13- Shariah Principles

Before we learn about the Islamic banking product proper, let’s understand some basic Shariah principles. As earlier mentioned, Islam permits trade and commerce but there there are rules to be observed, basically

a) avoidance of prohibitions;
b) observing that every contract possesses all its essential elements; and
c) that every essential element meets the necessary conditions.

There are many prohibitions, but these five prohibitions will make “akad” or contracts, invalid:

1. Producing or selling of impure goods e.g. liquor, non-halal food (including providing non-halal services like a Muslim serving liquor to a non-Muslim customer)

2. Producing or selling of goods that are of no use therefore of no value e.g. planting of tobacco, sale of cigarette, sale of musical instruments that can cause "ghairah or hayal"

3. “Gharar”, i.e. ambiguity or uncertainty. “Gharar” is divided into two namely (a) Gharar fahish, i.e. major or serious gharar, and (b) Gharar yasir, i.e. minor or slight gharar. The Gharar that causes a contract to be null and void is major “gharar” which arises out of one of the following:

# Asset or merchandise does not exist;
# Asset or merchandise cannot be delivered; or
# Asset or merchandise not according to specification.

4. Gambling i.e. anything that involves betting (to some scholars, this may include purchasing of "halal" stock and shares for speculating purposes i.e. although the transaction is valid but the intention may not)

5. “Riba” or usury; which means extra and it is of two kinds:

(a) Riba Duyun - riba out of lending and borrowing. This kind of riba is the extra amount of money that is either; imposed by the lender on the borrower in the contract; or promised by the borrower in the contract.

(b) Riba Buyu - riba in trading transactions. This kind of riba may arise out of an exchange between two ribawi materials in the same category if the rules are not observed.

What is "ribawi " materials? There are two categories or groups of ribawi materials.

(a) Medium of exchange such as i) gold in any form, ii) silver in any form, and iii) currencies ( the currency of each country is considered as one type).

Thus, technically when we purchase US1 dollar at RM3.50, it is considered riba. But due to "maslahah" (public interest) or "dharurat" (since current exchange mode is using currency or fiat money), most Shariah scholars agreed that the currency exchange is permisible under current form but it MUST BE DONE ON SPOT (immediate) basis. Currency cannot be sold or exchange on deferred payment nor can it be sold based on future value, thus future transaction is not allowed.

(b) Trading of all kinds of foodstuffs with broad classifications such as i) grains, ii) meats, iii) vegetables, iv) fruits, and v) salts which include sugars, oilments and medicines.

Riba in trading occurs when rules concerning the trading of ribawi materials are not observed. These rules are;

a) Same classifications in the same category,
Examples:-

916 gold exchanged with 750 gold, or Basmathi grade rice (less carbohydrate) exchanged with A1 rice. The weights or measurements or units of the materials must be the same, and the exchange must be immediate i.e. at the one and the same meeting. What it means here, one (1) bag of basmathi cannot be exchanged for half ( 1/2) bag of A1 rice (this is considered riba)


b) Different classifications in the same category,
Examples:

Malaysian currency of RM350 exchange with USD100, 10 grams of gold exchanged with RM350 or 1 tonne of palm oil or exchanged with 2 tonnes of wheat. Similar to the sale of gold, their exchange must be immediate (spot) i.e. at the one and the same meeting.

Note:
Different categories, (e.g. wheat or palm oil exchanged with money) no rules are required to be observed.

After taking out the types of muamalat (transactions) that are prohibited, those that are permitted can be divided into three broad categories as follows:

1. Trading Contracts;
2. Contracts of Profit Sharing;
3. Supporting Contracts.

Some of the most widely used transactions are;

(A) Cash Sales
# Normal cash sales;
# Foreign currency exchanges;
# Exchanges between ribawi materials of different classifications within the same category
(gold with money or wheat with palm oil)

(B) Deferred payment sales (debt financing contracts)
# Bai al-Murabahah (cost plus)
# Bai al-Salam;
# Bai al-Istisna’ (sale by order);
# Al-Bai Bithaman Ajil (deferred payment sale);
# Bai al-Istijrar (supply or whole sale financing);
# Al-Ijarah (leasing);
# Al-Kiraa wal-Iqtinaa’ (leasing then purchase);
# Al-Qardh (benevolent loan);

(C) Contracts for profit-sharing (equity financing) are:
# Al-Musharakah (joint venture profit sharing);
# Al-Mudharabah (trustee profit sharing);
# Al-Muzaraah (leasing of land for agriculture);
# Al-Musaqat (watering of orchard);

(D) Shariah also permits contracts to support and facilitate trading and mobilisation of capital. These contracts are:
# Al-Rahnu (mortgage);
# Al-Kafalah (guarantee);
# Al-Wakalah (agency);
# Al-Wadiah (safe custody);
# Al-Hiwalah (transfer of debt);
# Al-Ibraa’ (rebate);

Essential Element in a Contract
To make a permissible contract valid it must have essential elements and each essential element must meet the necessary conditions.

A) Contract of Sale

The essential elements and the necessary conditions in a contract of sale are:

1. Seller - capable of accepting responsibility:
# of sound mind;
# has attained the age of puberty;
# intelligent (has attained the age of majority);
# not restricted from dealing in business transactions;
# not a bankrupt;
# not a reckless spendthrift;
# not forced to enter into contract.

2. Buyer (same as seller)

3. Merchandise - exists.# of pure substance (halal/lawful).
# of some use therefore of some value.
# seller must be real owner.
# can be delivered to buyer.
# known (specifications).

4. Price - known in amount and type of currency.

5.Contract: Offer & acceptance# absolute, in definite and decisive language.
# acceptance must be consistent with offer.
# offer and acceptance made at the same meeting.


B) Contract of Leasing

The essential elements and the necessary conditions are:

1. Lessor - (same as buyer and seller);
2. Lessee - (same as buyer and seller);
3. Asset - belongs to lessor;
4. Known and specified;
5. In good working order;
6. Delivered to lessee;
7. Rental - known;
8. Use - can be fixed in value;
9. Lessor has the power and capability to use and lease the asset;
10. Period of leasing is known. If asset is multi-purposes, the type of use must also be defined and known;
11. Permissible;
12. Not for procurement of goods;
13. Contract - in definite and decisive language;
14. Acceptance must be in line with offer;
15. Offer and acceptance made at the same meeting.

C) Bai Al-Inah (this contract is acceptable by some Jurists)
Bai Al-Inah must meet the following requirements:

1. There must be two separate contracts. First the contract of sale by bank to customer on deferred payment term. Second the contract of repurchase by bank from customer on cash term;

2. The merchandise or the asset must not be a ribawi material in the medium of exchange category (gold, silver or currency) because all payments for purchases are made in money;

3. Each of the two contracts must have the essential elements and each of the essential elements must meet the necessary conditions.

D) Bai Al-Dayn (this contract is acceptable by some Jurists)
The requirements of Shariah concerning Bai Al- Dayn are:

1. A debt must have been created through a contract of deferred payment sale of goods or service;
2. The goods must have been delivered or the service must have been rendered;
3. The trading of the debt must be on cash term.

E) Qardh (benevolent loan)

In giving Qardh the two following matters must not be contravened:

1. The lender must not impose any extra payment in the contract;
2. The borrower must not promise in the contract to pay anything extra. Nevertheless, if the borrower decided to pay extra after the loan has been repaid (without promising any), it is acceptable.

F) Al-Mudharabah

The essential elements and necessary conditions of al-Mudharabah are:

1. Owner of capital - (same as buyer and seller);
2. Entrepreneur - (same as buyer and seller);
3. Capital - money only;
4. Not debt;
5. Specific amount;
6. Paid to entrepreneur;
7. From owner of capital only;
8. Business - halal;
9. Managed by entrepreneur only.

G) Profit/Loss contract e.g. Musharakah1. Profit shared according to agreement in fraction, ratio or percentage; not in absolute amount.
2. Loss borne by owner of capital – only.
3. Other characteristics - based on trust of owner of capital in entrepreneur.
4. Profit sharing ratio not necessary in accordance with the percentage of capital provided.

The sudden interest in Islamic banking is overwelming. There are banks runned by non-Muslims who are also keen to offer Islamic banking products. This is good and we hope that this development will continue. However, one wonder whether they truly understood the true intention of Islamic banking (usury free banking) or just taking advantage of the sudden interest in this banking system. Allah has showed that "usury or interest-backed banking system" has failed from time to time. The sub-prime and banking crisis in the West is a recent evidence that riba based financial system has failed. What more evidence do we need? Most important when offering Islamic banking product is not to take advantage of the recent interest and so call attracting muslim funds (particularly from the Arab world) but it is offered because one believed Usury (riba) is prohibited by God.

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12 - Islamic Banking Product Definition

Before we learn the practical aspects of Islamic banking, let's understand the types of products currently offered by Islamic banks throughout the world.

Murabahah

Murabahah (accurate transliteration murābaḥa) is defined as a cost-plus sale, where the seller expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. As the requirement includes an 'honest declaration of cost', murabaha is one of three types of bayu-al-amanah ('fiduciary' sale). Other two types of bayu-al-amanah are Tawliyah (sale at cost) and Wadiah (sale at specified loss)].

Istisna’a

Literally the word istisna’ derived from the root word sana’ or to manufacture or to construct something. Istisna’ is an order or request to manufacture something, whereby the requestor invited, induced or caused another to make or manufacture some goods for him. Technically, it is a contract to purchase for a definite price (agreed by both parties) something that may be manufactured later on according to agreed specifications between the parties. In other words, it is a contract of sale of specified items to be manufactured or constructed with an obligation on the part of the manufacturer or contractor to deliver them to the customer upon completion. The contract of Istisna’ creates a moral obligation on the manufacturer to manufacture the goods, but before he starts the work, any one of the parties may cancel the contract after giving a notice to the other. However, after the manufacturer has started the work, the contract cannot be cancelled unilaterally.

Ijarah

An agreement whereby the Bank (lessor) purchases or constructs an asset for lease according to the customer’s request (lessee), based on his promise to lease the asset for a specific period and against certain rent installments. Ijarah could end by transferring the ownership of the asset to the lessee and there must be usufruct. What does Usufruct means? Usufruct is a legal term describing a situation wherein a person or company has a temporary right to use and derive income from someone else's property (provided that it isn't damaged).

Musharakah

An agreement between the Bank and a customer to contribute to a certain investment enterprise, whether existing new, or the ownership of a certain property either permanently or according to a diminishing arrangement ending with the acquisition by the customer of the full ownership. The profit is shared as per the agreement set between parties while the loss is shared in proportion to their shares of capital in the enterprise.

Mudarabah
An agreement between the Bank and a third party whereby one party would provide a certain amount of funds which the other party (Mudarib) would invest in a specific enterprise or activity against a specific share in the profit. The Mudarib would bear the loss in case of default, negligence or violation of any of the terms and conditions of the Mudarabah.

Wakalah
An agreement between the Bank and an agent whereby the agent invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakalah.

Sukuk

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shari’ah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

Bai’ al-inah (sale and buy-back agreement)
The financier sells an asset to the customer on a deferred-payment basis, and then the asset is repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Some scholars believe that this is not compliant with Shari’ah principles but this principle is still being practice by some Muslim countries, particularly Malaysia.

Bai’ bithaman ajil (deferred payment sale)
This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except Bai’ bithaman ajil is normally offered for long-term deferred payment sale while Murabahah, is normally for short term deferred payment sale e.g. up to 1 year.

Bai muajjal (credit sale)
Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

Musawamah
Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabahah and Musawamah with all other rules as described in Murabahah remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.

Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver or currencies (these are “ribawi” items) based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Actually there are more Islamic banking products currently being offered in the market but those described above are the most common offerings. It is interesting to note that some Islamic banks are trying to emulate products offered by conventional banks. My answer to this, in their effort of trying to be innovative, they may risk developing a disguished "riba" product instead a truly shariah-compliant product. To me, instead of moving forward with their so call "product innovation" they are actually moving backward. We must move forward by improving the Musharakah (equity-based) financing structure rather relying too much on debt-based products. Musharakah if properly structured, is safer than debt-based financing product. We will examine more on this in later section.

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11 - Shariah Negative List

As earlier emphasized, the purpose of financing must be Shariah compliant. Bank is not allowed to finance any prohibited activities i.e. working capital for non-halal business. More examples of non halal business activities:-

# Financial services based on riba (interest);
# Gambling;
# Manufacture or sale of non-halal products or related products;
# Conventional insurance;
# Entertainment activities that are non-permissible according to Shariah;
# Manufacture or sale of tobacco-based products or related products;
# Stock broking or share trading in Shariah non-compliant securities; and
# Other activities deemed non-permissible according to Shariah.

For companies with activities comprising both permissible and non-permissible elements, two (2) additional criterias must be considered i.e. public perception or image of the company must be good;

The core activities of the company are important and considered maslahah (public interest) to the Muslim ummah (nation) and the country, and the non-permissible element is very small and involves matters such as `umum balwa' (common plight and difficult to avoid), `uruf ' (custom) and the rights of the non-Muslim community, which are accepted by Islam.

To determine the tolerable level of mixed contributions from permissible and non-permissible activities for turnover and profit-before-tax of a company, the SAC (Shariah Advisory Council and applicable to Malaysia) has established several benchmarks based on 'ijtihad' (reasoning from the source of Shariah by qualified Shariah scholars). If the contributions from non-permissible activities exceed the benchmark, the activity of the company will be classified as Shariah non-compliant. The benchmarks are:

# 5% benchmark - to assess the level of mixed contributions from activities that are clearly prohibited such as riba (interest-based companies like conventional banks), gambling, liquor and pork.

# 10% benchmark - to assess the level of mixed contributions from activities that involve the element of `umum balwa' which is a prohibited element affecting most people and difficult to avoid. An example of such a contribution is the interest income from fixed deposits in conventional banks. This benchmark is also used for tobacco-related activities.

# 20% benchmark - assess the level of contribution of mixed rental payment from Shariah non-compliant activities, such as rental payments from premises used in gambling, sale of liquor, etc.

# 25% benchmark - to assess the level of mixed contributions from the activities that are generally permissible according to Shariah and have an element of maslahah (public interest), but there are other elements that may affect the Shariah status of these activities. Among the activities that belong to this benchmark are hotel and resort operations, share trading, and stock broking as these activities may also involve other activities that are deemed non-permissible according to the Shariah.

The above benchmark is being used by the Securities Commission of Malaysia but such benchmark may not be applicable in other countries. If we are to look at it strictly, not only the investment of the company must be "halal", the type of business and it's funding source MUST also be "halal". Nevertheless, in today's world where we live in a "multi-faith society" couple with the element of maslahah (public interest), it would be best for us to leave the decision to determine the right benchmark to the "ulama' (religious teacher) and the SAC. Thus, the writer will only be focusing on the ' practical operation" side of Islamic banking rather than arguing on the Shariah decision. If we are to argue on "shariah decision", it will never end but the writer pray for a convergence on shariah decisions for the good of the ummah. Simple understanding to determine whether a company is running "halal" business activities can be graphically described as follows:

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10 - Basic Differences between Islamic and Conventional Banking

Before we understanding the detailed differences between Islamic and conventional banking products and transactions, it is important to know these broad differences:-

# Islamic banking only deals in “halal” products and services. The definition of "halal" has been earlir described in Article 5. Thus, all transactions must be SHARIAH COMPLIANT i.e. must be in accordance with the Islamic Jurisprudence.

# Most Islamic Financing transaction is based on trading and deferred exchange contract, whereas conventional banking loan product is granted on the basis of debtor and creditor relationship. In short, Islamic bank relationship is regarded as “Financier & Customer/Client” rather than “Lender & Borrower”. The only lender and borrower transaction under Islamic banking is when the borrower (i.e. the Bank) grant interest free loan under the principle of "Al-Qard". Under this transation, we expect the borrower to repay the loan at no extra charges. But if it is granted based on "Al-Qardhul Hassan", it is lent based on benevolent basis i.e. if the borrower cannot pay, we should not be expected to demand for repayment.

# The consideration of collateral to be looked upon separately. However, if the transaction is based on "joint-venture" basis, there should not be any collateral;

# In a default or termination situation, the Bank (or financier) normally demand the outstanding sale price. Generally, the sale price is fixed and comprise "principal and profits" predetermined upfront before a contract is signed.

# Compounding calculation i.e. to conventional practise of "interest upon interest" element is strictly prohibited under Islamic banking system.

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9 - Prospects of Islamic Banking

It is envisaged that the relative market share of the Islamic banks will increase and that the industry will continue to grow nationally, regionally and internationally. At the international level, The “Ten-Year Framework and Strategies” a joint initiative by IRTI, IDB and IFSB provides that the expected future outlook of the industry in the next ten years, among others will be as follows:-

# The Islamic Financial Services Industry (IFSI) could grow to US$1.4 trillion by 2010 and US$2.8 trillion by 2015;

# More to transform into full-fledged Islamic financial system;

# Mergers and acquisitions among Islamic banking players regionally and internationally;

# Growth of Islamic capital market;

# Strengthening demand and supply of Islamic Financial services due to pubic awareness;

# Shari’ah compliance and credibility of the services to maintain to ensure growth sustainability;

# Shari’ah compliant services will continue to attract customers of other faiths due to its transparency;

# Increase research and development investment to accelerate product development for resource mobilisation, liquidity and risk management.

International bodies involves in the development of Islamic banking:-

IIFM (International Islamic Financial Market);

IIRA – International Islamic Rating Agency

LMC – Liquidity Management Centre

IRTI – Islamic Research and Training Institute

GCIBFI – General Council For Islamic Banks and Financial Institutions

AAOIFI – Accounting and Auditing Organisation for Islamic Financial Institution

IFSB – Islamic Financial Service Board.


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8-Brief Development on Islamic Banking in Malaysia (1983-2007)

Malaysia is the first country in the world to have a dual system of banking and finance. When BNM BAFIA was amended in 1993, most conventional banks in Malaysia set-up full-fledged Islamic subsidiary. BNM Financial Sector Master Plan (FSMP) and the MIFC initiatives help spur further the development of Islamic Banking. Development of Islamic banking in Malaysia from 1983-2007 can be traced as follows:-

# Year 1983 - Islamic Banking Act was gazetted with the formation of Bank Islam Malaysia Bhd.

# 4 March 1993 - the Finance Minister allowed BBMB, UMBC and Maybank to open Islamic Banking window (known as SPTF - Skim Perbankan Tanpa Faedah)

# June 1995 – Formation of the Association of Islamic Banking Institute Malaysia (AIBIM)

# 1997 – Establishment of BNM Syariah Advisory Council

# 1 Dec 1998 - the term “Skim Perbankan Tanpa Faedah-SPTF” was changed to “Skim Perbankan Islam-SPI” couple with the issuance of the new Islamic Banking framework (a bank within a bank concept) to take effect on 2nd January, 2001.

# Oct 1999 - Bank Muamalat, as 2nd Islamic Bank in Malaysia was formed due to merger between BBMB and BOC to form Bumiputra-Commerce Bank.

# 31 Dec 2001 - BNM compliance date where SPI players to achieve at least 8% of the bank’s total assets.

# 25 March 2002 - BNM launched Financial Sector Master Plan (FSMP)

# September 2002 - Islamic Banking & Finance Institute Malaysia (IBFIM) was established as the industry owned training and research centre and .

# November 2002 - the Islamic Financial Services Board (IFSB) was established (function like Basel) to ensure soundness and stability of the Islamic financial system as well as paving the way for its global integration.

# 31 Dec 2002 - Total SPI assets recorded 8.9% (RM 68 billion) of total banking assets, while financing stood at 8.1% and deposit at 10.2% respectively.

# 8 Jan 2003 - BNM introduced the generic names for Islamic Banking products where SPI players shall be allowed to use English term without the Arabic term but the product name shall be hyphenated with the letter “ i “ at end of each generic product name.

# March 2004 - Application deadline for application of 3 full-fledged Islamic banking license by foreign parties

# March 2004 – Talk about existing bank need to establish an Islamic subsidiary (IS) by 3 January 2004. This IS will be licensed under Islamic Banking Act (IBA)

# April 2004 - BNM talk about change in the governance of Shariah Consultant.

# June 2004 - BNM announced they have issued Islamic full-fledged banking license to Kuwait Finance House (KFH), Al-Rajhi Investment Bank, Saudi Arabia and Qatar Investment Group.

# July 2004 – BNM announced Islamic banking license approved in principle to Bumiputra Commerce Group and RHB Capital.

# March 2005 – RHB launched RHB Islamic Bank

# May 2005 – Commence Tijari commenced business.

# June 2005 – BNM announced approval of two more Islamic subsidiaries to AmBank and Affin Bank.

# June 2005 - New BNM GP8-i for Islamic Banks issued.

# July 2005 – HLB launched Hong Leong Islamic Bank.

# July 2005 – RHB Capital launched RHB Dow Jones Islamic Index

# Aug 2005 – KFH commenced business.

# Sept 2005 - Deposit Insurance (launched on 1st Sept 05’)

# Sept 2005 - Product Approval Repository System (PARS) introduced by Bank Negara.

#Jan 2006 – BNM issued 4 takaful licences

#Feb 2006 – Inaugral issuance of Sukuk Negara Malaysia Ijarah (SBNMI)

#April 2006 – Affin Islamic bank & EONCAP Islamic Bank commenced operations

#Sept 2006 – Establishement of International Currency Business Unit (ICBU)

#Jan 2007 – Asian Finance Bank (Islamic bank) commenced operations.

For more news, visit http://aibim.com/content/category/8/64/129/

Development of Islamic Banking in global front

# 1996 – Citibank established Citi Islamic Investment Bank (CIIB) to handle Islamic finance deals. Others over the years also followed suits – Standard Chartered Bank, ABM Emro, BNP Paribas, Deutsche Bank, JP Morgan Case, The America La Riba Bank etc.

# February 1999 – Dow Jones launched its Islamic Market Index.

# November 1999 – Financial Times launched the FTSE Global Islamic Index.

# 2002 – HSBC Islamic banking arm, Amanah Finance involved in Malaysia Global Sukuk worth US$600 Million.

# July 2005 – RHB Dow Jones Index launched.

# November 2005 – Lloyds Bank London introduced Islamic products at 22 branches.

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7 - Islamic Banking is a Phenomenon

Islamic banking is a phenomenon that has taken many observers by surprise as it is an alternative interest-free banking option available to the consumer and it makes a lot of business sense at affordable costs. In addition, there are some thirty Islamic banks in operation globally, including the Jeddah-based Islamic Development Bank (IDB) but excluding numerous non-bank Islamic financial institutions.

The first modern experiment with Islamic banking was undertaken in Egypt under cover, without projecting an Islamic image, for fear of being seen as a manifestation of Islamic fundamentalism, which was not acceptable to the ruling political party. This first effort, led by Ahmad El Najjar, took the form of a savings bank based on profit-sharing in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country. These banks (which neither charged nor paid interest) invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi 1988). Thus, they functioned essentially as saving investment institutions rather than as commercial banks.

The Nasir Social Bank, established in Egypt in 1971, was declared an interest-free commercial bank, although its charter made no reference to Islam or Shari’ah (Islamic law).

The Islamic Development Bank (IDB) was established during 1974, but it was primarily an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB provides fee based financial services and profit-sharing financial assistance to member countries. The IDB operations are free of interest and are explicitly based on Shari’ah principles.

In the seventies, changes took place in the political climate of many Muslim countries so that there was no longer any strong need to establish Islamic financial institutions under cover. A number of Islamic banks, both in letter and spirit, came into existence in the Middle East, e.g., the Dubai Islamic Bank (1975), the Faisal Islamic Bank of Sudan (1977), the Faisal Islamic Bank of Egypt (1977) nd the Bahrain Islamic Bank (1979), to mention a few.

The first Islamic financial institution in Malaysia was the Muslim Pilgrims Savings Corporation set up in 1963 to help people save for performing hajj (pilgrimage to Mecca and Medina). In l969, this body evolved into the Pilgrims Management and Fund Board or the Tabung Haji as it is now popularly known. The Tabung Haji has been acting as a finance company that invests the savings of would-be pilgrims in accordance with Shari’ah, but its role is rather limited, as it is a non-bank financial institution.

The success of the Tabung Haji, however, provided the main impetus for establishing Bank Islam Malaysia Berhad (BIMB), which represents a fully-fledged Islamic commercial bank in Malaysia.

The Bank Islam Malaysia (Bank Islam Malaysia Berhad or BIMB) started operations on July 1, 1983 and was established to assist the financial need of the country’s Muslims and to further extend its services to the population at large.

In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds.

In Malaysia, the National Shari’ah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises BNM on the Shari’ah aspects of the operations of these institutions, as well as on their products and services.

In June 2005, Dow Jones and Company of New York and RHB Securities of Kuala Lumpur, teamed up to launch a new “Islamic Malaysia Index” — a collection of 45 stocks representing Malaysian companies that comply with a variety of Shari’ah based criteria. Three variables (the total debt of an indexed company, its total cash plus interest-bearing securities and its accounts receivables) must each be less than 33% of the trailing 12-month average capitalization, for example.

Reference should also be made to some Islamic financial institutions established in countries where Muslims are a minority. There was a proliferation of interest-free savings and loan societies in India during the seventies (Siddiqi l988).

The Islamic Banking System (now called Islamic Finance House), established in Luxembourg in l978, represents the first attempt at Islamic banking in the Western world. There is also an Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company has been set up in Melbourne, Australia

News on Islamic banking development in the world other than Malaysia.

• The combined assets of Islamic banks jumped by nearly 66 per cent at the end of 2008 despite massive losses suffered by the global banking sector because of the economic crisis, according to a an Arab banking group. From around $350 billion (Dh1.2 trillion) at the end of 2007, the total assets of the world's largest full-fledged Islamic banks surged to around $580bn at the end of 2008, an increase of nearly 66 per cent, the Beirut-based Union of Arab Banks (UAB) said in its monthly magazine, the Arab Banker. Bank Melli Iran remained on the top of the list at the largest Islamic bank at the end of 2008, followed by Al Rajhi Group of Saudi Arabia.

• Sept 29, 2009 - The Korean government submitted a tax proposal to the National Assembly to exempt companies from paying tax on distributions from Ijara and Murabaha, the most common types of sukuk, to help companies sell the notes, the finance ministry said today.

• 23 Sept 2009 - London has become one of the biggest centres for Islamic finance in the world, with five Islamic banks, and many others in the high street offering Islamic financial products, or "windows" as they are known (BBC News)

• Switzerland became the latest Western country to join the booming Islamic finance system, offering a full range of Shari`ah-compliant banking products and services, reported Qatari daily The Peninsula on Friday, November 13. “We are proud to be the first Swiss private bank to offer such a holistic range of opportunities in Islamic finance to the (Middle East) region and on a global scale,” Fidelis M Goetz, Head of Banking Division at Bank Sarasin, told a press conference in the Museum of Islamic Art in Doha.

• CHINA, the new economic powerhouse and one of the world’s fastest growing economies, has set its sights on Islamic banking and finance. The US$3.43 trillion (RM11.11 trillion) economy plans to woo Islamic banking and finance institutions to the country by establishing an Islamic finance hub.Islamic finance, with global assets worth over US$1 trillion (RM3.24 trillion), is now among the fastest growing sectors in international finance.Shenyang, the largest city in northeast China, has started the ball rolling by seeking Malaysia’s expertise in Islamic banking and finance to help establish an Islamic finance centre in the region.If the plan materialises, Shenyang will become the first Islamic banking and financial hub in the country of 1.3 billion people.The plan to establish Islamic finance centre would complement Shenyang Finance Development Target 2010.

• Islamic banking has been on the rise in the Asia-Pacific region, accounting for 60% of the global Islamic banking market. However, despite its rise in the rest of the region, the penetration of Islamic banking in India has been low. This is especially surprising with India having approximately 154 million Muslims and being the second largest Muslim population of the world. As mentioned in the Celent report Rise of Islamic Banking in the Asia-Pacific Region, this is primarily due to a regulatory block which allows Islamic banking to operate only in the form of a Non-Banking Financial Corporation. An amendment in the Banking Regulation Act of India, 1949 is required to allow the Islamic banking system to operate in banks in India.

• According to the quarterly report of De Nederlandsche Bank (DNB) Islamic banking in the Netherlands is on the rise. More and more Dutch financial institutions have an interest in offering Islamic banking. In the Netherlands the potential demand for Islamic banking will rise in the coming years "as a result of a growth in population, the educational and income level of Dutch Muslims," according to DNB. The central bank says that the risk profile of banks deviates from that of traditional banks but the supervision framework is effective, according to the organization.

• 11 June 2009 - Australia could have its first Islamic bank within five years and become an Islamic banking hub if regulatory hurdles can be addressed, government and business leaders say. Assistant Treasurer Nick Sherry said yesterday the Federal Government was committed to making the regulatory framework governing banks flexible enough to accommodate Islamic banking products and services while still protecting consumers.

• France's recently-announced readiness to clear hurdles to Islamic finance reflects a desire to jump on the wagon of the globally-booming industry, analysts believe."It's a strong signal and the players are listening," analyst Emmanuel Volland of the ratings agency Standard and Poor's told Agence France Presse (AFP) on Tuesday, July 22, 2009. France has recently announced plans to adjust its economic and legal frameworks to accommodate Islamic banking activities. Economy Minister Christine Lagarde has briefed Gulf investors on steps "to make (their) activities as welcome in Paris as they are in London and elsewhere." The government is expected to announce fiscal and legal adjustments to accommodate the Shari`ah-compliant industry before the end of July. The modifications will facilitate the issuance of Islamic bonds (Sukuk) and structured real estate transactions

• (MENAFN - Arab News) While the United Kingdom and London in particular may have the pole position in facilitating Islamic finance in Europe, Germany potentially could emerge as an even bigger market for Islamic finance on condition that it gets its act together in several areas especially on introducing enabling legislation and increasing government support. At the first major Islamic finance conference held in Germany and organized by IIR Deutschland in Frankfurt last week, the message was clear that despite the lack of government involvement in the sector, the number of Islamic finance transactions is increasing especially in the real estate and capital markets sectors. "The politicians for their own reasons simply appear not to be interested in facilitating Islamic finance as in the UK," explained Dr. Simon Grieser of the law firm Mayer Brown LLP in Frankfurt.

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6 - Historical view on usury ("riba")

Is Usury (“riba”) and Bank Interest synonymous? Usury is banned among the biggest religions of the world? Can we live in a world without interest? Is there a distinction to be drawn between the term “usury” and “interest” or are they just one and the same thing? What alternatives to interest and usury are opened to the Muslims ….? Let’s look at some historical views on usury.

Usury during Ancient Greek

• Usury existed at all levels of Babylonian Society. Interest rates then varied from 200-500% per annum. If debtor was unable to repay his loan within the time prescribed, the lender has the right to become the master or partial owner of his debtor and family. Debtor will be obliged to work (under bondage) for the lender until debt fully paid off. Usury or “interest” was roundly condemned by ancient Greek philosophers such as Plato and Aristotle. According to them, usury splits society into two distinct classes of wealthy lenders and the poor borrowers.
• During 451-450 BC, Law of the Twelve Tables was established, fixing the rate of interest at about 12 per cent. The 12 per cent rate remained in force until the code of Justinian (AD 533) according to which, the rate of interest had to be agreed upon in consonance with the status of the borrower. According to Roman Law interest was considered as compensation to the lender in the event that the borrower, failed to repay his debt by the agreed due date.

Usury in Hinduism and Buddhism

• Oldest Indian manuscripts against usury found in the Vedic texts of Ancient India (2000-1400 BC) in which the “usurer” (kusidin) is mentioned several times and interpreted as any lender at interest. More frequent and detailed references to usury found in the later Sutra texts (700-100 BC), as well as the Buddhist Jatakas (600-400 BC).
• Sentiments of contempt for usury found:- Vasishtha, a well known Hindu law-maker of that time, made a special law which forbade the higher castes of Brahmanas (priests) and Kshatriyas (warriors) from being usurers or lenders at interest. Also, in the Jatakas, usury is referred to in a demeaning manner: “hypocritical ascetics are accused of practising it”. By the second century AD, however, usury had become a more relative term, as is implied in the Laws of Manu of that time. “Stipulated interest beyond the legal rate being against (the law), cannot be recovered: they call that a usurious way (of lending)” (Jain, 1929: 3-10). This dilution of the concept of usury seems to have continued through the remaining course of Indian history so that today, while it is still condemned in principle, usury refers only to interest charged above the prevailing socially accepted range and is no longer prohibited or controlled in any significant way.
  

Usury in Judaism

• The Law of Moses “Thou shall not give him the money upon Usury nor lend for increase (Lev.25:37). According to the Old Testament, the distress experienced by an individual that forced him to borrow money was a term of Judgment on his past sins. In addition; if a man borrowed money and subsequently failed to repay the debt, he would be considered a wicked man. However, the Old Testament usually sympathized with the poor and the rich were expected to hold their more unfortunate neighbours with benevolent loans (al-Qhad Hassan).
• Criticism of usury in Judaism has its roots in several Biblical passages in which the taking of interest is either forbidden, discouraged or scorned. The Hebrew word for interest is neshekh, literally meaning "a bite" and is believed to refer to the exaction of interest from the point of view of the debtor. In the associated Exodus and Leviticus texts, the word almost certainly applies only to lending to the poor and destitute, while in Deuteronomy, the prohibition is extended to include all money lending, excluding only business dealings with foreigners. In the Leviticus text, the words tarbit or marbit are also used to refer to the recovery of interest by the creditor.
• The Old Testament taught that the charging of interest between Israelites was unlawful. In contrast however, interest was permitted if the transaction involved an Israelite and a foreigner (Ex-JEDT-23). The basic assumption for this distinction between the Jew and the non-Jew was that the Jewish borrower was poor and it was therefore an obligation on his Jewish brother to provide him with an interest free (benevolent) loan. In addition, it also forbids the Jew from being involved in any usurious transaction between Jews in the capacity of witness, agent, mediator or surety. As result of the interpretation, the Jews persisted in charging high interest in their dealings with non-Jews e.g. story of the Merchant of Venice.
  

Usury in New Testament

• Luke 35 ‘But love ye enemies, and do good, and lend hoping for nothing again; and your reward shall be great and ye shall be the children of the Highest for he is kind unto the unthankful and to the evil.” Exodus 22:25 “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury” Psalm 15 “ He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these things shall never be moved”.
• In 1179, a canon of the Third Lateran Council ordained that “Manifest usurers shall not be admitted communion, nor if they die in their sin, receive Christian burial.”From this it is apparent that usury per se and usury under any circumstances were considered as a violation of justice. With passing of time, however, Popes and Council had to deal with new practices (adopted practices introduced by Jews e.g. banking system).
• The position on Usury has remained pervasive through to present-day thinking in the Church, as the indicative views of the Church of Scotland (1988) suggest when it declares in its study report on the ethics of investment and banking: “We accept that the practice of charging interest for business and personal loans is not, in itself, incompatible with Christian ethics. What is more difficult to determine is whether the interest rate charged is fair or excessive.”

Pre-Islamic Arabia

It was customary for one to borrow from another at usurious (high) rates of interest. If the lender did not receive his principal and interest by the agreed due date, he would increase the amount of the debt and the rate of interest payable on it.

Usury in Islam

• When Islam was revealed, among its teachings was the prohibition of usury.
• It was reported that the Prophet Mohammad (PBUH) cursed i) those who took and (ii) paid usury and (iii) those who were witnesses and (iv) writers of usurious contracts. It was also reported that the Prophet said that all of the four types of people mentioned were equal in their sin due to their involvement in usury. Issue on usury, had exhaustively discussed by Muslim Jurists. They had arrived at the view that “Usury occurs when there is surplus on a debt you pay”. In other words, if a borrower repays even one Ringgit more than the principal, this one Ringgit is considered as usury. It should be pointed out that, in Islam not every “surplus” in transaction is prohibited. Surplus which arises from buying and selling is considered legitimate and lawful.
• Important verses of the Quran (muslim holy book) THAT RESULTED in the development of Islamic Banking is noted in article 2- Prohibition of Usury ("Riba") in Islam.

For more details about usury in Christianity and Judaism, please view : http://www.lariba.com/default.htm

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5 - The concept of "Halal"

Every religion has its own set of rules and beliefs. The concept of Halal is one such aspect of food preparation which is quite stringent and strictly followed. Halal is an Arabic word meaning lawful or permitted. It is what Sharia allows, and based on the General Guidelines for Use of the Term Halal - ( CAC/ GL 24-1997 1 ) issued by the Secretariat of the Joint Food and Agriculture Organisation of the United Nations ( FAO )/ World Health Organisation Food Standard Programme, halal food is defined as food fulfiling the following conditions:

• Does not consist of or contain anything which is considered to be unlawful;
• Has not been prepared, processed, transported or stored using any appliance or facility that was not free from anything unlawful;
• Has not in the course of preparation, processing, transportation or storage been in direct contact with any food that fails to satisfy the above two conditions;
• In addition, Halal food can be prepared, processed or stored in different sections or lines within the same premises where non-Halal foods are produced, provided that necessary measures are taken to prevent any contact between Halal and non-Halal foods.

Halal foods can also be prepared, processed, transported or stored using facilities that have been previously used for non Halal foods provided that proper cleaning procedures have been observed.

Food of plant origin
• Intoxicating and hazardous plants except where the toxin or hazard can be eliminated during processing

Alcoholic drinks• All forms of intoxicating and hazardous drinks

Food additives
• All food additives derived from the above.

Slaughter

Slaughtering of lawful animals is also regulated. This is explained by the guideline that all lawful land animals should be slaughtered in compliance with the rules laid down in the recommended Code of Hygienic Practice for fresh meat ( CAC/ RCP 11, Rev. 1-1993) and the following requirements:

• The person should be a Muslim who is mentally sound and knowledgeable of slaughtering procedures;
• The animal to be slaughtered should be lawful according to Islamic law;
• Both animal and the slaughterer must face the qibla (or qiblat), the direction in which the Holy Kaaba is located, when slaughtering;
• The animal to be slaughtered should be alive or deemed to be alive at the time of slaughtering;
• The slaughtering device should be sharp and should not be lifted off the animal during the slaughter act;
• The slaughter act should sever the trachea, esophagus and main arteries and veins of the neck region;
• All food should be prepared, processed, packaged, transported and stored in such a manner that it complies with Halal definition mentioned above. In short, production of halal products requires certain raw materials, additives, process, handling and transportation to meet the term of Halal as mentioned. In addition, the food industry should have a good system in order to assure that the products meet this requirement forever and no mistake can be made during the production period.

Interesting article on "Response of Muslim Council of Britain to the Farm Animal Welfare Council (FAWC) of UK"
FAWC of UK has came-up with a statement that slaughtering without pre-stunning is unacceptable and that the Government should repeal the current legislation” is misleading and is not based on objective evidence (Para 194 states, it is difficult to measure pain and distress during slaughter process in an objective matter. FAWC ignored the work of Grandin and Prof. Schulze, which can be summarized as follows:-

Grandin finding:

a) Features that keep the animals calm and reduce stress

Applicable to both religious as well as mainstream slaughter after stunning:
• Design features in the slaughter house (lair age, non-slippery flooring, solid walls, non-reflective surfaces, lowering of noise);
• Use of Upright Body and head restraint systems;
• Automated conveyor track;
• If handled gently and calmly, cattle enter voluntarily into the box;
• Cattle will place their heads in a well-designed head restraint.
• Device that is properly operated by a trained operator.

b) Pain perception during incision:

• Use of very sharp knife, at least twice as long as width of the neck;
• Adequately trained, experienced operator;
• Swift cut, avoiding see saw movement;
• Severance of carotid arteries on both sides;
• Reaction ‘no more than a flinch’ when the throat is cut;
• No further reaction of the animal’s body or legs during the throat cut;
• It appears that the animal is not aware that its throat has been cut.

c) Time to loss of sensitivity:

• Calm cattle collapsed quickly (often within 10 to 15s) and have a more rapid onset of insensibility;
• severing both carotid arteries and jugular veins (required by WASK Religious slaughter Regulation significantly reduces the time to loss of sensitivity;
• Using rapid cutting stroke (95%) of calves collapse almost immediately;
• Conversely, a slow knife stroke retained consciousness for up to 30 seconds in up to 30% cattle.

It is clear therefore, that provided attention is given to the design, construction and operation of the slaughterhouse, appropriately trained personnel are employed to handle animals appropriately, religious method is the least painful and most humane method of slaughter. That this evidence is based on work with cattle is further proof that on balance cattle slaughtered without pre-stunning DO NOT experience very significant pain and distress’. It is only appropriate, therefore that the Government rescind their statement that animals (especially cattle) slaughtered without prestunning are likely to experience very significant pain and distress.


Prof. Schulze statement “Islamic method of slaughter is most humane and least painful”

A study carried out by Prof Schulze and colleagues at the School of Veterinary Medicine, University of Hanover, Germany has shown that EEG recordings in animals slaughtered by the Islamic ‘halal’ method did not show any change from the graph before slaughter during the first 3 seconds - indicating thereby that the animal did not feel any pain. The EEG recordings of the following 3 seconds showed a condition of deep sleep – unconsciousness; due to large quantity of blood gushing out of the body. Following these 6 seconds, the EEG recorded zero level while the ECG showed heart beating and body convulsing – a reflex action of the spinal cord); simultaneous ECG recordings showed rapid pulse. EEG recordings of animals that were subjected to stunning by the captive bolt method were apparently unconscious soon after stunning but the EEG showed severe pain immediately after stunning followed by cardiac arrest.


Mercy Halal Islamic Slaughter Part 1

Mercy Halal Islamic Slaughter Part 2A

Mercy Halal Islamic Slaughter Part 2B

Mercy Halal Islamic Slaughter Part 3

Criteria for use of the term Halal

Under the Islamic Law, all sources of food are lawful except the following sources, including their products and derivatives which are considered unlawful :-

Food of animal origin
• Pigs and boars;
• Dogs, snakes and monkeys;
• Carnivorous animals with claws and fangs such as lion, tiger, bears, similar animals;
• Birds of prey with claws such as eagles, vultures, and other similar birds;
• Pests such as rats, centipedes, scorpions and other similar animals;
• Animals forbidden to be killed in Islam, like ants, bees, and woodpecker birds;
• Animals which are considered generally repulsive such as lice, flies, maggots and other similar animals;
• Animals that live both on land and in water such as frogs, crocodiles and other similar animals;
• Mules and domestic donkeys;
• All poisonous and hazardous aquatic animals;
• Any other animals not slaughtered according to Islamic Law;



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4-Topics for discussion

As a guide, the following topics will be discussed. Although some of the topics are a bit technical, we shall try to explain and express the same with simple examples.

1.0 INTRODUCTION

 Why Islamic Banking?
 Islamic Banking in Malaysia
 Doctrine of Usury (Riba)
 Usury - Historical Overview
 Sources of Syariah Law
 Syariah Requirement & Prohibitions
 Essential Elements and Necessary Conditions in Contract
 Types of securities allowed under Syariah Law
 Why the need of separate Banking System for Muslim?
 Common questions raised by those who do not understand Islamic Banking!
 Is Islamic Banking for Muslim Only?
 Syariah Qualification (how to determine whether a company is doing “halal” business)

2.0 SOURCE OF FUNDS

 Shareholders’ Equity
 Customers Deposits (detailed comparison between conventional and Islamic account deposits, inclusive brief outline on deposits offered by commercial banks)
 Al-Wadiah savings
 Al-Mudharabah – General Investment Account
 Al-Mudharabah – Specific Investment Account
 How Islamic banks fund its operation via Islamic Interbank Money Market (IIMM)
 IIMM mechanism and types of IIMM products

3.0 APPLICATION OF FUNDS

(Types of financing facilities – comparative approach between conventional & Islamic banking and practical application)

 Murabahah/Al-Bai Bithaman Ajil/Commodity Murabahah (Tawarruq transaction?)
 Cash line facility (Overdraft)
 Al-Murabahah (inclusive revolving credit/Vehicle Floor Stocking)
 Al-Mudharabah (Trustee Joint Venture Financing)
 Al-Musyarakah (Joint Venture Financing)
 Al-Ijarah Thumma Al-Bai' (AITAB-Islamic Hire Purchase)
 Al-Kafalah (Bank Guarantee)
 Al-Qhardul Hassan (Benevolent loan)
 Istisna Ijarah Mawsufah Fi Zimah (Order Sale and Forward Leasing)
 Al-Ijarah Muntahiya Bitamlik (Leasing ending with ownership)
 Al Rahnu (pawn broking)
 Brief overview on Islamic Structured products & Islamic Capital Market (including Islamic REITS)

4.0 HOW IS PROFIT CALCULATED AND SHARED BETWEEN BANK AND CUSTOMERS?

 Income recognition method and formula use by Islamic banks;
 Understand profit distribution table (common format for profit distribution between Bank and the Customer);
 Transfer pricing via inter-branch profit distribution/incentive.

5.0 ISLAMIC BANKING ACCOUNTING

 Examples of Accounting entries;
 Islamic banking treatment on General Provision (GP)
 Islamic banking treatment Non-Performing Accounts (BNM GP3 guidelines)
 Loss Write-Off

6.0 OPERATIONS

 Price structure e.g. multi-tier profit rate, step-up/step-down profit rate.
 Types of progressive disbursement – average method, lump sum and scheduled method.
 Reschedule of payment and treatment on partial payments;

7.0 BRIEF OVERVIEW ON ISLAMIC LEGAL DOCUMENTATION

 Types of Agreements (market practice)
 Common flaws in legal documentation(to detect usual flaws in legal documents drafted by lawyers)
 Court Jurisdiction – Shariah or Civil Court
 Some past legal cases and legal precedence (focus on Zulkifli Vs Affin Bank)
 Special Courts & Tribunal

8.0 WHICH IS CHEAPER & PROFITABLE – COMPARATIVE STUDY BETWEEN CONVENTIONAL AND ISLAMIC BANKING BUSINESS
 Consumer point of view! (to prove Islamic Banking facility is cheaper than conventional facility)
 BLR trend for last 24 years – fixed versus variable interest rates (as benchmark for Islamic banking pricing?!)
 Impact of 1997 currency crisis in banking industry i.e. on conventional and Islamic banking system and customers.
 Bankers point of view (to prove some of the Islamic Banking products are more profitable than conventional banking products although technically cheaper???)
 Effective Return comparison between Islamic and conventional banking

9.0 CHALLENGES

 Challenges, Future direction and industry trend
 Past Performance & Industry Statistics on Islamic banking.

10. TRUE ISLAMIC BANKING

 What are the true Islamic banking products? The writer point of view
 Why Muslim scholars continue arguing this and that product is non-Islamic or more Islamic?
 Why are we moving backward i.e. trying to emulate conventional products like derivatives and name the product as Islamic derivative?

Other topics that the writer will examine are Takaful and Capital Market Product (including sukuk, structured products).
Please take note that some of the topics that will be discussed above, may not be the general view of Islamic bankers, regulators or even Islamic banking scholars. In addition, the writer may also write his own view based on the writer's own experience on the operation and practical aspects of the Islamic banking business.


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3-Buy and sell transaction

Salaam, before we go into Islamic banking concept proper, I would like to remind all visitors on various wrong terminologies or choice of words used by the media, writers, some Islamic scholars and also some Islamic bankers (especially those with conventional background and just joined Islamic banks). To ensure everything to do with Islamic banking is shariah compliant, we must ensure correct terminologies and words are used to avoid gharar' (ambiguity). Let's examine the various terminologies commonly used now in describing Islamic banking products:-

Buy and Sell transaction

1. Islamic banking loan - financing concept which are sale related (under contract of buy and sell) like Murabahah (deferred payment sale) or Al-Bai Bithaman Ajil (actually murabahah but was given special product name by Bank Islam to denote deferred payment sale facility with payment tenor of above 12 months), Al-Mua'jjal (or any other names given by Islamic banks) is NOT A LOAN. The only Islamic loan product available is Al-Qhadhul Hassan or benevolent loan which is 100% profit free. If bank grant a customer a RM100,000 loan payable over say, 1 year, the maximum amount that the customer need to pay-back to the bank is RM100,000. "Trade is like riba but Allah permitted trade and prohibited riba". Thus, due to the fine line between trade and riba, the correct word to describe Islamic banking sale contract such as Murabahah should be "financing or pembiayaan" instead of "loan or pinjaman";
2. The word "borrower" which is meant for an Al-Qhadhul Hassan borrower, should be termed as "customer" under a sale transaction. When the word borrower is used, technically it means someone that need to repay a loan and since Murabahah is not a loan but a sale contract, customer is the right word to describe the transactors i.e. seller (the bank) and customer (buyer).
3. Term like "repayment" means, to repay a loan. To avoid gharar', the best choice of word should be "payment" for example, "payment of monthly installment" or "payment of sale price".
4. The word "interest" is also commonly used?! In a sale transaction, one need to sell higher than the original purchase price to make profit. Without profit, nobody in this right mind would engage in business transaction. Likewise, when a bank purchase a property (with intention to resell at a profit) at RM100,000 and sold it for RM120,000 to the customer (buyer), it means the Bank makes profit of RM20,000. Under the contract of buy and sell, the sale price is the ceiling price that the customer will pay or the bank will charge! This mean, if the customer defaults, the maximum amount that the bank can claim from the customer is only RM120,000. Under conventional bank, the bank shall continue to charge interest on compounding basis i.e. interest upon interest, until the loan is repaid. However, in reality, to avoid customers taking advantage on Islamic banks, National Shariah Advisory Council of Bank Negara Malaysia (BNM-NSAC) allowed Islamic banks do charge compensation charges (or penalty fee) on late payment but whatever compensation charges collected by the bank, are normally given to charitable organisation. Compensation charges should not be a source of income to the bank but as an attempt by the Bank to avoid customer from delaying payment. It is interesting to note that Banks in South Korea charge penalty interest at 12% per annum (much higher than the normal lending rate of between 6-8% per annum) to ensure borrowers pay promptly. If we examine this practise, in Korea paying promptly is cheaper than delaying payment. To think about it, it is good if this system can be implemented in Malaysia to avoid overdue payments.
5. Another term wrongly used is "repayable on demand or to recall the facility". This term is commonly use by Islamic banks to take action on defauting customers i.e. to recall the loan. Islamic Bank cannot use similar term for a deferred payment sale contract. To avoid gharar', the correct term that the bank should use is, for example, "the bank reserve the rights to accelerate the monthly installments or accelerate the payment of the sale price" instead of recalling the facility.

The wrong terminologies used by Islamic bank may not be a concern now but we never know when it comes to recovery through the process of Shariah law, the wrong choice of words may render the sale transaction as non-Shariah compliant.
We'll learn more about the proper terminology to be used for other products as we engage the various Islamic banking topics in this blog.

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2-Prohibition of Usury ("Riba") in Islam

Those who devour usury will not stand except as stand one whom the Evil one, by his touch, Hath driven to madness. That is because they say: “Trade is like usury,” but God hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for God (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever).

God will deprive usury of all blessing, but will give increase for deeds of charity: For He loveth not creatures ungrateful and wicked Those who believe, and do deeds of righteousness, and establish regular prayers and regular charity, will have their reward with their Lord: on them shall be no fear, nor shall they grieve.

O ye who believe! Fear God, and give up what remains of your demand for usury, if ye are indeed believers. If ye do it not, Take notice of war from God and His Apostle: But if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly. (Surah Al Baqarah Verses 275-276, 279)

There are three (3) strong reasons why all Muslims MUST avoid usury:

1. Allah permitted trade and forbidden usury (riba);
2. Allah will deprive usury of all blessing, this applies to the receiver, the giver and the witness;
3. Allah and his Apostle (Muhammad S.A.W) declare war to receiver of usury.

The Prophet (pbuh) thus made it abundantly clear that the greatest danger to the integrity of the "ummah" and the faith ("iman") of the believers would come from riba. This was confirmed by the warning from Allah Himself which was pronounced in the choice of riba as the subject of the last revelation.


In todays' Muslim world, most Muslims pray 5 times a day, fast during the month of Ramadhan and most importantly he/she declares himself or herself as a Muslim but quite many are also still indifferent when it comes to riba. They do not take pork (taught by their parent from young age) but yet they ignore the implications of receiving and giving usury (like working in conventional banks? invest in usury investments such as conventional bank fixed deposits, stock, unit trust etc or take-up conventional loan, conventional credit card etc?). Perhaps, 25 years ago we can say that one takes usury because of "dharurat" or "darurah (necessity) since there was no Islamic banking product then but since the establishment of Bank Islam in 1983, particularly now with so many Islamic banks in Malaysia and throughout the world, "dharurat" should no longer apply. Muslims have no choice but to use Islamic banking financial services and more importantly, to avoid riba investments. Bank Negara Malaysia statistics in 2008 indicated that there was over 9.3 million credit cardholders in Malaysia but only about 500,000 of the cardholders use Islamic credit cards? Let's assume, half of current credit cardholders are Muslims, why are they still indifferent between a "halal" and a "non-halal" credit card? Let's not deliberate whether current Islamic credit card product is considered shariah compliant (some Muslim scholars still argue on the Shariah principle used for Islamic credit card...we shall examine this later) but most importantly, if they claimed to be a Muslim, they should immediately switch to Islamic credit card.

Some says" Islamic banking is more expensive than conventional borrowing!?" Even if the statement is true (I will prove this statement is wrong in later article), must one forgo "halal" Islamic banking products for a "non-halal" conventional banking products? In the Western countries where "halal food" is difficult to get, one is willing to pay premium for the "halal" food but in Malaysia (if we are to use similar reason) as a Muslim, one MUST use Islamic banking product since Allah deprive blessing to users and takers of usury. Again the writer would like to stress that the Muslims today (particularly in countries where there are Islamic banks) have no choice but to use "halal" Islamic financial products.

There is a hadith of the prophet Muhammad S.A.W (pbuh) that says, "The sin of riba (usury) is as though one is having sex with his mother or father 36 times". This hadith indicates how severe is the sin of taking "riba". Worse than that, Allah and his prophet (pbuh) declared war on the receiver (including taker and witness) of riba. Please read this carefully, ALLAH DECLARED WAR TO THE RECEIVER OF RIBA.
With years of working experience in both conventional and Islamic banking system, with the help of Allah, the writer shall provide simple explanation, examples in the form of mathematical calculations, legal implications to prove that Islamic banking is relatively cheaper and less discreminating (when it comes to financing products) compared to conventional banking.




IslamicBankingWay.Com
ALLAH KNOWS BEST

1-Why this blog was set-up?

Assalamu alaikum warahmatullah and good day!

Effective today, Saturday 25th July 2009, the writer shall be writing about practical "step by step procedures and practises" on Islamic banking in Malaysia couple with comparative analysis between Islamic and Conventional Banking. This blog will cover various types of Islamic banking products (including the relevant Shariah principle applicable to the products), how bank calculates and share profits with their customers, why Islamic banking products are cheaper than the conventional products (yet profitable to the Bank) and other relevant issues relating to Islamic Banking.The writer shall also comment other products offered by Islamic banks outside Malaysia.

It should be noted that the Writer will be writing at his own time thus, for those who are doing research etc where you need immediate information, suggest you look for other Islamic banking websites and sources. What will make this blog different from the others, is that the Writer shall be writing on his "practical experiences,  actual application and implication (covering accounts, operations, risk,a audit etc), including actual examples" which you may normally not get from other websites. 

For those who are interested for updates, suggest you register yourself under " Follow by email" as whenever this blog is updated, you will be automatically updated. However, the Writer would like to disclaim all liabilities in relation to your email addresses (from use or abuse) as the "Follow by email" software belongs to a third party.

For those who are keen to get fee copy of the "Islamic Banking e-Book" (old version) you may register under "Join this site - Followers". Whenever an updated version is ready for distribution, you may request the same, also for free.

All materials to be posted in this blog may be used, copied, reprint and distributed for sharing purposes but not for commercial benefits. However the Writer would sincerely appreciate that , if articles from this blog are used as reference,  the user to mention this blog address  http://www.islamicbankingway.com/ basically to assist the Writer in his campaign to get more visitors to his blog.

The writer also welcome comments, articles, opinion and constructive criticism for the benefits of all "ummah" and also for benefits of non-Muslims who are keen to know about Islamic Banking operations and most importantly to Muslims, who are still "indifference" about Islamic banking.

Thank you and Allah knows best.

Ismail Hj Aminuddin
IslamicBankingWay.Com
Wassalam