CHAPTER 4 PRINCIPLES OF ISLAMIC BANKING

1. CHAPTER 4PRINCIPLES OF ISLAMIC BANKING Mohammad SallehAbdSaha Razizi bin Tarmuji razizi.uitm.edu.my

2. CONTENTS • 4.1 Investment and financing of HALAL activities. • 4.2 Profit and loss sharing VS Lender-borrower relationship. • 4.3 Trade-based financing VS Interest-based investment/loan. • 4.4 Prohibition of Riba, Gharar and Maysir. • 4.5 Payment of zakat. razizi.uitm.edu.my

3. 4.1 Investment and financing of HALAL activities. razizi.uitm.edu.my

4. 4.2 Profit and loss sharing VS Lender-borrower relationship. razizi.uitm.edu.my

5. Al-Mudharabah (Profit Sharing) • It can be define as a joint venture profit sharing contract. • The contract are between capital provider and the entrepreneur • Mudharabah term: The expression making or performing a journey (Ad-Darb fil Ard). • Agent(entrepreneur) gets profit by performing his hard work and efforts in the long journeys. razizi.uitm.edu.my

6. Mudarabah Contract razizi.uitm.edu.my

7. Pillars of Mudharabah • Sahibul Mal : owner of capital, fund provider • Mudharib : Entrepreneur • Ra’sul Mal : Capital • Al-Amal or Mashru’ : Business ventures or project • Ribh : Predetermined share of profit • Sighah : Offer and acceptance razizi.uitm.edu.my

8. Al-Musharakah (Profit-Loss Sharing) • The word is derived from sharaka or to share • Al Shirkah cover in its meaning: • shirkah al-mulk (joint ownership of common property) • Shirkah al-aqad (contractual partnership in a business in a business according to a mutual consent). • a partnership or joint venture for an economic activity between the bank and one or more clients. In this joint venture, all parties may contribute some (not necessarily equal) percentage of all three factors of economic production (capital, labor, and entrepreneurship). razizi.uitm.edu.my

9. The Musharakah Contract razizi.uitm.edu.my

10. 4.3 Trade-based financing VS Interest-based investment/loan. Trade-based Financing • Murabaha is a contract of sale where the seller discloses to the buyer the actual cost of the item to be sold in addition to the profit margin (mark up) added, to be mutually agreed upon with the buyer. • Murabaha financing is a widely used contract in contemporary Islamic banking and finance; and it is limited to cases where the customer actually needs to purchase some commodity. • Murabaha is an agreement wherein the bank purchases, at the request of a customer, a specified item, and then sells it to him at a mutually agreed marked-up price. • Payment for goods under murabaha may be made either on cash basis or under deferred payment terms. Although common usage of murabaha in trade financing is typically done by way of deferred payment, by definition, murabaha is not exclusively a deferred payment sales. razizi.uitm.edu.my

11. Murabahah in Islamic Banking razizi.uitm.edu.my

12. Subject of Murabaha (Item for Sale) • —Subject of sale must be specifically known and identified. • —Subject of sale must be in existence at the time of sale, and must be owned by the seller at time of sale. • —Subject of sale cannot be for haram use or forbidden commodities • —Subject of sale must be something of value and classified as property in fiqh. This may raise several important fiqh issues, such as, whether “rights” qualify as property or not. • —Sale must be instant and must not be attributed to a future date. • —Terms of delivery must be specified and certain. • —Sale must be unconditional and must not be contingent on a future event or fulfillment of a condition that is external to the transaction. razizi.uitm.edu.my

13. Difference Trade-based Financing and Interest-based Investment/loan razizi.uitm.edu.my

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15. 4.4 Prohibition of Riba , Gharar and Maysir razizi.uitm.edu.my

16. Evidence from al-Quran • Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. ( al-Baqarah:275) razizi.uitm.edu.my

17. O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. Al-Baqarah:278 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 (279) al-Baqarah razizi.uitm.edu.my

18. Evidence from Prophet Tradition (al-Sunnah) The Prophet said, "Avoid the seven great destructive sins." The people enquire, "O Allah's Apostle! What are they? "He said, "To join others in worship along with Allah, to practice sorcery, to kill the life which Allah has forbidden except for a just cause, (according to Islamic law), to eat up Riba (usury), to eat up an orphan's wealth, to give back to the enemy and fleeing from the battlefield at the time of fighting, and to accuse, chaste women, who never even think of anything touching chastity and are good believers. [Sahih al-Bukhari, Sahih al-Muslim] From IbnMasood (ra): The Prophet (pbuh) said: "Riba has seventy three segments, the least serious being equivalent to a man committing adultery with his own mother." [IbnMajah, Hakim]. razizi.uitm.edu.my

19. Three elements of Riba razizi.uitm.edu.my

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21. Types of Riba Riba al-Buyu` (arising from sales) Riba al-Dayn (arising from debt) razizi.uitm.edu.my

22. Riba al-fadl Riba al-nasiah Its occurs whenever the creditor advanced loan on some monthly interest in addition to the principal sums. Increase due time On other words, this stipulated interest which the lender takes from the borrower to pay back the capital. Second opinion- Any delay in the exchange of the ribawi items from the same type and category • Also known as Riba al-buyu’ that is riba by excess. • It applies to six items : gold, silver,date, raisin,wheat and barley and the like of them. razizi.uitm.edu.my

23. Riba al-Qard Riba al-Jahiliyah It is Riba in loan. It is when a loan contract is made or at rescheduling a previous debt. It is take place only in debts created via lending or extended to a new maturity via rescheduling . • It is riba in debt or out of lending and borrowing. • It was originated from the transaction of a loan , and it is interest or payment charged due to the loan given. • On the other words, it is the extra amount over the above principal of the loan. razizi.uitm.edu.my

24. عن عبادة بن الصامت رضي الله عنهقال رسول اللهِ صلَّى اللهُ عليه وسلَّمَ : الذهب بالذهب، والفضة بالفضة، والبر بالبر، والشعير بالشعير، والتمر بالتمر، والملح بالملح، مثلاً بمثل، سواء بسواء، يدًا بيد، فإذا اختلفت هذه الأصناف فبيعوا كيف شئتم؛ إذا كان يدًا بيد razizi.uitm.edu.my

25. Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt - like for like, equal for equal, payment being made on the spot. If the species differ, sell as you wish provided that payment is made on the spot'. Hadith: Muslim razizi.uitm.edu.my

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27. Prohibition of Gharar razizi.uitm.edu.my

28. Examples Transaction include Gharar razizi.uitm.edu.my

29. Types of Gharar razizi.uitm.edu.my

30. Maysir razizi.uitm.edu.my

31. Issues that related to gambling razizi.uitm.edu.my

32. Objectives restriction of gambling • It teach us to work for earning a living and not depend on chance and luck. • Individual property is sacred, it may not be taken unless given willingly or by lawful exchange. • Gamblers develop hater and enmity toward one another. • Gambling make a person more greedy. • It takes away from the remembrance of Allah. • To avoid wasting. razizi.uitm.edu.my

33. Payment of Zakat razizi.uitm.edu.my

34. Purpose and Benefit of Zakat • The foremost and primary is to distribute the wealth of the community among the poor • Removing the love of wealth from one’s heart, a spiritual disease that could be detrimental to one’s Iman. Thus, it is a form of Tazkiya (self-purification). • 3) Giving in the path of Allah acknowledging that whatever wealth one possesses is in reality the Almighty’s, and giving a monetary sacrifice for one’s lord. • 4) Prevention of monopolies in society. razizi.uitm.edu.my

35. 1 Enhances Volume of Productionwhen Zakat is collected and distributed among the poor they spend it on various consumer goods which increase the demand of various products of industries which increases production of goods.2 Discourages HoardingZakat discourages hoarding because it is levied on hoarded wealth.3 raises SavingsZakat is paid out of the accumulated wealth. the wealth owner must in saving ratio, in order to prevent the level of his wealth from decreasing.4 Zakat increase level of incomeZakat increase level of income due to circulation of wealth in the economy.5 Raises investmentZakat Raises investment due to increase in consumption and production of goods.6 reduces chances of recessionZakat increases circulation of wealth which reduces chances of recession.7  Reduces inequality of WealthZakat is distributed among the poors from rich people so it reduces inequality of wealth. razizi.uitm.edu.my

36. 8 Raises Income levelDistribution of Zakat acts as an unemployment tool. Zakat is given to poor it increases his income level.9 Raises Demand for necessitiesZakat Raises demand for necessities because poor buys things with Zakat of his needs.10 Raises Standard of LivingZakat Raises standard of living of a poor person.11 Reduces unemploymentZakat reduces unemployment and helps poors to do business with amount of Zakat.12 End PovertyZakat ends poverty as Zakat is given to poors.13 Redistribution of National Income.14 Reduces Crimes. razizi.uitm.edu.my

37. Condition of Zakah razizi.uitm.edu.my

38. Completion of Haul • Haul is defined as the completion period for zakah asset. • The length of time: one islamic Hijri year (1 year Hijri=354.5 days, 1 year Solar= 365.25 days) • Zakah only payable on asset that have been held for at least this period. razizi.uitm.edu.my

39. Types of Zakat ZakahFitr • ZakahFitr is a one off payment that is made once in every Muslim Hijri calendar year at any time between the first day of the month of Ramadhan and the first day of Shawal. • All Muslims are obliged to pay this, regardless of their age, status or wealth. • The amount of zakah payable is approximately 3kg of staple food in the relevant country or an amount of money that is equivalent to the price of the food. razizi.uitm.edu.my

40. Zakah Al-Mal (on wealth) • Zakah al-Mal is an annual payment based on the amount of wealth owned by a Muslim individual or organization. This payment is obligatory upon any Muslim individual or organization that has completed the requirement of Nisab (minimum taxable amount) and Haul (one Muslim Hijri calendar year). The payment is 2.5% out of the total wealth deemed for zakah. • Zakah al-Mal can be subdivided into zakah on: Business, Rental Income,Personal Income, Savings, Gold and Silver,  Shares,Livestock, Crop razizi.uitm.edu.my

41. Beneficiaries of zakah Zakah expenditures are only for the poor and for the needy and for those employed to collect [zakah] and for bringing hearts together [for Islam] and for freeing captives [or slaves] and for those in debt and for the cause of Allah and for the [stranded] traveler - an obligation [imposed] by Allah . And Allah is Knowing and Wise. Surah At-Taubah razizi.uitm.edu.my

42. Beneficiaries of zakah razizi.uitm.edu.my

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45. Islamic Legal Maxim( القواعد الفقهية) razizi.uitm.edu.my

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47. Matter are determined according to Intention(الأمور بمقاصدها) • An act of any human being is judged in the light of intention or the purpose it seeks to have effects. • This means that the effect to be given to any particular action or transaction must be in accordance with the intent underlying such action or transaction. • Eg: banks declare their policy of financing customers on non-interest bases it would be necessary to do so and not merely continue the same practice and seeking to rationalise it in Islamic terms such as mudharabah etc. razizi.uitm.edu.my

48. Hardship begets facility(الضرورات تبيح المحظورات) • The maxim indicates that any ruling which implementation causes hardship to a person or the action is unable to be performed by a particular person for a specific acceptable reason, then there are alternative and ways out that can be resorted to in order to overcome the difficulties and hardship. • Hardship- refer to surpass the normal limit and ability of a person such as travel/sickness/dharurah etc. razizi.uitm.edu.my

49. Eg: if the court orders the sale of assets of a negligent debtor to pay his creditors, it must begin with the sale of his movable goods if this would suffice to clear his debt, before selling his real property. razizi.uitm.edu.my

50. What is certain cannot be removed by doubt( اليقين لا يزول بالشك) • It is discusses about the principle that should be followed if there is doubt in any matter particularly in matters pertaining to Islamic law. • This means that a fact established by law or proven with evidence will remain so, until there is another certainty that removes it. • Eg: a partner has no right to assume a minimum rate of profit earned by his business partner and claim his share in that profit as different from amount stated to have been actually earned by the partner. razizi.uitm.edu.my