9/9/2015 1 ISLAMIC BANKING LAW Mohd Johan Lee LLB, MCL (IIUM), MA (Econs) (KCL) Advocate & Solicitor (High Cour t Malaya) Peguam Syarie Advocate & Solicitor (Supreme Court Brunei) Messrs. J. Lee & Associates ISLAMIC BANKING AND FINANCE : DEFINITION AND OBJECTIVES Islamic banks are to promote, foster and develop the banking services and products based on Islamic principles Islamic banks are also promoting establishment of investment companies or business enterprises so long as their activities are not forbidden by Islam 14 & 15/9/2015 (c) Mohd Johan lee 2015 2
ISLAMIC BANKING AND FINANCE : DEFINITION AND OBJECTIVES
Islamic banks are to promote, foster and develop the banking services and products based on Islamic principles
Islamic banks are also promoting establishment of investment companies or business enterprises so long as their activities are not forbidden by Islam
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Sec 2 of the IBA
“Islamic bank means any company which carries on Islamic Banking business and holds a valid licence……”
“Islamic banking business means banking business whose aims and operations do not involve any element which is not approved by religion of Islam”
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Wide definition allows IB to do all banking business – commercial, finance, merchant
Opportunity for innovation in the business and product development
Consistent with the principle of “permissibility unless otherwise prohibited”
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BAFIA confined the “banking business” into :
(i) Receiving deposits – CA/SA etc
(ii) Paying or collecting cheques
(iii) To provide loan/finance
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Islamic banking business” means the business of—
(a) accepting Islamic deposits on current account, deposit account, savings account or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers; or
(b)accepting money under an investment account; and
(c)provision of finance; and
(d)such other business as prescribed under section 3;
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SALIENT FEATURES OF IBF
Riba free – money does not create money
Gharar free – uncertainties to be avoided
No Lender – borrower relationship
Trading & leasing relationship
Profit & Loss sharing
Requirement of mutual consent
Prohibition of fraud and deception
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There are 2 modes of financing in IBF
Equity financing
Debt financing
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FINANCING NEEDS
Financing needs
Own financing Financing from others
Equity Financing
Debt Financing
Takes place when the capital/equity of other
party is taken to undertake a commercial
project
The financing is effected by debtDebt is given to the other party for
specific purpose
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FINANCING NEEDS
Equity Financing Debt Financing
Uqud al Istirak(profit & loss sharing)
Al-mudarabahAl- musharakah
Al- Bay/al Ijarah/al dayn(exchange/deferred
contract)BBA
MurabahahIjarahIstina’
Mode of Financing
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ISLAMIC BANK VS CONVENTIONAL BANKNo. ISLAMIC BANKING CONVENTIONAL BANKING
1.The functions and operating modes ofIBF are based on the principles ofIslamic Shari’ah
The functions and operating modes ofconventional banks are based on fullymanmade principles
2.It aims at maximizing profit butsubject to Shari’ah restriction
It aims at maximizing profit withoutany restriction
3.
Participation in partnership businessis the fundamental function of theIslamic banks.
Lending money and getting it backwith compounding interest is thefundamental function of theconventional bank.
4.The status of Islamic bank in relationto its clients is that of partners,investors and trader, buyer, seller
The status of a conventional bank, inrelation to its client, is that of creditorand debtors.
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COMMERCIAL BANKING
Deposits
IR@ 4%
Lending
IR@ 7%
De
posito
rs
FIs
Ne
eds fo
r fu
nd
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ISLAMIC BANKING
Wadiah
Mudharabah
Debt financing (Numerous principles
used
Equity financing/Musy/mudh
FIs
Ne
eds fo
r fun
d
Depositors/current
Depositors investment
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MISCONCEPTION & ISSUES
Banking is prohibited in Islam
Islamic banking is merely change in name
Islamic banking is expensive
Imitation of conventional product
Legal and political reality
Lack of knowledge and information
Technical issues
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DEVELOPMENT OF ISLAMIC BANKING
During the time of the Prophet (p.b.u.h)
‘bailtul mal’ (public treasury) – to fund state responsibilities.
Did not generally accept deposits from public nor grant loans
Baitul Mal have extended loans to Caliph Umar’ son Abd Allah and Ubayd Allah which were used for trading.
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1963 – Mit Ghamr Local Savings Bank (Egypt)
1971 – Nassar Social Bank (Egypt)
1975 – Islamic Development Bank (Jeddah) & the Dubai Islamic Bank
1977- Faisal Islamic Bank of Sudan & Kuwait Finance House
1978 – Faisal Islamic Bank of Egypt & the Islamic Bank of Jordan
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Malaysia
1969 – Establishment of Pilgrims’ Fund Board (Lembaga Tabung Haji)
1983 - Bank Islam Malaysia Berhad (public listed on 17 Jan 1992).
The Islamic Banking Act 1983 (7 April 1983) supervised and regulated by BNM
1984 - Syarikat Takaful Sdn Bhd (TA 1983)
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1993 –BNM introduced a scheme known as “Skim Perbankan Tanpa Faedah” (SPTF) & Islamic banking window
1996 – amendment to sec 124 of the BAFIA allowing conventional banks in Malaysia to operate IBF
1997- The establishment of NSAC by the BNM
1998 – Interest- free Banking Scheme (SPTF) was upgraded to Islamic Banking Scheme – setting up of Islamic Banking Divisions replacing Islamic Banking Units to headed by senior level of management
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1999 – Second Islamic Bank (BMMB)
2002 – Islamic Financial Services Board (IFSB) head office in Malaysia
2004 – establishment of Islamic banking subsidiary for conventional banks
2004 - grant of Islamic banking licenses to 3 other financial institutions (1 foreign & 2 local)
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2005: Entrance of Kuwait Finance House, Al Rajhi & Asian Finance (a consortium of Qatar Islamic Bank, RUSD Investment Bank Inc. & Global Investment House)
2008: International Islamic Banking licenses were issued to Unicorn International Islamic Bank, First Islamic Investment Bank Ltd (owned by PT. Bank Muamalat Indonesia) and Deutsche Bank Ag (2010), allow the bank to provide Islamic commercial and investment services denominated in foreign currencies.
2010: 5 new Islamic banking licenses to foreign banks (BNP Paribas SA, PT Bank Mandiri, National Bank of Abu Dhabi, Mizuho Bank and Sumitomo-Mitsui Banking Corporation) and the establishment of “Mega Islamic Bank” (to be announced)
2012 – Islamic Financial Services Act
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STAGE 1 – (1983 -1992)
STAGE 2 (1993-2000)
Institutional Building, activity
generation/market Vibrancy
STAGE 3(2000-2010)
Enactment of dedicated Act for Islamic banking
Full fledged Islamic bank
Legislative amendment to allow
window concepts NSAC
Islamic interbank money market
Financial SectorMasterplan (Islamicfinancial hub)
Islamic FinancialServices Board
Liberalization Islamicfinance sector
MalaysiaInternationalFinancial Centre
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FRAMEWORK OF ISLAMIC FINANCE
In general, the framework of Islamic finance is the same framework used by the conventional finance practices.
These frameworks are, inter alia legal and regulatory framework, taxation framework, accounting and auditing standards, etc.
Might have different or additional framework, such as accounting and auditing standard, etc, due to its peculiarity.
In certain jurisdiction, Islamic banking and finance might be regulated by different sets of regulations, either separate or additional, e.g. IBA 1983 (Now = IFSA 2013)
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CONT’D
However, Islamic Finance, as the name suggests, has another framework, which is considered the major element that differentiates IBF from the conventional banking and finance.
Any violation of this framework will definitely effect the validity of Islamic finance itself.
Shariah Compliance Framework
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THE SHARI’AH FRAMEWORK OF ISLAMIC BANKING AND FINANCE
Three main interrelated terminologies: Shariah, Fiqh & Muamalat
Shariah, when viewed from legal perspective is the fixed elements of Islamic law, i.e. what has been clearly stipulated and mentioned in the text. E.g. five time prayers, prohibition of riba’, etc.
As such, it is revealed in nature
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SHARIAH & FIQH
Shariah, in this sense, is wide and encompassing various branches of Islam
Normally, it comes in its generality and it emphasizes only on the principles and not the detailed rules (not all the time)
It is the duty of the judge (qadi), mufti and jurisconsult (ulama’) to exert their intellectual efforts in deriving and applying these principles on certain given scenarios.
The result of human reasoning and understanding to the shariah is known as fiqh
Fixed v. Flexible
Agreements v. Differences
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FIQH MU’AMALAT (ISLAMIC COMMERCIAL LAW)
However, in its general usage, it is called al-syariat al-Islamiyyah (Islamic law).
Islamic commercial law is one of the components of Islamic law
Other components of Islamic law include: Islamic law of purification and worship
Islamic family law
Islamic criminal law
Islamic law of evidence and procedure
Islamic law of inheritance, etc
The main subjects of Islamic commercial law are commercial contracts and the rules governing them
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ISLAMIC FINANCE PARADIGM
Original rule of permissibility: - Initial legal ruling in commercial contract is permissibility - Contrary to acts of devotion (Ibadat)- No legal injunction is needed in sanctioning new contract - Every contract is considered lawful and acceptable if no principle of shari’ah is violated
- Open a very wide door for further innovations
Real Economic Activities Transactions-oriented not loan-based.
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IBF AND SHARI’AH PRINCIPLE
IBF or Islamic commercial law (fiqh al-muamalat) is part & parcel of Shari’ah
Basic concepts of fiqh al – muamalat:
Wealth is a trust & amanah from God
Prohibition of unjust & oppressive practices
Promotion of honesty, transparency, justice & fairness
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COMPONENT OF SHARI’AH
Divinely revealed principles governing faith, conduct and legal injunctions.
Definition 1: Every excess in return of which no reward or equivalent counter value is paid
Definition 2: Predetermined excess above the loan received by the creditor conditionally in relation to a specified period.
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“Those who eat riba will not stand (on the Day of judgment) except like the standing of Shaitan leading him to insanity. That is because they say: “Trading is only like riba,” whereas Allah has permitted trading and forbidden riba. So whosoever receives an admonition from his God and stops eating riba shall not be punished for the past; his case is for Allah (to judge). But whoever returns (to riba); such are the dweller of the Fire – they will abide therein.”
(Surah al-Baqarah: Verse 275)
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From Jabir RA, he said: “Rasulullah SAW cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt).”
(Narrated by Muslim)
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PROHIBITION OF RIBA14 & 15/9/2015(c) Mohd Johan lee 2015
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The debtor borrowed money to be paid in certain time, and the amount is more than the amount borrowed – RIBA QARDH
A creditor gives a periodic loan and takes monthly interest. The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will be charged – RIBA QARDH
Arising out of exchange contract (‘uqud mu’awadhat), a buyer must pay a consideration. If he fails to settle on time, the period will be extended by increasing the amount (principle + interest) – RIBA JAHILIYYAH or RIBA QARDH based on the agreement
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Occur out of an exchange between two ribawi materials in the same kind where the necessary rule(s) is (are) not observed
Guided by the saying of Rasulullah SAW:
Ubadah bin al-Samit RA nar r ated that Rasulullah SAW said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt – like for like, equal for equal, and hand-to-hand (spot); i f
the commodities differ, then you may sell as you wish, provi ded that the exchange is hand-to-hand or spot transaction.”
(Narrated by Mus lim)
‘I LLAH (RATIO DECI DENDI) FOR PROHIBITION:
o Gold & silver (and other th ing s serve sam e purpose) -Medium of
exchange (currency)
o Wheat, barley, dates & salt -Staple foods
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LITERALLY (LUGHATAN):
Deceit/ fraud (khid’ah), uncertainty, danger/ risk, and peril/hazard (khatar) that might lead to destruction and loss.
TECHICALLY (ISTILAHAN):
Uncertainty and ignorance of the contracting parties over the substance or attributes of the object of sale, or of doubt over its existence and availability at the time of contract (majlis al-’aqd).
TYPES OF GHARAR
GHARAR FAHISH (Major/
excessive gharar)
GHARAR YASIR (Minor
Gharar)
GHARAR LA YUMKIN
IHTIRAZ ‘ANHU
(Unavoidable Gharar)
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PROHIBITION OF GHARAR
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To avoid any dispute due to unfairness in dealing caused by the lack of knowledge.
“O believers! Do not eat up your property among yourselves unjustly; except it be a trade amongst you, by mutual consent.”
(Surah al-Nisa’: Verse 29)
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THE AVOIDANCE OF GHARAR
Meaning of gharar:
- Literally: risk, uncertainty, hazard
- The sale of probable item whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling
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GHARAR
Meaning: has a range of negative connotations, such as, uncertainty, deception, risk, hazard, ignorance etc.
If there is gharar, the contracting party/ies do not really understand the attributes / consequence of the contract
Under Islamic law, gharar is prohibited because its existence in the contract may deny the parties of equal bargaining power and they cannot make informed decisions; or if there is risks on deliverability of the object of the contract
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PROHIBITION OF GHARAR
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Interpretative Efforts
What amounts to
Trade by Mutual Consent
Criteria■ Offer & Acceptance, indicating
consent■ Elimination of mistake, fraud etc
Criteria■ All illegal & defective elements in
contracts including gharar & uncertainty
Unjust (bati l)
Surah an- Nisa’: ayat 29“ … squander not your property amongst yourself unjustly (batil) except it be a
t rade among you by mutual consent…”
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PROHIBITION OF GHARAR IN THE SUNNAH
The sunnah uses the word gharar and its derivatives much more extensively than the Qur`an in the sense that several new meanings are added
In relation to commercial transactions, the Prophet s.a.w. in many of his sayings directly prohibited the sale involving gharar (uncertainty) and jahalah (ignorance)
Thus, the prohibition of gharar is made conclusive by the sunnah / hadith of the Prophet s.a.w.
Examples: the prohibition of gharar sale (i.e., the sale contract affected by gharar), the prohibition of the sale of fish in the sea, bird in the air, unborn animals, lost items, etc.
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CONT’D…
In Islamic law, gharar can be of two degrees: Excessive or major (gharar fahish)
Minor and tolerable (gharar yasir)
Only major /excessive gharar will affect the validity of contracts, where it will render the contract void / voidable, depending on the degree of uncertainty
Gharar affects trading and exchange contracts (mu`awadat); not charitable and unilateral contracts
In banking & finance – gharar can be triggered e.g. – in the sale contract to create the indebtedness if the asset used is uncertain / vaguely identified; the trading of a securitised debt which is unconfirmed / not established, sale of insurance policy
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APPLICATION OF GHARAR
Broadly speaking, gharar will effect the validity of contract if it occurs in these areas:
- gharar in kind / type / attribute / quantity of the object
- gharar due to delivery time
- gharar due to the price/ mode of payment
- doubt over the ability to deliver
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THE BENCHMARK
Gharar is excessive (gharar fahish)
Occurs in exchange contracts (‘uqud al-mu’awadat)
Effects the subject matter of the contract directly, not just the appendage
No public need (al-hajah al-’ammah) for the contract in discussion.
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CONT’D
However, the subjectivity of this benchmark is very obvious
Demarcation on excessive and trivial gharar
Determining the public need? To what extend
Inevitably, this demarcation will be influenced by differences in time, societies, individual taste and preference, technology and the way certain transaction is conducted as well as regulatory framework.
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CONT’D
To prevent gharar, the parties to contract must have adequate knowledge and information on the subject matter:
i- Their existence and deliverability
ii- Its quality, quantity and attributes are known
iii- Time –frame for payment and delivery
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TOLERABLE GHARAR
However, gharar is tolerable if: - i) it is trivial (gharar yasir)- ii) It occurs in other than exchange
contracts, such as in gratuitous contracts.
-iii) It happens to the ancillary object (appendages) only (not the principal and main subject matter of contract)
- iv) the economic need for the contract embodying the risk is substantial
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RIBA
FIXED in theory and application
GHARAR
NOT FIXED in application as its application changes with the quality of knowledge, legal framework, technology etc.
Very much dynamic
Is about mental exerc ise
“These are the main challenges that we are facing, especially in our product development efforts”
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OTHER THINGS TO BE AVOIDED
Transaction involving the prohibited commodities (e.g pork & liquor)
Surah al Maidah (5:3)
Surah al Maidah (5:90)
Transactions involving gambling (maysir)
Surah al Maidah (5:90)
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EXAMPLES OF NON-COMPLIANCE
Riba can occur All interest-based lending activities Fixed return on deposits in conventional banking
Gharar can be triggered Asset used in the sale/ lease contract is
uncertain/vaguely identified Selling price or lease rental is known to the parties upon
entering into the contracts etc Investment in non-Shariah compliant companies,
conventional bonds, etc.
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THEORY OF ‘AQAD
Barbati defined “aqad” in his kitab “Inayah ‘ala Fath al-Qadri”:
“Legal relationship created by the conjunction of two declarations, from which flow legal consequences with regard to the subject matter”
Definition defines the essential elements of an ‘aqad:
1. The offer (ijab) and acceptance (qabul) executed are legally binding on parties in the contract;
2. The contracting parties; and
3. The subject matter of ‘aqad on which the aqad gives the effect.
‘Aqad can be translated as “contract”
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“O believers! When you contract a debt for a fixed period, write it down. Let a scribe write in down in justice between you. Let not the scribe refuse to write, as Allah has taught him…”
(Surah al-Baqarah: Verse 282)
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REQUIREMENT OF MUTUAL CONSENT
Requirement of mutual consent based on al Quran (4:29):
O you who believe, devour not your property among yourselves by unlawful means except that it be trading by your mutual consent.
Manifested through expression of the parties
No certain formalities in concluding contract
In general mutual consent is achieved if it is made freely by a competent person (puberty and prudence)
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PROHIBITION OF FRAUD AND DECEPTION
The words Khilabah, ghishsh and tatfif has been used widely in Al Qur’an and the Sunnah to convey the meaning of fraud and cheating
It refers to maneuver practiced by one of the parties to induce a person to a contract without which he would have not entered it
It also refers to concealing the defects of and adulteration in merchandise.
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SHARIAH CONTRACTS IN ISLAMIC BANKING
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SHARIAH CONTRACTS ACCORDING TO THEIR PURPOSES
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ISLAMIC BANKING MARKET SHARE AS AT 2009
16
14
9
776
4
4
4
29
Sales
Malaysia
Bahrain
UK
Kuwait
UAE
USA
Iran
Pakistan
Saudi Arabia
Others
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GLOBAL MARKET VIEW
Increasing universal acceptance and popularity ofIslamic financial products and services as well ascontinuous innovation to develop globally acceptedand recognized Islamic financial products andservices...estimated 1.6 billion Muslims worldwideand Islamic assets are set to hit more than USD1.03trillion by 2012 (“The Banker 2009”).
Islamic finance has expanded at annual rate of 15-20% with a presence spanning more than 75countries with more than 300 Islamic financialinstitutions... robust growth.
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LOCAL MARKET
As at June 2010, the country’s Islamic bankinghas accumulated a total of RM303 billion inassets or 19.6 per cent of the total assets ofthe banking sector which is RM1.5 trillion.
Islamic Sukuk garnered 57 per cent or RM172billion of the total bond issuance of RM301.75billion
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UK – Govt sets an objective to ‘entrench London as a
global gateway for Islamic Finance. 5 FSA-approved Islamic banks and 2 Takaful
operators.
Hong Kong – aims to become an Islamic finance hub Hang
Seng Islamic China Index Fund in 2007 Shari’ahAdvisory Council formed.
Japan – new law allowing banks to do Islamic finance.
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France –
passed rules and regulations to support Islamic finance activities.
Considering licensing first Islamic bank
Singapore –
established first Islamic bank
Introduced tax neutrality for Islamic finance
Aspiring to be centre for Islamic finance
Issued sukuk
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Australia –
Islamic cooperative finance and mortgage established.
Consider to establish Islamic bank.
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ESSENTIAL CONTRACTS IN ISLAMIC FINANCE
Underlying principles utilised in devising products of IBF is very important as they separate IBF from conventional products.
Contrary to conventional finance, which is specification driven product, Islamic finance is more structure and principle based product
Rules and regulations will differ from one product to another, depending on the structure employed
In general, various underlying Shariah principles have been utilised in devising products of Islamic Banking and Finance.
They can be summarised as below:- Sale based products- Lease based products- Participatory products- Fee based products 72
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EXAMPLES OF THE PRODUCTS AND UNDERLYING PRINCIPLES
Banking products
IIMM products
Capital Market Products
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KEY ISLAMIC COMMERCIAL CONTRACTS
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Gratuitous Contracts
Trading Contracts
Investment Contracts
Supporting Contracts
Leasing Sale
Bay` B i thaman Ajil
(BBA)
Operational Lease
F i nancial Lease Murabahah
Salam
Waqf
Loan
Mudarabah
Musharakah
Kafalah
Rahn
Hi walah
Wadiah
Wakalah
Jualah
Muqasah
Ibra’
Gi ft
I stisna’ etc.
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ISLAMIC BANKING
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SOURCES OF FUND
APPLICATIONS OF FUND
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EQUITY FINANCING
DEBT FINANCING
Fee Based ServicesWakalahKafalah
Sale based financingBBA / Murabahah
‘Inah/Tawaruq/daynSalamIstisna
Lease Based Financing-Ijarah-AITAB
Comsumer Banking
MudharabahMusharakah
Corporate Banking
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Sale is a bilateral contract – where theexchange is made between two subjectmatters (asset & price)
The purpose : the transfer ofownership
Rules of gharar and riba appliedextensively on contract of sale
SALE BASED CONTRACTS IN ISLAMIC BANKING
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Involves the exchange of:
commodity for another commodity
(barter)
Commodity for money (trading)
Money for money (sarf- currency
exchange)
OBJECT OF SALE
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Deferment could either be in subject matter or price
Deferment in commodity : bay’ al-salam & Istina’
Deferment in Price : BBA
TIME OF DELIVERY OF SUBJECT MATTER
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Cash sale Sale by immediate paymentThe price must be paid during the conclusion of the contract
Deferred payment saleby installment basisLump sum payment in the futurePeriodicallyOther method agreed upon the partiesIn some contracts, the payment must be spot and deferment is not allowed, e.g bay’ al-dayn, salam, bay’ al ‘urbun
MANNER OF PAYMENT
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REGULAR SALE (BAY’ AL MUSAWAMAH)
TRUST SALE (‘UQUD AL-AMANAH)
Common sale, sat at negotiated price
No reference to the cost price of the commodity
The profit (or loss) is only know to the seller
The seller to correctly reveal the cost price at which the acquired the good (amanah)
Example of trust sales:
Mark-up (murabahah)
At- price sale (bay’ tawliyyah)
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To finance the producer, manufacturer and the like
Salam and Istisna’
To finance the customer to own a propertyAll credit sales/deferred payment sales (bay’ mu’ajjal)
To provide commitment to purchaseBay’ al – ‘urbun
To obtain cash instead of propertyAl Inah & Tawarruq
To get the highest priceBay’ al –muzayadah (auction)
NATURE AND PURPOSE OF SALE
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Classical : can be used to purchase various commodities as long as the manner of payment is deferred
Modern application: somehow wider than itsclassical application, used to finance variousitems such as : houses, land, motor vehicle,consumer good, share, overdraft facility,education financing package, personalfinancing, refinancing of an asset etc.
APPLICATION OF BBA
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INTRODUCTION- BBA
Al Bai Bithaman Ajil /Bai al Muajjal= The sale with subsequent payment i.e. deferred payment
A transaction where the delivery of the goods is present yet the consideration sum is to be paid in the future
However the buyer and the seller must determine the mechanism of payment during the aqad
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INTRODUCTION- BBA
The most common practice in Malaysia is over the buying and selling of property
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Seller Buyer
Consideration in 300
installments
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INTRODUCTION- BBA
Banking Facility
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Seller/ Customer
Buyer/ Banker
= buyer Consideration
in 300 installments
Instant Payment RM150,000
= Seller
Back to Back resell –RM350,000
1
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BBA WITH NOVATION (CONT)
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PurchaserBanker
= buyer
Consideration= deferred payment---monthly
progressive installments
Payment
= Seller
1Vendor
Novation
3
/Customer
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BAY' BI THAMAN AJIL (BAY'AL-MUAJJAL)
Sale against deferred payment
It is a trade-deal in which the seller allows the buyer to pay the price of a commodity at a future date in lump sum or installments
Need not have reference to the profit margin
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LEGALITY OF BBA
It is allowed under the concept of sale (bay')
Issue: whether the deferred price can be charged more than the spot price in BBA
Majority of Muslim scholars (Hanafis, Shafiis,al-Shawkani):
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BBA refers to sale with deferred payment
In Fiqh perspective:
Any sale, whether it is murabahah (mark-up sale) or normal sale (musawamah) can use the method of deferred (BBA) payment
As long as the contract involve the element of deferred payment of price, then it is called a BBA
BAY’ BITHAMAN AJIL (BBA)
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Permit additional charge
Price of deferred sale could be higher than cash sale
Provided that the following conditions to be fulfilled: The object of sale must come into the possession of the
financier/bank before being handed over to the other party
In case of default or delay of the payment by the customer, the price can no longer be raised
If customer in financial difficulty, respite should be given to him & another date be fixed for the payment of the balance of the price
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OTHER CONDITIONS OF BBA
Time for payment must be fixed & known to parties
The time for payment is calculated from the time of delivery of the thing sold
Regards should be made to the customary practice
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Definition – the sale of a deferred item in exchange for an immediate (forward) price
Purpose of Salam – original purpose of a Salam was to meet the needs of small farmers who needed money to grow their crops and feed their family until the time of harvest
Salam as mode of financing – Salam has become a mode of financing used by Islamic banks and suitable as a mechanism to raise fund
Salam commodities – Salam contract is acceptable for fungible, generic goods only – not suitable for unique goods
BAY’ AL- SALAM
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Banks and financial institutions may use Salam as a mode of financing especially to finance the agricultural sector.
The bank asked the customer to produce and deliver certain commodity on the agreed date
The customer may be required to provide security for thecontract (mortgage/guarantee)
In the case of default of delivery, the collateral will beused either to realize the required commodity bypurchasing it from the market, or to recover the priceadvanced by the bank
SALAM AS A MODE OF FINANCING
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In modern practice, the contract of Salam is normally done in a parallel way
After concluding the contract with the first client, the bank then enters into another contract of Salam with another client
In the first contract, the bank is the buyer, but in the second contract the bank is the seller
PARALLEL SALAM
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Bank entered into a contract of Salam (on 31 June 2010) with supplier where supplier will deliver to the bank on 1 October 2010 – bags of paddy at a purchase price
The bank then entered into another contract of Salam with the client where the bank agreed to deliver 100 bags of paddy on 1 Oct 2010 at a selling price (purchase price with profit)
EXAMPLE
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ILLUSTRATION OF PARALLEL SALAM
Bank
Supplier
Client
Commodity to be delivered by the
customer
Commodity to be delivered by the bank
Bank paid the price in advance
Client paid the selling price in advance
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Promise to buy from third party
in this arrangement, the bank after the contract of Salam with supplier, obtain a promise to purchase from a third party (client)
This promise should be unilateral in nature and it is not a sale
No advance payment is required
Once the bank requires the commodity, the bank will sell the commodity to the client at selling price
SECOND OPTION
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ILLUSTRATION
BANK
Supplier
Client
Commodity to be delivered by the customer
Client promise to buy the commodity at a selling priceContract of sale is
concluded once the commodity is obtained
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A financing contract which involves the sale and buy back transaction of an asset by a seller
The intention of bay’ al-’Inah is to obtain liquidity (cash) rather than acquiring the object of trading.
Bay’ ‘inah is so disputable, because majority of jurists, regard it illegal, as it is considered as a legal device (hilah) to taking riba’
BAY’ AL – ‘INAH
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Property
Property
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CONTRACT OF SALE (BAI’) – ‘INAH
LEGALITY
SAC of BNM in the Regional Shariah Scholars Dialogue on 29th June 2006 resolved that:
1. The permissibility of bai’ inah and tawarruq is still a matter of juristic disagreement among the Shariah scholars backed by their own basis of justifications.
2. Bai’ Inah contract is still necessary in the context of local Islamic finance development. However market players are required to strengthen and enhance the operational processes and documentation to comply with the features of bai’ inah as permitted; and
3. Since bai’ inah contract is still regarded as a matter of juristic disagreement among the Shariah scholars, it is more desirable that Islamic financial institutions to limit its use in products which face difficulty in structuring them based on other consensually accepted contracts.
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CONTRACT OF SALE (BAI’) – ‘INAH
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VIEWS OF SCHOLARS ON ‘INAH
Majority• Not permissible• It is
stipulated/conditional sale
Permissible only if it involves a third party
& no prior agreement to that contract is made
(tawarruq)
Permissible (some of Shafi’ considered it
reprehensible (makruh)
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Bay Inah consists of two sets of sale and purchase contracts that fulfill all the necessary requirements of a valid contracts
Total adherence to the external manifestation of the contract and no investigation to the inward intention.
IMAM SHAF’I’S VIEW ON ‘INAH
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SHARIAH ADVISORY COUNCIL OF BANK NEGARA MALAYSIA’S RULING ON BAI’ INAH:
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BAI AL INAH
Banking Facility
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Seller/ Banker
Buyer/ Customer
= buyer Consideration
in 300 installments
Instant Payment RM350,000
= Seller
Back to Back repurchase –RM200,000
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One party sells his property to another for a higher price which is to be paid in the future on the condition that the latter will sell it back to the former on spot (for a lower price)
Or, one party sells his property to another for a price which is paid on spot on the condition that the latter will sell it back to the former for a higher price but to be paid in the future.
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The underlying purpose is to obtain cash money. Legitimacy: the Shafiis validated it as it conforms to all
essential elements of a valid sale (though a number of Shafii jurists also considered it discouraged - makruh).
The majority disapproved it as it goes against the hadith (two sales in one) and also a legal trick to circumvent the prohibition of riba.
The Hanafis have however approved tri-partite Inah
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Distinguish Factors Al – ‘Inah Al - Tawarruq
Concept Purchase of a commodityon deferred payment basis and it is then sold for cash, at a price lower than the purchase price, back to the original seller
Buying a commodity for a deferred payment and selling it to another person other than initial seller at a lower price for immediate payment
Purpose To facilitate cash and liquidity shortage
To facilitate cash and liquidity shortage
Parties Two parties involve for two transactions
Three parties (at least)involve for two transactions (at least)
Subject matter Return back to the original seller
Transferred and possessed by third party
TAWARRUQ VS ‘INAH
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What is “dayn” (debt)
a constructive property (mal hukm) established in the liability of the debtor
• Sale of debt
Sale of future receivables for cash
Can “debt” be sold?
Yes
It is considered as property of value (mal mutaqawwim)
However, subject to jurists view on whether debt is “money” or “right”
CONTRACT OF SALE (BAI’) - DAYN
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The Malaysian SAC of SC Allowed: Arguments: Islamic debt is a good as
asset as it has haq maliy, as therefore can be sold at whatever price provided it is sold on spot
Also, the practice of sale of debt at a discount is supported by the hadith : “give a discount for early payment”
Middle Eastern ScholarsNot allowed:Arguments:Debt is nothing but a payment of monetary debt, and as such it remains monetaryMoney for money exchange requires spot and equal exchangeThe Hadith on “discounting” does not apply to a creditor giving a discount to a third pary.
BAY’ AL-DAYN WITH DISCOUNTING
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Islamic Accepted Bills IAB is used as a result of securitizing a debt which
may arise from Islamic financing IAB is normally used for import or export financing
facilities (IAB import & IAB export) Bank draws Bill of Exchange on the debt to the
customer The BOE has its value (the bank’s selling price) &
time of maturity The BOE can be traded in the secondary market
Bank sell the debt to FIWith discounted price (RM400k)Profit : RM100K)
FI may wait until maturity (20 years) & gain RM100kOr FI sells it to other at discount price (RN450k)Profit : RM50k)
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CHARACTERISTIC OF BBA
A deferred payment sale
The subject matter must be owned by the seller at the time of sale
The parties must clearly identify the mechanism of payment of the purchase consideration sum
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CHARACTERISTIC OF BBA
The profit margin need not be stated
As a sale, during the aqad
there must be a transfer of ownership & possession
the purchase consideration must be fixed
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CHARACTERISTIC OF BBA & INAH
A deferred payment sale
The subject matter must be owned by the seller at the time of sale
The parties must clearly identify the mechanism of payment of the purchase consideration sum
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CHARACTERISTIC OF BBA & INAH
The profit margin need not be stated
As a sale, during the aqad
there must be a transfer of ownership & possession
the purchase consideration must be fixed
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BBA THIRD PARTY FINANCING
Owner(s)
1. A & B
2. A
3. A or A & B
Customer(s)
1. A
2. A & B
3. X or X & Y
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LETTER OF HIBAH (GIFT)
INTRODUCTION- BBA
Third Paty Banking Facility
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Seller/ Customer
Buyer/ Banker
= buyer Consideration
in 300 installments
Instant Payment RM150,000
= Seller
Back to Back resell –RM350,000
1Owner(s)
Owner(s)
2
4
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DOCUMENTATION FOR BBA
LO
Facility Agreement
Asset Purchase Agreement
Asset Sale Agreement
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LEGAL DOCUMENTATION FOR BAI AL INAH
Sale and Purchase Agreement between the Customer and the Banker– Normally = Asset Sale Agreement
Customer purchase from Bank (thus Indebtedness)
Subsequent (back to back) Sale and Purchase Agreement between the Banker and the Customer Normally = Asset Purchase Agreement
Charge/ Mortgage/ Lien/ Deed of Assignment
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Istisna
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ISTISNA - INTRODUCTION
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Customer Manufacturer
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INTRODUCTION
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Customer
Financier
Contractor
Istisna’ 1
Istisna’ 2
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INTRODUCTION
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Customer
Financier
Contractor
Istisna’ Purchase Istisna’
Sale
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This contract is also an exception to the general rule pertaining to the existence of the subject matter at the time of contract
This contract involves manufacturable goods only (commodities that cannot be manufactured e.g. fruits, grains etc are not suitable)
Payment of the price is flexible - need not be advanced at the time of contract only
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Proper description of the goods ordered should be made
Time, place and mode of delivery of both the goods and price should be specified at the time of contract
This contract is suitable to finance the purchase of property which is still under construction
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Originally the istisna' contract is not binding on neither party until the goods are made and accepted by the buyer (majority view in the Hanafi school)
However, in contemporary Islamic banking, it is accepted that istisna' is binding on both parties from the start (minority view in the Hanafi school)
As with other types of sale, parties in istisna' are free to fix the price as they wish, using e.g., cost-plus or mark-up approach
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Payments for the price is flexible and can be delayed until delivery, or even beyond
However, to make matters easier, a schedule of progress payment may be agreed between the parties
In contemporary practice, Islamic banks may employ istisna' to finance manufacture and construction contracts - project financing
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Classical Islamic law also allows the manufacturing party in an istisna‘ to sub-contract the manufacturing to a third party through a second istisna'
This arrangement is known as "back-to-back istisna"" or "parallel istisna'"
This structure has been used by contemporary Islamic banks to finance the purchase of major manufactured goods such as ships and airplanes
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CHARACTERISTIC
One party buys good that the other partyundertakes to manufacture in according withthe specification given in the contract
Subject matter must be manufacturablegoods only (not for commodities)
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CHARACTERISTIC (CONT.)
Subject matter not in existence at the timeof contract
Subject matter shall be identified byspecification only and not by designation(because it is not in existence at the time ofcontract)
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CHARACTERISTIC (CONT.)
Contract to manufacture i.e. hire of personto do something
Payment can be prompt, deferred or paid ininstallments. Normally it will be progressivelyin proportionate with the progress of thework completed
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CHARACTERISTIC (CONT.)
Manufacturer undertakes to make the goodswith his own material. The buyer doesn’thave to supply any goods
Ownership of the manufactured good remainwith the manufacturer until and unlessdelivered
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CHARACTERISTIC (CONT.)
If it is by progressive payment, it ispermissible for the seller to request securityor deposit.
The good need not be manufactured by theSeller. His obligation is to deliver the good tothe buyer only
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CHARACTERISTIC (CONT.)
Delivery date does not have to be fixed.However, the buyer can include a final dateof delivery after which the contract will beterminated
Penalty for late payment (which is withoutprejudice to the termination right after cutoff date) or liquidated damages for latedelivery save in case of force majeure
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CHARACTERISTIC (CONT.)
Before the manufacturing or contrsutionprocess has commenced, either party canterminate the contract.
However, once the process has commenced,it is binding on both parties (i.e. irrevocable)if the constituent conditions and terms aresatisfied
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ISTISNA’
Istisna’ literally (لغة) -request to construct.
Technically (اصطالحا) -agreement to sell to or buy from a customer a non-existent assetwhich is to be built according to the ultimate buyer’s specifications and is to be delivered on a specified future date at a predetermined selling price.
1. I stisna’ 1 – r equesting Bank to constr uct a specified type of asset
2. Under take to constr uct the asset & to deliver it in a specific per iod.
5. Bank deliver the asset
4. Contr actor deliver asset to the Bank
3. I stisna’ 2/ Parallel I stisna’ –Bank r equests sub-contr actor to constr uct the asset & to deliver it in
a specific per iod.
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CONTRACT OF SALE (BAI’) – ISTISNA’
LEGALITY
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SPECIFIC SHARIAH REQUIREMENTS
An Istisna’ contract is valid if it complies with Shariah requirements i.e the essential elements (rukn/ ركن) of the contract and the necessary conditions (syart/ شرط) of rukn.
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SPECIFIC SHARIAH REQUIREMENTS
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SPECIFIC SHARIAH REQUIREMENTS
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SPECIFIC SHARIAH REQUIREMENTS
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Legal/Security Documents : This Letter of Offer Master Facility Agreement (Overdraft) Istisna’ Purchase Agreement Istisna’ Sale Agreement Deed of Assignment Power of Attorney Debenture
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Murabahah & Tawaruq
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INTRODUCTION - MURABAHAH
Originate from the root word of ribh = to increase or profit
Sale of commodity at the cost price plus a known profit
Illustration: Ibought this commodity for 10 RM and I am
selling it at the profit of 2 dollars;
I am selling the commodity at the profit of 1RM for every 10 RM that I spent for its cost
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INTRODUCTION - MURABAHAH
= the sale at the cost + a known profit
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Seller Buyer
Cos t + Profi t
Rm50 + Rm20
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LEGAL BASIS OF AL MURABAHAH
No dispute among the jurists on the validity of Bay’ al-murabahah
This is a form of sale (bay’)
Comes under the purview of “Allah has permitted sale and prohibited riba” (2:275)
The scholar prefer Musawamah over Murabahah. Why?
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CONDITIONS
Customer expresses his wish to acquire goods through the Bank
Transaction between the Bank and Customer must be genuine
no prior contractual relationship between the Customer and the Supplier
the Supplier is not the Customer or the agent of the Customer
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CONTRACT OF SALE (BAI’) - MURABAHAH
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Prophet Muhammad SAW permitted the sale of goods at a price more thanits purchase price. He says Gold for gold, silver for silver, wheat for wheat,barley for barley, dates for dates, salt for salt – like for like, equal for equaland hand to hand (spot); if the commodities differ, then you may sell as youwish, provided that the exchange is hand to hand or spottransaction.”(Narrated by Ahmad and Muslim)
Ijmāc al-fuqahā’ on the permissibility of the Murābahah sale.
Al-Kassāni has pointed out that the people inherited these kinds of sales(Murābahah) throughout the generations and ages without any protest ofnon-acceptance
CONTRACT OF SALE (BAI’) - MURABAHAH
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CONTRACT OF SALE (BAI’) - MURABAHAH
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MODUS OPERANDI
CUSTOMER
SELLER
Delivery Option
(1) Customer PP - MPO
(3) Bank Sells & Delivers Asset
(4) Pays Price
(2) Bank Buys & Receives Asset @ Customer Buys as the Purchasing Agent
of the Bank - MPO
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BAY AL TAWARRUQ (COMMODITY MURABAHAH)
• A contract discussed by the ulama in the past especially, those of Hambali.
• A transaction to get cash or liquidity through sale contract
• Similar to Inah
• An arrangement whereby a person who need of case bought some goods for deferred payment.
• He then sole the goods to another party for case payment of a lower price.
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TAWARRUQ – ORIGINAL FORM
162
Ali Abu
Kassim
Se l ls Asset on defe rred payment term
Se l ls Asset on cash term
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• Accepted by majority of the Ulama
• Due to the presumption that parties intended to circumvent the prohibition of riba was quite remote in tawarrruq due to its tri-partite nature.
• Yet ulama like Umar Abd Aziz and Shaybani chose to discourage it.
• Ibn taymiyyah and Ibn Qayyim disallowed it and dismissed it as legal trick.
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Different from Inah because the subject matter that has been sold in Tawarruq will not be resold back to the original owner.
Thus, Al tawarruq contract will need at least 3 separate parties.
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CONTEMPORARY PRACTICE
165
Bank Customer
Dealer B
Se l ls Asset on defe rred payment term
Us ing Murabaha
(RM1100)
Se l ls Asset on spot
Dealer APurchase on spot (RM1,000)
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APPLIED SHARIAH COMPLIANCE PRACTICE
166
Bank Customer
Dealer B
Se l ls Asset on deferred payment term us ing Murabaha(RM1100)
As age nt sells Asset on spot on behalf of the Customer. Money col lected banked into Cus tomer account
Dealer APurchase on spot (RM1,000)
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EXPLANATION
1) Bank obtains promise to buy from client
2) Bank buys commodities from broker A and
pays cash.
3) Bank sells the commodities to client on
deferred basis.
4) The client authorizes the bank as his agent
to sells the commodities to commodities
broker B on cash.
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EXPLANATION (CONT)
5)The amount will be deposited into client's account. Client obtains liquidity and has liability to pay bank on deferred basis.
6)Client will pay the bank on deferred basis, according to their agreement
This model has been used by Islamic bank in Middle East to provide personal financing (personal loan) to their clients.
E.g. al-Tawarruq al-mubarak finance (Arab National Bank -Saudi Arabia), al-Khair financing (Abu Dhabi Islamic Bank- UAE), Amanah Personal Financing (HSBC Amanah), tasaheel (al-Manar - Kuwait)
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EXPLANATION
1) Bank obtains promise to buy from client
2) Bank buys commodities from broker A and pays
cash
3) Bank sells the commodities to client on deferred
basis.
4) The client authorises the bank as his agent to sells
the commodities to commodities broker B on cash.
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EXPLANATION (CONT)
5)The amount will be deposited into client's account. Client obtains liquidity and has liability to pay bank on deferred basis.
6)Client will pay the bank on deferred basis, according to their agreement
This model has been used by Islamic bank in Middle East to provide personal financing (personal loan) to their clients.
E.g. al-tawaruq al-mubarak finance (Arab National Bank -Saudi Arabia), al-Khair financing (Abu Dhabi Islamic Bank- UAE), Amanah Personal Financing (HSBC Amanah), tasaheel (al-Manar - Kuwait)
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Modern definition BBA is a contract that refers to the sale and
purchase transactions for the financing of an asset on a deferred and an installment basis with a pre-agreed payment period.
The sale price will include a profit margin which is disclosed to the customer (murabahah.
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In modern practice BBA & Murabahah contracts are used in the same manner.
In some countries, the term Murabahah is used and in some countries the term BBA is used.
Malaysia practice:
Murabahah is designed for short term financing & the payment is on bullet payment
BBA is for long term financing by installment o
No significant difference in term of modus operandi
BBA V MURABAHAH
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CONTEMPORARY PRACTICE OF TAWARRUQ
Liquidity Instrument
Personal financing
Cash line
Overdraft
Credit card
Working capital financing
etc
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CONTEMPORARY PRACTICE OF TAWARRUQ
Deposit & Investment Instrument
Commodity Murabahah Deposit- i
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APPLYING TAWARUQ INTO FINANCING MODE
Step 1 The Customer has desire to purchase an asset i.e
commodity and thus, enter into a binding promise (Wa'd Mulzim) for asset requisition to purchase the commodity from the Bank. In the meantime, the Customer also appointed the Bank as his restricted agent (in this context, it is referring to the specific Wakalah concept) to accept the commodity on his behalf. The Customer will issue a Purchase Requisition (which is irrevocable on issuance) to the Bank. The document comprises of the following elements:
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a. Purchase Request, to the effect that the Customer has desire to purchase a commodity and requests to purchase the Underlying Commodity from the Bank;
b. Undertaking To Purchase (Wa'd Mulzim), to the effect that the Customer undertakes to purchase the Underlying Commodity from the Bank at the Selling Price upon the Bank having purchased the said Underlying Commodity from a commodity trader (i.e 1st Trader); and
c. Agency to Conclude Purchase, to the effect that the Customer will appoint the Bank as his restricted agent (under specific Wakalah concept) to conclude the purchase of the Underlying Commodity from the Bank and subsequently to enter into the Murabahah Sale Contract (on his behalf) with the Bank.
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The Customer will also execute and deliver a Letter of Agency to the Bank whereby the Customer will appoint the Bank as his agent (under Wakalah concept) to sell the Underlying Commodity to another commodity trader (i.e 2nd Trader) upon conclusion of the Murabahah Sale Contract
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STEP 2
Upon receipt by the Bank of the Purchase Requisition from the Customer and pursuant to the Purchase Request, the Bank will purchase the Underlying Commodity from a commodity trader at the cost price of the Underlying Commodity which shall be an amount equivalent to the Financing Amount.
The commodity trader will deliver the Underlying Commodity evidenced by the certificate together with the delivery order as evidence for the transfer of ownership to the Bank.
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STEP 3 Pursuant to the Undertaking To Purchase (Wa'd
Mulzim), the Bank will then sell the Underlying Commodity to the Customer at the Selling Price based on the Murabahah concept (Commodity Cost + Profit Margin) which shall be payable by the Customer to the Bank by way of installments or deferred payment or any other method in accordance with the manner as prescribed by the Bank.
Pursuant also to the Agency To Conclude Purchase, the Bank (as the Customer's restricted agent to accept on the Customer's behalf) will then conclude the purchase of the Underlying Commodity from the Bank and enter into the Murabahah Sale Contract
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Step 4
The Murabahah contract concluded and the Customer appoints the Bank as an agent to sell the commodity to the second trader.
Step 5
Upon conclusion of Step 3 above and pursuant to the Letter of Agency, the Bank will then sell the Underlying Commodity to the second commodity trader at the Commodity Cost.
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Step 6
The Bank will then disburse the sale proceeds, which will be an amount equivalent to the Financing Amount, received from such sale, into Customer's new account and used to settle the old account.
Underlying Asset = Oleo chemical related products or any other Shariah compliance commodities
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DOCUMENTATION FOR MURABAHAH
Agency Agreement
Waad
LO
Facility Agreement
Murubahah Sale Agreement
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MURABAHAH COMODITY DEPOSIT -I
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Customer Bank
Dealer B
Se l ls Asset on defe rred payment term
Us ing Murabaha
(RM1100)
Se l ls Asset on spot (Rm1000)
Dealer APurchase on spot (RM1,000)
Appoints Bank as agent
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Customer/ Depositor appoints Bank as an agent to purchase metal commodity from trader A on cash basis in an established metal commodity market
Bank as agent to Customer, buys commodity on spot from Dealer A
Customer then sells the commodities to the bank for a profit and on deferred payment.
The bank then sells the commodity to Dealer B on spot basis, which price is credited into the Islamic Deposit Account.
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As agent to purchase the commodity on behalf of the customer, the bank receives cash from the customer which is deemed as deposit in the bank’s account.
By the purchase from Customer, the bank assumes liability (Cost +Profit of Customer) to be paid to be customer on maturity.
At the end of the transaction, the customer effectively gets some profits after investing money in the spot purchase of the commodities and selling them to the bank with a mark up on deferred payment basis.
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Literal : sale of usufruct (bay’ al manfa’ah)
Technically: the transfer of usufruct for a consideration – rent or ujrah in the case of hire, and wages or ujr in the case of employment
IJARAH
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Hadith from Said ibn Musayyib
“we used to lease out land for some portion of the agricultural products, and the Prophet (s.a.w) prohibited us from such practice. Instead he asked us to leas it out for gold or money”
Ijma’ of the companions of the Prophet
Legality of Ijarah based on real need for such transaction
LEGALITY OF IJARAH
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CONTRACT OF IJARAH
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CONTRACT OF IJARAH
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OPERATING LEASE
Lessor Supplier
Lessee
Purchase of asset
delivery
Delivery of the leased asset
Payment of the rental
Delivery of the leased asset at the end of leasing period
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FINANCIAL LEASE
BANK CLIENT
CAR DEALER
2. Client approaches the bank and obtain AITAB financing facility
4. The bank leases the car to the client at certain rental price with an option to purchase at the end of financing period
3. The bank purchases the car and pay the remaining purchase price of the car (90%)
1. Client identifies the vehicle and pays deposit (10%)
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It can be done in various ways:
The bank unilaterally promise to make a gift of the asset to the client at the end of the period
A promise upon the payment of the remaining installments
The final payment is considered the price of the car
A promise to sell for a token or other consideration (AITAB)
TRANSFER OF ASSET TO LESSEE (CLIENT)
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Two situations
(a) Normal situation
call option (the right of the client to purchase)
Unilateral promise by the bank to sell /give the leased object to the customer
(b) In the event of default, the bank has two options
Call back the facility and repossess the car
Put option (the right of the bank to sell) – by
requiring the client to purchase the car at an agreed price
PUT AND CALL OPTION
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All liabilities and r isks per taining to the leased asset ar e to be bor ne by the Bank includingobligations to r estore any impair ment and damage to the leased asset ar ising from wear andtear and natur al causes which ar e not due to the lessee’s misconduct or negligence.
The lessee should car r y out oper ating or periodical (or dinary) maintenance
The Bank insur es the leased asset (cost to be bor ne by the lessor ) for damages. The takaful/insur ance cost can be included as par t of the fix ed lease r ental and cannot be char gedsepar ately to the lessee
Despite of requirement in the BNM CAS that the Bank to cover maintenance cost of theleased asse t during the ijar ah tenure, the BNM allows the Bank to follow market practices.
It is per missible for the Bank as lessor to sell the leased asset to a thir d party without consent ofthe lessee.
If the lessee stops using the leased asset or r eturns it to the Bank w ithout the Bank’s consent,the r ental will continue to be due in r espect of the r emaining per iod of Ijārah, and the Bankmay not lease the asset to another lessee for this per iod, but must keep it at the disposal of thecurr ent lessee
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6) Early Settlement
not permissible for one sided contract termination.
it can be terminated unilaterally in certain circumstances:
the Ijārah contract can also be terminated due to the following event ofdefault (based on current clause on event of default in the BIMB’s Ijārahagreement).
7) Transfer of the ownership of the leased asset in IMB
The method of transferring the title: A sale or a gift
The document evidencing a promise of gift or sale should be independentof the contract of the Ijārah
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EQUITY FINANCING
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Applications of fund
EQUITY F INANCING
DEBT FINANCING
Fee Based ServicesWakalahKafalah
Sale based financingBBA / Murabahah
‘Inah / daynSalamIstisna
Lease Based Financing-Ijarah-AITAB
Comsumer Banking
MudharabahMusharakah
Corporate Banking
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Definition
An agreement between a capital provider (rabbulmal) and an entrepreneur (mudharib) whereby the rabbul mal would contribute capital to the business which is to be managed by the mudharib.
Profits generated by the business are shared accordance with the terms of the mudharabah agreement whilst losses to be borne solely by the rabbul mal unless the losses are due to the customer’s misconduct, negligence or breach of contracted terms.
Type of Mudharabah
Unrestricted Mudharabah - where the rabbul mal allows the mudharib tomanage the capital without any restrictions. e.g. current account, savings accountand General Investment Account(GIA)
Restricted Mudharabah - where the rabbul mal requires the mudharib to makeinvestments subject to certain restrictions such as type of instrument, sector orcountry exposure. e.g. Specific Investment Account (SIA).
CONTRACT OF MUDHARABAH
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Owner of Capi tal(Rabbul Mal)
CONTRACT OF MUDHĀRABAH
Invests in BusinessOutcome of Business
Entrepreneur(Mudhārib)
X% to Mudhā rib
Y% to
Rabbu l Mall
Profit sh ared in
ac cordance to pre-agr eed propo rtions
(X:Y)
Loss bor ne totally
by rabbu l mal
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CONTRACT OF MUDHARABAH
LEGALITY
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1.Mudharabah Contract
Agreement must be in compliance with the rukn and syart of Mudharabah
2. Capital
Must be in the form of cash and cannot be in the form of debt
The Bank may issue Mudhārabah Investment Certificate as a proof of capital
It is not permissible for the Bank to guarantee to the depositor againstlosses except by a third party in case of misconduct and negligence.
3.Profit Allocation
Interim profit - can be distributed as long as the operation are profitable.
Profit allocation ratio and its calculation methodology must be c learly
known and agreed by the parties
The Bank may use an indicative profit rate in mudhārabah deposit contract
The Bank can take precautionary steps by setting up Profit EqualisationReserve (PER) and Investment Risk Reserve (IRR).
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4. Losses
Are borne only by the customer. The Bank does not bear any portion thereofunless the loss was due to his misconduct or negligence
5. Duties and Powers of the Bank (Mudhārib)
The The Bank must c lear ly exp lain and ensure that customers understandand accept the mudhārabah contract adopted in the deposit products (BNMCAS requirement).
The Bank must provide adequate and timely product transparency anddisclosure to depositors/ investors on risk and return of on profit sharinginvestment (PSIA) (BNM CAS requirement).
6. Charges, Profits and Benefits
The Bank is not entitled to charge a fee in addition to the profit(Contradiction between Bank Islam’s SSC decision and BNM SAC’s) and theBank cannot impose administrative cost on depositors in mudhārabah depositaccount.
The Bank is allowed to grant any reward or gift to the depositor in additionto the profit from the use of the fund
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7. Termination of the Contract
If the contract does not stipulate the period of the business venture, itcan be unilaterally terminated.
If the period of business is explicitly stipulated, the contract can beterminated upon maturity or if both parties mutually agree or when theevent of defaults occur
8.Dormant Account and Unclaimed Monies
The Bank may close a dormant account which has balance of RM 10 orless and the RM 10 is considered as service charge (Contradictionbetween Bank Islam’s SSC decision and BNM SAC’s)
10. Current Account Based on Combination of Mudharabah and Wadi’ah
The Bank acts as a mudharib and trustee (wadi’), while the depositoracts as a rabb al-mal and muwaddi’. Both parties must agree on theprofit-sharing ratio at the time of opening the account. The guarantee onthe deposit will only be given if the account balance does not satisfy theconditions of mudharabah. However, if the account balance complieswith the conditions of mudharabah, the customer will have to bear allthe risks of financial losses.
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Definition of Mushārakah ( ( مشاركةContract
Musharakah Mushārakah literally (lughatan/ لغة )means sharing. Technically (istilahan/ ,(اصطالحا itmeans a contract between two or more parties tocontribute capital in various proportions to apartnership.
Profits generated by the partnership are shared inaccordance with the terms of the mushārakah contractwhilst losses are shared in proportion to the respectivecontributors’ shares of the capital.
CONTRACT OF MUSHARAKAH
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Rasūlullāh SAW himself travelled to Syām to trade with other people’s money including that of Sayyidatunā Khadijah binti Khuwailid RA
Suhayb narrated that Rasulullah SAW said:
“There is blessing in three transactions: credit sales, silent partnership (i.e. muqāradhah or mudhārabah), and mixing wheat and barley for home, not for trading”
(Narrated by Ibnu Majah)
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(i) sharikat al – milk
proprietary partnership
concerned with joint ownership of property
any increase of the property should be shared by
co – owners in proportion of the extent of their ownership
(ii) Sharikat al – aqd
commercial/ contractual partnership
An agreement between two or more persons for common participation in capital & profits
TYPES OF MUSHARAKAH
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(i) Finance partnership (sharikat al – amwal)
(ii) Labour partnership (sharikat al – a’mal)
(iii) creditworthiness/ reputation partership(sharikat al –wujuh)
CLASSIFICATION OF SHARIKAT AL AQD
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a. Limited (I’nan)
- partners liabilities & rights are subject to their proportion of investment – as per the agreement
b. Unlimited (mufawadah)
- Partners enjoy complete equality in the capital, management & other rights
NATURE OF SHARIKAT AL AQD
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The most important type of partnership
Mainly used in Islamic banking
Accepted by all Muslim jurists
Flexible – no strict conditions
Practical
Main features:does not require equality in investment
no equality in personal status, distributions of profit and liabilities
Relationship of partners is based on agency
Gives the freedom to partners to conduct business in the area of
commerce covered by their partnership
SHARIKAT AL INAN
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Shareholding
Shareholding of company
In the form of equity
• Financing
Islamic banks provide equity financing to customers
In the form of retail or corporate financing
MUSHARAKAH & MUDHARABAH IN ISLAMIC BANKING
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The share certificate evidences a form of capital contribution in a company
The investment in the shares can be in the form of mudharabah 0r musharakah
The shares can be sold at any price as it represents the assets owned by the company
The profit for the investors can be in the form of capital profits, or dividends, or both
Shari’ah stock selection must be done to ensure that companies invested in are only conducting Shari;ah compliant activities.
SHARI’AH PRINCIPLES IN SHAREHOLDING
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In the setting up of the Bank
Several investors agree to contribute certain amounts of money for the establishment of the bank
These shareholders are normally varied in their capital contributions/rights/liabilities
MUSHARAKAH IN SHAREHOLDING
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2 types of shareholders in private or public company:
1. Ordinary shareholder Musharakah ordinary share Rights and liabilities are limited to their
shares to the company2. Preference shareholder Musharakah preference share Non-cumulative, irredeemable,
unconvertible
MUSHARAKAH SHARES
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A partnership agreement whereby a business venture is entered into and managed by both parties.
However, any or all the parties have the right to waive that right. In case of waiving of right by all, a third party will be appointed as an agent to manage the venture.
Any profit arising will be shared according to predetermined ratios.
Losses however, will be shared in proportion with the capital investment contributed by each party.
MUSHARAKAH PROJECT FINANCING
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The financier will provide 100% financing for the relevant project whilst the initiator of the project will manage it.
The financier cannot interfere in the management of the project, but can take up the follow-up and supervision task.
Both parties agree through negotiation on the ratio of the distribution of the profits generated from the project, if any.
If there is a loss in the project, the bank bears all losses.
MUDHARABAH PROJECT FINANCING
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The current practice in Malaysia is to use partnership (mudarabah) as the underlying contract in the Islamic investment account.
The customer and the bank will be sharing the profit according to certain ratio or percentage agreed at the time of the contract
The financial loss, if any, will be borne by the customer as capital provider.
ISLAMIC INVESTMENT ACCOUNT
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General Investment Account (GIA) Special Investment Account (SIA)
In GIA, the mudarabah arrangement is of a generalmandate (mudarabah mutlaqah) and the ratio ofprofit sharing is more or less uniform/standard,advertised as a ready package between the bankand customerIn GIA, the minimum investment amount is lowerthan the SIA.
TYPES OF ISLAMIC INVESTMENT ACCOUNT
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In SIA, the mudarabah arrangement is of a specific mandate (mudarabah muqayyadah) for e.g., the customer can place restrictions to the bank as to the type of dealing, or project that the bank can enter into with the capital
The ratio of profit sharing can be negotiated between the customer and the bank
The minimum investment amount is higher than the GIA
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A contract of partnership with declining / diminishing ownership
A form of Shirkah which creates an avenue for the capital investor to finally allow its partner to be free of the joint ownership after the initial investment period has been satisfied.
A hybrid of three contracts, namely:
Shirkah (partnership)
Ijarah (lease)
Bay’ (Sale)
MUSHARAKAH MUTANAQISAH
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1• Customer and the Financier jointly acquire and own the property from the
Developer
2• The financier purchases the property and leases the property to the
Customer on the basis of Ijarah
3
• The customer pays the rental
• The rental price would be proportionate to the length of repayment required by the Customer and subject to the agreement of the financier
4
• At the end of the rental, the Customer would acquire the fullownership of the property as the customer has repaid all of thefinancier’s share.
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DEFINITION The term used to connote partnership contract is
shirkah Literal meaning: intermingle, thus, the "intermingling of properties whereby one cannot be differentiated from the other"
Technical / legal meaning: Maliki: the permission to transact (tasarruf) with the
partnership property
Hanbali: the amalgamation of rights and freedom to use / transact (tasarruf)
ShafFi: the confirmation of the rights of two persons / more over a common property
Hanafi: a contract between two parties in relation to capital and profit
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SHARIAH LEGALITY
Surah al Nisa' (4:12):"... but if more than two, they share in a third...“
Surah Sad (38:24):".. Truly many are partners (in business) who wrong each other; not so do those who believe and work deeds of righteousness, and how few are they?
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SHARIAH LEGALITY Hadith Qudsi.
" I am the third of two partners so long as a partner does not betray his companion; if one of the partners does betray the other, I cease to be a partner to them."
Sunnah taqririyyah: the Prophet was reported to have approved some of the partnership contracts practiced by the people of his time
Ijma': the legality of shirkah in general is agreed by ijma' of the jurists; though they differ regarding the types and conditions of the permissible shirkah
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LEGAL ASPECT OF SHIRKAH
Majority/ Jumhur: shirkah is not a binding contract, i.e., the partners have the option to terminate the contract as and when they wish to (‘aqd ghair lazim)
Shirkah entails that the partners hold a fiduciary position (amanah) in relation to the partnership property & capital; whereby, the exercise of necessary prudence and the avoidance of harm (darar) is the overriding principle
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ESSENTIAL ELEMENTS & CONDITIONS OF SHIRKAH
Offer & Acceptance
Made in the contract meeting (majlis al 'aqd)
Free from any defect due to mistake, cheating or coercion
Contracting parties
Capacity to contract {ahliyyah al ada'), e.g. sanity, puberty & prudence
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ESSENTIAL ELEMENTS & CONDITIONS OF SHIRKAH
Subject matter of Shirkah •Capital & labour as agreed in the contract
Capital - in cash, except for Maliki who allows capital in the form of circulating or fixed assets
Capital - ready property (mal hadir), not absent-property {mal ghaib) - not immediately available for use by the partnership upon its commencement of business
Labour can be considered as capital by jumhur, except Shafi'I who considers capital to be limited to property {mal) only
Additional condition: purpose of shirkah should be lawful, not immoral / against public order
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OTHER GENERAL CONDITIONS FOR SHIRKAH
Capacity to accept agency (wakalah):• Partners must be capable of being agents to their
colleagues
• The fixing of ratio of profit sharing:• Ratio of profit sharing must be fixed in advance, since
distribution of profit is part of the subject matter of the contract;
• Ignorance of the subject matter may render the contract void, thus, ratio of profit sharing must be known by all partners
Fixing of profit must be in ratio, not fixed amount• Because the actual profit to be gained is not yet known• To fix the profit at a certain amount is incompatible with the
very nature of shirkah (risk taking justifies gain taking)
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TYPES OF SHIRKAH
Many ways of classification
Generally, two broad classification:
• Shirkah al milk (proprietary partnership) - joint
ownership of property
• Shirkah al 'aqd (contractual partnership):
• joint ownership is not necessary;
• the emphasis is the joint exploitation of
capital, and joint participation in profits and
losses; based on the terms of the partnership
contract
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TYPES (CONT) Based on type of capital, shirkah al 'aqd can be
further subdivided into: Shirkah al amwal (monetary capital)
Shirkah al a'mal (labour capital)
Shirkah al wujuh (reputation/creditworthiness as capital)
Based on terms of partnership contract: Shirkah al mufawadah (unlimited investment
partnership) - fuJL and equal authority to transact with partnership capital & property
Shirkah al "inan (limited investment partnership) - each partner may only transact with the capital according to the partnership agreement and to the extent of the joint capital
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APPLICATION OF SHIRKAH
From the many forms of shirkah, the commonly used types are:
Shirkah al 'inan with monetary capital (amwal) -commonly / commercially referred to as "musharakah"
Mudarabah/ qirad/ muqaradah
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MEANINGS Meaning of "musharakah":
"an arrangement whereby two or more persons contribute to the capital with their property for the purpose of trading with the joint capital, the profit of which, shall be shared among the partners"
Meaning of “mudarabah”: "an arrangement whereby the owner of some property
(termed as rabb al mat) gives a specified amount of capital to another person (termed as mudarib) who is to act as the entrepreneur to trade with the capital, the profit of which will be shared between the two parties according to the terms of their agreement. The losses will be borne by the rabb al mal as the financier, whilst the mudarib suffers the frustration of a fruitless effort"
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INTRODUCTION
Musharakah = joint venture/ partnership
= different from mudharabah because in Musharakah, both party shall contribute jointly in term of costs and effort whereas in Mudharabah, one party is the cost provider (rabb mal) while the other one is the worker (mudharib)
Both parties have the rights to receive the profit made
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Musharakah = Joint participation (even 1%)
Mudharabah = Sponsored partnership
Equity Financing = the core and heart of islamic finance (mu’amalat)
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INTRODUCTION
Musharakah
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Ali
30%
Kassim
70%Joint Venture
MudharabahAli
100%
Kassim
Expertise
Partnership
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MUDARABAH
Note: Shafii and Maliki prefer the term qirad or muqaradah to connote mudarabah
Jurists differ whether mudarabah is a form of shirkah or not
Maliki and Hanbali consider mudarabah as a type of shirkah
Hanafi and Shafi'i consider mudarabah as an independent category of its own
All jurists unanimously agree on the legality of mudarabah based on evidences in the Quran, sunnah and ijma'
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ELEMENTS & TYPES OF MUDARABAH
Elements of Mudarabah The two contracting parties:
rabb al mal & mudarib
The subject matter: capital, labour & profit
The offer & acceptance
Types of Mudarabah Unlimited mandate mudarabah (mudarabah
mutlaqah)
Limited mandate mudarabah (mudarabah muqayyadah
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GENERAL PRINCIPLES IN MUSHARAKAH & MUDARABAH
Both contracts presuppose:
contribution to capital,
the subsequent sharing of the profits and losses
The relationship between the partners is mainly based on the principle of agency (wakalah)
The distribution of profits and losses can be made based on the ratio of capital contribution
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GENERAL PRINCIPLES IN MUSHARAKAH & MUDARABAH
Alternatively, the profits can also be shared according to a ratio agreed in the contract between the parties
However, losses must always be based on the ratio of capital contribution
The maxim says: "profits are shared according to what has been agreed upon by the parties at the time of the contract, and losses are to be borne according to the ratio of capital contribution".
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OBSERVATIONS
Mudarabah and musharakah are in line with the Shari'ah principles of justice, fairness and cooperation.
Mudarabah and musharakah also reaffirms the Islamic legal maxim (qa’idah fiqhiyyah) - "profit is with the undertaking of liability" (al ghunmu bil ghurmi)
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SOME COMMON APPLICATIONS OF MUSHARAKAH & MUDARABAH
Islamic investment account – mudarabah
Shareholding:
Private companies – musharakah/ mudarabah
Public companies – mudarabah/ musharakah
Unit trusts — musharakah / wakalah
Takaful (some model): between the takaful company and takaful participant - mudarabah
Asset financing - musharakah mutanaqisah
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PROJECT FINANCING (EQUITY-BASED)
The most suitable contracts for project financing in meeting Shari`ah compliance requirements and contractual requirements, are equity based financing, e.g. mudarabah & musharakah
Both contracts are designed to mobilise capital, for later utilisation in specified project/s and according to contractually agreed terms
All parties may then share the profits generated according to the ratio of capital contribution or other contractually agreed ratio
All parties also bear the risk of losses, whether in monetary form (for capital providers), or in term of loss of expected income (on the part of the manager)
Both mudarabah & musharakah also allocate and distribute the resources in the best and efficient manner, compared to lending with interest
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MUDARABAH PROJECT FINANCING
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Loss borneTotally by rabb al mal
Profit shared in accordanceto pre-agreedproportions
(X:Y)
Y% torabb al
mal
X% to mudarib
Financier (Rabb al Mal)
Company (Amil / Mudarib)
CAPITAL
Project Revenue
Invests in project
Contract of MudarabahProfit Sharing ratio – X:Y
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MUSHARAKAH PROJECT FINANCING
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Y%
Company
Capital
Invests in project
Contract of Musharakah Capital contribution – X:Y
Financier / Bank
• Prof it: shared according to agreed ratio or according to ratio of capital contribution
• Loss shared according to ratio of capital contribution
Project Revenue
X%
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FEATURES OF EQUITY-BASED ISLAMIC PROJECT FINANCING
Capital contribution from both or one of the parties, as the case may be (musharakah viz-a-viz mudarabah)
Profit is neither certain nor fixed
Sharing in the profit and loss - equitable
Management of the running of the projects
Credit risk as well as business/performance risk (managing partner’s role)
Moral hazard and collateral-free
No issue of default payment
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OBSERVATIONS
Unfortunately, both mudarabah and musharakah have so far failed to woo the choice of most financiers and investors because of the potentially higher risks born by
the parties in the event of losses
Most financiers and investors are also not equipped with the skill and expertise needed to effectively manage a mudarabah / musharakah venture, nor are they familiar with the risk management techniques for the two contracts
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CHALLENGES FOR MUDARABAH / MUSHARAKAH IN PROJECT FINANCING
Moral hazard
Investors’ appetite and preference
Lack of expertise and skill in equity investment and management
Unfriendly accounting and taxation framework
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MUSHARAKAH MUTANAQISAH FINANCING
MUSHARAKAH MUTANAQISAH (DIMINSHING PARTNERSHIP )
This method of asset financing combines a number of contracts, i.e., partnership, leasing and sale contracts
The modus operandi of the product is as illustrated below:-
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MUSHARAKAH MUTANAQISAH (MODUS OPERANDI)
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Financier Customer
Provides most of financing e.g. 90%
Provides some financing e.g. 10%
Both financier + customer become partners in the ow nership of asset (Shirkah al Milk)
Asset to be acquired
STEP ONE
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Financier CustomerPay monthly installment partly as rental and partly as gradual
purchase price of part of financier’s share in the Asset
90%
Financier’s share
decreasing
0%
100%
Customer’s Share
increasing
10%
AssetSTEP TWO
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INTRODUCTION
Musharakah Mutanaqisah = a type of musharakah
Naqish = to diminish
Mutanaqisah = diminishable or redeemable
Musharakah Mutanaqisah = Joint venture where one partner has given the other partner the right to redeem/ diminish his share in the JV in such a way that in the end of the day, the shareholding will be 100% owned by the latter
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Ali
10%
Kassim
90%
100% 0%
Property MM
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INTRODUCTION
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Ali
10%
Kassim
90%
100% 0%
Business M M
Co XYZ
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SHARIAH LEGALITY
It is acceptable by virtue of various Quranic injunction and hadith as well as the practise of the Companions.
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CHARACTERISTIC OF MUSHARAKAH MUTANAQISAH
There must be a joint venture where the parties have contributed jointly into the venture
The contribution need not be equal. It could even be 1%:99%
The venture could be one where both parties will contribute their expertise/ labour. What about one where one party= of mere sleeping partner/ monetary partnership?
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CHARACTERISTIC OF MUSHARAKAH MUTANAQISAH
It could be over property ownership (in which case it is a Shirkah al Mulk) or over commercial or contractual transaction (in which case it is a Shirkah al ‘aqad)
One of the partner must be given the right to redeem the entire ownership over the property or transaction from the other party
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CHARACTERISTIC OF MUSHARAKAH MUTANAQISAH
The redemption sum or formula shall be fixed in advance
The timeframe to call on this option can be fixed or flexible
Both parties will have the right to the property or venture until and unless the property or venture has been fully redeemed.
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CHARACTERISTIC OF MUSHARAKAH MUTANAQISAH
In case of a property MM, the occupying party shall bear the upkeep and maintenance of the property
In case of a business venture MM, the parties shall also be entitles to receive their salary for the parts and roles they play in the management of the business
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PAST STRUCTURE (UNI)
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Ali
10%
Uni
90%
100% 0%
Staff Financing
Property= Uni Trust = in favour of Uni
Tenancy is by Uni for unspecified date (Month2 Month) No Charge
Rental≠Redemption Indebtedness=on rental arrears
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PAST STRUCTURE (SEMI GOVERNMENT BODY)
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Ali
10%
ABC
90%
100% 0%
ABC SCHEME
Co XYZ
ABC = Preferential Shares and Special Shares
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CURRENT STRUCTURE
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Ali
10%
Banker
90%
100% 0%
Housing Facility
Property= Co-Proprietors but… Trust = in favour of Banker
Tenancy is by the Partnership for facility duration With/ Without Charge
Rental = Redemption Indebtedness=Defaults of instalment
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ILLUSTRATION ON CURRENT STRUCTURE
Banker & purchaser (P) as owner of the property.
P will give give his waad/promise (that he agrees Banker 's shares to diminish from time to time)
Banker’s shares will diminish with payment/installment received from P until end of tenure.
to avoid hassle of co-ownership, both parties will be the registered owner, but Banker stands as trustee for the partnership. (trust deed to be registered)
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ILLUSTRATION ON CURRENT STRUCTURE (CONT) why trustee? in order to secure Banker in event of default
as trustee of the partnership and also owner of the property, Banker has the right to sell off the property to 3rd party by way of private treaty or auction etc.
that's why neither charge nor assignment needed under this scheme! (however, some bankers still required charge as additional security)
so, what will be the P right on the property?-right to utilise the property by a lease/ijarah agt.
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ILLUSTRATION ON CURRENT STRUCTURE (CONT)
event of default? a)in the MM agt, there's a clause on "purchase
undertakings" i.e P undertakes to purchase Banker 's shares (as the whole) in the event of default.
failure of P to perform his u'taking will result in the Banker exercising its right to sell off the property to 3rd party.
b) indebtedness? will occur in the event of default Banker may opt for selling off the property to 3rd party.
c) however, Banker may exercise its rights as trustee to sell off the property (even no indebtedness occurred!) and the proceeds/loss should be divided between partners according to shares ratio.
Banker has obtained blanket approval from FIC to acquire property.
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STRUCTURE
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Ali
10%
Bank
90%
100% 0%
Financing
PA
Bank as PA to the partnership
Waad
Waad given by the Customer to buy all of the bank’s share in the property
Trust Deed
Trust given by the partnership to whoever regis tered as the proprietor
Charge of transfer form or lien (caveat)
Ijarah
Customer rent the property from the partnership/ bank for the entire duration
MM Master Facility
Agreement
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LEGAL DOCUMENTATION
Property MM Musharakah Mutanaqisah Partnership/ Facility Agreement
Trust deed
Ijarah/ Lease/ Tenancy Agreement, if applicable
Waad/ Promise
Charge (Form 16A), if applicable
Pre-executed Discharge (Form 16N) and Transfer form (Form 14A), if applicable
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The term wakalah literally (lughatan) means “preservation” and “delegation of one’s affair to another
Wakalah consists of one person empowering other person to perform some acts for him, whereby the latter stands in the stead of the former in regard to such act.
The first person is called the principal (muwakk il/ موكل), the person who stands in his stead is called the agent (wakil/ وكیل ), and the act is called the authorised act (muwakkal fihi/ موكل فیھ).
Unrestricted wakalah (wakalah mutlaqah/ وكالة مطلقة )
Restricted wakalah (wakalah muqayyadah/ وكالة مقیدة )
CONTRACT OF WAKALAH (AGENCY)
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In Islamic banking business, the wakalah contract may be formed in the following forms:
i. Bank is appointed by a customer to act as his agent (eg. LC)
ii. Bank appoints its customer as its agent. (MPO)
MODUS OPERANDI
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1. Wakalah Contract
The wakalah contracts must be separate and independence from the maincontract (e.g. sale contract) on which it is required.
2. Reference to the Principal
Must In the case of sale and leasing, the contract concluded by an agent neednot to be made by reference to his principal. However, should the contract bemade without reference to the principal, the rights and liabilities under thecontract belong to the contracting partyi.e. the agent.
3. Duties of AgentTowards Principal
Carry out the authorizedactwith ordinaryskill and diligence.
Do not use his position for his personal interest and to the detriment of hisprincipal
Must keep proper accounts of all transactionsconnected with the wakalah
Must not accept bribesor secretprofit.
must act on trust (amanah).
He must not take the principal’s property or any confidential he has acquiredin the course of his appointment as an agent for his own benefit
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4. Remuneration andReimbursement
Where there is an express or implied agreement to pay, the agent can claimremuneration.
In the case where he acts voluntarily, it is considered that he acts out of courtesyfor the principal
The remuneration can only be claimed when the authorized act has beencompleted. If the agent relinquished his agency without completing his duty, nopayment needs to be paid by the principal
The agent reserves the right to be reimbursed for all expense and indemnifiedagainst all losses and liabilities incurred by him whilst acting within the scope ofthe agency, even though there is no clause referring to it in the contract.
5. ActionBy Unauthorized Person/ Agent (Fuduli)
Action of an unauthorized agent is dependent upon the ratification of the principal.
When the unauthorized act is properly ratified, the ratification dated back to thetime when
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6. Termination of Wakalah Contract
The agent has fulfilled his duties or when the fixed period of the wakalah hasexpired
Dismissal of the agent by the principal and the dismissal will not be effective untilinformation thereof has been given to the agent
Upon the agent giving up the agency.
The death of either principalor the agent
The agent or the principalbecomes insane or bankrupt
The destructionof the subject matter or the authorized act
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Deposit taking based on wakalah
• Bank acts a wakil to manage customers’ investment
Letter of credit (LC) based on wakalah
Bank as wakil to make payment to the negotiating bank\
Private banking investment
Bank as wakil to manage investment (wealth management)
In murabahah financing
Bank as wakil to buy asset from vendor
In tawarruq financing
Bank as wakil to sell and buy the commodity through the brokers
APPLICATION OF CONTRACT OF AGENCY IN ISLAMIC BANKING
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EXPORTER
Advising/Negotiating
IMPORTER
ISSUING BANK
1. Applies for LC and places 100% deposit 7. Client receive
documents4. Client provides doc and receives payment
3. Advice LC
2. Issues LC
5. Forwards Doc
6. Payment reimbursement
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CONTRACT OF KAFALAH (GUARANTEE)
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Quranic verse indicates the permissibility of the kafalah contract. ‘Abdullah bin ‘Abbas RA states that za’im is another word for kāfil i.e. guarantor:
“They s aid: We have lost the (golden) bowl of the king and for him who produces it is (the reward of) a camel load an d I will be bound by it (za’im).”
(Surah Yusuf: Verse 72)
Al-Bukhari narrated that Salamah bin al-Akwa’ said:
“We were with the Rasulullah SAW when a deceased person was brought. They s aid: “Ya Rasulullah, perform prayers on him?” He said: “Has the deceased left anything?” They s aid: “No”. He said: “Is he in debt?” They s aid: “Three dinars.” He said: “Perform prayer on him” (while Rasulullah SAW did not perform the prayer). Abu Qutadah said: “Perform prayers on him Ya Rasulullah and I guarantee for his debt.” Then Rasulullah SAW performed prayers on him.”
LEGALITY
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Kafālah (Guarantee) Contract
Permissible to incorporate a kafālah contract into the original contract(e.g. sale contract) or to be designated in a separate contract.
Permissible to include securities together with the kafālah in onecontract.
Permissible to fix the duration of a guarantee or to set a ceiling on theamount to be guaranteed or to be restricted by a condition
Not permissible to issue a bank guarantee for customer who will use itto:
Acquire a non-Shariah compliant asset,
Acquire an asset to be used in non-Shariah compliant activities,
Perform non Shariah compliance activities,
Conclude non-Shariah compliant transaction.
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The Effect of Kafālah Contract
The Kafālah contract is binding on the guarantor.
The creditor/ beneficiary is entitled to claim the amount of his debt/right from either the debtor/ guaranteed person or the guarantor and hehas the choice of claiming his debt/ right from either of them
It is not permissible for the guarantor to seek compensation from thedebtor/ guaranteed person prior to paying the guaranteed amount.
If the guarantor fulfils his obligations, he has a right to recourse fromthe debtor/ guaranteed person unless the guarantee is offered withoutthe debtor’s request or consent
If the creditor discharges the debtor/ guaranteed person from his debt/right, the guarantor is also discharged automatically from his liability.
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Several Guarantees
If a group of people jointly indebted under one particular accountguarantees each other, it is permissible to take action against any one ofthem for the whole amount of the debt
If there are several guarantors of one debt who have become guarantors forsuch debt separately, action can be taken against any one of them for thewhole amount of the debt.
If they become guarantors at one and the same time, action shall be takenagainst each one for his proportion of the debt.
Guarantee Fee
It is permissible for the guarantor to take payment for the guarantee
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Termination of Guarantee Contract
If the debt/ right is paid/ performed to the beneficiary/ creditor either bythe principal or guarantor.
If the beneficiary/ creditor absolves either the principal or the guarantor ofthe debt
If the original contract in which the guarantee is required becomes null andvoid.
In the case where a guarantee is given to the creditor to secure payment forthe purchase of a property, the contract is considered terminated if thecreditor grants the property as a gift to the principal debtor
If either the debtor or guarantor transfers the liability for the debt throughhiwalah to a third party, both parties are then absolved of the debt.
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Definition of Wadī’ah الوديعة) ) Contract
There are tw o categories of Wadī’ah contracts:
Wadī’ah Yad Amānah (safe keeping / أمانة يد الوديعة ). It refers to the contract ofdepositing goods or moneys (known as `deposits’) with another person (custodian),w ho is not the ow ner, for safekeeping. It involves the follow ing conditions:
The deposits are segregated physically according to depositors / account holdersand they are not mingled.
The deposits are not utilized by the depositary The depositary or the custodian does not impose any service charge / fee to the
depositor. The role of the depositary is to act as a trustee to the deposits. If the deposits
under custody is accidentally missing or destroyed, the depositary is notobligated to replace or compensate it.
WADĪ’AH CONTRACT
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Wadī’ah Yad Dhamānah (guaranteed deposits / ضمانة يد الوديعة ). It refers to thedeposits as above mentioned but followed with any or combination of thefollowings:
Deposits are pooled together and not physically segregated according todepositors/ accountholders
The deposits are utilized or used by the depositary, such as for investment orfinancing.
Service charge/ fee is imposed bythe depositaryon the deposits In addition, the depositary must promise/ guarantee to return the deposits to
the depositor upon request.
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The Wadī’ah contract is permissible based on Qur’ān, Hadīth and consensus of fuqahā’( الفقھاء إجماع ):
Al lah SWT says:وا األمانات إلى أھلھ اإن ا� يأمركم أن تؤد
“Verily, Allah commands that you should render back the trusts to those,to w homthey are due…”
(Sūrah al-Nisā’: 58) Prophet Muhammad SAW said:
أد األمانة إلى ائتمنك وال تخن خانك“Return trusts to the one who entrusted you, but do not betray the onew ho betrayed you.”
(Narrated by Abu Daw ūd and al-Tirmidhī)
Ijmāc al-fuqahā’ is also of the view that the deposit contract is permissible based onthe need of asking others to hold one’s property/ money for safekeeping.
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The customer places his money in the Bank for safe keeping.The Bank guarantees that the money is available to bewithdrawn by the customer at any time.
The Bank utilizes the money for its business activities suchas financing or investment. Profit derived from the utilisationof the customer’s money belongs wholly to the Bank.
The Bank at its sole discretion may shared the profit and pay
to the depositor under the contract of hibah / .(الھبة)
The following diagram shows the modus operandi of Wadī’ahcontract in the deposit based products:
Modus Operandi
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MODUS OPERANDI
Financing and Investment
Profit
Owner of fund CUSTODIAN
Contract
Customer permission
o Discretiono Not
promised
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Rukn (Tenet) Syart (Condition)
Depositor (المودع) Must be capable of acceptingresponsibilities:
Sane (cāqil / .(عاقل
Discerning (rāsyed راشد/ )
Legal age (bāligh .(بالغ/
Not prohibited from enteringinto agreement such as abankrupt.
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Rukn (Tenet) Syart (Condition)
Depositary (الوديع) The conditions are similar withdepositor except depositary can beindividual (syakhsiyyah ţabīciyyah/
Deposited object (الوديعة ) i. Must be capable of beingpossessed and delivered.
ii. Must have value.
Rukn (Tenet) Syart (Condition)
The contract; offer and
acceptance ( : الصیغة.(اإليجاب والقبول
i. The offer must be absoluteand decis ive.
ii. Acceptance must match withthe offer. The aacceptancemay be verbal or may beimplied through physicalreceiptor silence.
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Right of Safekeeping
The Wadī’ah contract makes it binding to the Bank to safe keep thedeposited object.
If the money under custody is accidentally lost or destroyed, the Bank isobligated to replace or compensate it.
Utilisation of Funds
The Bank must ensure that the customer have given permission to theBank to utilise the deposited funds.
The Bank must return the fund as and when requested bythe depositor.
If two or more depositors make a joint deposit and then one of themdemands withdrawal of the deposit, the Bank shall honour the demandsubject to conditions determined earlier in the contract.
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Charges, Profits and Benefits
The Bank is entitled to charge a safekeeping fee to the depositor
The Bank is prohibited from promising any profit / reward to the depositorfrom the use of the deposits. Promising profit, reward or gift (hibah / (الھبةwill tantamount to ribā qardh ( القرض ربا ).
The depositor is prohibited from demanding any rewards for the safekeepingof the moneys with the Bank.
Profits generated from the utilisation of the fund belong to the Bank.
The Bank at its absolute discretion may reward (hibah) the depositors with aportion of the profits generated from the utilisation of the fund. The Bankmay also reward the depositor in the form of benefits or gift.
The gift includes souvenirs such as umbrella, diary, pen and others.
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Terminationof the Contract
Either the Bank or depositors may cancel the contract at any time they w ish
The contract can be terminated through any of the follow ing events: Bank returns the deposits to the depositor irrespective of whether the latter requests it
or not. Death of the depositor or upon w inding up of the depositary. If depositor becomes insane or coma. The contract is terminated since he/ she would
lose his eligibility to continue the contract. If legal restrictions (hajr/ الھجر ) are imposed on the depositor due to mental
incompetence, bankruptcy and other legal restriction such as Anti Money LaunderingAct (AMLA) and Biro Maklumat Cek (BMC) offender.
If the depositor transfers ownership of the deposits to other party. If the outstanding balance transferred to the Registrar of Unclaimed Monies after
being classif ied as Unclaimed Monies (inactive for a period of seven years) asrequired under the Unclaimed Monies Act 1985.
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Literal meaning : transfer/change Legal definition: Hanafi – the transfer of debt from the dhimmah
of the principal creditor to the dhimmah of thetransferee of debt (new creditor) by way of trustwith him
Jumhur : the transfer of debt from onedhimmah to the other
AAOIFI – a transfer of debt from the transferor(muhil) to the payer (muhal ‘alayh) (StandardNo 2)
HIWALAH
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Sunnah : “the delay to pay debt by the rich is a form of injustice. So, if somebody wealthy is asked to accept the transfer of debt, he should accept it”.
Majority interpret the hadith to meanrecommendation of the acceptance of hawalahby the transferee
LEGAL BASIS
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Parties to Hawalah
Transferor (muhil/orginal debtor) who makes the offer
Acceptance by both
transferee (muhal)
Beneficiary of the transfer (muhal ‘alayhi/payer)
AAOIFI - All consent of all parties
The debt must be known, valid and binding
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Two ways: Starts with offer from the principal creditor –
transfer of right to the debt (hawalahal haq) Most common form and allowed by jurists
Results in the change in the creditor
Comparable with sale of debt at par though most jurists regard hawalahas an independent contract not a form of sale of debt
Starts with the offer from the principal debtor –transfer of the debt (hawalahal dayn)
No change in the creditor but change in the debtor Less common
MODUS OPERANDI
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Once the transfer of debt is completed,the transferor would be released from anyobligation. The creditor can now claim hisdebt only from the transferee.
The transfer of debt establishes the creditor’s right to demand payment of the debt from the consignee.
LEGAL EFFECT
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Issuance of a cheque against a current account – the transferor (issuer of cheque) + the transferee (the bank) + beneficiary (the creditor of the cheque).
Travelers' cheques
Remittance (transfer of money)
MODERN APPLICATION OF HAWALAH
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When the hiwalah is cancelled before it becomes effective
When the transferee pays the debt to the creditor
When the creditor gives the debt as a gift to the transferee and the latter accepts it
When the creditor releases the transferee from the debt
TERMINATION OF HIWALAH
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Hanafi & Shafi’ – a transfer of ownership ofmithli property from one party to another inexchange for a later payment of an equivalentamount
Malikis – a loan of something valuable granted only as a favour to be recovered back in the form in which it was granted.
QARD HASSAN
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Qard – a kind of gratuitous loan given to theneedy people for a fixed period withoutrequiring the payment interest, profit or reward.
The receiver of qard is only required to repaythe original amount of the loan.
Hasan – an act which benefits person otherthan those from whom the act precedes withoutany obligation.
“who is he who that will lend to All a goodly loan so that He may multiply it to him many times” And it is Allah that decreases or increases (your provisions), and unto Him you shall return” (al Baqarah (2) : 245
“Verily, those who give sadaqat, men and women, and lend Allah a goodly loan, it shall be increased manifold, and theirs shall be an honourable good reward (i.e. paradise)” (Al Hadid (57) : 18
LEGALITY OF QARD
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1. Parties
2. Ijab & Qabul
3. The loan contract should be written down –majority : not obligatory but strongly recommended
4. Getting two witness –
to avoid dispute (‘and get two wintnesses out of your own men and if there are not two men, then a
man and two women”)
Majority - recommended
REQUIREMENTS
Same as murabahah
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Overdraft facilities
Current account
Qard or benevolent loan by depositor
QARD : MODERN PRACTICE
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Administrative and services charge – actual cost of giving the loan AAOIFI; Book cheque, ATM card; Not include indirect cost
Early demand to pay back : majority - the creditor can demand as the loan is voluntary
Guarantors
Liquidity management instrument based on qard – hibah – sole discretion of the borrower & no pre-condition clause
ISSUES
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ISLAMIC FLOOR ARRANGEMENT (CAR)
Car manufacturer/
distributor
Bank
Authorize dealer/agent
3. Send invoice
1. Appoint agent
2.Place order
4. Bank disburses
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HOUSE FINANCING WITH NOVATION AGREEMENT
Vendor
Customer
Financier
1. S&P
2. Novation agreement
3. The financier be “in the shoes” of the customer
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BBA FINANCING (WITHOUT NOVATION AGREEMENT)
BANK CUSTOMER
2. Customer comes to the bank for financing-bank purchases the house from the customer
1.Customer purchases a house from the developer
DEVELOPER
3. Subsequently Bank sells the house to customer
4. Customer pays the selling price by installment
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ISLAMIC DEPOSIT BASED ON TAWARRUQ
BROKER A
Depositor
BROKER B
Islamic Bank
1. Sells Metal “X”
2. Pays the purchase price at cost (RM100) on spot
3. Sells metal “X” at cost plus profit (deferred)
4. Pays the purchase price at cost plus profit (deferred)
6. Pays purchase price of Metal “X” at
cost price (RM100) on spot
5. Sells metal “X” at cost
price (RM100)
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Jurisdiction of Courts Legal infrastructure Islamic Banking Act 1983 Banking and Financial Institutions Act 1989 Central Bank of Malaysia Act 1958 Stamp Duty Act 1949 Real Property Gains Tax Act 1979 Government Investment Act 1983 Takaful Act
LEGAL & REGULATORY FRAMEWORK OF IBF
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Courts jurisdiction is governed by Federal Constitutions of Malaysia
Art 121 : civil courts have no jurisdiction overmatters within the jurisdiction of Shariah courts
JURISDICTION OF COURTS IN IBF
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List I (Federal list) of 9th Schedule
Civil & criminal procedures
Administration of justice
Contracts & mercantile laws
Arbitration
Etc
JURISDICTION OF CIVIL COURTS
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Para 1 of List II (State List) of 9th Schedule
Organization & procedures of Shariah Courts
Islamic Law
Personal law
Family law
No jurisdiction over criminal matters
Jurisdiction over person professing Islam
JURISDICTIONS OF SHARIAH COURTS
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Lies in the Civil Court
Because of the following reasons:
IBF comes under contract & mercantile matters provided in Federal List (List I of 9th Schedule)
Islamic law (as provided in Para I, List II of 9th
Shc) is limited only to persons professing religion of Islam, thus exclude other persons & “legal person” such as banks & FI
Legislation of IBF are all federal legislations
JURISDICTION ON IBF
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Islamic Banking Act 1983
Banking and Financial Institutions Act 1989
Central Bank of Malaysia Act 1958
Islamic Financial Services Act
LEGAL INFRASTRUCTURE
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Brief Act of 60 sections & 8 parts Provides licensing & regulation of Islamic Banks Establishment of BIMB & BMMB Amendment in 2003 Important provisions – salient features of IBA: Definition – sec 2 Licensing – sec 3 SAC – sec 13 Financial requirements – part III
ISLAMIC BANKING ACT 1983
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Limitation of sec 2
No substantive laws on Islamic banking
Ambiguities in the definition – no guideline/detail explanation on transaction that is considered as IBF
The term “religion of Islam” is not defined –what mazhab to follow
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Regulates IBs – grant license to carry on Islamic banking business
IB must be company having license from Minister of Finance
Company registered under Companies Act
LICENSING OF IB (SEC 3)
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Licensing requirements
Must carry Shariah compliant activities
Must establish Shariah Advisory Board to advice on its operations
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License will not be granted if no SAC
Bank shall comply with the advice of SAC
SAC to seek advice of SAC of BNM
Uniformity of standard practice & product development between IBS.
SAC to ensure adherence of Shariah principles in the operation & product innovations
SHARIAH ADVISORY COUNCIL
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The IBA complies with prudential &financial requirements similar with conventional banks
Eg., capital adequacy framework, statutory reserves, liquidity framework, statistical reporting, audited financial reports, ownership control & management restriction on business.
FINANCIAL REQUIREMENTS & DUTIES (PART III)
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Provides laws for licensing & regulation of institutions carrying banking & finance, merchant banking, discount house etc
In 1993, BNM allows conventional banking institutions to participate in IBF using existing structure
As a result, BAFIA was amended (sec 124) to : i formalize the carrying on of Islamic banking
business by conventional bank Establishment of SAC to advise Islamic product
BANKING & FINANCIAL INSTITUTION ACT 1989
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Sec 124 124 (1) licensed institution may carry Islamic banking business 124 (2) conventional bank carrying on Islamic banking business
is subject to this Act 124 (3) – the institution must seek advisee of SAC 124 (4) – must comply with any written regulation & guidelines
from BNM or other regulatory bodies 124 (5) the institution shall not be deemed an Islamic bank 124 (6) BAFIA shall not apply to Islamic Bank 124 (7) related terms:
SAC refers to SAC of BM Islamic banking business – same with IBA Islamic financial business – any financial business which the aim
& operations do not involve any element against Shariah
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CBMA was amended in 1989 to facilitate IBF
Establishment of NSAC at BNM (sec 16B)
NSAC as the authority for ascertainment of Islamic law on IBF
Court may refer to NSAC of BNM in arbitration proceeding involving shariah issues
Decision of NSAC can be considered by court & binding on arbitrator
CENTRAL BANK OF MALAYSIA ACT 1958
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Legal establishment of SAC as the authority for ascertainment of Islamic law on IBF
Member of SAC may be appointed by Minister, on recommendation of the Bank
Qualification – people who have knowledge or experience in both Shariah, banking & finance other related disciplines
No member of the SAC shall become member of any Shariah advisory board of other banks
PART VII (SEC 51-58)
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Bank shall consult SAC on IBF matters
IFI may refer to SAC for a ruling or advice
Court or arbitrator shall take into consideration of SAC decision
Decision of SAC are binding on court and arbitrator
Bank may establish a secretariat to assist SAC
EFFECT OF SAC’S DECISION
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CENTRAL BANK MALAYSIA ACT 2009
Part VII (Section 51 till Section 60)
51. (1) The Bank may establish a Shariah Advisory Council on
Islamic Finance which shall be the authority for the
ascertainment of Islamic law for the purposes of Islamic
financial business.
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55. (1) The Bank shall consult the ShariahAdvisory Council on any matter relating to Islamic financial business
56. (1) Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arisesconcerning a Shariah matter, the court or the arbitrator, as the case may be, shall—
(a) take into consideration any published rulings of the Shariah Advisory Council; or
(b) refer such question to the Shariah Advisory Council for its ruling.
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57. Any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56.
58. Where the ruling given by a Shariah body or committee constituted in Malaysia by an Islamic financial institution is different from the ruling given by the Shariah Advisory Council, the ruling of the Shariah Advisory Council shall prevail.
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IFSA 2013: AN IMPACT ON SHARIAH GOVERNANCE FRAMEWORK & SHARIAH COMMITTEE
Codification of key elements of ShariahGovernance Framework to promote compliance with Shariah:
Shariah Committee Legislated establishment of Shariah Committee
to advice Islamic financial institutions in ensuring its business affairs & activities comply with Shariah
Bank may approve single Shariah Committee for financial group if can establish it is capable of performing its functions effectively
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Codification of duty on Islamic financial institutions to ensure its aims, operations, business, affairs and activities are in compliance with Shariah at all times
Compliance with rulings of Shariah Advisory Council a determinant of “compliance with Shariah”
Reporting obligations on non-Shariahcompliances imposed on Islamic financial institutions
Bank empowered to assess rectification plan to address non-compliances
Backed by comprehensive enforcement tools to address non-compliances
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SECTION 28
28. Duty of institution to ensure compliance with Shariah.
(1) An institution shall at all times ensure that its aims and operations, business, affairs and activities are in compliance with Shariah.
(2) For the purposes of this Act, a compliance with any ruling of the Shariah Advisory Council in respect of any particular aim and operation, business, affair or activity shall be deemed to be a compliance with Shariah in respect of that aims and operations, business, affair or activity.
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(3) Where an institution becomes aware that it is carrying on any of its business, affair or activity in a manner which is not in compliance with Shariah or the advice of its Shariah committee or the advice or ruling of the Shariah Advisory Council, the institution shall—
(a) immediately notify the and its Shariah committee of the fact;
(b) immediately cease from carrying on such business, affair or
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(4) The Bank may carry out an assessment as it thinks necessary to determine whether the institution has rectified the non-compliance referred to in subsection (3).
(5) Any person who contravenes subsection (1) or (3) commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both.
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Duty of institution to ensure compliance with Shariah(s .28, IFSA)
Where an institution becomes aware that it is carrying on any of its business, affair or activity in a manner which is not in compliance with Shariah or the advice of its Shariah committee or the advice or ruling of the SAC, the institution shall —
(a) immediately notify BNM and its Shariah committee of the fact;
(b) immediately cease from carrying on such business, affair or activity and from taking on any other similar business, affair or activity; and
(c) within 30 days of becoming aware of such non-compliance or such further period as may be specified by BNM, submit to BNM a plan on the rectification of the non-compliance.
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The Bank may carry out an assessment to determine whether the institution has rectified the non-compliance.
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SECTION 29
29. Power of Bank to specify standards on Shariah matters.
(1) The Bank may, in accordance with the advice or ruling of the Shariah Advisory Council, specify standards—
(a) on Shariah matters in respect of the carrying on of business, affair or activity by an institution which requires the ascertainment of Islamic law by the Shariah Advisory Council; and
(b) to give effect to the advice or rulings of the Shariah Advisory Council.
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29(2)(a)(ii)
(2) In addition, the Bank may also specify standards relating to any of the following matters which does not require the ascertainment of Islamic law:
(a) Shariah governance including—
(i) functions and duties of the board of directors, senior officers and members of the Shariah committee of an institution in relation to compliance with Shariah;
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Need to be read together with Shariah Governance Framework
(ii) fit and proper requirements or disqualifications of a member of a Shariahcommittee; and
(iii) internal Shariah compliance functions; and
(b) any other matter in relation to the business, affair and activity of an institution for the purposes of compliance with Shariah.
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(3) Every institution, its director, chief executive officer, senior officer or member of a Shariahcommittee shall at all times comply with the standards specified by the Bank under subsections (1) and (2) which are applicable to such person.
(4) Every institution shall at all times — (a) ensure that its internal policies and
procedures on Shariah governance are consistent with the standards specified by the Bank under this section; and
(b) whether or not standards have been specified by the Bank under this section, manage its business, affairs and activities in a manner which is not contrary to Shariah.
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(5) Every director, officer or a member of a Shariah committee of an institution shall at all times comply with the internal policies and procedures adopted by such institution to implement the standards specified by the Bank under subsection (1) or (2).
(6) Any person who fails to comply with any standards specified under subsection (1), commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding eight years or to a f ine not exceeding twenty-five million ringgit or to both.
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SECTION 29 It empowers the Bank Negara to specify, in
accordance with the advice of the ShariahAdvisory Council, standards on Shariah matters which require the ascertainment of Islamic law by the Shariah Advisory Council or to give effect to the advice on rulings of the Shariah Advisory Council.
This Section also empowers the Bank Negara to specify standards on, Shariah governance such as functions and duties of key functionaries, fit and proper requirements or disqualification of a member of a Shariahcommittee, and on any other matters, for purposes of compliance with Shariah by the institution.
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Further, an institution is also required to ensure that its internal policies and procedures on Shariah.
Subsection (5) further emphasize that the duty to ensure compliance with Shariah not only applicable to the directors and Shariahcommittees but also extended to all officers of the institution.
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S. 29 (6)
Any person fails to comply with any standard fixed by BNM has committed an offence and shall be punishable with
Imprisonment of not more than 8 years;
or
Fine not more than 25 million Ringgit Malaysia
or both.
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“standards” includes any obligation or requirement as specified by the Bank under this Act and such standards may contain any interpretative, incidental, supplemental, consequential and transitional provisions as the Bank considers appropriate.
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Stamp Act 1949
Real Property Gains Tax Act 1976
Government Funding Act 2005
Takaful Act 1983
RELEVANT STATUS ON IBF
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1989 – amendment to sec 14A – to avoid double stamp duty for Islamic financing documents.
Sec 14A – “where it is shown that a principal orprimary security secures the repayment of moneysprovided under a scheme of financing madeaccording to the Syariah, duty chargeable thereonshall be calculated on the principal amountprovided by the financier or financing body”
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Stamp Duty (Exemption) (No. 5) Order 1984 (effective 1st Oct 1983)
All instruments for purchase of property under Murabahah & BBA – is subject to exemption of stamp duty
PSA – on principle amount – not total selling price (cost + profit)
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RPGTA – provides for imposition, assessment & collection of tax or gains/profits derived from disposal or acquisition of real property/shares in real property companies
Since BBA & Murabahah involve purchase & sale between bank & customer (legally the transaction amounts to acquisition & disposal)
1985 : amendment to sec 3 – avoid double taxation on IBF transactions.
REAL PROPERTY GAINS TAX 1979
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Act to confer power to Government to receive moneys from Islamic banks for a fixed period
How?
By issuing Investment Certificates (MGIC)
No fixed return (unlike interest)
Government will give back profit in the form of:
Hibah/gift – qard hasan
Profit – sale (murabahah, BBA/bay’ inah)
GOVERNMENT FUND ACT 2005
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Objective:
“to provide for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities, and the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with Shariah and for related, consequential and incidental matters”.
