principles of islamic banking
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ISLAMICBANKING AND
FINANCE
Mahyuddin Khalidemkay@
salam.uitm.edu.my
PRINCIPLES OF ISLAMIC BANKING
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CONTENTS
INVESTMENT AND FINANCING OF HALALACTIVITIES
PROFIT AND LOSS SHARING VS LENDER-
BORROWER RELATIONSHIP
TRADE-BASED FINANCING VS INTEREST-
BASED INVESTMENT/LOAN
PROHIBITION OF RIBA, GHARAR AND
MAYSIR
PAYMENT OF ZAKAT
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INVESTMENT AND FINANCING OF HALAL
ACTIVITIES
Impermissible to invest andgive financing to related
activities
Financial serviced based on Riba
Gambling and gaming
Manufacture or sale of non-halal products
Manufacture or sale of tobacco-based orrelated product
Stockbroking or share trading in Shariah non-compliant securities
Other activities that conflicts with Shariah
Entertainment activities that conflicts withShariah
Conventional insurance that containing ofgharar
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PROFIT AND LOSS SHARING VS LENDER-BORROWER
RELATIONSHIP
PROFIT LOSS SHARING
First Tier Between bank and depositor
The depositor are considered to beprovider of the capital (Rabb al mal)
The bank functions as a working partner ormanager of funds (mudarib or amil)
Second Tier
Between bank and entrepreneur
The entrepreneur is the manager of fund
The bank functions as provider of capital
LENDER-BORROWERRELATIONSHIP
The relationship between a lender and aborrower is governed by a loan contractbetween them.
Such a contract would specify all theobligations of the two parties in everypossible future contingency.
With respect to:
The amount of repayment
The interest rate on the remaining debt.
A possible adjustment in the collateralrequired by the lender.
The actions (in particular investmentdecisions) to be undertaken by theborrower.
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TRADE-BASED FINANCING VS INTEREST-BASED
INVESTMENT/LOAN
TRADE-BASED FINANCING CHARACTERISTICS INTEREST-BASED LOAN
The bank has to purchase the
requested commodity before
selling it to the customer.
Legal Nature of
promise
The customer is required to
make a unilateral promise to
buy the commodity from the
bank, before the bank makes
the purchase.
Price includes a known profitor mark-up.
The mark-up in murabahah is
part of the sale price, it is set
only once and then it does not
change overtime.
Profit Rate Profit comes from the interestrates.
Murabaha financing productsare fixed-rate products.
The rate, once determined for
a given contract, is not
allowed to float with changes
in the interest rates or any
other rate.
Fixed and Floatingrate Many conventional bankingproducts are floating-rate
products.
The rates on such loans are
automatically adjusted
upwards or downwards in line
with changes in interest rates.
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TRADE-BASED FINANCING VS INTEREST-BASED
INVESTMENT/LOAN
TRADE-BASED FINANCING CHARACTERISTICS INTEREST-BASED LOAN
Murabaha does not allow
such rescheduling as no
additional amount can be
charged for the same.
The amount of the
murabahah price remainsunchanged.
Rescheduling of
payment
Loan rescheduling is
accompanied by
additional interest charge
for the timing differences.
If it is given voluntarily, it is
allowed.
The rate of discount must
not be pre-specified in the
murabahah contract as a
condition.
It is not a right that the
debtor can claim.
Rebate on early
payment
Conventional financial
system grants the
borrower a discount or
rebate if the customer
decides to pay earlier than
the scheduled time.
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Unlawful gain derived from the quantitativeinequality of the counter-values in any transactionpurporting to effect the exchange of 2 or more
species which belong to the samegenus(category) and are governed by the sameefficient cause(illah)
Definition of Riba on Trade transaction
A predetermined excess or surplus over andabove the loan received by the creditorconditionally in relation to a specified period
Definition of Riba on Loan transaction
PROHIBITION OF RIBA
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Al-QuranAl-Baqarah: 275
EVIDENCE
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Hadith: From Jabir: The Prophet saw cursed the receiver
and the payer of usury, the one who records it
and the two witnesses to the transaction and
said: They are all alike (in guilt and sin). From Abi Said al-Khudri: The Prophet saw said:
gold for gold, silver for silver, wheat for wheat,
barley for barley, dates for dates, salt for salt,
like for like, and hand to hand. Whoever paysmore or takes more has indulged in riba. Take
taker and the giver are alike (in guilt).
EVIDENCE
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ELEMENTS OF RIBA
Excess or surplus over
and above the loancapital
Bargain to beconditional onthe payment of
apredetermined
surplus
Determination ofthis surplus inrelation to time
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REASONS FOR PROHIBITION OF
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REASONS FOR PROHIBITION OF
RIBA
To preventinjusticebetween
contractingparties
Exploit thepoor/
creditors
An exploitations
of peopleignorance over
the types ofcommoditiesinvolved intransaction
An exploitationof people
needs. Thus,they have no
choice but to beinvolved in Riba
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CATEGORIES OF RIBA
Categories ofRiba
Riba al-Buyu`
(Trade Transaction)
Riba al-Fadl
Riba al-Nasiah
Riba al-Dayn
(Loan Transaction)
Riba al-Qard
Riba al-Jahiliyah
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CATEGORIES OF RIBA
RIBA AL-BUYU`
Riba al-Fadl
Also known as Riba al-buyu that is riba by excess.
It applies to six items : gold, silver, date, raisin, wheat
and barley and the like of them.
Riba al-Nasiah
Its occurs whenever the creditor advanced loan onsome monthly interest in addition to the principal sums.Increase due time
On other words, this stipulated interest which thelender takes from the borrower to pay back the capital.
Second opinion- Any delay in the exchange of theribawi items from the same type and category
RIBA AL-DAYN
Riba al-Qard
It is riba in debt or out of lending and borrowing.
It was originated from the transaction of a loan , and it
is interest or payment charged due to the loan given.On the other words, it is the extra amount over theabove principal of the loan.
Riba al-Jahiliyah
It is Riba in loan.It is when a loan contract is made or at rescheduling aprevious debt.
It is take place only in debts created via lending orextended to a new maturity via rescheduling.
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RIBAWI ITEM
RibawiItem
Gold
Salt
Silver
WheatBarley/Oat
Dates
Salt
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ISLAMIC RULINGS ON RIBA IN
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ISLAMIC RULINGS ON RIBA IN
TRADE
Category Type Exchange Quantity Items
1 Same
category
Same
type
Spot
exchange
Equal in
quantity
Regardless of
quality
Gold with Gold,
Wheat with Wheat
2 Samecategory
Differenttype
Spotexchange
Inequalityis
permitted
Equality is not acondition
God with SilverWheat with Rice
Salt with Dates
3 Different
category
Different
type
Delayed is
permitted
Inequality
is
permitted
Time and
Quantity Factor
is not a
condition
Gold with Wheat
RM with Dates
ISLAMIC RULINGS ON RIBA IN
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ISLAMIC RULINGS ON RIBA IN
TRADE
Category Type Exchange Quantity Items
4 Ribawi Items and Non-
Ribawi Items
Delayed is
permitted
Inequality is
permitted
Time and
Quantity
Factor is not a
condition
RM with vehicles
UD with furniture
5 Between 2 Non-
Ribawi Items
Delayed is
permitted
Inequality is
permitted
Time and
Quantity
Factor is not a
condition
Bricks with Sands
Cloth with Patrols
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PROHIBITION OF GHARAR
Literally:Deceit, risk, fraud, uncertainty or hazard that
may be lead to destruction loss.
Technically:
When a matter that is concealed by one party. Occurs when a party undertake venture
blindly without sufficient knowledge
Minor uncertainties can be permitted whenthere is a necessary
Both of contracting parties must have aperfect knowledge regarding to transaction
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PROHIBITION OF GHARAR
Sell good that seller is not in position todeliver.
Sell unknown pages or known goodsagainst unknown price.
Make a contract conditional on aunknown event.
Sell good on basis of false description. Sell good without proper examination.
Gambling.
Examples of Gharar relatedtransaction:
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TYPES OF GHARAR
Gharar Yasir
This type of gharar is tolerate andwill not invalidate a contract.
Gharar yasir may include thefollowing cases:
The uncertainty is slight or trival
Contract is unilateral or charitable(al tabarruat) such as gift orbequest
There is a public need for thetransaction or contract(consideration of maslahah)
Gharar Fahish
This type of gharar is not tolerateand may result in contractvoidability
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PROHIBITION OF MAYSIR
Refers to the easy acquisition of wealth bychance, whether or not it deprives the others
right.
Qimar means the game of chance in which
one gains at the cost of others.
Issues that related to gambling:
Contest using SMS
The prize winning tickets
Horse racing
Lottery
Crossword puzzles
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PAYMENT OF ZAKAT
Meaning of zakat To grow
To purify
To improve
Purpose of Zakat
The foremost and primary is to distribute the wealth of thecommunity among the poor
Removing the love of wealth from ones heart, a spiritualdisease that could be detrimental to ones Iman. Thus, itis a form of Tazkiya (self-purification).
Giving in the path of Allah acknowledging that whateverwealth one possesses is in reality the Almightys, andgiving a monetary sacrifice for ones lord.
Prevention of monopolies in society.
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BENEFIT OF ZAKAT
Enhances Volume of Production
When Zakat is collected and distributed among the poor they spend iton various consumer goods which increase the demand of variousproducts of industries which increases production of goods.
Discourages Hoarding
Zakat discourages hoarding because it is levied on hoarded wealth.
Raises Savings
Zakat is paid out of the accumulated wealth. the wealth owner must insaving ratio, in order to prevent the level of his wealth from decreasing.
Zakat increase level of income
Zakat increase level of income due to circulation of wealth in theeconomy.
Reduces inequality of Wealth Zakat is distributed among the poor from rich people so it reduces
inequality of wealth.
Zakat ends poverty as Zakat is given to poor.
Redistribution of National Income.
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CONDITION OF ZAKAT
Zakat Performer Muslim
Every Muslim who is of a certain age and owns enough assets isrequired to pay zakat.
Zakat Assets
Full ownership. A Muslim only required to pay zakat if he or she hasfull and legal ownership of an asset.
Its payable only on those assets acquired for the purpose of creatingor generate wealth.
Zakat need only be paid on those assets that exceed a minimumvalue.
Minimum value is termed Nisab.
Completion of Haul
Haul is defined as the completion period for zakat asset. The length of time:
One Islamic Hijri year (1 year Hijri=354.5 days, 1 year Solar= 365.25 days)
Zakat only payable on asset that have been held for at least thisperiod.
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TYPES OF ZAKAT
Zakat Fitr
Zakat Fitr is a one off payment that ismade once in every Muslim Hijricalendar year at any time betweenthe first day of the month ofRamadan and the first day of
Shawal. All Muslims are obliged to pay this,
regardless of their age, status orwealth.
The amount of zakat payable isapproximately 3kg of staple food inthe relevant country or an amount of
money that is equivalent to the priceof the food.
Zakat Al-Mal (on wealth)
Zakat al-Mal is an annual paymentbased on the amount of wealthowned by a Muslim individual ororganization.
This payment is obligatory upon any
Muslim individual or organization thathas completed the requirement ofNisab (minimum taxable amount)and Haul (one Muslim Hijri calendaryear).
The payment is 2.5% out of the totalwealth deemed for zakat.
Zakat al-Mal can be subdivided intozakat on:
Business, Rental Income, PersonalIncome, Savings, Gold andSilver, Shares, Livestock, Crop
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BENEFICIARIES OF ZAKAT
1. The poor (Faqir/Fuqara)
2. The needy (Miskeen)
3. The administrators of zakat (Amil)
4. The sympathizer (Muallaf) - Those who are inclined to enteror have already converted to Islam.
5.
To free slaves (Riqab)6. Those who are in debt (Gharimin)
Zakat can be used to pay off the debts of a person who hasborrowed to pay for basic necessities or those on financialproblem.
7. For the causes of Allah (Fisabilillah) Zakat can be use to finance any form of struggle or work for
the love of Allah.
8. Those who are stranded during a journey (Ibnus Sabil) Zakat can be used to help a traveller facing difficulties in
continuing his journey.
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ISLAMIC LEGAL MAXIM ( )
Qawaid fiqhiyyah or Legal maxims are general ruleswhich can be applied in various cases that comeunder common rulings.
Plays great role in the formation of Islamic lawbecause they are uses as principles to deduce rulesof fiqh.
Legal maxims are indeed general rules of fiqh, whichcan be applied in various cases that come under thecommon rulings e.g.. transactions, munakahat,evidence etc.
Have a great role in the formation of Islamic lawbecause they are used as guidelines in finding therules of fiqh but cannot be accepted as sources ofshariah.
These maxims have solved most of the minor rules
of fiqh and without them these minor rules will haveno standing ground which will make it hard to solve
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FIVE MAJOR MAXIMS
Acts Are Judged By The IntentionBehind Them
Certainty Is Not Dispelled ByDoubt
Hardship Begets Facility
Harm Must Be Removed
Custom Is The Basis OfJudgement
ACTS ARE JUDGED BY THE INTENTION BEHIND
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ACTS ARE JUDGED BY THE INTENTION BEHINDTHEM( )
An act of any human being is judged in thelight of intention or the purpose it seeks tohave effects.
This means that the effect to be given to any
particular action or transaction must be inaccordance with the intent underlying suchaction or transaction.
E.g.:
Banks declare their policy of financing customerson non-interest bases it would be necessary todo so and not merely continue the same practiceand seeking to rationalize it in Islamic terms
such as mudharabah etc.
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CERTAINTY IS NOT DISPELLED BY DOUBT
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CERTAINTY IS NOT DISPELLED BY DOUBT( )
It is discusses about the principle that shouldbe followed if there is doubt in any matterparticularly in matters pertaining to Islamiclaw.
This means that a fact established by law orproven with evidence will remain so, untilthere is another certainty that removes it.
E.g.:
A partner has no right to assume a minimum rateof profit earned by his business partner andclaim his share in that profit as different fromamount stated to have been actually earned by
the partner.
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HARDSHIP BEGETS FACILITY
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HARDSHIP BEGETS FACILITY
( )
The maxim indicates that any ruling whichimplementation causes hardship to a person orthe action is unable to be performed by aparticular person for a specific acceptablereason, then there are alternative and ways out
that can be resorted to in order to overcome thedifficulties and hardship.
Hardship- refer to surpass the normal limit andability of a person such as travel/sickness/dharurah etc.
E.g.: If the court orders the sale of assets of a negligent
debtor to pay his creditors, it must begin with thesale of his movable goods if this would suffice toclear his debt, before selling his real property.
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HARM MUST BE REMOVED
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HARM MUST BE REMOVED
( )
The scholars have classified harm into twocategories :
Harm which is inflicted intentionally in order to cause
damage. This kind of harm is forbidden and the
perpetrator shall bear the consequences of hisaction.
Harm which is cause unintentionally without any
intention to cause harm or damages to others.
E.g.:A buyer of perishable goods absents himself without
taking possession of the purchased goods. The
seller , in order to protect himself and the buyer from
loss, has a right to unilaterally revoke the contract ofsale and sell the oods to some other art .
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CUSTOM IS THE BASIS OF JUDGEMENT
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CUSTOM IS THE BASIS OF JUDGEMENT( )
This maxim means the practices of thepeople whether in their actions or sayings,
regardless of whether they are general
practices of the people or the practices of
certain groups of people. E.g.:
A person authorizes another to sell something
on his behalf without laying down conditions asto sale price and unit of currency, the agent will
be treated to be bound by conventional rules of
charging a reasonable price and prevalent
currency.
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