UNIVERSITI TEKNOLOGI MARAARSHAD AYUB GRADUATE BUSINESS SCHOOL

IFE 730ISLAMIC BANKING MANAGEMENT AND OPERATIONS

ASSIGNMENT ON:ISLAM AND TAXATION

PREPARED FOR:DR. MASTURAH BIT MAIN

PREPARED BY:NURUL NADIA BINTI ABDULL RASHID (2014715621)

NOR HAFIZAH BINTI SAMANAL(2014970723)

NIK NAINUNIS BINTI ABDUL GHANI(2014701609)

NUR SHAHIDATUL AKMAR BINTI MAHYEDIN (2014956817)

MARCH-JULY 2015

1.0 Introduction

Bai` `inah refers to an arrangement that involves sale of an asset to the purchaser on a deferred basis and subsequent purchase of the asset at a cash price lower than the deferred sale price or vice versa, and which complies with the specific requirements of Bai inah. Bai inah is very controversial issues pertaining to the Islamic product only Shafii schlors are permitted the bai Inah contract. Since the Bai Inah come out many issues, the contract of tawaruq are establish and accepted many of scholars.

2.0 Bai Al- InahBai inah is one of the contracts of sales in Islamic banking system. Previously, bai inah is used in Islamic banking product such as personal financing and credit card. But most of Muslim scholars decided that this contract involved hillah to Riba. To solve this problem they come out with tawaruq contract.

2.1Definition of Bay Al-Inah

Literally, Inah is a loan or an advance payment. It is said in Arabic: Itana ar-rajul (the man bought on credit). This is usually said when he barters one for another on credit or when he buys on credit. This type of sale named Inah (a credit sale) because the buyer of commodity for a fixed time will take its compensation (from the seller) in cash on the spot.

Technically, scholars gave different definitions to Inah due to their differing opinions regarding its form. However, the most famous definition given to it by classical scholars was: a situation whereby a person sells his commodity to another for a specific price with payment delayed until a fixed date, and then he buys it back from the other person at a lower price in cash.

2.2The form of Inah

The classical jurist cited different forms of Inah in their books. There are:

1. A sells a commodity or asset to B for a certain price with payment delayed until a specific date, and then buys it back from him at a lower price in cash.2. A buys a commodity from B through an intermediary present at the time of the transaction. For the first step, the intermediary buys it from B and then he sells it to A, seeker of Inah, at a price higher than the price at which the intermediary bought it from B, with payment delayed till a fixed time. Then A sells it to B for cash at a price lower than the price A paid for it. Ibn Taymiyyah commented on this form by saying, If he buys a commodity from him then sells it to him, and buys it back from him again, or sells it to the third party who is real owner from whom the loaner bought it in the first instance, it is riba.3. A sells a commodity to B, with payment delayed till a stipulated time. He then buys it back, with payment delayed till a date later than that of the first transaction at a higher price.

2.3Modus operansi of Inah in the banking sector

Bay al- Inah is normally applied in cash line facility-i, credit card, and personal financing whereby the purpose of the financing is normally for cash and liquidity. The application of Bay al-Inah in Islamic finance can be looked from the following modus operandi.

1. The bank sells a particular asset to the customer on a deferred payment basis at the real cost plus the profit that is equivalent to the maximum amount to be paid by the customer which is RM70 000.2. The customer then resells the same asset to the bank on cash basis with a lower price than before which is RM50 000.3. The customer pays the bank the amount he utilized by installment or cash basis at once.

2.4Legality of Bayal-Inah

A) Al- Inah is permissible:

i) According to the hadith below, reported by Abu Hurayrah. The Messenger said: Sell the al-Jam`u (lower grade of) dates for silver dirhams and then buy with the silver dirhams the al-Janib dates.According to Ibn Hajar & al-San`ani: the hadith indicates the permissibility of Bay` al-Inah.The Prophet s.a.w never specified: the sale should be with the third or the first party with the help of the silver dirham and the hadith is a general hadith involving the third and the first party.

" ". . " ".

Abu Hurayrah reported that Rasulullah had hired a man in the Khaibar battle. The man then came and gave Rasulullah the dates of al-Janib (high quality dates) and the Rasulullah asked: Do all the dates of Khaibar as good as this? The man replied: O the Messenger of Allah, by Allah, no, we usually would take a measure of this type of date to be exchanged with two measures of another (lower) types of dates, and exchanged two measures with three measures. The Messenger of Allah said: Dont do that, sell the al-Jam`u (lower grade of) dates for silver dirhams and then buy with the silver dirhams the al-Janib dates

ii) There are many misleading views regarding the position of Imam Al-Shafi representing the Shafii school pertaining to Bay al-Inah. This view stem from the presumption that imam al-Shafii validates and out rightly endorses Bay al-Inah. The following provides some evidences from the classical Islamic Jurisprudence texts that refute this view:

The basis for my position is that if a contract fulfils the Shariah manifest criteria for its validity, I will not invalidate it on the basis of a presumption or a customary practice between the sellers and the buyers. Hence, I will approve it by virtue of its apparent validity, but I prohibit a kind of situation where the two of them nurse an intention that may likely lead to the invalidation of the contract if it is manifested. For instance, I forbid someone buying a sword with the intention to kill with it unjustly, but it is not unlawful for the seller to sell it to someone he suspects will use it to kill with it unjustly, but it is possible that he will not use it to kill unjustly. I therefore do not invalidate this kind of business transaction. Likewise, I detest that someone sells grape to a buyer he thinks will use them to make wine, but I do not invalidate such a sale because he is selling it as something lawful, and it is possible that the buyer will not, however, make wine from the fruit, just as it possible that the purchaser of a sword may not use it to kill. Likewise I invalidate a temporary marriage, i.e., mutah, whereby an expiry date is stipulated in the contract, but if a man marries a woman through a valid contract with the motive to have her as his wife for only a day, or less or more, I would not invalidate such a marriage contract but I would only invalidate the contract when such a kind of intention is made manifest or detected. In another vein, if a man buys a commodity from another person, and the payment is deferred to a stipulated time, there is nothing wrong if he sells it back to the person he bought it from or to another person for cash at a price lower or higher than the price at which he bought it, or for a debt or barter of a commodity at a value he chooses to assign to it. The reason here is that the second transaction is not linked to the first transaction.(Al-Shafii, Al-Umm, Volume 3, page 90)

This statement of Al-Syafii signifies that he does prohibit Inah ethically if the party in contract is not able to justify his action and intention before Allah (s.a.w). This is to say does not prohibit it on the basis of mere presumption of peoples intention in entering into the sales contract. However, if the mal-intention of the person dealing in Inah is explicit or apparent through his expression that the commodity is to be resold to the first seller, then he would inevitably prohibit it.

The Zahiri school agreed with Al-SyafiI, as stated by Ibn Hazm that:

Whoever sells a commodity for a stipulated price to be paid immediately or for a deferred payment for a short or long term, he has right to sell that commodity to the one he bought it from at the same price he paid for it, or less or more. Payment can be made instantly, and it may be deferred to a time shorter or longer than the time of the first transaction or for the same time. All these is such a condition, then it is forbidden and must be nullified without any hesitation, and it should be classified as a kind of coercion as maintained by Al-ShafiI. (Ibn Hazm, Al-Mahalla bi Al-Athar, Volume 7 page 549)

iii) The following is the tenet for a valid Bay al-Inah contract from Syafii point of view. Bay al-Inah contract concluded in a manner whereby both, the buyer and the seller know their intention to do Bay al-Inah, but there is no manifestation of it (intention to Bay al-Inah contract) in the contract.

See the following sample clause, which some shariah scholars argue that intention is manifested by it.

Recital (in PSA) : in accordance with the principle of BBA, the bank has entered into an agreement with the customer wherein the bank at the request of the customer has purchased from the customer the property at the purchase from the customer the property at the purchased from the customer the property at the purchase price stated therein for the purpose of immediately thereafter reselling the property to the customer upon deferred payment terms.In pursuance of the property purchase the bank hereby agrees to sell and the customer hereby agrees to purchase the property upon and subject to the term and conditions herein contained.

iv) Qiyas (Analogical Reasoning)

Bay Inah is valid. It is equivalent sale to the third party. There involve two contract. The second sale is separate from the first sale. The buyer has possessed (qabd) by virtue of making instalment. Hence, it is his right to sell on to anyone (including the first seller), either based on cash or debt method, lower or higher pricing.

B) Ba al-Inah is prohibited:

- - " " .

i) According to the hadis above, reported by Ibn Umar. Rasulullah forbade contract of al-Inah. The hadith indicates al-Inah contract is a prime source of humiliation, disgrace and disaster. Unless you repent and get rid of al-Inah. Ibn Umar reported that Rasulullah had said: If you sell to one another with al-Inah, and follow (from behind) the bulls tail and are satisfied with farming and abandoned al-jihad, Allah will force you into a state of humiliation and He will not remove it until you return back to your religion. " " : : : : : { } .*

ii) Narrated by Abu Ishaq, from his wife Aliyah binti Anfa`: It was reported that Saydatina Aishah was asked by a mother (a slave belongs to Zaid bin Arqam) about a particular transaction dealt by her. She said: O Ummu al-Muminin! I have sold a slave of Zaid bin Arqam to `Ata at 800 dirham in credit (on behalf of her master). Because of `Ata (the buyer) needed some amount of money (cash), I have purchased the slave back at 600 dirham in cash. Saydatina Aishah responded: How could you fulfill such a bad sale. You should inform Zaid bin Arqam that the said transaction has removed all his rewards throughout his participation in jihad with the Prophet (peace be upon him), if he does not repent. According to the majority of jurists, Aishah assertion clearly indicated that Inah was unlawful contract.

iii) Maliki also said that Inah is impermissible and their evidence is based on what Ahmad said in az-zuhdi, narrated from Ibn Umar, There is a time that comes toward us and we find that none of us says that he has the right of Dinar and Dirham from his Muslim brother (Abdul, 2010). There are also a few past scholars prohibited Inah. They said that, Inah is the sister of riba. If the buyer sells to a non-seller at an instance, it is also Inah, but it is allowed by the consensus. According to Muhammad bin Al-Hassan, Inah is impermissible. He said that, In my heart, this sale is like mountains invented by riba dealers.

iv) Al-Awza`i reported that the Prophet said: There will come a time where people will legitimize riba by using al-bay`. (mursal) Legitimizing (istihlal) is referred to transforming a ruling from haram to halal. Indicates any contract in physical term to be sale-purchase, but in essence (the substance) is a form of riba. Hence it is prohibited.

2.5Country that implement Bai Inah Since the Bai inah is very controversy, there are only two countries that implement the Bai Inah. Malaysia and Brunei are the only countries applying inah in their banking system. Their Shariah schlors agree that the majority of scholars and financial institutions prohibit inah, but they consider the issues as a kind of ijtihad that allows divergence of opinions. 2.6Conditions of Bai Inah Since the Bai Inah is very controversy, there have certain condition that must be fulfilling to the legality of the Bai Inah. The function of Bai Inah transaction is no other than facilitating the customer to get cash from the buyer for whatever reason to use the cash. And of course, the financier i.e. the seller must ensure that the purpose of the transaction is approved by the Shariah.The Council in its 8th meeting held on 12th December 1998/ 23 Syaaban 1419 resolved that bai`inah transaction is permissible based the following conditions:The ruled Bai al-inah is acceptable subject to the following conditions:

1. The mechanism practiced is acceptable to the shafii school. Meaning that the permissibility are follow the shafie school which is Imam Shafii the validity of Inah does not have relation with the intention or niyyah in the contracting parties. This intention is something hidden which is not known unless its specified in the contract.2. The transacted item is not a ribawi item (goods that are not consonance with fiqh rules with respect to cash or items sold by weight and/or measure).a. Any of sale contract in the bai inah arrangement shall not be effected on ribawi asset within the same type and category; andb. Any of the sale contracts in the bai inah arrangement shall not be affected on ribawi asset within the same category but of different type on deferred basis.3. The buyer must receive (take possession) the good before selling it back to the original sellerThe ownership in the bai inah asset must be effectively transferred from the seller to the purchaser. Before transfer the good must be receive. Possession of the asset shall be either in the form of physical possession (qabd haqiqi) or constructive possession (qabd hukmi).

2.7The Application or practice in the industry The practices of Bai inah applying in their banking system is only Malaysia and Brunei Darussalam. In Malaysia Bai inah have changes the contract with Tawarruq since the Bai Inah has many controversy issues. But before applying Tawaruq Malaysia used Bai inah in their banking system. The example of the practices in the Bai inah is as follows:

NoIslamic Financial InstitutionPersonal Financing/ Product Name

1Bank Kerjasama Rakyat Malaysia Personal Financing-i Aslah

2OCBC Al-Amin (M) BerhadPersonal Financing-i for Progres-i, Sukses-I, Prestij-i and Corporate Cash-i

3Public Islamic Bank BerhadBAE Personal Financing-i

4AmIslamic Bank BerhadPersonal Financing-i

5Bank Simpanan NasionalBSN AFLAH SPIK Personal Financing-i

6AgrobankAgroCash-i

7Alliance Islamic Bank BerhadAlliance Cash Vantage Personal Financing-i

8CIMB Islamic Bank Berhad0. Xpress Cash Financing-i0. Cash Plus Financing-i0. Pembiayaan Peribadi Sektor Awam-i

9Affin Islamic Bank BerhadAffin Islamic Personal Term Financing-i

10Maybank Islamic BerhadMaybank Islamic Personal Financing-i

Most of the Financial institutions they used Bai inah as the personal Financing and also for the Credit card,working capital financing and BBA financing. The following are show the mechanism of Islamic credit card based on the combination of bai inah and wadiah concept:i. The customer purchases an asset from the bank on deferred terms ( the purchase price comprise cost plus profit); for example, f o r example, RM11, 800 (RM10, 000 + RM1, 800) to be paid within one year by the customer.

ii. The customer thereafter will sell back the asset to the bank on cash basis (at cost value); for example, RM10,000. The selling price of the asset is lower than the purchase price. This is the amount which will be credited into a marginal wadiah account of the bank for customers use2.8 Issues pertaining to Bai Inah Bay al-inah is not found in any classical Islamic commercial law. However the Bai- inah are permitted by school Shafii because Shafii said that the intention of niyyah is not condition to be determining the validity contract of Bai Inah Bay al-inah has two contracts which is sale contract and repurchase contract. The issues raised by the following :2.8.1Existing two sales in one sale.The hadith have stated that prohibit the carrying out of two sale contracts in one sale contract, as well as that of relating a sale with conditions contravening the requirement of that sale. Al-Shafie is the only school of Islamic law (mazhab) that legalizes bay Inah, while other schools of Islamic law consider bay al-Inah as a kind of invalid transaction that leads to the usury (riba).2.8.2No actual selling and buying transactions (bai) and the assets are never leave the bank also one of the issues pertaining to Bai inah . This means that the contract Bai inah selling and buying are only an excuse to give out loan with interest. Its just as hillah to used the Islamic commercial Law in obtaining cash without involve any elemant in Riba.3.03.13.23.33.43.5 Conditions of TawarruqEven though there have some issues regarding Tawarruq, but there also some solution that make by Accounting and Auditing Organizing for Islamic Financial Institutions (AAOIFI) to ensure the genuine application of Tawarruq. So, all Islamic financial institution that has implemented Tawarruq as their banking product, they should fulfill all the parameters to make sure the contract is valid. The parameters from AAOFI Shariah Standards for Islamic Financial Institution 2010 act as a guideline to all Islamic financial institutions. The important thing in any contract is the subject matter. AAOIFI state that the subject matter or commodity should be identified. The buyer should know the quality, quantity, size and so on about the commodity. This is too distinct from the other assets of the seller. The client should be given a full description about the commodity or subject matter if the commodity is not made available at the time of signing contract. To make different from Bay al-inah, Tawarruq is permissible because it involve three or more parties. So, the commodity should sell to other party not the original seller, this is to avoid Inah. Tawarruq is divided into two which are classical Tawarruq and organize Tawarruq. In 2009, OIC Fiqh Academy resolution deemed organized Tawarruq is impermissible. Based on parameters by AAOIFI, the institution should not arrange to sell the commodity to a third party. The institution should sell the commodity to open market to show that the selling is not organized. Besides, the institutions should provide the client with the information the he or his appointed agent may need in order to sell the commodity. In order to have a valid contract based on Tawarruq, all the Islamic financial institutions should fulfill the several parameters as valid condition. This is to ensure the contract is not same with Bay al-inah because the contract of Inah is like hilah or back door of riba. All the condition of subject matter must disclose to client to make sure the commodity is identified.

3.6 Application in Financial institutions

3.6.1 Deposit Product Customer deposited cash in Islamic financial institution, which is then delegated to purchase commodities in cash on the international market. For example from metal trader A on cash basis. The ownership of the commodity is belongs to customer. Then, bank will purchase the metal commodity from customer on a deferred sale at cost price plus profit margin. The Islamic financial institution will sell back the metal commodity to another metal trader on cash basis in the metal commodity market. The Islamic financial institution will pay back until maturity date to customer.3.6.2 Financing ProductThe Islamic financial institution purchases metal commodity from metal trader A on cash basis in a recognized metal commodity market. The Islamic financial institution sells the metal commodity to the customer on credit basis at cost plus profit margin. The customer appoints the Islamic financial institution as his agent to sell the metal commodity to metal trader B on cash basis in the metal commodity market. This product is to help customer to obtain cash for financing. Then, the customer will pay back based on agreed term. Deposit product and financing product based on Tawarruq is permissible by Shariah Advisory Council. 3.6.3 Sukuk IjarahIt consists of the sale of a certain property or asset to the public at a fixed price, then leasing the same property from them on the condition that they will be resold to the first seller at the original purchase price, either through deferred payment or spot basis. The sukuk holder would profit from both sales. 3.6.4 Bursa Suq Al-SilaBursa Suq Al-Sila is an Islamic commodity trading platform for the Islamic financial and capital market. It is designed to serve as a multi-commodity and multi-currency platform, initially with trading of CPO (crude palm oil) to serve the Malaysian market. This platform is Shariah-compliant on end-to-end basis & designed to be in line with International Shariah standards. Trading platform is fully electronic and web-based; access is via internet with multiple security features. To ensure the operational of Bursa Suq Al-Sila is valid, there have some parameters must be meet. The parameters are the quantity of the CPO, the quality, and other specifications. 3.7 Issues Regarding Tawarruq3.7.1 Issues on CommoditiesSubject matter is one of the important pillars in contract of sale. The contract will be invalid if the subject matter is not identified. In contract based on Shariah, the goods must be specified and good commodities. If the subject of the sale has no value or is used for an illegitimate purpose, the sale of contract will be invalid. In Malaysia, Bursa Malaysia introduced the Commodity Murabahah (Suq Al-Sila) as a platform to assist Islamic Financial transactions. They offered real commodity that valuable such as crude palm oil. In modern organized Tawarruq, there are many commodities used are spoiled commodities. For example, Shaykh Ali al-Qara Daghi revealed that he encountered one Tawarruq transaction using the underlying commodity was actually junk quoted by (Dusuki, 2010). The goods is a defective aluminum from Russia that had been in storage for more than 10 years. In fact, the broker used that commodity precisely because it could not be sold. The lack of proper monitoring of the practice by certain segments in the market that could lead to the redundancy of commodities being transacted is concerned by some scholars. This issues pertaining to fictitious commodities are the main reasons why organized Tawarruq is deemed a fictitious sale and thus disallowed by most scholars. 3.7.2 Issues on AgencyIn modern banking organized Tawarruq, the customers will not buy the commodity themselves. A customer in need of cash (mustawriq) will authorize the bank (agent) to buy it from the market on customers behalf. Based on AAOIFI guideline in Article 4/7, the client should not delegate the institution or its agent to sell on his behalf a commodity that he purchased from the same institution and similarly, the institution should not accept such a delegation.The inclusion of tawkil(authorization) in the Tawarruq contract have argue by some scholars. This is because it similar to usurious finance because the mustawriq will take the smaller amount from the bank, while the higher amount will be paid by him when the fixed time lapses. This issue of Tawkil may make the contract agreement either prohibited or makruh. In addition, the client should sell the commodity either himself or through his own agent. The bank should provide the client the information needed to sell the commodity. This is clearly stated in AAOIFI in its Shariah Standards in Article 4/10. The specification of the commodity must be specific with the weight, quantity, quality and time to deliver. 3.7.3 Issues on Possession and DeliveryThe object must be exist and owned by the seller at the time of the contract because it is the important condition of sale contract. The main purpose of sale contract is to transfer ownership of the object of the sale to the buyer and ownership of the price to the seller. The sale contract is deemed to be an invalid sale if this condition is not fulfilled. Majority of jurist said that, it is necessary that the goods be accepted by the buyers hand.The issue of non-delivery arises in the current practice of commodity Murabahah. In some cases, the buyer restricted from taking any delivery, either explicitly or implicitly, by a normal procedure as practiced in the market. If the subject matter does not exist, the seller should give clear description to the buyer. This is to ensure the contract of sale is valid.

4.0 Similarities and differences Similarities Element Inah Tawaruq

Objective To obtain cash or liquidity

Differences Element Bai inah Tawaruq

Definitions a situation whereby a person sells his commodity to another for a specific price with payment delayed until a fixed date, and then he buys it back from the other person at a lower price in cashAkma buat

Contracting parties Involve 2 parties Involves 3 parties or more

Applications 1. Personal Financing 2. Working Capital Financing 3. BBA Financing4. Islamic Credit Card

1. Personal financing 2. Deposit financing 3. Sukuk 4. Bursa suq Al- Sila

Muslim scholars Majority of them not approve Majority of them approve

AssetThe asset return to the first sellerThe asset does not return to the first sellers

Types No specified Classical Tawaruq and Organized Tawaruq

5.0 Conclusions

6.0 References