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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