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Zaharuddin Abdul RahmanShariah Advisory CommitteeStandard Chartered Saadiq Malaysia Berhad

05 March 2011


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Islamic Financial planning covers :-

1) Income Monthly Fixed Income Side Income

1) Investment Stock Market Internet Scam Investment Sukuk (Islamic Bond)

Unit Trust Fund Property Investment Mudarabah general Investment Account

Islamic Financial Planning OutlinesIslamic Financial Planning Outlines


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3) Expenses Major expenses (house, car) Minor expenses (daily)

4) Takaful coverage- Medical & Health- Education etc

1) Inheritance planning- Appointment of Wasi- Wasiat- Co-Owned Wealth (Harta Sepencarian)- "It is better to leave heirs rich than to leave them poor

in order that they be begging at other people's doors".

1) Banking Savings Services Doing business



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Why DoWhy DoWe NeedWe Need

Islamic Banking & Finance?Islamic Banking & Finance?

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Copyright Asyraf Wajdi Dusuki (ISRA) & Dr Irwani

Abdullah (IIUM)

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To Comply with Shari`ahTo Comply with Shari`ah -- A Manifestation ofA Manifestation of

Obedience!Obedience!

Distribution of Wealth

Halal Earnings Halal Spending


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Islamic Financial Planning & InvestmentIslamic Financial Planning & InvestmentAllah saying:And when the prayer is finished, then you may disperse through

the land, and seek of the bounty of Allah; and celebrate thepraises of Allah often (and without stint); that you may prosper(Falah)" (62:10).

Prophet said :-

, ,,

Both feet of sons of Adam will not go to the next level exceptafter undergo five questions :where is he got his wealth and

how is he spend it..

The Second Caliph (Umar al-Khattab ) said :

Do not do commercial transaction in our market except youhave equip yourselves with Islam rulings (in commercial

transaction)


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All the planning must be free from the following

elements:- Interest (riba): contractual increase over capital

loan Gambling (maisir): speculative or aleatory contracts

in which obligations and benefits accruing toparticipating parties are not fully defined at thetime when the contract became effective leading toeither wining or losing arising from mere chanceinstead of work and effort.

Ambiguities (Gharar): uncertainties that exists incontracts involving contracting parties and thesubject matter, which leads to disputes andunjustified gain

Intoxicants (qimar): consumption of alcoholicbeverages, which can impair the intellect ('aql)leading to irrational behavior.

Consumption of pork Illicit sex (zina) : sexual relation outside marriage

which annihilate the sanctity of the family system

(nasl).



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Demographically, Muslims population are huge.. research shows there areample opportunities in Islamic finance remain untapped

Adapted from: PWC, Wikipedia

Untapped Potential Potential customer base: worlds 1.5 billion

Muslims

Bulk of worlds Muslim population is young:60% of global Muslim population is under 25years

Muslim high net worth individuals: USD1.5 1.8 trillion

Takaful penetration rate: Below 2% inMiddle East Region

New petrodollar wealth USD500 billion p.a.Adapted from: OliverWyman report

Top World Oil Producers, 2008

(thousand barrels per day)

Rank Country Production

1 Saudi Arabia 10,782

2 Russia 9,790

3 United States 8,514

4 4,174

5 3,973

6 3,350

7 3,186

8 3,046

9 2,741

Iran

China

Canada

Mexico

United Arab Emirates

Kuwait

Source: www.wtrg.com

As the petrodollar money surge, GCC countries are looking for shariahcompliant investments.

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Islamic assets todaySetting the context The MalaysianThe Malaysian

financial systemfinancial system

11% of the global Islamic banking assets are fromMalaysia (USD84.4bn)

Source: IFSL Research Jan 2010, Islamic Finance 2010 (estimates based on TheBanker)1 Banking, takaful and fund assets end-2008: USD822bn

Iran

36%

S.Arabia16%

Malaysia11%

UAE10%

Kuwait8%

Bahrain6%

Qatar

3%

UK2%

Others6%

Turkey2%

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Current Financial Crisis presents opportunity to IslamicCurrent Financial Crisis presents opportunity to IslamicFinanceFinance

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'There has been much questioning ofthe values underpinning the

conventional financial system & thesearch for alternatives means that

Islamic banks are likely to receive moreattention, especially as their raison

d'tre is morality in financialtransactions, based on religiousteachings Professor Rodney

Wilson

ShariahShariahvaluesvalues

consistentconsistentwithwith

universaluniversalvaluesvalues

Reala

ctivi

ties

Eth

ical

G

overnance Partner

ship

KEY ELEMENTS OF ISLAMIC FINANCE (IF)

Sources: Bloomberg, London School of Economics (LSE)

Source: Bank Negara Malaysia

Source: LSE website


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Documentation

Accounting

TreatmentLegal

Structure

ProductStructure What

constituteShariah

Compliantin IslamicFinancial

Transaction?

Operation

We needtofinanceour car,house,

business


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Any transfer of wealth or propertyhas to be made through a valid

contract or `aqad

Divine Sources(Quran & Sunnah)

Mutual Consent(Redho)

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Theory ofContract in Islam

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ShariahParameter for

Islamic Product

Shariah-CompliantActivities

1st Level ofCompliant

2nd Levelof

Compliant

Uqud Musamma

Uqud GhairMusamma

Investment ActivitiesFinancing Activities

Purification Process

Risk Mitigation & Mgmt

Monitoring & Supervision

Governance 14


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RibaRiba Literally means excess, increase, expansion, growth. In Shariah:

o Hanafis School: A surplus of commodity or an excess inreturn without counter value

o

Ribais a predetermined excess or surplus over andabove the loan received by the creditor conditionally inrelation to a specified time period

Riba was made forbidden in the 8th or 9th yearafter the Hijrah (flight from Makkah)

12 Quranic verses dealing with Riba The word riba occurs 8 times, 3 times in 2:275and one time each in 2:276, 2:278, 3:130, 4:161and 30:39

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Copyright Asyraf Wajdi Dusuki (ISRA) & Dr Irwani Abdullah

(IIUM)

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Allah Strongly Condemns andAllah Strongly Condemns and

Prohibits RibaProhibits Riba

O you who believe! Observe your duty to Allah, and give up whatremaineth (due to you) from usury, if you are (in truth) believers.And if you do not, then be warned of war (against you) from Allah

and His messenger. And if you repent, then you may have yourprincipal (without interest). Wrong not, and ye shall not be

wronged. (Al-Baqarah: 278-279)


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Prophet s.a.w. also condemns RibaProphet s.a.w. also condemns Riba

"Avoid the seven grave sins". The companions asked: "And what are they, OMessenger of Allah? He said: "They are: associating others with Allah,

engaging in magic, killing a forbidden human soul without a legal right,

devouring riba, devouring the wealth of an orphan, escaping on a day ofreligious battle, and defamation of unsuspecting believing married women.

The Prophet s.a.w. condemns those who take riba, give riba, witness to riba(transaction) and the writer of the ribatransaction.

,

"There are seventy three different types of riba, the least of which is equivalentto bedding one's mother, and the worst of which is equivalent to destroying

the honor of a Muslim". (Narrated by Ibn Majah and Al-Hakim).

Copyright Asyraf Wajdi Dusuki (ISRA) & Dr Irwani

Abdullah IIUM

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MISCONCEPTIONSABOUT RIBA

INTEREST Should beAllowed because of

Inflation

Bank Interest isNOT RIBA

because NOTEXCESSIVE

RIBA is notrelevant to

commercial loans

RIBA should beallowed under

Dharurah

Interest-basedcommercial transactions

is NOT RIBA because

its newly invented 18


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Rationale for the Prohibition ofRationale for the Prohibition ofRibaRiba

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1. Element of injustice in financing productive activities An interest-based production loan constitutes a contract with unequal

countervalues certainty of interest obligation vs. uncertainty of business

outcome Injustice to debtor obligated to pay interest even if business venture results in

no profit or loss Injustice to creditor in the event of substantial profits, creditor receives a

return disproportionate to amount of generated profits

1. Element of exploitation in financing consumption Riba assumes money as a commodity, one which the rich has in abundance The rich is able to generate more wealth without exerting much effort or

contributing to productive activity

1. Riba inconsistent with Islams perspective on debt In Islam, incurring debt is discouraged

The Prophet s.a.w. refused to offersalat-ul janazah of a person who died

indebted

Borrowing money should be limited to cases of dire need1. Riba is a source of crisis

Making money out of money Encouraging Leverage while curbing innovation and development of real

economy Wealth Inequality rich becomes richer while poor becomes poorer


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GhararGharar Literally: Deceit, fraud, uncertainty, danger, peril, orhazard that might lead to destruction or loss Technically:uncertainty and/or ignorance of

one/both parties in a contract over the substance orattributes of the object of sale, or doubt over itsexistence and availability at the time of contract

Rationale for prohibition: To ensure full consent and satisfaction of the partiesin a contract

Ghararin commercial contracts may lead to injustice,exploitation and/or enmity among contracting parties

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TypesofGharar

Gharar yasir(minor or slight)

Gharar Fahish(major or

excessive))Tolerated and will notinvalidate a contract

e.g. Bay salam (forwardsale)

Not tolerated and may

result in contractvoidabilitye.g. Bay madum (sale ofinexistence object)

1 2

2121


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Gharar in a contractGharar in a contract

Exchange Contract(e.g. Sales, Leasing)1.Non Possession/existence of object

2.Conditional Sales3.2 in 1 contract4.Selling with unknown price 22


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Copyright Asyraf Wajdi Dusuki(ISRA) & Dr Irwani Abdullah (IIUM)

Gharar Is TolerableGharar Is TolerableExceptionalContract

(e.g. salam,istisna)Gharar is tolerable!

Why?

1. Public needs

(hajiyat andmaslahah)

2. Gharar is trivialwith stipulated

conditions

CharitableContract

(e.g. hibah,takaful)

No Issue of Gharar!

Why?

It is a unilateral

contract andhence does notlead to dispute

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RIBA PROFITSWhatsThe

Difference?

NOCOUNTER-VALUE

WITHCOUNTER-VALUE

(`IWAD)

Effort(Al- Risk(Al- Liability(Al-

Whats The Difference BetweenRiba & Ribh

Allah permits tradingbut prohibits Riba(2:275)

They said that indeedtrading is just like riba(2:275)

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Qaidah Fiqhiyyah:

Justification of Profit is due toproperty, effort and liability assumed

(Jamharatul al-Qawaid al-Fiqhiyyah Vol.1P.332)


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Freedom fromQimar & Maysir

(Gambling)

Freedom fromGharar (Ambiquity)

Entitlement toEqual, Adequate,

Accurate Info.

Freedom fromDharar (Detrimental)

Freedom fromRiba

Promote Public

Interest

(Maslahah)

Freedom fromPrice control &

Manipulation

Freedom toContract

Entitlement toTransaction at

Fair Price

Characteristics of Shariah-compliant Banking and

Financial System

PromoteBrotherhood

A system groundedon moral andethics

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General Classification ofGeneral Classification ofContract in IslamContract in Islam

Charitable Contracts

( )

Exchange Contracts( )

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Cooperation Contracts( )

Profit-making Contracts


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Various formsof Islamic

Contractsused inBanking

Sales-based Contracts

Lease-based Contracts

Equity-based Contracts

Fee-based Contracts

Hybrid Contracts

BBA deferred sale;Murabahah cost-plus

sale; Bai al-Inah, Baial-TawarruqIjarah Wa Iqtina; IjarahThumma Al-Bai, IjarahMuntahia Bitamleek

Mudarabah,Musyarakah

Kafalah/Dhaman(Guarantee); Wakalah(agency)

MusyarakahMutanaqisah(DimishingPartnership), AITABetc.

Deposit-taking ContractsWadiah Yad Amanah;Wadiah YadDhamanah,Mudarabah; al-Qard

Promise/UndertakingWa`ad

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ShariahCompliant

Risk?

LegalStructure

ConsumerDemand How to

structurefinancialproducts

that comply

withShariah?

Viability?

We needtofinanceour car,house,

business

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I t h ll M liI t h ll M li


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In a nutshell as a Muslim, a manIn a nutshell as a Muslim, a manneeds to abide with Shariah!needs to abide with Shariah!

Every TransactionsMust Be Shari`ah Compliant!

What Does it Mean ByShari`ah Compliance?

SHARIAH COMPLIANTSHARIAH COMPLIANT IS NOTIS NOT


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SHARIAH-COMPLIANTSHARIAH-COMPLIANT IS NOTIS NOT

JUSTJUST ABOUT:ABOUT:

Satisfying the mechanics of financialoperation;

Fulfilling the legal documentationrequirement

Focusing on the legal form of a contract


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VALIDITY vs. PERMISSIBILITYVALIDITY vs. PERMISSIBILITY

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VALID(SAHIH)contract that meets its

requirements and conditions

PERMISSABLE (HALAL)contract that is used

to obtain Halal(Permissible) ends.

Financial Contract MUST beBOTH HALAL (Permissable) &

SAHIH (Valid)

A Valid Contract is not necessarilyHalal (Permissable)

Validity(Sahih Qadaan) is based on the FORM of theContract while Permissibility (Sahih Diyanatan) is

Based on the SUBSTANCE of the contract and

the INTENTION of the contractors.


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Shariah-Compliant Requires

Financial Contract to be Shariahcompliant both in terms of FORM and

SUBSTANCE Operation to be Shariah compliant Islamic banking to be more ethical

Socially Responsible

A h i D i i H k S i (I l iA h i D i i H k S i (I l i


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Approach in Deriving Hukm Syari (IslamicApproach in Deriving Hukm Syari (Islamic

Legal Ruling)Legal Ruling)

Ibadah Fixed Determined by God Original Ruling is

prohibited unless there isa valid justification thatexplains its permissibility

Otherwise, it is

considered bidaah(innovation)

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Muamalah Combination of fixed

and flexibility Based on premise:

The original ruling ispermissible

Unless there is a clearand valid justificationthat suggest otherwise

Understanding the illat(rationale) andmaslahah


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HIGHER OBJECTIVES OF ISLAMIC FINANCEHIGHER OBJECTIVES OF ISLAMIC FINANCE

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Achievement of the principle of risk sharing

Ch ll tCh ll t ShariahShariah Ad i B dAd i B d


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Challenges toChallenges to Shari ahShari ahAdvisory BoardsAdvisory Boards

and Servicesand Services

1. lack of knowledge and comprehension among Shariah scholarsabout modern financial practices.

2. Shortage ofShariahscholars to serve Islamic financial institutions.

3. The challenge to synergize between the Shariah, regulatory, legal,finance and tax requirements in product development.

4. The challenge to move towards innovations and providing Islamicbased services and products. This is to move away from theprevailing practice of imitation and replication of the conventionalproducts or the sole focus on Shariahcompliant services.

5. The challenge to provide speedy and timely Shariah solution toIslamic financial institutions issues.

6. The challenge to balance between monetary and Shariahobjectives.

7. The challenge of secrecy and confidentiality.

8. The challenge of the knowledge gap in the industry whereby theunique features of Islamic finance and its products are not well

understood and appreciated. 35


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Do ?Do ?1. Learn and understand.2. Subscribe to Islamic Finance services & Products.3. Urge and demand more from the industry by using

consumer power.4. Government support and incentives5. Education institution offer the relevant course

6. Writes and explains.7. Issue more sukuk for viable projects.8. Monetary?9. Stress on equity financing rather than debt financing.10. Cancellation of credit card or limitation.11. Controls over speculation and its tools at stock market and

derivatives market.12. Limit discounted debt trading.13. more strict regulation of the financial markets


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ConclusionConclusion Malaysia is moving from controversial issues (e.g. Inah) to get global

acceptance Emphasis on transparency & consistency in:

a) Product development & approvalb) Documentationsc) Operationsd) Supervision & Shariah Audit

Knowledgeable service providers (front-liners, managers, Shariahadvisors) need to invest in more continuous training & course in IBF &Fiqh muamalat

Shariahadvisors and Shariahgovernance are among the industrys maincomponents.

There are various tasks and responsibilities need to be executed byShariahadvisors to their institution and to the industry.

Effective contributions and commitment of Shariah advisors are highlysought after. Thus, Shariah advisors must continuously enhance theircompetence, caliber and knowledge.

Assessment signifies that they have many roles to carry.

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