A Practical Call for Shariah-Compliant Product Innovation
Before
we explore the product concepts below, it's important to set a practical
disclaimer. The modern fractional-reserve banking system, which has its
roots in 17th-century Europe (click to know more: An Economist's View on Fractional
Reserve Banking) has evolved over the centuries into the global standard, is a deeply entrenched
international order. Realistically, fundamentally changing this system is a
monumental task, one that requires immense and coordinated political will from
conscious leaders around the world.
However,
as a former Islamic banker, the writer firmly believe that we are not without options. Rather
than waiting for a systemic overhaul, we can—and must—work pragmatically within
the current framework to innovate. Our primary goal should be to structure
Islamic banking products that genuinely meet Shariah requirements,
addressing potential compromises on both the funding (deposits) side and the
financing (assets) side of the balance sheet.
A Challenge to Practitioners
and Students
This
blog post is intended to spark that innovation. The following product ideas are
suggestions for talented Shariah advisors (who may not always have the
opportunity to be practising bankers) and for the next generation of students
in Islamic banking.
To
work on these challenges, let's temporarily set aside the conventional
regulatory constraints, such as the Basel requirements and other standard
banking procedures, and perhaps land laws and other regulatory requirements.
Instead, let's first focus on building the operational procedures and contracts
for these products from the ground up, ensuring they are fully
Shariah-compliant and practically implementable.
Once
the concepts are solid, we can then study how to fit them into the existing
regulatory framework or seek the necessary exceptions to allow them to be
implemented. The products detailed here may already exist in some niche form,
and they may be viable for today's market, or they may be concepts for the
future. The crucial work is to develop them.
The True Alternative: A Full-Reserve Institution
This
brings us to a fundamental question: how can we design products that strictly
avoid the warning in Surah Al-Baqarah 2:278 & 279?
Al-Baqarah (2:278)
يَٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُواْ ٱتَّقُواْ
ٱللَّهَ وَذَرُواْ مَا بَقِيَ مِنَ ٱلرِّبَوٰٓاْ إِن كُنتُم مُّؤۡمِنِينَ
278. O you who have believed, fear Allah and give
up what remains [due to you] of interest, if you should be believers.
Al-Baqarah (2:279)
فَإِن لَّمۡ تَفۡعَلُواْ فَأۡذَنُواْ بِحَرۡبٖ
مِّنَ ٱللَّهِ وَرَسُولِهِۦۖ وَإِن تُبۡتُمۡ فَلَكُمۡ رُءُوسُ أَمۡوَٰلِكُمۡ لَا
تَظۡلِمُونَ وَلَا تُظۡلَمُونَ
279. And if you do not, then be informed of a war
[against you] from Allah and His Messenger. But if you repent, you may have
your principal - [thus] you do no wrong, nor are you wronged.
A
Framework for a Full-Reserve Shariah Bank
The answer begins with
abandoning the foundational structure of modern banking: fractional-reserve
banking. In a conventional fractional-reserve system, money is created as
interest-bearing debt, a mechanism that is systemically inseparable from riba
(interest).
A true
Shariah-compliant alternative would, therefore, be a Full-Reserve Financial
Institution. This institution would not be a "bank" as we
currently know it, as it would not (and could not) create new money. Instead,
it would act purely as a trustee (Amin), a manager (Mudarib), and
a partner (Sharik), dealing only with 100% real, existing assets and
capital.
The Parliamentary
'Workaround'
For this institution to
function in the modern economy, it must be able to accept deposits and access
payment systems. This requires a novel legal solution.
A practical approach,
such as one that could be proposed under a nation's legislative body (like the
Malaysian Parliament), would be the creation of a new, distinct category of
banking license that can fit in with the current Islamic banking system (requires conversion)
This special charter,
which we can call a 'Full-Reserve Shariah Bank' license, would legally recognise
the institution as a 'bank' but explicitly exempt it from the
conventional framework built on fractional-reserve lending.
A
New Regulatory Paradigm: 'Asset-Fiduciary Compliance
This new model would
require a new regulatory focus. Instead of regulating capital adequacy
(which presumes leverage and risk-shifting), this special provision would
regulate 'Asset-Fiduciary Compliance.'
The primary regulatory
oversight would shift to:
- Enforcing the 100% Reserve:
Mandating and auditing to ensure every Ringgit of depositor funds is 1:1
backed by tangible, existing assets, not by credit "created"
from nothing.
- Validating Contractual Roles:
Legally certifying its functions as Amin (Trustee), Mudarib
(Manager), and Sharik (Partner), ensuring all profits and losses
are shared according to these specified, Shariah-compliant contracts.
- Ring-Fencing:
Legally and operationally separating the institution from the
interest-based interbank system, ensuring its liquidity and operations
remain pure. Since most current Islamic banks are subsidiaries of the existing banks, it will be much easier to fit in.
In essence, Parliament
wouldn't be changing the institution to fit the old definition of a 'bank'; it
would be creating a new, precise legal definition designed exclusively for this
asset-backed, trust-based model. This innovative step, however, is contingent
upon the 'political will' to enact such a fundamental reform.
The
alternative is a Full-Reserve (or 100% Reserve) Financial Institution. This
institution would not be a "bank" as we know it, as it would not (and
could not) create money. It would act as a trustee (Amin), a manager
(Mudarib), and a partner (Sharik), dealing only with 100% real,
existing assets and capital.
A
Note on Terminology: Why 'Member' instead of 'Depositor'
Before
we start, let's look at the term 'Member,' which is used exclusively throughout
this document to distinguish this institution's proposed model from that of a
conventional, fractional-reserve bank.
- A 'Depositor'
relationship implies a debtor-creditor contract, where money is lent to a
bank, which then uses those funds to create new interest-bearing debt.
- A 'Member'
in this institution engages in true Shariah-compliant contracts. They are
either:
- A partner
(Rabb al-Mal or capital provider) who places capital into a Mudarabah
(profit-sharing) investment, sharing in real business risks and profits.
- A client
who pays a fee (Ujrah) for a pure Wadiah (safekeeping)
service, where the institution acts as a trustee (Amin) and funds
are held at 100% reserve.
This
terminology is critical to reflect that the relationship is based on
partnership, trade, and trust—not interest-bearing debt.
A Collection of
Shariah-Compliant Products
Here
are 12 products an institution could offer, all based on real-sector economic
activity (trade, leasing, partnership) and strictly avoiding the legal fictions
used in many "disguised Riba" products (such as Tawarruq or Inah).
1.
The 100% Reserve Trust Account
(a) Name: The Trust-Keepers Account (Al-Wadiah
al-Amanah)
(b) Structure: This is a pure Wadiah
(safekeeping) contract. Members deposit their funds (e.g., a state-issued fiat currency or, perhaps in the near future, digital gold currency) with the institution. The institution holds these
funds at 100% reserve, meaning every single dollar deposited is
physically or digitally held in trust and never lent out.
(c) What is Charged: A fixed service fee (Ujrah)
for safeguarding the funds, processing transactions, and maintaining the
account. This could be a flat RM10/month or a tiered fee based on the amount
deposited, reflecting the higher cost of safeguarding or insuring the funds (perhaps
to support the cost of Takaful coverage).
(Note: A study would be needed to
confirm the Shariah compliance of using Takaful to insure deposits in this pure Wadiah and other placement/deposit structures, if PDIM does not apply)
(d) How to Refund: This is not a loan. The members can
withdraw their funds on demand at any time, in full.
2A. Profit-Sharing Investment Fund (Al-Mudarabah – General Fund)
(a) Name: The Managed Investment (Al-Mudarabah)
(b) Structure: This is for members who want their
money to grow but are willing to accept business risks. The member (as Rabb
al-Mal, or capital provider) deposits funds into an investment pool. The
institution (as Mudarib, or manager) uses this capital to invest in
real, productive, Shariah-compliant assets and businesses (e.g., funding a
local farm, buying equity in a tech startup).
(c) What is Charged: No "interest" is charged or
paid. The institution and the member share the actual profits from the
venture according to a pre-agreed ratio (e.g., 60% for the member, 40% for the
institution). If there is a loss, the member bears the financial loss, and the
institution loses its time and labour. This is true risk/reward sharing.
(d) Profit Distribution and Principal
Redemption: This is an
investment, not a loan. Profits (or losses) are calculated at the end of
a set cycle (e.g., quarterly) based on the average profit of the entire
commingled pool and distributed according to the agreed ratio.
(e) Key Feature (Liquidity): Because this is a General (Unrestricted)
Mudarabah, the member's funds are "bulk funded" into a large,
commingled pool. Therefore, a member's ability to redeem their principal is not
tied to the completion of any single project. Redemption is governed by the
fund's general terms (e.g., an agreed-upon notice period).
2B.
Profit-Sharing Investment Fund (Al-Mudarabah – Specific/Restricted Fund)
(a) Name: The Managed Investment (Al-Mudarabah)
(b) Structure: This is for members who want their
funds invested in a single, pre-selected project they choose (usually marketed by the Institution). The member
(Rabb al-Mal) provides the capital, and the institution (Mudarib)
provides the expertise to manage that specific venture (e.g., "ABC Halal
Food Truck"). The amount invested normally matches the project
requirement, or a group of members combine to fund it.
(c) What is Charged: This is a true risk/reward sharing model. In case of profit, the actual profits from that specific venture are shared at a pre-agreed ratio. In case of loss (with no negligence by the Mudarib), the member bears the financial loss, and the institution loses its time and labour.
(d) Profit Distribution and Principal Redemption: This is an investment, not a loan. Profits, losses, and the ability to redeem principal are all directly tied to the completion, liquidation, or exit from that single project. Risk is concentrated on this one venture.
Key
Distinction: General vs. Specific Funds
|
Feature |
General
(Unrestricted) Fund |
Specific
(Restricted) Fund |
|
Concept |
Funds
are placed into a large, commingled investment pool with other
members. |
Funds
are allocated "back-to-back" to one single, pre-selected
project or deal. |
|
Manager's Role |
The
institution has broad discretion to invest the entire pool across all
its deals. |
The
institution can only use funds for the specific project you agreed to
finance. |
|
Risk & Return |
Return
is based on the average profit of the entire pool. Risk is
diversified. |
Return
is tied directly to the success or failure of that one project.
Risk is concentrated. |
|
Example |
Investment
of RM10,000 into the "General Investment Account." |
Investment
of RM100,000 specifically to finance the "ABC Halal Food
Truck" project. |
To ensure fairness, the institution must have specific terms and conditions that mitigate risks, clearly outline the responsibilities of each party, and establish remedies for negligence or breach of contract by the institution (the Mudarib). The detailed drafting of these operational requirements would be the work of the institution's legal and Shariah scholars.
3.
Joint Venture Financing
(a) Name: The Joint Partnership (Al-Musharakah)
(b) Structure: A member (e.g., a business owner) needs
capital. The institution provides capital not as a loan, but as an equity
partner. Both parties contribute capital and/or expertise to a specific
project.
(c) What is Charged: Both parties share the profits
based on a pre-agreed ratio. Losses are shared strictly in proportion to the
capital contribution.
(d) How to Repay: This is a partnership, not a debt. The
institution is "repaid" by receiving its share of the profits. The
partnership can end after a set time, a profit target, or by the member
gradually buying out the institution's shares.
4.
Declining or Diminishing - Balance Partnership (for Home/Asset Ownership)
(a) Name: Diminishing Partnership (Musharakah
Mutanaqisah)
(b) Structure: This is the true alternative to a
mortgage. The member and the institution buy an asset (like a house) together.
For example, the institution pays 80% and the member pays 20%. They are now
co-owners. The member lives in the house and pays rent (Ijarah) to the
institution for using its 80% share. With each payment, the member also buys a
small portion of the institution's share (e.g., 1%).
(c) What is Charged: A rental fee (Ujrah) on the
institution's portion of the asset, tied to the rental value of the property. As
the member's ownership grows (e.g., to 21%), the rent they pay decreases
(as they now only rent 79%).
(d) How to Pay: The member's monthly payment is part rent, part buy-out. They "pay" by slowly purchasing the institution's equity share (usually the principal amount of the original investment after deducting the buy-out portion) until the member owns 100% of the asset. Both parties share the risk of the asset's value
A concept already explained in my earlier (No. 34) blog page: https://islamicbankingway.blogspot.com/2020/05/34b-dmf-shariah-concept.html
5.
The Tripartite Development Partnership
(a) Name: The Tripartite Development Partnership
(Musharakah al-Ta'awun)
(b) Core Concept: A three-way partnership between the Institution
(as financier), a Landowner (as equity partner), and a Contractor
(as service provider) to build and sell properties at a fair, cost-plus-profit
price. This model bypasses the conventional developer, providing full cost
transparency and making homes more affordable.
(c) The Parties & Their Roles:
- The
Institution (Financier & Managing Partner): Provides cash capital for construction,
project management expertise (by hiring experts or through outsourcing or setting
up a subsidiary), and manages finances/sales.
- The
Landowner (Equity Partner):
Contributes the land as their "in-kind" capital share and becomes a
partner in the project's profits or units.
- The
Contractor (Service Provider / Sani'): Provides all labour and materials and construction
services for a fixed, pre-agreed fee. This is a service contract (Istisna'),
not a partnership.
- The End Buyer (Client): An Individual or first-time house buyer who can afford and purchase a home at a transparent, lower price.
(d) Structure: A Phased Approach
- Phase
1: The Joint Venture (The Musharakah) The Institution and Landowner form a Joint Venture (JV) or
SPV. The land is valued (e.g., RM1M) and the Institution commits the
construction cash (e.g., RM4M). A Profit-Sharing Ratio (PSR) is agreed upon.
- Phase
2: The Construction (The Istisna') The new JV hires a building contractor on a
"Commission to Build" (Istisna') contract. The contractor
gives a fixed, transparent price (e.g., RM4M) to build the 10 houses, and the
Institution pays the contractor in stages.
- Phase 3: Profit Distribution (The Payout) The 10 houses are completed (Total Cost: RM1M Land + RM4M Construction = RM5M). The Landowner has a choice:
- Option
A (Unit Share):
Take their share in physical units (e.g., 2 units).
- Option
B (Profit Share):
The JV sells all 10 houses (e.g., at a 20% markup for RM6M total), and
the RM1M profit is split per the PSR.
(e) Advantages: This structure provides radical cost
transparency (no hidden developer premium resulting sky sky-high pricing, especially in cities like Kuala Lumpur and Johor Bahru) and controls housing prices
(based on Actual Cost + Agreed Profit). The Institution can "stack"
this product with Diminishing Partnership (Product 4) to finance the
end-buyers, creating a complete Riba-free ecosystem.
(f) How the Buyer Pays: Financing Models for Home Ownership. Once the house is built, the final step is to finance its sale to the end-buyer. The institution can offer two primary methods:
- Option 1: The Partnership Model (Diminishing Partnership) The Institution and the Buyer become co-owners (e.g., 90% / 10%). The Buyer's monthly payment is split: (1) Rent (Ijarah) for using the Institution's 90% share, and (2) Acquisition to buy a small portion of that share. The title is held jointly. As the Buyer's share grows, the rent they pay decreases, until they own 100%.
- Option 2: The Direct Sale Model (Cost-Plus Deferred Sale) The Institution sells the house (transparent cost, e.g., RM100,000) to the Buyer at a fixed, transparent, cost-plus price (e.g., RM130,000). This RM130,000 is divided into equal, fixed monthly instalments. The payment is fixed for the entire term. The title can be transferred on Day 1, with the Institution taking the title as collateral (Rahn).
Comparison
of the Two Financing Models
|
Feature |
Option
1 (Partnership Model) |
Option
2 (Direct Sale Model) |
|
Contract |
Partnership
& Lease (Musharakah Mutanaqisah) |
Sale
with Deferred Payment (Murabahah) |
|
Ownership |
Co-owned.
Buyer's equity grows slowly. |
Buyer-owned. The institution holds the title as collateral (Rahn). |
|
Monthly Payment |
Variable (potentially). Payment is (Rent + Equity). Rent can be tied to the
market rate. |
Fixed.
The price is set on Day 1 and never changes. |
|
Risk |
Shared. The risk of the asset's value is shared by both partners. |
Transferred.
The Buyer assumes all risk/reward of the property value after the sale. |
6.
True Asset Leasing
(a) Name: The Lease (Al-Ijarah)
(b) Structure: A member needs to use an asset
but not own it (e.g., a car, medical equipment). The institution buys the
asset and takes full legal ownership. It then rents the asset to the member
for a fixed period.
(c) What is Charged: A rental/lease payment (Ujrah). The
institution, as the true owner, is responsible for all major maintenance
and insurance (a key difference from a "finance lease", which is just
a disguised loan).
(d) How to Pay: The member pays the periodic rent. At
the end, the member can return the asset, renew the lease, or (if agreed)
purchase the asset at its market value at that time.
7.
Forward-Sale for Working Capital
(a) Name: The Forward Purchase (Al-Salam)
(b) Structure: A producer (e.g., a farmer, a manufacturer) needs cash today to produce goods for tomorrow. The institution pays the producer the full price in advance for a specific quantity and quality of goods (e.g., 10 tons of rice or wheat) to be delivered at a future date.
(c) What is Charged: The institution's "profit" comes from the sale of the goods, not interest. It takes the risk that the price of rice or wheat may fall by the delivery date.
(d) How to Repay: The producer "repays" by delivering the physical goods as specified in the contract. No money is repaid.
8.
The Benevolent Fund
(a) Name: The Goodly Loan (Al-Qardh al-Hasan)
(b) Structure: This is a separate fund within the
institution, funded by Zakat, Sadaqah (charity), and direct contributions. It
provides zero-interest, zero-fee loans for humanitarian needs (e.g.,
medical emergencies, food, debt relief).
(c) What is Charged: Absolutely nothing. The Qur'an
states, "You may have your principal capital." This is the only
contract that is a "loan," and its defining feature is that the
return is only the principal.
(d) How to Repay: The borrower repays the exact
principal amount they borrowed, according to a flexible schedule, with no
penalty for late payment.
9.
Manufacturing/Construction Finance
(a) Name: The Commission to Build (Al-Istisna')
(b) Structure: A contract to commission the
manufacture or construction of a specific asset (e.g., a house, a machine). A
member (the Mustasni') wants an asset built. The institution (as the Sani',
or builder) agrees to produce it for a fixed price. The institution can build
it themselves or engage a third-party developer using a parallel Istisna'
contract.
(c) What is Charged: A fixed sale price for the
final, delivered asset, agreed upon in advance.
(d) How to Pay: The member "pays" by making scheduled
instalment payments as the asset is being built. This is a sale, not a loan.
10.
Agricultural Partnership (Land-Share)
(a) Name: The Crop Share (Al-Muzara'ah)
(b) Structure: The institution (as the landowner)
provides a piece of farmland to a farmer (the 'Amil). The farmer
provides the labour, expertise, and (often) the seeds.
(c) What is Charged: There is no "charge." Both
parties share the resulting crop (the harvest) based on a pre-agreed
ratio. If there is a drought, both parties share the loss.
(d) How to Pay: Not a loan. The "payment"
is the institution's share of the physical harvest.
11.
Orchard Partnership (Fruit-Share)
(a) Name: The Orchard Share (Al-Musaqah)
(b) Structure: Similar to Muzara'ah but
specifically for existing orchards (e.g., palm oil, fruits). The institution
provides the trees, and the farmer provides the labour (irrigation, pruning,
harvesting).
(c) What is Charged: No "charge." Both parties share
the fruit/produce from the orchard at harvest time, based on a pre-agreed
ratio.
(d) How to Pay: The "payment" is the
institution's share of the fruit.
12.
Forward Lease (Funding for Future Assets)
(a) Name: Forward Lease (Ijarah Mawsoofah fi al-Dhimmah)
(b) Structure: A contract to lease an asset that does not
exist yet but is specified in detail. A member (e.g., a university) needs a
new dormitory built. The institution agrees to fund the construction (e.g.,
using Istisna') and the university commits to leasing it for 20 years once
it is built.
(c) What is Charged: A rental fee (Ujrah). Crucially,
the rent payments only begin after the asset (the dormitory) is
delivered and ready for use.
(d) How to Pay: The member pays the periodic rent as
agreed for the duration of the lease.
In
theory, the number of possible products is nearly limitless. As long as a
product is structured around the core principles of Trade (Bay'), Leasing
(Ijarah), Partnership (Shirakah), or Service (Ujrah), and it
avoids the forbidden elements of Riba (interest), Gharar (excessive
uncertainty), and Maysir (gambling), it can be designed to be
Shariah-compliant.
This
is a common practice in Shariah-compliant project finance. The key is to create
a special legal entity for the project and then use different contracts for
each phase.
Combining Products: A "Stacked" Project Finance Example
These
products can be "stacked" or combined to finance a large, complex
project, like building and operating a factory, without a single
Riba-based loan.
The
Project: Building a New RM100 Million Solar Panel Factory. A group of entrepreneurs
("Founders") has the expertise but only RM20M (20%). They approached the institution for the other RM80M (80%).
Phase 1: Creation of the Project Company ("ProjectCo")
(a)
Product Used: Joint
Partnership (Al-Musharakah)
(b)
Structure: The Founders
contribute RM20M and the Institution contributes RM80M to create
"ProjectCo." They are now equity partners in an RM100M company.
Phase 2:
Building the Factory (e.g., RM40M cost)
(a)
Product Used:
Commission to Build (Al-Istisna')
(b)
Structure: ProjectCo
(the client) signs an Istisna' contract with a construction firm. ProjectCo
pays the RM40M from its equity capital in instalments as the factory is built.
(c)
Outcome: The building
is an asset owned by ProjectCo, financed with equity, not debt.
Phase 3:
Acquiring Manufacturing Equipment (e.g., RM50M cost)
(a)
Product Used:
Lease-to-Own (Ijarah Muntahia Bittamleek)
(b)
Structure: The
Institution (in a separate transaction) buys the RM50M in equipment. It
then leases (Ijarah) this equipment to ProjectCo for a 10-year term. The
Institution makes a one-sided promise (Wa'd) to transfer ownership to
ProjectCo after the final rent payment.
(c) Outcome: ProjectCo gets the equipment without a loan. The Institution earns a legitimate profit from the lease.
Phase 4: Funding Operations (e.g., RM10M Working Capital)
- Product
Used: Managed
Investment (Al-Mudarabah) or Forward Purchase (Al-Salam)
- Option
1 (Mudarabah): The
Institution provides RM10M in cash to ProjectCo's operations, sharing in the
net profit from the first batch of panels sold.
- Option
2 (Salam): The
Institution pays ProjectCo RM10M today in exchange for receiving a
specified quantity of solar panels in 6 months, which the Institution can then
sell itself.
- Outcome: ProjectCo gets working capital. The Institution's return comes from shared profits or real goods, not interest.
In this entire RM150M+ project, not a single Ringgit of interest-bearing debt was created. The entire structure is robust, tied to the real economy, and avoids the injustice of Riba.
A Shariah-Compliant Approach
to Collection and Default
This is the "out-of-the-box" concept, which is actually the original "in-the-box" principle:
i.e. the institution retains ownership (or
co-ownership) of the real asset. This single shift from "lender"
to "owner" or "partner" is the most powerful protection and
fundamentally changes the nature of a "default".
- The
conventional bank is a lender; its product is money (debt).
- The
Shariah-compliant institution is a trader/partner; its product is
the asset itself.
Here’s
how this principle protects without exploitation.
1.
The Asset-Leasing (Ijarah) Solution
- Product: A true lease (Ijarah) for
an asset, like a car.
- The
Protection: The
institution buys the car and holds the legal title. The member is
simply a renter.
- If
the Member "Defaults" (Stops Paying Rent):
- Not
Exploitative: The
institution doesn't charge penalties or compound interest. (Note: The
current penalty allowed in some Islamic banking was initially a
deterrent, but later, banks were allowed to take a portion as
income. This proposal suggests returning to the original, non-penalty
method.)
- Simple
& Just: The
institution simply terminates the lease contract and, as the legal
owner, repossesses its own asset. It's no different from a car rental
company taking back its car.
- Option to Return: The Member may opt to return the car to the institution to avoid the cost of repossession, or he may introduce someone else who is willing to complete the lease.
2.
The Partnership (Musharakah) Solution
- Product: Diminishing Partnership (Musharakah Mutanaqisah) for a house.
- The
Protection: The
institution is a co-owner (a partner) in the house.
- If
the Member "Defaults" (Stops Paying Rent/Buyout):
- Not
Exploitative: The
conventional bank forecloses, seizes 100% of the asset (including
the member's 20% equity), sells it at a low auction price, and then sues
the member for the remaining difference. This is an exploitative collection.During the auction, cartels may also be involved in bidding among their cartel members.
- Simple
& Just (The Partnership Liquidation):
- The
partnership contract is terminated.
- The
house is sold at the fair market value.
- The
proceeds are split according to the current equity shares.
- Example:
If the member had paid down the share to 30% and the house sells for
RM100,000 (after any unpaid rent is settled), the institution gets
RM70,000 and the member gets RM30,000.
- The
member walks away with their equity intact. The institution is protected
because it gets its capital back from the asset it co-owned.
- To
ensure fairness and combat the risk of bidding cartels, the Institution
must strictly manage the auction process. This could include imposing a
rule that a property bought at auction cannot be immediately
"flipped" to a third party, or, alternatively, the Institution
could offer financing to the winning bidder to encourage legitimate
buyers. This is to discourage auction cartels in the auctioning process. Whether we like it or not, this is happening today.
3.
Takaful (Cooperative Insurance)
- The
Protection: A Takaful
(Islamic insurance) policy is tied to the financing.
- How
it Works: All
members (and the institution) contribute to a mutual tabarru'
(donation) pool.
- If
the Member "Defaults" (Due to Job Loss, Sickness, etc.): The Takaful fund makes the
payments on the member's behalf. This is something Takaful players need to explore.
- Why
it's Just: This
protects everyone. The institution is protected from loss, and the member
is protected from losing their home due to a genuine catastrophe. It
replaces the "punishment" of default with mutual support.
4.
Rahn (Collateral)
- The
Protection: The
institution takes a separate asset as security.
- How
it Works: A farmer
getting a Salam finance might put up his tractor as collateral (Rahn).
- If
the Farmer "Defaults" (Fails to Deliver Wheat):
- Not
Exploitative: The
institution cannot just seize the tractor and keep it.
- Simple & Just: The institution is only allowed to sell the tractor at fair market value to recover its exact principal cost (the money it paid for the wheat). Any and all surplus must be returned to the farmer. It is a tool for capital recovery, not for profiteering.
The Human Reality of Collection: A Call for a Proactive, Supportive Framework
The collection process above may look smooth and simple, but in reality, it may not be so. While the principles of a partnership liquidation (selling an asset and splitting the equity
"If you don't pay, we will send our repossessor" is the language of an adversarial, conventional lender
. It treats the member as a debtor to be punished. This approach is fundamentally incompatible with the principles of Musharakah (partnership) and Takaful (mutual support) . "Come and see us to solve your problem" is the language of a partner
. It is the only approach that aligns with the institution's identity as an Amin (trustee)
The goal should not be to create a "Shariah-compliant repossession process." The goal should be to create a partnership support system that makes repossession the absolute, final, and rare exception. The institution's first move must be one of compassion and collaborative problem-solving, preserving the dignity of the member while protecting the shared interests of all members in the fund.
Conclusion:
From Lenders to Partners
This
exploration of 12 distinct products, the "stacking" methodology, and
the principles of just-in-collection is more than an academic exercise. It is a
practical blueprint for an alternative financial ecosystem, one that operates
in parallel with the conventional system.
The
common thread is the fundamental shift in identity: from a "lender"
to a "partner," "trader," "trustee," or "lessor."
This
model, rooted in real assets, tangible services, and shared risk, is not a
nostalgic return to the past, but a coherent and sustainable path forward. It
builds value by participating in the real economy, not by creating debt.
The
challenge remains for Shariah scholars, students, and banking practitioners to
take these concepts, refine their operational procedures, and advocate for the
regulatory space to build them. By doing so, we can offer a true, viable
alternative that provides both financial services and economic justice.
islamicbankingway.blogspot.com
ONLY ALLAH KNOWS BEST
9-Nov-25
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