution towards taking care of the underprivileged. Therefore, this
study, intends to examine the impact of Waqf on poverty alleviation in Oyo state south-
west, Nigeria. Oyo State is one of the states in Nigeria, it has a population of over five
million, and it is located in South West, Nigeria, with its capital in Ibadan. It also has
thirty-three Local Governments (National Population Commission, 2010). Ogunbado
(2013) state that Oyo State is one of Yorubaland along with Lagos, Ekiti, Ondo, Ogun,
Osun and the state is one of the oldest states in the country which has been in existence
since establishment of the state. Its capital is the largest city in West Africa. The state is
bounded on the north side by Kwara state, in the east side by Osun state, in the south by
Ogun state and in the west by the Republic of Benin. Oyo State covers around 28, 454
square kilometres of land mass (Adeyonu Oni, Okoruwa&Omonona 2012). To achieve
the objective of this study, we have examined how the domain of TPB influences the
establishment of waqf institution toward poverty alleviation. The paper is organized as
Factors Motivating the Establishment of Waqf Institution......
66 Journal of Islamic Banking and Finance Oct – Dec 2019
follow: After the introduction, Section two deals with literature review, historical context
of waqf and importance of waqf in poverty alleviation. Section three explains the
methodology of the study. And the last section is based on findings and conclusion.
2. Literature Review and History
Going back to history, Waqf is one of the ancient charity institutions in the globe
and the initiative dates back to the lifetime of the Holy Prophet (S A W). During the life
of the Holy Prophet (SAW), Umar Ibn Khatab made an inquiry on how he should arrange
a piece of property and the Prophet (saw) answered by saying “preserve the thing itself
and devote its fruit for a religious purpose.” According to this narration, Umar Ibn
Khattab, withheld the property from being sold or willed out, rather the property was held
for commercial purpose and the income generated was used for charity purpose. This
action of Umar ibn Khattab was cited as the first example of waqf in Islam (Bremer,
2004).
Kahf (1998) gives a comprehensive account of what waqf is all about. He defined
waqf as holding an asset and preventing its consumption for purpose of repeatedly
extracting its usufruct for the benefit of an object representing
righteousness/philanthropy. Saifuddin, Kayadibi, Polat, Fidan, & Kayadibi (2014) define
waqf as a property or asset donated by its owner for the sake of Allah in perpetuity
(forever) to be used for charity for the benefit of Muslim Ummah. The scholars further
stated that poverty is the major problem that faces many Muslim countries and agreed
that waqf and zakat can be an alternative to tackle the problem. Cizakca (1998) stated that
Muslims are encouraged to establish waqf institution that would encourage them to
perform ongoing charity for many years even including periods after the death of the
founder. Ali (2009) explain that establishment of waqf institution has played a major role
in the improvement of the Muslims community wellbeing in the history of Islam.
Therefore, the establishment of waqf institution is essential to the survival and the
development of the Muslim Ummah. Foyasal (2010) described the role of waqf institution
and the role of waqf fund in the alleviation of poverty in Bangladesh and its contribution
to the establishment of Dhaka University. Waqf institution plays a significant role in
poverty alleviation with increasing social wellbeing activities. The social wellbeing
derived from waqf will be governed by its types and scope. Waqf are of two types
namely: Philanthropic and Religious. The philanthropic waqf has two categories of
beneficiaries which are the public-philanthropic and family philanthropic. Only the
Public philanthropic are important institutions for poverty alleviation. Ahmad Bello
(2009) sees waqf as an essential part of Islamic civilization that takes care of the poor
within the community. Waqf institution assists welfare development and keeps step with
economic development in the community. It represents an asset dedicated in perpetuity
for a particular beneficiary or group of beneficiaries to attain specific purposes. The
encouragement of establishing such a socioeconomic movement is in line with Zakah.
The institution of waqf is not only successful and active, throughout Islamic previous
times, but has contributed meaningfully to numerous social causes such as education,
health, research and meeting need of less advantaged of the society. He further explains
that the institution of waqf in the current socioeconomic setup should be seen as an extra
source in poverty alleviation. The previous history of waqf recommends that the
Journal of Islamic Banking and Finance Oct – Dec 2019 67
institution can be used to organize additional funds for needy sections of the community
to address social issues such as skill and micro-entrepreneurial development, education,
healthcare and water and sanitation facilities in the rural areas. The last waqf for posterity
or family waqf surfaced after the Prophet (S A W) passed away, during the rule of Umar
ibn Khattab (635-645). The second Khalifah. Umar ibn Khattab decided to document in
writing his Waqf in Khaybar, he called some of the companions of the Muhammad (S A
W) to confirm this document. Many of those that engage in family waqf set a condition
that the income and the fruit of their waqf must firstly be given to their own family and
only the extras if anything left, should be given to the needy and poor. This type of waqf
is called family waqf or posterity waqf. Waqf in Islamic community may also be for one’s
own offspring or family. Alongside the lines accepted by traditional Fuqaha,’ we discuss
that the waqf family is charitable in spirit because it gives revenue/usufruct to people free
of charges and improves the wellbeing of upcoming generations (Monzer 2003, Nourand
Hassan (2012).
Mustafa and Ogunbado (2015), Waqf properties create a large percentage of
societal wealth in numerous Muslim nations. however, numerous Muslim nations are
facing many socio-economic problems such as illiteracy, poverty and lack of basic
healthcare services. These socio-economic issues urge contemporary Muslim scholars to
restore the conventional methods of financing the growth of waqf properties to guarantee
that waqf institution plays a vital role in enhancing the social welfare of the ummah. The
practice of philanthropy for enhancing social welfare of others is significantly energized
in Islam. According to the authors, over hundreds of years, waqf as a social foundation
has played a greater role in enhancing the social welfare of the Muslim communities and
society at large. And it additionally opens an entryway for wealthier Muslim to be liberal
and use their wealth in an appropriate way to seek of Almighty Allah’s pleasure and
perpetual rewards.
Hisham (2013) further explains that:
Muslims needed an institution that would enable them to perform all three of these
good deeds. The institution was the waqf which can, indeed, assure ongoing, recurring
charity for many years, even centuries, after the death of the founder; it can finance
scholars whose lasting word would benefit mankind for a long period and the sawabs
(good deeds) that would accrue to them would be shared by the waqf’s founder who had
provided for their sustenance in the first place; finally the management of the waqf can be
entrusted to the offspring of the founder so that while, on the one hand, careful and loyal
management is assured, on the other, the offspring would pray for the deceased for,
thanks to his waqf, he or she is not destitute (Hisham,2013 p. 393).
According to the (Khan. nd) historically, the institution of waqf was meant to be
can be used for the poor and needy in the society by organizing extra resources to address
the socioeconomic problems like health, education, care, skills and micro-entrepreneurial
growth, and water and cleanness services in rural areas. The author is of the opinion that
waqf can also maintain a fund, properly invested, and utilized during famine and other
crisis to help extremely poor to survive the crisis. A waqf can assist people in the
Factors Motivating the Establishment of Waqf Institution......
68 Journal of Islamic Banking and Finance Oct – Dec 2019
perspective of nations with extreme poverty, facing starvation, sicknesses and death. He
related that in the modern socioeconomic set-up the institution of waqf should be seen as
an extra source to maintain the program of poverty alleviation. Jalil and Mohd Ramli.
(2008) mention the Waqf as a charity instrument that is used to establish institutions like
hospitals, universities and research centre that could generate income. The incomes
generated from these institutions are distributed among the Muslim community. Khan
(1998) gives a comprehensive account of what waqf is all about. He defines Waqf as
holding an asset and preventing its consumption for the purpose of repeatedly extracting
its usufruct for righteousness/philanthropy purpose.
Osman (2012) It is further acknowledged that: The essential element of Waqaf is
that a person, with the intention of committing a pious deed, declares part of his or her
property to be henceforth unalienable and designates persons or public utilities as
beneficiaries of its yields (Osman, 2012 p. 26).
Ahmed. et. al(2015) in their article examines the perception of Muslim society in
Uganda on Waqf and its roles in socioeconomic development. Furthermore, high rate of
awareness among Muslim people in Uganda on Waqf and socio-economic roles would
provide a platform for a religious authority to urge Muslims to give their wealth as Waqf
for socio-economic improvement. For example, more hospitals and schools could be built
and Waqf organisation would be capable to provide microcredit finance for small-scale
businesses. This, in turn, will enhance the social welfare, create employment and reduce
poverty among Muslim society. According to the survey, the finding of the study shows
that majority of respondents are aware of Waqf and its part in socio-economic growth.
Nevertheless, the majority of the respondents do not know that Waqf can be created from
movable property such as agricultural products, livestock and finances. The authors
emphasise that the Uganda community is facing many socio-economic problems such as
lack of good healthcare, poverty and education and it is imperative for a religious
authority to promote waqf to the Muslim community to ease their living and to raise
funds for socio-economic improvement.
Mannan (2005) defined Waqf as an act of refraining from the use and disposal of
any asset from which one can benefit or perpetually use its proceeds for charity purpose.
Similarly, Magda Ismail (2014) defined Waqf as the retention of an asset
immovable or movable, by an organizer and the perseverance of its benefit in
permanence to the recipients.
In summary, Waqf is a form of donation that is religiously encouraged as an act of
worship in Islam and involves the holding of properties, assets or one’s belongings in the
custody of an Islamic entity meant solely to meet the needs of the poor and needy (Noor
Faezah, 2014; Mardziyah, 2014).
Review of the Factors that Influences the Establishment of Waqf Institution Towards Poverty Alleviation & TPB.
This study employs Theory of Planned Behavior (TPB) as the underpinning of its
theoretical model. Ajzen, (1991) extends the theory of reasoned action (TRA) as it
Journal of Islamic Banking and Finance Oct – Dec 2019 69
answers the weakness that is inherent in the TRA (Fishbein & Ajzen, 1975; Ajzen &
Fishbein, 1980). In this regard, perceived behavioural control (PBC) which is one of the
core variables of TPB is assessed by asking people of how much control they possessed
while executing a particular behaviour. Importantly, the inclusion of TPB variables
brings about tremendous improvements in desired behaviour. Moreover, it reveals
people’s feeling concerning the easiness or difficulty that is associated with the
performance of a specific behaviour (Ajzen, 1991). These theories, in essence, describe
human behaviour towards a particular behaviour under diverse situations. Consequently,
taking the TPB into consideration, intention and feeling of control which individual holds
is used to determine behaviour, whereas their attitudes, PBC and subjective norms
influence intentions.
The issues which influence the establishment of the waqf institution toward poverty
alleviation are attitude, subjective norm, perceived behavioural control, religiosity and
amount of information. The explanation of each variable will be clarified in this part. All
these external variables will explain the relationship between dependent variable and
independent variables consistent with the previous researchers.
Attitude
Attitude is setting up of the relationship between behaviour and belief (Fauziah et
al., 2008). Fishbein and Ajzen (1975) defined attitude as an individual's behaviour
towards awful or good activities. The scholars express that people's feeling, for example,
negative or positive will influence the individual in playing out a specific behaviour.
Also, the Theory Planned Behaviour (TPB), shows that attitude has an important
relationship with the individual behaviour.
Using Theory of Planned Behaviour (TPB) Osman (2014) affirms the suitability of
TPB in understanding the waqf establishment and found its support among educated
people. Clearly, attitude is significantly related to waqf establishment that will lead to
poverty alleviation. This result is in line with the findings of previous studies,for
example, Lada et al., (2008); Amin and Chong, (2011).
Subjective Norm
Social influence is regarded as the subjective norm which is a construct that is
unique to TPB. Importantly, subjective norm influences the individual behaviour and
social environment (Fishbein and Ajzen, 1975).
Ajzen (1991) defines subjective norms as the perception of the influence of friends
or relatives with regards to whether certain behaviour should be performed. It alludes to
an individual's view of applicable options from others on whether to execute specific
behaviour. Past studies, for example, Shih Fang (2004), Lada et al. (2008) and Amin and
Chong (2011) have found significant, impact of subjective norm on the establishment of
waqf institution. Clarified in more detail, Lada et al. (2008) look at the impact of
subjective norm and the establishment of waqf institution. This study shows that
“environment” can be a major factor explaining why person performs some behaviour.
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70 Journal of Islamic Banking and Finance Oct – Dec 2019
Perceived Behavioural Control
Perceived behavioural control refers to the level of capacity and control which an individual perceives over performing the desired behaviour (Ajzen, 1991). Ajzen (2002) found that PBC has a direct influence on behaviour and indirect influence on behaviour via intention anchored on the assumption that an individual is going to be motivated to execute his behavioural intention (Ajzen, 2002). In line with the argument of Madden et al. (1992), it is possible for an individual to possess favourable attitudes and/or social influence to perform the behaviour, his intention however to execute such a behaviour may be reduced if he has not enough information or other resources at his disposal to kick off the behaviour. In essence, there is a tendency that an individual is going to perform certain behaviour if he believes that he has the required ability and is confident to perform it. Previous studies have reported the significant influence of PBC in different fields (Bhattacherjee, 2000; Armitage, 2005). For instance, in the case of participation in waqf scheme, one would expect that an individual who believes that he has the resources, is likely to have better perception that he is in control and therefore, his behavioural intentions may increase for the establishment of waqf Institutions toward poverty alleviation
3. Research Methodology
This study uses a cross-sectional design with emphasis on survey method. Cross-sectional design involves gathering data once over a period of days, weeks or months in order to meet the research objective (Cavana, et al., 2001).The method is desirable because it is an excellent method of obtaining information about what people believe can influence their behaviour, and the respondents’ attitudes and characteristics (Keyton, 2015). The research design is vital to identify the outcome from the respondent by answering the questionnaire which relates to the dependent (establishment of waqf institution as a way for poverty alleviation) and independent variables comprising attitude, subjective norm, religosity, perceived behavioural control and amount of information. The outcome of the survey is suitable to measure the relationship between dependent variable and independent variables.
This aspect deals with the diagrammatical presentation of the relationship between the three independent variables comprising attitude, subjective norm and perceived behavioural control; and the dependent variable (establishment of Waqf institution as a way for poverty alleviation) is equally shown in the diagram. The framework, as depicted in Figure 1. below indicates that the five independent variables influence the establishment of waqf institution toward poverty alleviation.
Figure1. Research framework
Journal of Islamic Banking and Finance Oct – Dec 2019 71
Three hypotheses are formulated to examine the impact waqf on poverty alleviation among Muslim Ummah in Oyo State South West of Nigeria.
The following hypotheses are formulated. Hypothesis 1
H1: There is a positive significant relationship between attitude and establishment of waqf institution as a way of poverty alleviation.
Hypothesis 2 H1: There is a positive significant relationship between subjective norm and
establishment of waqf institution as a way of poverty alleviation.
Hypothesis 3 H1: There is a positive significant relationship between Perceived Behavioural
Control and establishment of waqf institution as a way of poverty alleviation.
Population
The population is the aggregate of items possessing a common trait or traits (Kotharin, 2004). It refers to the total entities qualified to be studied by the researcher (Marczyk et al., 2005).
The population of this study, therefore, refers to the total number of Islamic scholars (Alfasmeans Islamic scholar in the Yoruba language) in Oyo state, south-west, Nigeria. This covers Islamic scholars in all local government areas of Oyo state, South West, Nigeria. In Nigeria for instance, there is no provision for ministry of religious affairs; hence, it becomes difficult for the researcher to get a comprehensive list of all the Islamic scholars in the state. In the same manner, the league of Imam and Alfas in the state does not have the list of Islamic scholars needed for this study. However, based on the interaction of the researcher with some of the identified Islamic scholars in the state, coupled with documentary evidence, the state has an average number of five hundred (500) scholars qualified to form the population of this study. The population of this study, therefore, stands at five hundred (500) people. Based on this, the study will draw a sample of three hundred (300) Islamic scholars (Alfas) across the thirty-three-local government of Oyo state, Nigeria. However, we select the sample size in a scientific way by following the recommendations of authorities. Krejcie and Morgan (1970) provide a table for the determination of sample size for a different population. The sample size correlates with the population of 500 is 217 this is in line with (Krejcie& Morgan, 1970).
Questionnaire Design
The researcher used a self-administered questionnaire. Questionnaire is considered
appropriate for this study due to the following reasons: 1) It is a relatively cheaper
method which enhances the response rate (Sekaran, 2003); 2) There is no sensitive
question involved in the study; 3) The questions are straightforward and easy to
understand; 4) The scale used is easy to understand and manage; 5) Brief and clear
written instructions were given.
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72 Journal of Islamic Banking and Finance Oct – Dec 2019
The questionnaire was distributed to the respondents who are living in Oyo State,
Southwest, Nigeria and questions are written in the English language. The questionnaire
contains twenty-seven questions divided into 4 sections which are: A, B, C and D.
In section A, the question indicates the respondent’s demographic profile like
education level, gender, occupation, marital status and age. The objectives of this
question are to know the correlation of the demography toward establishment of waqf
institution towards poverty alleviation among Muslim Ummah in Southwest Nigeria.
Section B indicates the respondent’s perception of the establishment of waqf institution as
a way of poverty alleviation. The questionnaire emanates from the measurement adapted
from the literature. Specifically, a 5-point Likert scale questionnaire comprising strongly
disagree (1), disagree (2), neutral (3), agree (4), and strongly agree (5) used for the study.
After that, this section is divided into 5 sections as follow:
Attitudes
Subjective Norm.
Perceived Behavioural Control.
Section C addresses how the establishment of waqf institution as a way of poverty
alleviation is measured.
Lastly, section D provides a space for respondents to leave their comment,
opinions, or suggestions for the establishment of waqf institution toward poverty
alleviation among Muslim Ummah. These can be used to understand the user behaviour
and their establishment towards waqf institution.
Measurement and operationalization of variables
In this research, the dependent variable is the establishment of waqf as a way of
Poverty alleviation. Meanwhile, the independent variables are attitudes, subjective norm,
perceived behavioural control. The questionnaire items are adapted from previous
studies.
Dependent Variables: Establishment of Waqf Institution as a way of Poverty Alleviation
This study uses items adapted from Ramayah et al. (2009) and Gopi and Ramayah
(2007). The variable is measured using a 5-point Likert scale questionnaire strongly
disagree (1), disagree (2), neutral (3), agree (4), and strongly agree (5). The items are
presented as follows:
1. I will choose waqf institution as a way for poverty alleviation.
2. Overall, I plan to participate in waqf institution as a tool for poverty
alleviation.
2. I will recommend waqf institution to my friends as a mechanism for poverty
alleviation.
Journal of Islamic Banking and Finance Oct – Dec 2019 73
4. My general intention to participate in waqf is as an instrument for poverty
alleviation.
5. I will think about opting for waqf as a tool for poverty alleviation.
Independent Variable: Attitude
Fishbein and Ajzen (1975) defined attitude an individual's behaviour towards awful or good activities. The scholars express that people's feeling, for example, negative or positive will influence the individual in playing out a specific behaviour.
Attitude is measured in this study using items adapted from Ramayah et al. (2009) and Gopi and Ramayah (2007). The variable is measured using a 5-point Likert scale strongly disagree (1), disagree (2), neutral (3), agree (4), and strongly agree (5). The items are presented as follows:
1. Waqf establishment is beneficial.
2. Participating in waqf institution is rewarding.
3. I have a positive perception of the establishment of waqf institutions.
4. Establishment of waqf institutions is a good idea.
5. I like the establishment of waqf institutions.
Independent Variable: Subjective Norm
Ajzen (1991) defined subjective norm as the perception of the influence of friends or relatives with regards to whether a certain behaviour should be performed.
Subjective Norm is measured in this study using items adapted from Ramayah et al. (2009) and Gopi and Ramayah (2007). The variable is measured using a 5-point Likert scale strongly disagree (1), disagree (2), neutral (3), agree (4), and strongly agree (5). The items are presented as follows:
Most people who are important to me think that I should participate in waqf institution establishments.
My friends think that I should be involved in waqf institution establishment.
I am expected to be involved in waqf institution establishment.
Independent Variable: Perceived Behavioural Control
Perceived behavioural control refers to the level of capacity and control which an individual perceives over performing the desired behaviour (Ajzen, 1991).
Perceived behavioural control (PBC) is measured in this study using items adapted from Shih and Fang (2004). The variable is measured using a 5-point Likert scale strongly disagree (1), disagree (2), neutral (3), agree (4), and strongly agree (5). The items are presented as follows:
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74 Journal of Islamic Banking and Finance Oct – Dec 2019
1. I have financial resources to partake in waqf institutions.
2. I have the ability to be involved in waqf institutions.
3. I have knowledge about waqf institutions.
4. Participating in waqf establishment is within my control.
This part explains the analyse of the data collected through questionnaire. The data
were interpreted using SPSS version 22. The data analyses included descriptive statistics,
while correlation analysis used in checking the degree of relationship that exists among
the variables investigated in this paper and regression analysis was used in examining the
influence of others on the respondent Islamic Scholar (Alfas). However, a total of 218
questionnaires were retrieved and was used in the data analysis. This indicates that
response rate was estimated of 72.6%. The details are summarized in the below Table
1.2.
Table 1.2
Response Rate and Data Collection
items Frequency Percentage
Distributed Questionnaires 300 100.0
Collection Questionnaires 218 72.6
Questionnaires used for analysis 218 72.6
Demographic Analysis
In Table 1.3about respondent’s demographic factors information which includes
age, gender, marital status, education level and occupation were explains. The result
indicates that out of a total of 218 respondents, male respondents (96.3%) were higher
than female (3.7). It is also observed that respondents who are less than 30 years of age
are 39.9%; those between 30 and 39 are 20.2%; 40-49 are 10.6%; 50-59 are 14.2%; while
those between 60 and above constitute 15.1%.
Married respondents in the survey are 48.2%; single respondents are 26.6%, while
others are 25.5%.On the basis of the level of education, respondents with primary
education are 43.6% of the sample; those with secondary education constitute 11.9%;
respondents with tertiary institution qualification take 18.3% of the sample population;
while others are 26.1%.
On the basis of respondent’s occupation, civil services are 44.5%; those in business
are 12.4%; farming (18.3%); self-employed (5.5%); academics/ teachers (19.3%).
Journal of Islamic Banking and Finance Oct – Dec 2019 75
Table 1.3 Demographic Data of respondents Profiles
Frequency Percent (%)
Gender
Male 210 96.3
Female 8 3.7
Age
Less than 30 87 39.9
30-39 44 20.2
40-49 23 10. 6
50-59 31 14.2
60 and above 33 15.1
Marital status
Married 105 48.2
Single 58 26.6
Others
55 25.2
Level of Education
Primary 95 43.6
Secondary 26 19.3
Tertiary institution 40 18.3
Others 57 26.1
Occupation
Civil servant 97 44.5
Business 27 12. 4
Farming 40 18.3
Self-employed 12 5.5
Academic/teacher 42 19.3
Others
Table 1.4
Correlations
WAQAF PBC ATT NORM
Pearson Correlation
WAQAF 1.000 .569 .427 .474
PBC .569 1.000 .458 .332
ATT .427 .458 1.000 .267
NORM .474 .332 .267 1.000
Sig. (1-tailed)
WAQAF . .000 .000 .000
PBC .000 . .000 .000
ATT .000 .000 . .000
NORM .000 .000 .000 .
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76 Journal of Islamic Banking and Finance Oct – Dec 2019
N
WAQAF 218 218 218 218
PBC 218 218 218 218
ATT 218 218 218 218
NORM 218 218 218 218
Note: PBC= perceived Behavioural Control, ATT= Attitude, SUB-NORM= Subjective Norm,
Waqf.
Table 1.4 shows pearson correlation of all variables examined. It is indicating that
all the inter-correlation are significant. However, the coefficients of correlation are all
below the threshold value of 8.0 this shows that the tendency of multi-collinearity is low.
Similarly, the result of variance inflation factor (VIF) report values of 1.290, 1.145 and
1.347 for attitude, subjective norm and perceived behavioural control respectively. This
indicates that data was free from multi-collinearity. Therefore, the data can be used for
further analysis.
4 Analysis Method
Regression statistical analysis is used to examine the hypotheses or more
independent variables in this study.
Finding and Discussion
From the regression result displayed in table 1.4, the value of the coefficient of
determination (R2) is 43.6% signifying that the independent variable under consideration
(attitude, subjective norm, perceived behavioural control) jointly explain 46.3% of the
variance in the value of establishment of waqf institution as a way of poverty alleviation.
Also, Durbin Watson value for this study is 2.303, which falls between the accepted
range of 1.5 and 2.5 which is acceptable (Lukacs, Burnham & Anderson, 2010). The
purpose of checking Durbin Watson is to investigate the issue of auto-correlation. The
value of 2.303 has demonstrated that this study is free from auto-correlation and sample
error that might occur at random as the Durbin Wasson value falls within the acceptable
value of 1.5 to 2.5.
Table 1.5
Model Unstandardized Coefficients t P.
Value B Std. Error
(Constant) 4.014 1.698 2.363 .019
ATT .204 .071 2.866 .005
NORM .387 .071 5.430 .000
PBC .350 .053 6.607 .000
Dependent variable is establishment of Waqf.
Table 1.5 indicates the results of analyses of survey data in the study on the
significance of factors (attitude, subjective norm, perceived behavioural control) to
Journal of Islamic Banking and Finance Oct – Dec 2019 77
influence the establishment of the waqf institution as a way of poverty alleviation. From
this table, it is observed that all relationships are significant.
Hypothesis H1 stated that there is a positive significant relationship between
attitude and establishment of the waqf institution as a way of poverty alleviation. The
result (β=.204, t=2.866, p value=.005) show that there is a positive and significant
influence of attitude on establishment of the waqf institution as a way of poverty
alleviation. This indicates that the hypothesis is supported.
Hypothesis H2 stated that there is a positive significant relationship between
subjective norm and establishment of the waqf institution as a way of poverty alleviation.
The result (β=.387, t=5.430, p value=.000) show that there is a positive and significant
influence of subjective norm on establishment of the waqf institution as a way of poverty
alleviation. This indicates that the hypothesis is supported.
Hypothesis H3 stated that there is a positive significant relationship between
perceived behavioural control and establishment of the waqf institution as a way of
poverty alleviation. The result (β=.350, t=6.607, p value=.000) show that there is a
positive and significant influence of perceived behavioural control on establishment of
the waqf institution as a way of poverty alleviation. This indicates that the hypothesis is
supported.
Therefore, all hypotheses are supported and significantly so.
Discussion
The study brings out that there is a positive significant relationship between attitude
with establishment of the waqf institution as a way of poverty alleviation. Based on this,
Ajzen (1991) viewed attitude as necessary things to predict and describe human action.
Many studies conducted also show a significant positive relationship between action and
attitude. Meanwhile, attitude towards establishment of waqf indicates how Muslims view
waqf as good or bad, will influence their decision to embrace the establishment of the
waqf institution towards poverty alleviation. This research supports the previous studies
such as of Shih and Fang, 2004; Lada et al, 2008; Amin and Chong 2011, that confirm
that attitude significantly and positively influence the establishment of waqf institution
towards poverty alleviation.
The result shows that there is positive significant relationship of subjective norm in
establishment of the waqf institution as a way of poverty alleviation. This implies that the
input, awareness or orientation given by those who know and value waqf institution can
influence like minded friends and people surrounding me in society. This can go a long
way in influencing those who are not well conversant with the waqf institution to
embrace the idea of its establishment. The result of the research is consistent with the
previous finding of Lada et al. (2008), and Amin &Chong (2011). The evidence found
the relationship between subjective norm and establishment of the waqf institution as a
way of poverty alleviation. This research finding indicates that subjective norm can give
a significant and positive influence on establishment of the waqf institution as a way of
Factors Motivating the Establishment of Waqf Institution......
78 Journal of Islamic Banking and Finance Oct – Dec 2019
poverty alleviation in Oyo state, south-west, Nigeria which is also in according with the
previous study mentioned.
The result shows that there is a positive significant relationship between perceived
behavioural control and establishment of the waqf institution as a way of poverty
alleviation. The evidence found the relationship perceived behavioural control and
establishment of the waqf institution as a way of poverty alleviation, according to the
obtained result. This research supports the previous study of Noor Faezah (2014) that
found that perceived behaviour control contributes in a significant and positive way in
influencing the establishment of waqf institution towards poverty alleviation.
Limitation
Although this study was successful, there are various factors that limit its finding.
The most important limitation is little literature available in the subject area. The study
mostly focuses on Islamic religion perspective because the waqf is an Islamic principle
that is understood by Muslims. The study also involved particular respondents which is
Islamic scholar in Oyo state in particular location who know much about waqf and its
application in the society. Therefore, the finding of the study cannot be generalized on
others geographical states in south-west areas and the entire country (Nigeria). Future
studies can cover other parts of the country. The study makes a contribution to Oyo state
government particularly Muslim Ummah in providing guideline and direction for
establishment of waqf institution towards poverty alleviation. In addition, the study also
provides the theoretical evidence to future researchers. Generally, the study examined the
contributing factors of the establishment of waqf institution towards poverty alleviation
among Muslim Ummah in Oyo state south-west, Nigeria. The study has also contributed
to the existing knowledge related to the waqf. It is hoped more similar research can be
conducted in another area.
Recommendation
Arising from the discussion of findings elaborated earlier, the following
recommendations are made:
(1) Muslim in Oyo state should see the establishment of waqf institution as a necessity
for the benefit of Muslim Ummah and mankind in general. The true practicality of
waqf establishment can arguable lead to the poverty reduction, eradication and
elimination.
(2) Islamic scholars should organize workshops, seminars, conferences and trainings
with a view to enlighten people on the concept of waqf institution and how it can be
used in dealing with poverty problem in the society.
(3) Also, Islamic scholar should create orientation and awareness to the wealthy people
on how to meaningfully contribute to waqf institution and the rewards accruable to
them as prescribed by the Holy Quran.
Journal of Islamic Banking and Finance Oct – Dec 2019 79
Conclusion In conclusion, according to the objective of the study, research questions, general
problem statement, related literature and analysis on data conducted, I shall discuss, this
paper outcome with this conclusion: This research identified the factors that influence
Muslim to establish waqf institution towards poverty alleviation among Muslim Ummah
in Oyo state, south-west, Nigeria. The factors are attitude, subjective norm and perceived
behavioural control. The researcher adopted self-administered questionnaires to gather
information from the respondents. Waqf is Islamic mechanism to alleviate poverty in a
society that assists needy. According to the literatures reviewed if Oyo state Muslim
Ummah can embrace establishment of waqf, it can help them to assist underprivileged
Muslim and reduce poverty in the state especially the current time that country faces
recession problem. The waqf institution can be a foundation of financing for investment
in the state, particularly for Islamic contracts like Mudarabah, Musharakah,
Murabaha,Sukuk and others in this aspect it would help to upgrade the investment in the
state and the entire country at large. Similarly, the revenue generated from those
investments could be utilized on programmes like poverty alleviation among others. This
arguably would reduce poverty level among Muslim Ummah in the state which has
always been an important matter.
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84 Journal of Islamic Banking and Finance Oct – Dec 2019
The Impact of Dividend Policy on Shareholders’ Wealth: A Case Study of
Syariah Compliance Companies By
BalqisMohd Idris, Nadia Farah IzzatiNazri,
Syukriah Ali, HasniAbd Rahim and KartiniKasim
Abstract Maximizing the shareholder’s wealth is an ultimate goal for every firm.
It can be achieved through the company’s action, usually through the
periodic dividend payments which is determined by dividend policy. The
objective of this study is to determine the impact of dividend policy on
shareholders’ wealth based on ten (10) Syariah compliance companies
in consumer product sector listed at Bursa Malaysia within the period of
2007 to 2017. The market price per share (MPS) was used as the
dependent variable. The dividend policy such as Earnings per Share
(EPS), Dividend per Share (DPS), Return on Equity (ROE), and
Retained Earnings (RE) were used as a proxy of dividend policy and
represent as independent variables.
This study used a multiple linear regression analysis at a significance
level of 5% processed by Eviews version 9.5 and 10. From the results, it
showed that all the variables proxies of the dividend policy has positive
effect on shareholders’ wealth (MPS).
Keywords: Dividend Policy, Shareholder’s Wealth, Market Price,
Earning Per share, Dividend Per share, Return of Equity, Retained
Earnings
Authors: Balqis Mohd Idris, Nadia Farah Izzati Nazri: Bachelor of Business
Administration (Finance), Syukriah Ali, Hasni Abdul Rahim: Faculty of Business and
Management, Kartini Kasim: Faculty of Science and Mathematics, Universiti Teknologi
MARA, CawanganKedah,KampusSungai Petani, Kedah,Malaysia.
Email: corresponding author: [email protected]
Journal of Islamic Banking and Finance Oct – Dec 2019 85
1. Introduction
A shareholder, also referred as a stockholder, is an individual, company, or institution that owns at least one share of a company’s stock (equity). Since shareholders are a company's owners, they reap the benefits of the company's successes in the form of increased stock valuation or profits that is distributed as dividends. Market Price per Share (MPS) refers to the value of “share price” and it is determined based on demand and supply of the stock. It has no specific relation to the value of the company's assets, such as book value per share does, which is based on the information from a company's balance sheet. The current value of expected future returns gain by the owner of the firm is also known as shareholder wealth.
Every strategy and decision making by the management are vital as it gives impact to the ability of firm to maximize the shareholder’s wealth. Maximizing the shareholder’s wealth is an ultimate goal for every firm and it can be achieved usually through periodic dividend payments or Return on Equity (ROE) which represent the return on the shareholders’ investment for a given period. Dividend payment is determined through dividend policy which helps company on deciding how much dividend should the company allocates to the shareholders based on their current performance.
Shareholder’s wealth can be measured using Market Price per Share (MPS). According to Azhagaiah & Priya (2008), Market Price per Share (MPS) represent shareholder’s wealth which indicate the firm’s investment activity, financial health, and dividend decisions. They added that the goal of maximizing shareholder’s wealth can be achieved by maximizing the market capitalization of the firm which is calculated using the firm stock price. Changes in Earnings per Share (EPS), Dividend per Share (DPS), Return on Equity (ROE) and Retained Earnings (RE) will give an impact to MPS.
The present study intends to examine the significant impact of dividend policy (EPS, DPS, ROE and RE) on shareholders’ wealth. This study is conducted based on ten (10) Syariah compliance companies within consumer product sector listed at Bursa Malaysia. The dependent variable in this study is shareholders’ wealth which is represented by Market Price per Share (MPS). The independent variable is dividend policy which is a set of guidelines that suggest a suitable amount of dividend to be given to the shareholders. Dividend policy is measured by using four variables which are Earnings per Share (EPS), Dividend per Share (DPS), Return on Equity (ROE) and Retained Earnings (RE).
2. Literature Review
2.1 Shareholders’ wealth (MPS)
In this study, shareholders’ wealth will be measured using Market Price per Share (MPS). This is consistent with the previous study done by other researchers, among them are (Sarwar, 2013; Ofori-Sasu, Abor, & Osei, 2017; Faraz, Ishfaq, & Khan, 2017; Sumathi, N., & Jothi, 2018). Market price usually moves based on demand and supply of assets. When demand exceeds the supply of assets, MPS tend to increase and vise versa decrease when supply exceeds demand. In the same vein, Hemadivya & Devi (2013) posited that the demand and supply factors does have an impact on the MPS and it is sensitive to any action performed by asset holders through buying and selling decision.
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86 Journal of Islamic Banking and Finance Oct – Dec 2019
2.2 Earnings Per Share (EPS) and Shareholder’s Wealth
Earnings per share (EPS) is the portion of a company's profit allocated to each
share of the common stock and it serves as an indicator of a company's profitability.
There were many studies conducted on EPS and shareholder’s wealth. Among them
were, (Khan et.al, 2011; Hemadivya & Devi, 2013; de Wet & Mpinda, 2013; Sarwar,
2013; Malhotra & Chandiwala, 2013; Masum, 2014). Hemadivya & Devi (2013)
conducted a study on the relationship between market price and EPS in India on three
sectors which are primary, manufacturing and service sectors. Similarly, de-Wet &
Mpinda (2013) studied the short run and long run effect of EPS on shareholders wealth
on 46 companies listed on Johannesburg Securities Exchange (JSE) within the period of
1995 to 2010. They discovered that EPS is not significant on the market price. Khan et.al
(2011), and Sarwar (2013) conducted a similar study on the companies listed at Karachi
stock exchange. As the samples of the study, Khan et.al (2011) analyzed 55 companies
starting from 2001-2010 while Sarwar (2013) focused on 36 companies in sugar industry
in Pakistan. In the same vein, Malhotra & Chandiwala (2013) conducted a study on 95
companies from different industries listed in National Stock Exchange (NSE) in India.
Contrariwise, they found that EPS has positive relationship on the market price. While
other researchers focus on industries, Masum (2014) and Mohammad Abdelkarim
Almumani (2014) examine the relationship between EPS and stock price on banking
sector. The former study was conducted in Dhaka Stock exchange for the period of 2007
to 2011 and the latter was in Amman Stock Exchange over the period of 2005 – 2011.
Both researchers concluded that EPS is positively related to stock price.
2.3 Dividend per Share (DPS) and Shareholder’s Wealth
Dividend is a surplus sharing of firm’s current profit distributed to their
shareholders. (Oloidi & Adeyeye, 2014). As mentioned by Barfield (1995), most of the
shareholders are interested on dividend offered by the firm which can be gained through
dividend payment. Among the study conducted on dividend payment effect on
shareholder’s wealth are by Adefila, Oladipo, & Adoeti, (2004), Sarwar (2013), de-Wet
& Mpinda (2013), Majanga (2015), Ansar, Butt & Shah (2015), Farrukh et.al (2017).
Adefila et al., (2004), examined the effects of a firm’s dividend policy on the market
price of 15 companies listed on Nigeria stock exchange from 1990 to 1999. The result
shows that no correlation between dividend payment and share prices of Nigerian firms.
Contrariwise, other findings concluded different result. Among them are Sarwar
(2013), de-Wet & Mpinda (2013) and Ansar et al., (2015) which conducted their study at
Karachi stock exchange while Mohammad Abdelkarim Almumani, (2014) chose all
Jordanian banks listed in Amman Stock Exchange over the period of 2005-2011 as the
samples of the study. Ansar et al., (2015) focused on 30 companies in textile, cement and
chemical sector in Pakistan, likewise Majanga (2015) emphasized the study on 13
companies listed on Malawi stock exchange for the period of 2008 until 2014. Similarly,
Farrukh et al., (2017) extend the study by using 51 companies which paying stable
dividends for 10 years consecutively. They found that dividend per share has significant
positive relationship with market price per share.
Journal of Islamic Banking and Finance Oct – Dec 2019 87
2.4 Return on Equity (ROE) and Shareholder’s Wealth
Return on Equity (ROE) give information to investors about the effectiveness of
firm in utilising their capital. It gives investors the picture of a firm whether they are
good in generating profits using the existing resources. A rising in ROE shows that firm
is using the existing capital efficiently as to generate income. Khan et al. (2011), and
Ansar et al. (2015) studied the relationship between ROE and market price in Pakistan
while Masum (2014) in Dhaka. Along the same line, Purnamasari (2015) conducted the
study in Indonesia by selecting 45 companies listed in Indonesia Stock Exchange for the
period of 2012-2013. All of the researchers finding confirmed that ROE is positively
significant to the market price per share.
2.5 Retained Earnings (RE) and Shareholder’s Wealth
Retained earnings are profits generated by a company that are not distributed to
shareholders as dividends but are either reinvested in the business or kept as a reserve for
specific objectives (such as to pay off a debt or purchase a capital asset). Many researches
studied the relationship between Retained Earnings (RE) and Market Price per Share
(MPS). Sarwar (2013) reported that RE is not significant to the share price. On contrary,
Oyinlola & Ajeigbe (2014), Ansar et al., (2015) and Farooq et al. (2017), reported
different result. Oyinlola & Ajeigbe, (2014) carried on a similar study on 22 listed
companies on Nigerian Stock Exchange from 2009 to 2013, while Farooq et al. (2017)
choose 91 firms from manufacturing sector listed on Pakistan Stock Exchange. The
study covered six years’ period starting from 2009 to 2014. They concluded that retained
earning has positive and significant impact on stock price.
Based on the evidences of prior studies, despite their mixed findings, the following
hypotheses were developed to determine the impact of dividend policy on shareholders’
wealth.
H1: There is positive significant effect of Earning per Share (EPS) on the
shareholders’ wealth.
H2: There is positive significant effect of Dividends per Share (DPS) on the
shareholders’ wealth.
H3: There is positive significant effect of Return on Equity (ROE) on the
shareholders’ wealth.
H4: There is positive significant effect of Retained Earnings (RE) on the
shareholders’ wealth.
3.0 Methodology
3.1 Data collection and samples
This research paper is based on ten (10) Syariah Compliance companies that were
listed on Main Market of Bursa Malaysia in the consumer product sectors. The data
collected for all variables, range from year 2007 to 2017 which is 11 years. The
The Impact of Dividend Policy on Shareholders’ Wealth: .......
88 Journal of Islamic Banking and Finance Oct – Dec 2019
dependent variable is shareholders’ wealth as measured by Market Price per Share (MPS)
while the independent variables are Earnings Per Share (EPS), Dividend Per Share
(DPS), Return on Equity (ROE), and Retained Earnings (RE). The data is then analysed
using E-views version 9.5 and version 10. Table 1 shows the measurement of the
variables of the study.
Table 1: Measurement of Variables
VARIABLES MEASUREMENT INFERENCE AUTHORS
Market Price per
Share (MPS)
High market value reflects
that the firms are in very good
position and lower value
reflects otherwise.
(Gejalakshmi & Azhagaiah,
2015)
(Gejalakshmi, 2017),
(Gejalakshmi &
Azhagaiah, 2015)
and (Damodaran,
2008)
Earnings per
Shares (EPS)
It represents the capacity of
firm to pay dividends. Firm is
willing to pay high dividend if
it increases profitability.
(Gejalakshmi & Azhagaiah,
2015)
(Om & Goel, 2017)
and (Seetharaman &
Rudolph, 2011)
VARIABLES MEASUREMENT INFERENCE AUTHORS
Dividend per
Shares (DPS)
The dividend per share reveals
how well earnings support the
dividend payout. (Gejalakshmi
& Azhagaiah, 2015)
(Gejalakshmi, 2017)
and (Om & Goel,
2017)
Return on
Equity (ROE)
It explains how many dollars
of profit a company generates
with each dollar of
shareholders' equity.
(Damodaran, 2008)
(Lanka, 2014), (Om
& Goel, 2017) and
(Kai, Shyuan, Yer,
Yee, & Lly, 2014)
Retained
Earnings (RE)
A firm with growth in its
retained earnings can use the
additional earnings to expand
its business, which can
potentially lead to high profits
and increase the firm’s value.
(Gejalakshmi & Azhagaiah,
2015)
(Margaretha, 2015),
(Farooq et al., 2017)
and (Gejalakshmi &
Azhagaiah, 2015)
3.2 Analysis of data
First, descriptive statistical analysis is used to describe the mean, maximum and
minimum value of the study. Then, correlation analysis was performed to diagnose the
multi-collinearity problem. Next, three different panel data models; pooled effect, fixed
effect estimation and random effect estimation are used in order to analyse panel data.
The basic panel data model for panel data is as follows:
Yit = β0 + β1 X1 + β2 X2 + β3 X3 + β4 X4 + αi + εt = 1, 2...n
Journal of Islamic Banking and Finance Oct – Dec 2019 89
Where,
Yit = Dependent Variable (MPS)
X1 = Earnings per Share (EPS)
X2 = Dividend per Share (DPS)
X3 = Return on Equity (ROE)
X4 = Retained Earnings (RE)
β0 = Intercept term
β1, β2, β3, β4 = Slope coefficient
αi = Unknown Intercept
εt = Error Term
Finally, model specification tests which is Hausman Test were used to choose the
appropriate model in order to achieve the objective.
4.0 Findings And Discussions
4.1 Descriptive Analysis
Table 2: Descriptive Analysis
MPS EPS DPS ROE RE
Mean 12.50143 0.645245 0.391721 25.6799 2.75E+08
Maximum 103.2 3.083 2.75 100.35 1.22E+09
Minimum 0.405 0.0589 0 5.09 10044364
Table 2 shows the detail of descriptive analysis of variables used in this present
study for the period of 2007 to 2017. Market Price of share which is the dependent
variable in this study shows that overall companies in the consumer sectors have an
average price of RM12.50. The maximum value of MPS is RM103.20 and it represented
by Nestle Berhad while the minimum value is RM0.405 which is represented by
Cocoland Berhad.
The first independent variable is EPS which range from minimum value of
RM0.0589 to maximum RM3.083 with an average of RM0.645. Ajinomoto Berhad
represent the maximum value of EPS while the minimum is Kawan Food Berhad.
DPS which is the second independent variable has an average value of RM0.39 and
it ranges from minimum value of RM0.00 to the maximum value of RM2.75. During the
study period, Nestle Berhad paid the maximum dividend per share to their shareholders
while Kawan Food Berhad paid no dividend to their shareholder in year 2009.
The third independent variable is ROE. On average, the ROE of the companies is
25%. Nestle Berhad show the maximum values of 100.35% which indicates that the
company is efficient in using shareholders’ money to generate net income. The minimum
value of ROE is 5.09% and it is represented by Latitude Tree Berhad.
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90 Journal of Islamic Banking and Finance Oct – Dec 2019
Lastly, the average value of Retained earnings (RE) is RM275,000,000. F&N
Holdings Berhad show the maximum value of RM1,220,000,000. It constitutes that the
company retained the highest amount of net income in the company after it has paid out
dividends to their shareholders. However, Kawan Food Berhad shows the lowest value of
RE which is RM10,044,364.
Table 3: Correlation Coefficient
Table 3 shows the correlation amongst the variables utilised for the study.
According to Gujarati and Porter (2009), the problem of multi-collinearity occurs when
the correlation of pair of independent variables are more than 0.8. Based on the result in
Table 3, this research concludes that there is no serious multi-collinearity problem in this
model since the correlation of independent variables are less than 0.8.
Table 3 shows the correlation amongst the variables utilised for the study.
According to Gujarati and Porter (2009), the problem of multi-collinearity occurs when
the correlation of pair of independent variables are more than 0.8. Based on the result in
Table 3, this research concludes that there is no serious multi-collinearity problem in this
model since the correlation of independent variables are less than 0.8.
Table 4: Regression Analysis
MODEL
POOLED EFFECT
MODEL
FIXED EFFECT
MODEL
RANDOM EFFECT
MODEL
VARIABLE
C -1.63088
0.0062 ***
-0.31801
0.5990 *
-1.63088
0.003 ***
EPS 0.686064
0.0000 ***
0.709339
0.0000 ***
0.686064
0.0000 ***
DPS 0.150393
0.0403 **
0.211451
0.0027 ***
0.150393
0.0258 **
ROE 0.692816
0.0001 ***
0.502264
0.0026 ***
0.692816
0.0000 ***
RE 0.304585 0.158525 0.304585
MPS EPS DPS ROE RE
MPS 1
EPS 0.873868 1
DPS 0.789247 0.776719 1
ROE 0.750319 0.737011 0.673645 1
RE 0.488372 0.35905 0.428151 0.165368 1
Journal of Islamic Banking and Finance Oct – Dec 2019 91
0.0000 *** 0.0216 ** 0.0000 ***
R2 0.840905 0.878611 0.840905
F-STATISTICS 0.0000 0.0000 0.0000
NO. OBSERVATION 110 110 110
HAUSMAN TEST 0.0000
Notes: C (Market per Share), EPS (Earning per Share), DPS (Dividend per Share), ROE
(Return on Equity),
RE (Retained Earnings), and R2 (R-Squared).
(*) Statistical Significant: 10%, (**) Statistical Significant: 5%, (***) Statistically Significant:
1%
Table 4 shows the results of the regression analysis of pooled effect, fixed effect and random effect models on the impact of dividend policy on shareholders’ wealth as measured by MPS. As shown above, the fixed effects model is the best model to explain the impact of dividend policy on shareholders’ wealth, as it has the highest adjusted R2 value of 87.86%. This implies that the four factors examined in this study explain almost 88% of the impact of dividend policy on shareholders’ wealth. The F-Test (p value= 0.000). indicates that all four variables which are EPS, DPS, ROE, and RE are significant on shareholders’ wealth as measured by MPS. Further, the result of Hausman test (p value= 0.000) for this study indicates that fixed effects model is more appropriate compared to random effect. Hence, the following hypothesis are concluded:
i. Earnings per Share (EPS)
H1: There is positive significant effect of Earning per Share (EPS) on the market price of share (MPS).
The result shows that the p-Value of EPS is 0.000 below than alpha, 0.05 which shows significant effect between EPS and MPS. The coefficient of Earning per Share (EPS) shows positive relationship with MPS. An increase in EPS will lead to an increase in MPS. Therefore, it can be concluded that EPS is statistically significant towards MPS, Thus, H1 was accepted.
EPS tells how much company makes profit per outstanding share. As an investor, the main objective of investing is to earn profit. The higher the EPS, the higher the profit made by the company which attract more investor to buy the stock. When the demand for the stock exceed the supply, it will lead to an increase in MPS. This is support by Khan et al. (2011), Sarwar (2013), Malhotra & Chandiwala (2013), Masum (2014), Mohammad Abdelkarim Almumani (2014) which found that EPS had positive relationship with MPS.
ii. Dividend per Share (DPS)
H2: There is positive significant effect of Dividends per Share (DPS) on the market price of share (MPS).
The result shows that the p-Value of DPS is 0.0027 below than alpha, 0.05 which
shows significant effect between DPS and MPS. The coefficient of dividend per
share (DPS) shows positive relationship with MPS. An increase in DPS will lead to
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92 Journal of Islamic Banking and Finance Oct – Dec 2019
an increase in MPS. It can be concluded that DPS is statistically significant towards
MPS. Thus, H2 was accepted.
Dividend is one of the sources of income for the shareholders. An increase in DPS
is drove by an increase in total dividend paid. The greater the dividend paid, the
greater the income will be earned by the shareholders which coincided with the
investor objective in investing. The company that pay consistent dividends are
popular among investors. Even though dividends are not guaranteed on common
stock, many companies generously rewarding shareholders with consistent and
sometimes increasing dividends each year. Companies that do this are perceived as
financially stable especially among buy and hold investors who are most likely to
benefit from dividend payments. When companies display consistent dividend
histories, they become more attractive to investors. As more investors buy in to
take advantage of this benefit of stock ownership, the market price of share
naturally increases. This finding is consistent with Majanga (2015), Ansar et al.
(2015), and Farrukh et al. (2017).
iii. Return on Equity (ROE)
H3: There is positive significant effect of Return on Equity (ROE) on the market
price of share (MPS).
The result shows that the p-value of ROE is 0.0026 below than alpha, 0.05 which
shows significant effect between ROE and MPS. The coefficient of return on equity
(ROE) shows positive relationship with MPS. An increase in ROE will lead to an
increase in MPS. Therefore, it can be concluded that ROE is statistically significant
towards MPS, Thus, H3 was accepted.
ROE used to measure the efficiency in generating net income by using the
shareholders’ equity. High ROE reflects how good the management uses its
existing capital. It can cause an increase in investor confidence level on the
company’s management where it left a high expectation on investors that the
management has the ability to use the capital efficiently in generating more profit.
Thus, the attraction on the stock rise and it will create demand which lead to an
increase in MPS, which consistent with the research finding by Ansar et al. (2015),
Iqbal Khan (2012) ; and Masum (2014).
iv. Retained Earnings (RE)
H4: There is positive significant effect of Retained Earnings (RE) on the market
price of share (MPS).
The result shows that the p-Value of retained earnings (RE) is 0.0216 below than
alpha, 0.05 which shows significant effect between RE and MPS. The coefficient of
retained earnings (RE) shows positive relationship with MPS. An increase in RE
will lead to an increase in MPS. It can be concluded that RE is statistically
significant towards MPS. Thus, H4 was accepted.
Journal of Islamic Banking and Finance Oct – Dec 2019 93
The company’s management needs to focus on maximizing shareholders’ wealth. A
good quality company management would assist in achieving shareholders’ wealth
maximization. The result shows that when high growth firms retained more
earnings, it prognosticates these firms have more opportunities to invest thus
investors perceive that these firms have investing opportunities, thus more investors
will invest in these firms. Due to this reason, it will generate positive signal in the
market which leads to the stock price of these firms’ increase. The finding
corresponded with findings by Oyinlola & Ajeigbe (2014), Ansar et al. (2015), and
Farooq et.al (2017),
5.0 Recommendations
The present study focused on the impact of dividend policy on shareholders’ wealth in particular of the Syariah compliance company in consumer product industry in Malaysia. In order to increase the significance of the study, it is recommended that the research area is to be broadened by including companies selected from nine sectors listed at Bursa Malaysia thus allows observation and comparison to be made on the impact of dividend policy on respective sectors annual growth cycle. In addition, the research also should increase the sample size by lengthening the duration of financial years to attain reliability and accuracy.
6.0 Conclusion
The ultimate objective for this study is to identify the impact of dividend policy on shareholders’ wealth. This research analysed on ten (10) Syariah compliance companies out of 130 companies in consumer product industry within the time period from 2007 to 2017. The data collected from the sample size had been analysed using regression analysis.
From the Hausman Test, it suggested Fixed Effect Model to be used to determine the impact of dividend policy on shareholders’ wealth. Fixed Effect Model shows that all the independent variables; Earnings per Share (EPS), Dividend per Share (DPS), Return on Equity (ROE), and Retained Earnings (RE) have positive significant relationship with Market Price per Share (MPS) and among the variables, EPS is the most influential factor on MPS. From these findings, it shows that any changes in EPS, DPS, ROE, and RE will give impact on generating shareholders’ wealth.
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94 Journal of Islamic Banking and Finance Oct – Dec 2019
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Bay’ al-Wafa Repo [BW Repo-i]: A Proposed Shariah Compliant Liquidity
Management Instrument from the Classical Perspective
By
Abdul-Azeez Maruf Olayemi*
Abstract
The dearth of Shariah compliant instruments for liquidity management is yet a major challenge that works against the stability and the growth
of Islamic banking and finance. However, an in-depth study of the
literatures of Fiqh ‘Islamic jurisprudence’ shows that one of the method that was used to solve the problem by classical scholars was the
introduction of some hybrid contract, such as Bay’ al-‘Uhudah, Bay’ al-
Wafa contracts etc. Adopting jurisprudential and legal methodology, the current study seeks to propose a new tradable and viable instrument
for the market. The instrument is coined “BW Repo-i.” It is a Shariah compliant repurchase agreement. If the instrument is adopted, it is
believed that it will offer a solution to the challenges of liquidity
management in the Islamic financial institutions. The instrument shall be tradable at both the primary market and secondary market of the
Islamic money market.
Keyword: BW Repo-I, Bay’ Wafa Contract, Liquidity Management,
Bay’ al-Istighlal
Introduction
This study advocates for the introduction of a new instrument to the Islamic
interbank money market. The instrument is anticipated to contribute significantly in the
* Author: Abdul-Azeez Maruf Olayemi, Ph.D Law, IIUM, Malaysia, Post-Doctoral Fellow,
University of Malaya, Malaysia, Asst. Prof. Jumeira University, UAE, Academic, Ibn Batut
African Institute, Republic of Benin.
98 Journal of Islamic Banking and Finance Oct – Dec 2019
solving of the problem of excess liquidity portfolio in Islamic banks and other Islamic
financial institution. It is also expected to enhance the transactions of the banks within a
minimum possible period, which may be a day or even less. The proposed instrument is
coined ‘Bay’ al-Wafa Repo (BW-i Repo).
The instrument is structured in the Bay’ al-Wafa contract which is permitted by
Shafi’i Schools of law and the al-mutakhirun ‘the latter days’ scholars of Hanafi. The
contract was provided for in the Majjalah al-A’hkam al-‘Adliyah, which was the
applicable coded civil law in the Ottoman empire. The law is still in practice, in the
occupied State of Palestine and the State of Israel1 as well as other countries in the
Middle East and the Muslim world. The contract is also approved by the Shari’ah
Advisory Council (SAC) of the Malaysian Security Commission (SEC) for the stock
market. 2 It is hoped that the application of BW-i Repo in Transport Company, for
instance, will be able to solve the problem of the unavailability of the instrument of
overnight or even some seconds’ mature period of the liquidity management in the
Islamic banking industry.
1 See ,<http://www.mfa.gov.il/MFA/Government/Branches+of+Government/
Judicial/Development+of+the+Law+in+Israel-+The+First+50+Yea.htm>retrieved 15/04/2012). 2 Resolution of the SharÊÑah Advisory Council of the Malaysian Security Commission,
Principles of Muamalat in the Capital Market, at 26.
Journal of Islamic Banking and Finance Oct – Dec 2019 99
Bay’ al-Wafa Contract
Bay’ al-Wafa ‘is a sale contract in which when the seller pays back the price of
the goods he sold to a buyer, such buyer will return the goods back to the seller’.3 That is
to say, it is a sale contract whereby a seller will sell certain article to a buyer on credit
basis with the notion that the article will be returned to the seller whenever he pays back
the debt to the buyer.4 In another-word, Bay’ al-Wafa is also defined as a security
contract whereby a seeker of cash or liquidity will sell his property on the condition that
when he returns back the purchase price to the buyer the property will be returned back to
him. For instance, an owner of an estate may sell such property to a buyer, on the
condition that such property will be returned to him when he pays back the price to the
buyer.5
Besides, the contract is also referred to as Bay’ al-Uhudah ‘custody sale’ due to its
resemblance to pledge and mortgage contract. It is also known as Bay’ al-Idah and Bay’
al-Wa’ad. That is ‘promise sale’, which shows that it is based on ‘promise’ and not
stipulation or condition. Other names of the contract are bay’ al-amanah ‘trust sale’. This
is because the subject matter of the contract is regarded as being in the ‘trusted-custody’
of the buyer, and Bay’ al-Nass ‘people’s sale’. That is, given its frequent use by the
people as a customary contract of mobilizing liquidity for business, BayÑ al-JÉÒidh
‘permissible sale’ due to its legalization by some jurists, and BayÑ al-MuÑÉd ‘returned
sale’ due to its nature of repurchase of the sale object.6
Historically, the contract of Bay’ al-Wafa emerged in the 5th Century in Bukhara
and Balkan, due to the need for a Shari’ah compliant incentive providing contract for the
mobilization of liquidity for business and which will be capable of avoiding transaction
in riba ‘interest’.7 Hence, the development and the legalization of Bay’ al-Wafa contract
by the Hanafi School of law, that is due to human needs, on the basis of the Shari’ah
principle of ‘al-‘Aamr idha daq itasa’, wa idha itasa’ daq’ ‘when there is an intense
need, the scope of the rule leniently expands, and when there is no intensity of the need
the rule will contract/narrows’. Therefore the Hanafi School of law permits the contract
on the basis of al-Istiasn ‘rule of equity’.8
3 Article 118, Majallah al-Ahkam al-‘Adliyyah. 4 MuhÍammad Rawwas Qal’aji & Hamid Sadiq Qunaibi, Mu’jam Lughat al-Fuqaha
(Dictionary of Islamic Legal Terminology), (Bairut: Dar An-Nafaes, 1985), at 115. 5 Articles 118 and 396-403 of Majallat al-Ahkam al-Adliyah 6 Rafic YËnus Al-Masri, Renting an Item to Who Sold it, is it Different from Bay' Al-Wafa'
Contract, J.KAU: Islamic Econ.,Vol.19, No. 2, pp: 39-42 (2006 A.D./1427 A.H.) 39, see,
<http://www.scribd.com/doc/57292317/bai-wafa
>(retrieved 11/04/2013). 7 KasanÉ, BadÉi’u’ al-SanÉ’iu’, Ibid., at 186. 8 Ibn Nujaim, Zaynu al-ÑÓbidÊn Bin IbrÉhÊm, al-AshbÉhu wa an-NazÉ’ir (BairËt: Dar al-
Kutub al-IlmiyaH, 1405AH/1985), at 242.
Bay'al-Wafa Repo [BW Repo-i]: A Proposed Shariah Compliant Liquidity..........
100 Journal of Islamic Banking and Finance Oct – Dec 2019
Shari’ah Rule on Bay’ al-Wafa
It is a common knowledge that, rulings on the permissibility of contracts under
Islamic law are jurisprudential and are seldomly unanimously agreed upon amongst the
Shari’ah jurist, given the diversity in methods of interpretation and legal reasoning in the
various Schools of Islamic law. This is the case with Bay’ al-Wafa contract. Therefore,
the jurists of the various notable schools of law, mainly, hold two divergent opinions as
regard the permissibility of Bay’ al-Wafa . This is as follows:
1. The al-Mutaqadimun ‘earlier’ jurists of the four notable Schools of law, that is,
Hanafi , al- Maliki, Shafi’i and Hanbali Schools of law are of the opinion that Bay’
al-Wafa is not permissible. They argued that it is a way of legalizing the prohibited
riba ‘interest’ based transaction contrary to the rule of the holy Qur’an .9,10 Thus,
majority of the scholars of the OIC International Fiqh Academy are guided by this
opinion and hold that the contract is impermissible as contained in the resolution of
the Academy which is as follows:
Having considered the research papers received by the Academy on the subject of
Bay’ al-Wafa . Having listened to the discussions held about Bay’ al-Wafa '' and
its real nature i.e ''the sale of money on condition that when the seller returns the
price, the purchaser returns to him the amount purchased'', resolves
First: That this sale is in fact ''loan which has generated a profit'' It is therefore a
fraudulent practice of Riba, and is considered unsound by the majority of the
Ulema.
Second: The Academy considers this contact prohibited in Shari'a.11
2. Conversely, ‘al-Mutaikhirun’ the contemporary generations of the jurists of Hanafi
and Shafi’i Schools of law argue that Bay’ al-Wafa is permissible. They hold that
the contract is actually a method of avoiding transaction with riba ‘interest’. They
further maintain that, contrary to the argument of the jurists that it is not ‘interest’
based since it is not guaranteed, and that rather, it is a gratuitous gesture. Thus, if
for an unforeseen reason or occurrence, the expected benefit cannot be derived by
the buyer/pledgee, the seller/pledgor will not be liable for restitution or the payment
of any substitute, unlike an interest based transaction.12 Thus, they assert that
evidence that support the permissibility of Bay’ al-Wafa is the presumption of the
9 M. Tahir Mansuri, Islamic Law of Contracts and Business Transactions, (New Delhi: Adam
Publishers & Distributors, 2007), at 321. 10 YËsuf KamÉl, Figh IqtiÎÉd al-Suq, (Cairo: DÉr al-Wafa, 1996), at 195. 11 Resolution and Recommendations of the Council of the Islamic Fiqh Academy (1985-
2000)” , IRTI., see, < http://www.applied-islamicfinance.com/fatwa_12.htm> (18/04/2012). 12 Ba’alawi, Bughyatu al-Mustarshin, (Dar al-Ma’rifah, n.d.), at 133.
Journal of Islamic Banking and Finance Oct – Dec 2019 101
permissibility of all contracts except that which is divinely prohibited. In the same
vein, the minority of the scholars of the OIC Fiqh Academy13, as well as the
scholars of the Shari’ah Advisory Council of the Malaysian Security Commission
holds that the contract is permissible. The contract approved by SAC Malaysian as
contained in the resolution of the Council, is as follows:
Resolution:
At its 11th meeting on 26 November 1997, the SAC passed resolution that Bay’ al-
Wafa ’ is permissible under Islamic jurisprudence and can be developed as a principle
for formulating products in an Islamic capital market.14
Bone of Contention
The bone of contention that led to the divergence of opinions amongst the scholars as regards the permissibility of Bay’ al-Wafa , is that, the contract appears to be a hybrid contract which is of the characteristics of sale and mortgage contract, while in fact it is a separate novel single contract on its own. Those who see it as a sale and mortgage contract argue that, it is a sale contract which does not allow the buyer to assume the complete ownership and take disposition of the sale property until acquired.
Nevertheless, the scholars that permit Bay’ al-Wafa argue that the contract is a new
security contract,15 which is in the form of a sale contract. Thus, the objective of the contract is to preserve the right of recovering of the counter value that was exchanged by the contracting parties. In short, it can be observed from the arguments that, the opinion that professes the permissibility of Bay’ al-Wafa epitomizes nothing but the creativities in the application of the rules of Shari’ah law and the ability of the jurists in intensifying the principle of al-Ijtihad to resolve contemporary problems. It is a common knowledge that in the context of al-Ijtihad there is room for divergence of opinions. A notable supporter
of the opinion that permits bay’ Wafa is, Shaykh Mustapah Zarqa’, 16 who argue that Bay’ al-Wafa should be regarded as a contract of security which is in the form of sale
contract.17 The objective of the contract is to mobilize liquidity for business through securitized loan.
Conditions of Bay’ al-Wafa
As a sale contract, the rules of Bay’ al-Wafa only allow a buyer of subject matter to take the possession of the usufruct of the property within the period of the sale. He can utilize the usufruct for himself, he can take the benefit of it by leasing or letting it to other
13 Resolution and Recommendations of the Council of the Islamic Fiqh Academy (1985-
2000)” , IRTI., see, < http://www.applied-islamicfinance.com/fatwa_12.htm>
(18/04/2012). 14 Resolution of the SharÊÑah Advisory Council of the Malaysian Security Commission,
Principles of Muamalat in the Capital Market, at 26. 15 al-ZarqÉ’, al-Madkhal al-FiqhÊ,(DÉr al-Qalam li al-Nashri wa al-TaozÊ) Vol. 1, at 554. 16 Mustapah ZarqÉ’, Nizam al-Ta’amin, at 36 -37. 17 al-ZarqÉ’, al-Madkhal al-FiqhÊ, Vol. 1, at 554.
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102 Journal of Islamic Banking and Finance Oct – Dec 2019
parties. As opposed to the practice in a mortgage contract. The purpose of mortgage ‘al-Rahn’ is to securitize loan. Even if the mortgaged property is leased with the permission or consent of the mortgagee, such act shall invalidate the mortgage contract, because of the removal of the guarantee of the security of the loan.
The following rules of mortgage are applicable to Bay’ Wafa:
a. The buyer does not have the right of consuming the sale property. He cannot
transfer its ownership to another party with a price. He cannot mortgage it. He is
obliged to preserve it and protect it.
b. The buyer in the contract of Bay’ al-Wafa is under obligation to return the property to the owner / the seller when he returns the purchase price to him. This is where the contract derived its name ‘Bay’ al-Wafa ’ ‘the sale of fulfillment’. Likewise, the buyer can demand his money from the seller any time and he will deliver the goods to the seller, just as a creditor can demand his money from a debtor.
c. That the rules of Shufu’ah ‘pre-emption’ are not applicable to a real property (unmovable property) which happens to be the subject matter of Bay’ al-Wafa . This is because the property must be returned to its owner.
d. When a sale property in Bay’ al-Wafa need maintenance, the seller shall be responsible for the expenditure, because he still retain the ownership of the property.
e. The property in Bay’ al-Wafa shares the same status of guarantee with the subject matter of mortgage property throughout the period of the contract. This means that if the property perishes while in the possession of the buyer, the seller will only pay the amount of the money which can be valued for what he was given as a loan, just
like in a mortgage. Clearance between them will take the following form.18
i. If it happens that the value of the subject matter of the Bay’ al-Wafa is equal to the price received for its sale. Then, the obligation of paying back the money will cancel-out when the property perishes as explained in the above. Yet the buyer will return the remaining amount to the seller if any.
ii. However, if the value of the property is more than the price, which is the common practice, the remaining amount shall be considered as a trust. Thus, the buyer is not under obligation to pay it.
iii. That a seller in the contract of Bay’ al-Wafa , if he fails to return the price to the buyer, the buyer has the right to seek a court order to compel him or sell the property.
It appears from this explanation that the same rules which are applicable to mortgage property and the secured loan in mortgage contract are also applicable to the subject matter of Bay’ al-Wafa and its price of purchase and that the rules of sale
18 Ibn ÑÓbidÊn,MuÍammad al-AmÊn, Rad al-MuhtÉr ala Dar al-MukhtÉr SharÊÑah TanwÊr
al-AbÎÉr, (Riyadh: DÉr ÑÓlam al-Kutub, 1423AH1983), Vol. 9, at 545.
Journal of Islamic Banking and Finance Oct – Dec 2019 103
contract are not applicable to it. Thus, the following is the explanation on the Bay’ Wafa Repo.
REPO (Repurchase Agreement)?
Repurchase agreement, which is commonly referred to as ‘Repo’, is an agreement
between a seller and a buyer that the seller reserve the right to repurchase the subject
matter of their transaction at an agreed upon time and price. It is ‘a form of short-term
borrowing for dealers in securities. The dealer sells the securities to investors, usually on
an overnight basis, and buys them back the following day.’ Thus, for the party that sells
the security (and agrees to repurchase it in the future) it is a Repo. However, if it is
bought by a buyer who agrees to sell it in the future) it is a reverse repurchase agreement.
Repos are classified as a money-market instrument. They are usually used to raise short-
term capital.’19
In another word, a Repo is synonymous to a secured loan whereby the buyer of the security, that is the lender or investor will be given documents as security against the loan he advanced. Thus, in the case of default he can sell the security to recover his money. The seller of the securities, that is, the borrower in the other hand can repurchase back the security from the buyer. A repo is a highly liquid security. That is, those which can be converted to cash within a short time. They may be sold to a third party through the open-market-operation. Examples of the securities in Repo transaction are treasury bills and government bonds.
Repo is of three types. These are; (1) Overnight Repo, that is a repurchase agreement where its period of maturity is only one day, (2) Term Repo, a term repo is a Repo in which there is an agreement between the transacting parties for the date of its maturity. That is, a Repo with a specified date of maturity, (3) Open Repo, that is a repurchase agreement which does not carry any specified date for the date of its maturity. Nevertheless, as a liquidity management instrument its maturity date may not exceed one
or two years.20
Mechanism of the Proposed BW-i Repo Transaction
1. In order to allow for a minimum short-term transaction in the ‘BW-i Repo’ the underlying asset of the security may be in the form of the share certificate in Transport Company or other very highly liquid activities. That is, such as airline, railway, vessels, or inter/intra-city bus or Taxi Company. That is to say, that the pledged security to be sold by the seller to the buyer must be a share certificate from the instance of a transport company.
2. The fund receiver will give the fund provider the right to derive benefit from the collateral. That is, the share certificate of the loan seeker in the transport company, for example, within the maturity period of the loan.
19 Investodedia, see,< http://www.investopedia.com/terms/r/repurchaseagreement.asp#ixzz1s
EMvAhJq >(retrieved on 16/04/2012). 20 Financial Times, see, < http://www.ft.com/home/asia>(retrieved on 17/04/2012).
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104 Journal of Islamic Banking and Finance Oct – Dec 2019
3. The seller of the collateralized property that is the share certificate reserve the right to purchase back the certificate from the buyer, on the purchase price. That is, the actual earlier purchase price.
4. The benefit to be derived on the share certificate within the transaction period, if any, is not guaranteed. Thus, if due to unforeseen reason the benefit cannot be derived, the seller shall not be liable for any restitution, substitution or damages.
5. The buyer may transfer the pledged property by sale to a third party, with the
consent of the seller as opined by the jurists.
6. The other highly liquid asset may form the asset that underlies the transaction.
Secondary Market – Bay’ al-Istigirar
Some scholars of the Hanafi School of law hold the opinion that ‘both the seller and buyer in Bay’ al-Wafa contract can transfer the subject matter of the transaction to a third party through sale agreement. That is, if the seller and the buyer insert a term that
allows for the transaction in their agreement.21 Other scholars of the Hanafi School of law, such as al-Sadr al-Shahid, Omar Abdul Aziz and al-Margunani, as well as al-Ba’lawi from Shafi’i School of law permit the transfer of the subject matter of Bay’ al-Wafa to a third party through a sale process without any restriction.22
Conclusion
To sum up, the BW-I Repo, the newly proposed instrument for Islamic interbank money market is aimed at solving the challenges of excess liquid margin in the Islamic financial institution. One of the problems that confront the Islamic financial institutions is the lack of a flexible short-term instrument of liquidity management. Hence, the proposal of the BW-i Repo, which is a repurchase agreement that is structured in the Shari’ah based contract of Bay’ al-Wafa , to allow for a flexible Shari’ah compliant and incentive based non-interest-bearing instrument of short-term liquidity management in the financial institution. It is believed that the instrument will enable the Islamic financial institutions to manage their liquidity portfolio on a shorted-term basis, at best, if is accepted.
Bibliography
al-‘Atar, Ala’udin, Ali Bin Daud, , Udah fi Shariah al-‘Umdah, (Bairaut: Dar al-Bashair, 1403AH/1983).
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e+Law+in+Israel-+The+First+50+Yea.htm>(retrieved 15/04/2012).
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AbÎÉr, (Riyadh: DÉr ÑÓlam al-Kutub, 1423AH1983), Vol. 9, at 545.
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al-IlmiyaH, 1405AH/1985), at 242.
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<http://www.ibfim.com/images/media/articles/shariah01.pdf>, (15/04/2012).
KasanÉ, Abubakar Bin Ahmad, BadÉi’u’ al-SanÉ’iu’ fi Tartib al-Sharai’u, (Beirut: Darul Kutub
al-Iilmiyah, 1981, ).
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Publishers & Distributors, 2007), at 321.
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Islamic Legal Terminology), (Bairut: Dar An-Nafaes, 1985).
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Contract, J.KAU: Islamic Econ.,Vol.19, No. 2, pp: 39-42 (2006 A.D./1427 A.H.) 39, see,
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IRTI., see, < http://www.applied-islamicfinance.com/fatwa_12.htm>(18/04/2012).
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106 Journal of Islamic Banking and Finance Oct – Dec 2019
Book Review* Title: Islamic Finance, Principles and Practices
Author: Hans Visser
Class: Academic / Finance / Research
Edition: Second
Publisher: Edward Elgar Publishing Limited, UK
Year of Publication:2013
ISBN: 978-1-78347-148-5
Pages:XIV & 281Chapters:8 (numerical)
Miscellaneous:Figures, tables, boxes, preface, abbreviations, introduction,
references, glossary & index.
Language: English
Overview
Islamic finance in no doubt is a global icon appreciated by both Muslim and non-
Muslim across the world as a unique system for all with its result oriented products and
services. It is equally pertinent for the academia, researchers, industrialists and
professionals involved and or interested in the field of Islamic finance today to
understand it accurately in view of educating, developing, promoting and practicing the
subject correctly. Thus, Professor Emeritus Hans Visser's Islamic Finance, Principles and
Practices is among the timely titles to meet the academic and the industrial basic
expectation with several aspects of Islamic finance.
Appreciating the author by considering his world renowned profile and the title of
his book, it has been a presumption to read the book with a deeper interest and gain an
applied solution resulting from detail thoughts and analysis in it, but in reality, the book
addresses and duly presents only a basic understanding on the subject with no detail to
qualify it as a scholarly reference(Pp. 14-17, 66-74, 76-77, 81-85, 106-109, 130-134,
* Reviewer: Mohd Ma'Sum Billah, PhD, Professor, (Finance, Insurance, Investment, Capital
Market, Petroleum Trade & Finance), Islamic Economics Institute King Abdul Aziz University,
Jeddah, KSA,
www.drmasumbillah.blogspot.com
Journal of Islamic Banking and Finance Oct – Dec 2019 107
150-152 and 163-169 are among others). Moreover, the references used are (many)
secondary sources while some are un-refereed and or outdated ones, which are not
expected to have been relied on by a notable author and duly considered by a reputable
publisher like Edward Elgar(Pp.27 n. 1, 58, 155 and 196 are among others).
Furthermore, the title is to focus on principles and practices, but it has been
observed that, the latest regulatory standard has not been referred (for instance: Islamic
Financial Services Act (Malaysia) 2013, which was published in the Gazette on 22 March
2013, and came into force on 30 June 2013, Basel III, Latest AAIOFI's Standard, Fatawa
produced by OIC Fiqh academy, ISRA, University of al-Azhar, Dalla al-Barakah and so
on as referred to the entire book). Also expected practical solution by case studies or
recommended models have not been addressed (Chapter 1-8).
Several related cases have been decided in Malaysia, Pakistan, Saudi Arabia and
other jurisdictions (Arab-Malaysian Finance Berhad v Taman Ihsan Jaya Sdn Bhd &Ors,
Mayban Berhad (MBB) v. Marilyn Ho Siok Lin, [2006] 7 MLJ 249, Bank Islam Malaysia
Berhad v Adnan Omar [1994]3 CLJ 735, The historical judgment of FSC of Pakistan on
Riba' Dispute Settlement Resolution in Islamic Cross Border Finance Transactions in
Saudi Arabia, the high court of England in Islamic Investment Company of the Gulf
(Bahamas) Ltd v Symphony Gems NV &Ors unreported 2002 WL 346969, [2002] All ER
(D) 171 (Feb) (QBD: Comm Ct),are among others.). Decisions of these cases are so
relevant to the title of the book, but surprisingly have not been consulted thus, makes the
book questionable in being comprehensive and or professional reference.
Review on Chapters
Chapter 1:Why Islamic Finance? The chapter provides a basic background of
Islamic finance justifying its practicality by mixed views from some scholars, politicians
and writers without establishing the author's own stand of view (Pp. 1-10). Moreover, the
chapter creates some serious confusions without detailing or clarifying the truth, for
instance; "Islamic finance was born out of ideals to Islamize Muslim Societies…."(P.7)
why and how?, "Sunnites are not allowed to rise against Muslim ruler" (P.7)how
authentic is this and is a Muslim or an Islamic ruler? Because, all Muslim rulers are not
Islamic, but all Islamic rulers are Muslim,"….to introduce …Islamic banks, not out of
conviction, but for fear of being branded insufficiently Islamic" (P.7) if so, how the
position of the world today towards Islamic finance?, "Islam against the rest of the
world" (P.7) is this a generalization or what does this mean in reality?, "there is more
than one way to read the holy scriptures" (P. 8) what does it refer to and what is its
authenticity?. It may create confusion once a particularization is generalized and or vice-
versa.
Chapter 2: Sources of Islamic law. In this chapter, the author has made a
descriptive and brief analysis on the sources of Islamic law mainly based on the
Book Review
108 Journal of Islamic Banking and Finance Oct – Dec 2019
secondary resources. It was supposed to be important for the author to analyze the
chapter by citing and illustrating relevant primary sources of Islamic law, facilitating the
governance of the Islamic finance today. It is also undesirably observed that, the author
has made very little attention to establish his own justifiable and an analytical view
something discovered one to benefit others rather focusing in highlighting others existing
views. The chapter seems present a literature review, but not an expected scholastic
research result (Pp.12-26). The chapter creates several confusions for instance; "Jurists
have differed over the scope of Istislah……" (P. 16), where and how? What is the author's
stand on it?, "…..separate group, which has its own problem" (P. 24), what types of
problem, how, reasons and impact?
Chapter 3: The Islamic Economy. The author in this chapter has made an attempt to
analyze the background of the modern Islamic economic growth in the 20th century and
positive reaction and due efforts of the Islamic scholars in establishing the idea based on
the divine teachings (Pp. 29-31). Thus, the submission is that, the Islamic economy or
finance is pillared on the divine principles of Tawheed (oneness of Allah), ethics, rights
and obligations (Pp. 30-31). Islamic economy is a rule followed by Muslim as the author
claimed (P. 30), but it is in fact an integrated system with universal value, which benefits
all regardless of one's religion, gender, color or even status.
The chapter advocates in analyzing on some fundamental components of Islamic
economics or finance namely; Zakat (alm), Riba (usury), Gharar (uncertainty) and
Maisir (gambling). The analysis deems a descriptive one (Pp. 31-55) without making
them prescriptive with contemporary practical solutions so to be consistent with the title
of the book. The author at the end of the chapter highlights on the need of a separate
Muslim economy (Pp.56-59), but he fails to submit the fact that, Islamic economy is
naturally a separate system, which has already been established and appreciated (even
with a smaller size by gradual growth) globally as a beneficial component for all thus, a
"dream of a separate Muslim economy" as claimed by the author (P. 56), is not relevant.
Furthermore, to enjoy with an Islamic economic or financial system needs not necessarily
to be prerequisite with an Islamic state as proven by Islamic finance in today's world
reality.
Chapter 4: Forms of Islamic Finance. The author has made a good academic
analysis, but lack of attention to the practical paradigm as to the comprehensive structure,
problems faced by the Islamic financial industries and the alternative solutions, for
example; in the case of Bay' al-Ina' (buy back sale), Bay' al-Dayn (debt trading),
Tawarruq (monetization) and al-Murabaha (Sale by deferred payment) and so on (Pp.
63-75). Islamic finance is not merely a profit-and-loss sharing (P. 62), but it is unique in
nature because it is a risk sharing technique thus, differentiated from the conventional
model. The author highlighted major instruments of Islamic finance by mainly compiling
the others ideas (Pp. 63-75) without making his own stand of view so to share a
discovered thoughts to be referred to. The nature of risk in each product varies thus, it has
Journal of Islamic Banking and Finance Oct – Dec 2019 109
been important for the author to provide a practical solution as to risk management for
each product (Pp. 66-94) though a brief section provides a mere idea to the issue (P.99-
100).
Likewise, the chapter provides a very basic note as to the legal frame (Pp. 94-99),
which is not sufficient to be used as a reference in governing the forms of Islamic
finance. As regard to the issue of financial derivatives (Pp. 90-94) the author truly
analyzed the views of others without making his own stand in deed besides neither a case
study nor an empirical submission has been made with a right position in the research
thus, creates confusion to the right direction. Moreover, the author fails to analyze
relevant regulatory standards (ref. preview as an example), which facilitate the Islamic
financial products highlighted in this chapter. Thus, the chapter presents a basic readings
with no comprehensive analysis or solutions.
Chapter 5: Islamic Banks. The author in this chapter has made a significant
analysis on several notable aspects of Islamic banks and banking from the experiences of
Malaysia, Sudan, Pakistan, Sweden, United Arab Emirate, Egypt, Bahrain, Indonesia and
so on. Generally the analysis is a conceptual and brief (Pp. 106-108) without much
contribution with the practical paradigm, cases on issues, risk factors and directives on
issues, audit, marketing strategies, customers' services, product innovation, legal aspects
and the problems and the sustainable growth plan are among others, which ought to have
been addressed in the chapter to make a meaningful one to be used as a good reference.
The author touched on the idea of moral hazard in Islamic financing (Pp. 110-115),
but would have been expected to be illustrated with the nature of the hazard haunting the
market and due recommendation on how to avoid such hazards to make furtherance
purified system. Under the purview of Practice of Islamic banking (Pp. 125), the author
addressed some good aspects, which are also more as literature review without empirical
submission with justifiable models to be practiced.
Chapter 6: Special Sectors. The author in this chapter analyzed several major
issues of Islamic finance namely; insurance, home financing and investment, but brief
like a handbook or a nutshell. There are mainly four models of Takaful practiced in the
world namely; Tijjary (Mudharabah & Tabarru'), Wakalah (Wakalah & Tabarru'),
Ta'awuni (Cooperative) and Hybrids (Wakalah & Waqf), but the author has analyzed
Tabarru' Takaful as a separate model (P. 132). It is not clear where and how this model is
practiced?
Furthermore, no structure or case study has so far been provided in the analysis to
justify the practicality of the models. Under 6.3 of the chapter, the author has made a
brief discussion on various modes of home financing, but left with some confusions
resulting from hypothetical discussion with no applied structure. For instance; the author
claims that, "Murabaha home finance has some unattractive features ……."(P. 137). How
Book Review
110 Journal of Islamic Banking and Finance Oct – Dec 2019
is it and what is the alternative solution? The discussion on investment was good (P.142-
152), but missed the governing principles of the Islamic Financial Services Act 2013
(Malaysia). Also other forms of Islamic investment like Unit trust, micro-investment,
investment in stocks, mutual funds and so on, which have not been addressed despite they
are in practice. As regard to the issue of Islamic hedge fund, the author suggested that, "it
could take long positions with the help of Murabaha contract for asset-backed securities
such as Sukuk or Common stock" (P. 152), the practical structure has not been ruled out
thus, remained vague.
Chapter 7: Public Finance and the Monetary Authorities. Public finance in the
Islamic economy refers to Zakat, Waqf, Fidya, Fitrah, Jizya, Ushr, Ganimat, Khumus,
Kharaj are among others. Islamic fiscal policy, the Shari'ah compliant contemporary
practicality and the right authorities in deciding, enforcing and supervising Islamic public
finance and the monetary activities in reality have not been unexpectedly addressed under
this chapter. The author instead, provides a nutshell of public finance and the monetary
policy mainly what is practiced under the modern economy (Pp. 157-164) with a
minimum touch on Shari'ah complaints or Shari'ah alternative in the modern reality.
Thus, it is vague whether the author is confused about the public finance and the
monetary policy under the Divine principles of Shari'ah. It has also been closely
observed that, the author relied mainly on the secondary references (Pp. 156-164) without
prioritizing his own stand of view ought to be used as a primary reference. It would have
been prudent should the author analyze the chapter by considering the issues from the
broad principles of Shari'ah and the contemporary Shari'ah compliant practicality, which
may contribute to a sound direction in today's reality. As regard to the supervision of the
financial sector under the Shari'ah principles, which ought to have been analyzed by
justifying from divine authorities and authenticities and thereafter ruling out a Shari'ah
compliant paradigm in the modern reality. Perhaps some case studies may be made for a
better understanding. But it is undesirably observed that, the author under the chapter 7
discussed the supervision of financial sectors with some facts of contemporary practices
(Pp.164-169) without expected illustration, which creates furtherance confusion on the
true nature of supervision analyzed in this chapter. It is thus, a query whether the author
truly understands the nature of supervision in the financial sector and the position of the
authority under the Shari'ah principles per se.
Chapter 8: Islamic Finance: A Tentative Verdict. In this chapter, the author has
made a significant analysis with thoughts and recommendations that may contribute to
researchers to think a thought towards a betterment of Islamic finance. Yet, it would have
been more significant should the author discover the shortcomings and unresolved issues
haunting the Islamic finance today, while suggesting possible way forward (solution or
effective tips) with applied justification to overcome those of unresolved shortcomings
and challenges that hindering the significant growth of Islamic finance. Nevertheless, the
author in this chapter has made some remarks, which are questionable, for instance;
Journal of Islamic Banking and Finance Oct – Dec 2019 111
"Islamic finance was born from attempts to Islamize society" (P. 184), is Islamic finance
the key to Islamize society? It is in fact one of the components for mankind to lead their
day to day commercial life in accordance with the Divine principles of Shari'ah, which
also equally benefits non-Muslim. "there are important gaps in the range of services and
instruments offered by Islamic financial institutions and they see themselves forced to
provide some services in circuitous way" (P.185), what kind of force? Is one Shari'ah
contrary or the compliant?
If in case one is with Shari'ah contrary, shall not fall within the ambit of the Islamic
finance per se and thus, the service providers shall be questioned. Therefore, the
allegation made by the author in the above statement shall demand clarification so to
waive the cloud of wrong impression against the service providers."….fiqh mua'malat is
flexible enough at least for Malaysian scholars to allow maslaha…." (P. 186). Masaleh
al-Mursalah (public interest) is one of the sources of Islamic law, which is endorsed by
the fuqaha and also by the contemporary Islamic scholars, which is thus, not an
opportunity. Malaysian or any other country's scholars apply the doctrine of Masaleh al-
Mursalah only within the ambit of the Shari'ah rulings. Therefore, the author's phrase
"….at least for Malaysian scholars…." in the aforementioned statement creates an unjust
misconception about Malaysian scholars, which shall be refuted.
Final Remarks
Professor Emeritus Hans Visser has made a good effort in producing the book
"Islamic Finance, Principles and Practices" with its second edition, which is
undoubtedly appreciable. The book presents with numerous shortcomings, confusions
and misunderstanding on the truth of some notable aspects of Islamic finance as
highlighted in the above review exercise, which are strongly recommended to be thoughts
and duly incorporated and be reviewed by at least three leading subject experts before its
next printing takes, so to make the book reliable and refereed reference one.
Recommendation to the Author
Upon careful reading and reviewing the book "Islamic Finance, Principles and
Practices" (second edition) authored by Professor Emeritus Hans Visser, the following
recommendations are made:
1. The book shall be revised as per comments made in the review section.
2. In the course of revision, up to date relevant thoughts, principles and practical
paradigm shall be consulted and duly incorporated.
3. The author shall rely on the primary sources unless an unavoidable circumstance
where secondary sources may be referred to.
4. Any reference used must be screened through as to one's authenticity before one is
referred.
Book Review
112 Journal of Islamic Banking and Finance Oct – Dec 2019
5. The author shall not simply compile others' thoughts, but prioritize the
establishment of own submission by justifying one through relevant principles and
empirical paradigm.
6. Each issue shall be treated with integrated submission as to thoughts, phenomena,
principles, practices and the furtherance justifiable recommendations.
Recommendation to the Publisher
To keep up a sustainable dignity of the publisher, the following recommendation is
made:
1. Being a world class publisher, Edward Elgar shall not simply consider any
proposed manuscript without through investigation over one as to thoughts,
analysis, outcome and the references presented therein.
2. The second edition of "Islamic Finance, Principles and Practices", shall be
requested to be revised intensively as per aforementioned review reports and shall
be reviewed further at least by three subject experts before its next printing takes
place.
3. The manuscript shall neither merely be a result of compilation of others' thoughts
nor be a brief nutshell, but shall be a result of original thoughts by detailing with
justification, so to be used as a refereed reference, benefiting the academia,
researchers, practitioners, regulators, developers, promoters, students and others
who may have the affiliation and or interest in the subject.
Journal of Islamic Banking and Finance Oct – Dec 2019 113
Note to contributors Journal of Islamic Banking and Finance is an official publication of International
Association of Islamic Banks Karachi, Pakistan. It is a refereed quarterly journal, as well as a pioneer in the field of Islamic banking and finance being published since 1984. It provides a forum for researchers, particularly in Islamic Banking and Finance, wishing to share their expertise with a vast intelligentsia in the form of articles, research and discussion papers and book reviews. Major areas of interest for the journal include: (i) Theoretical issues in banking and financial industry specially from Islamic perspective; (ii) Empirical studies about the Islamic banking and financial institutions; (iii) Survey studies on issues in Islamic banking and finance; (iv) Analytical studies of applied Islamic banking; (v) Comparative studies on Islamic and conventional banking systems; and (vi) Short communications and interviews investigating the perceptions of leading bankers and banking experts as well as policy makers.
Articles Submission: The contributors are requested to observe the following rules.
• Articles should be typed in M.S. Word and restricted to 10 to 15 pages of A-4 size paper. We accept original contributions only and if the material is taken from some book or any other source, the source may be mentioned. The editorial team does not assume any liability for the views of the writers expressed in their articles nor may necessarily agree with their views.
• The articles should be submitted before start of the first month of each quarter, beginning from January, April, July & October enabling review and approval of the material by the editorial board for publication in the issue in hand.
• If the editorial Board is of the opinion that the article provisionally accepted for publication needs to be revised, shortened, or the particular expressions therein need to be deleted or rephrased, such opinions will be communicated to the author for appropriate action. The author may also be requested to recast any article in response to the comments made thereon by the reviewers.
• The numbering of footnotes will be consecutive, and the footnotes themselves will be placed at the end of the article.
• The author(s) of articles published will receive 2 complimentary copies of the Journal of Islamic Banking & Finance and the IAIB reserves all rights in the material published in the Journal.
Abstract:
The articles should contain well summarized abstracts between 100 to 200 words, covering the subject matter of the articles, its conclusion and the result arrived at, with key words.
Tables and Figures: Figures, tables and boxes should be numbered consecutively in Arabic numeral (i.e
figure 1, figure 2 and Table 1 & Table 2)
Book Review:
New books (on Islamic economics, finance and banking, as well as on issues and
problems of economic development) will be reviewed in the Journal on request.
Authors/publishers may send two copies of each book to the editor for purpose of review.
All communications should be addressed to the editor.
114 Journal of Islamic Banking and Finance Oct – Dec 2019
Journal Of Islamic Banking and Finance
Publication Date: 1984 (Pioneer in field of Islamic Banking & Finance in Pakistan) Frequency: Quarterly (Refereed/Peer Reviewed) Registration: ISSN 1814-8042 Indexing/Abstracting Service): Index Islamicus
Circulation: Worldwide include IMF, World Bank, Central Commercial
Banks, Universities, Educational Institutions, and Public Libraries in Pakistan/abroad, Individuals, Scholars, Jurists etc.
Notice: We are strained to take the decision reluctantly, to modest increase the rates for subscription/advertisement rates due to skyrocket increase for the cost of printing and the paper price internationaly.
Advertisement Rates Remains Same (per Insertion)
Pakistan Ordinary Full Page (Coloured) Rs. 11,000/=
(Minimum 3 Insertions)
Inside Front Cover (Coloured) Rs. 12,000/=
Inside back Cover (Coloured) Rs. 12,000/=
Full Page Back cover (Coloured) Rs. 15,000/=
Abroad Ordinary (Coloured) US$. 125/=
Full Page Back Cover (Coloured) US$. 200/=
Subscription Rates (Including postage)
One year Two years Per single copy
Pakistan Rs. 1000.00 Rs. 1800.00 Rs. 225.00
Overseas US$. 80.00 US$. 150.00 US$. 20.00
Pakistan For Students & Libraries Rs. 550.00
Overseas US$. 35.00
Old Issues of One Year
Pakistan Rs. 500.00 Overseas US$. 25.00
Note: The payment be made through draft/telegraphic transfer payable in
Pakistan in favour International Association of Islamic Banks. For Further Details Please Contact:
B-5 (1st Floor), Kehkashan Apartments,
Block No. 7, Main Clifton Road,
Karachi (Pakistan)
Phone: + 92 (21) 35837315
E-Mail [email protected]
www.islamicbanking.asia, www.facebook.com/JIBFK
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116 Journal of Islamic Banking and Finance Oct – Dec 2019