Islamic Finance

Revision Notes Shujau

-2012 Shujko

Topics
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Concept of Brotherhood What is Islamic Finance Riba Gharar Differences between Riba and Profit Five principles of Muamalah qard ul-hasan Mudarabah (equity) Bai Bithaman Ajil-BBA Musharaka (equity) Musharakah Mutanaqisah Ijarah Ijarah Muntohia Bitamleek Al bai principles- sales & purchase Difficulty for islamic banking Late charge Parallel Istisna Bay al dayn

-2011 Shujko

1. 2. 1. 2. 3. Profit maxi. Wealth maxi. Profit & wealth max. From tislamic perspective 3.

4. 5.

6.

Based on shariah To ensure human well being & social eco. Justice Wealth belongs to Godhumanmearely trustees of his wealth Profit sharing or distribution Mandatory transfer of profit/wealth from better offfs to worse off Zakat

1. 2. 3. 4.

Mudharabah Shirkah Murabahah Musharakah

Goal of a firm
Islamic view point: 1. Concept of Halal & haram 2. Islam exhorts its belivers to excel in this life as well as in the hereafter. . Quran 2:198, 62:10 3. Conflic arises bet. Wealth & virtue Alternatives: 1. Satisfactory profit 2. No profit.injury to the consumers or competitors 3. Not be maxi. .good of soceity & to satisfy the needy.

Profit max. In shariah

instruments

Principles of Islamic FM Goal of a firm

1. 2. 3. 4. 5. 6. 7. 8. Profit maximization Normal & abnormal profits Goals of the firm Islamic view on profit Alternative Suggestion by Muslims Multiplicity of objectives Implication on the economy Profit maximization that is not allowed

Islamic view point & alternative

Other topics

-2011 Shujko

Features: 1. Basis of IF denounces usury or riba 2. Asset based as opposed to currency based 3. Based on element of shariah Challenges: 1. What is the overall demand 2. Are std. set by shariah scholars 3. What risks associated with IF 4. Need future regulation 5. To create awareness & understanding 6. Danger of muslims not taking IF products

Principles: 1. Prohibition or Taking interest 2. Risk sharing 3. Prohibition of speculative beh. Gharar 4. Do not violate the rules of shariah & boardsalcohol,pork 5. Money is seen as potential capital.

Growth Reason: 1. To opr in shariah compliant products 2. Increase in oild wealth & their influence in decision making 3. Increase in compet. & ethical focus 4. Fasted growing religion & 2 largest religion

Reason for growth Definition Principles

Salam: This product is based on the Islamic financing structure of Salam, which is a sale contract whereby the purchaser (DIB) pays the price in advance, and the seller (customer) delivers goods with certain specifications and certain quantity on agreed future dates

Shirkah: is a business partnership where two or more partis pools their financial resources and expertise. The profit ratio is also predetermined. Losses are shared in accordance with the financial resources provided for the project. Shariah compliant current & saving account 1. Absence of interest 2. Profit sharing 3. Qard hassan- interest free loan

Future challenges

What is Islamic Finance

Instruments

Istinaa (commissioned fanufacture) 1. Solution for manufacture of goods 2. With a promise to produce a specific product that can be made under certain agreed specification at a determined price and on a fiixed date

Mudaraba (partnership financing): 1. Once party provides the labour while the other provides the capital

Musharaka (equity participation): 1. Parties involved contribute in varying degrees of assets, techincal expertise. 2. All parties invest in capital

Ijara (leasing): 1. One party lease an asset for a specific amount of time & cost from another party, usually a bank. 2. Bank bear all the risk

-2011 Shujko

Murabaha (cost plus): 1. Undertaking a trade with a markup 2. Used for shrot-term financing 3. E.g. bank pur. An asset fr supplier with the resale based on the cost plus an agreed markup. Mostly on financing property. 4. Fixed markup identified at the outset

Any interest or predetermined payment above and over the actual amount of principle is equivalent to Riba and is strongly prohibited by the Quran and the Sunnah 1. 2. establish justice The interest system is inherently incapable of allocating available liquid funds among firms Risk sharing No prift sharingonly risk Goodwill affectbenefit to the rich people. Without taking any riks gets money Discourage productive work.

1. Al-Rum, 30:39 2. Al-Nisa, 4:161 3. Al-Imran, 3:130-2 4. (Al-Baqarah, 2:275-81 2:275 Allah has permitted trade and has forbidden interest

Hazrat Abu Hurairah radiyallahu anhu reported that the Messenger of Allah said: I came across some people in the night in which I was taken to the heavens.Their stomachs were like houses wherein there were serpents,which could be seen from the front of the stomachs. I asked :O Gabriel! Who are these people? He replied these are those who devoured usury

3. 4. 5. 6. 7.

Definition

Prohibition of RibaQuran

Prohibition of Riba- Sunnah

Rations for prohibition

Riba

Other religions

Consensus of Scholars

Types of Riba

Riba al-qard: This is the stipulated interest which the lender takes from the borrower in consideration of the time given to the borrower to pay back the capital. It is HARAM based on the Quran and the Sunnah and the consensus of Muslim scholars.

Judaism prohibits usury for two reasons Many early Christian theologians such as St. Ambrose of Milan (d. 397 AD) strongly supported forbidding usury

Majority of scholars prefer a restrictive definition Scholars who allow a reasonable rate of interest and prohibit only usuryMarufDawalibi Sheikh Tantawi, the Grand Mufti of Egypt...supporting

-2011 Shujko

Riba al-fadl: riba arising from exchange of commodities Gold for gold, silver for silver, ....like for like, payment made hand to hand. If anyone gives more or asks for more, he has dealt in riba. The receiver and giver are equally guilty

Riba al-buyu This leads to the second use of the word riba. It is also known as riba al-buyu (riba on sale). The most common form of riba albuyu is is known as riba al-nasiah, which stands for increase in exchange for an extension of repayment period

1. calculating the present value of a future amount

2.

Islam does not consider the time value of money as tool of earning . However, Bay al-Muajjal and Bay al-Salam are permissible in Islamic law

1. Bai dayn Check the other slide on bai dayn

definition

Project Discounting from the Islamic Perspective

Discounting

Can define as possibility of loss/damage to money/property risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for synonymous to the probability of a known loss

1.
2.

Peril: serious danger, fir, windstorm Hazard: thing ahat can be dangerous or cause damage. pollution

Murabahah is most widely used Islamic Finance Contract - late payment - Contemporary contract Risks in Salam Counter party risk Commodities require additional cost for storage Risks in Istisna financing Countrer party risk Default risk Risks in Musharakah Credit risk Moral Hazard Systemic instability

Peril & Hazard definition

1. Financial and Non-financial 2. Static and Dynamic Risk -Dynamic- related to economy, price level, taste, less predictable, -Static- Loss due to dishonestydifficult to prevent 3 . Fundamental and Particular risk - Fundamental-not related to particular individual, not controllable, PEST - particular risk: loss arise out of individual events. 4. Pure and speculative risks - speculative: gabling - person who bough machine

Risk and Return

Classification of Risk Types of Risk in Islamic Finance Application Types of risk Components of Islamic Law

1. 2. 3. 4. 5. 6. 7. 8.

Risk of non-compliance w r ift Credit risk Country risk Investment risk Liquidity risk Operation risk Market risk Rate of return risk

Uncertainty (gharar) - allows minor uncertainity Inequality (Ghubun) -Ghubun yasir (insignificant) -Ghubun Fahish (significant) Deception (Taghrir) -Taghrir Qawli (related to statements) - Taghrir fili (deeds)

Gharar is generally translated as risk, hazard or uncertainty. Metwally (2006) also defined Gharar as speculative transactions, which are harmful to society

designed to prevent the weak from being exploited

Definition
1. to ensure full consent and satisfaction of the parties in a contract. protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information.

Prohibition of Gharar

2.

Rations for prohibition

Gharar
substantial gharar (Gharar fahish): prohibited

Classic examples

Types of Garar

Classic examples of Gharar are the sale of a fish that is still in the sea, birds in the sky, an unborn calf, and un-ripened fruits on the tree

trivial gharar (Gharar yasir: Tolerated

-2011 Shujko

Differences between Riba and Profit

Riba Definition Stipulated surplus from debt. It exists as long as the exchange/transaction gives rise to inequality of counter values (alfadl) and determent in time of exchange (al-nasiah). Prohibition Countervalues Wealth creation Deals only with money, hence no Deals with real assets thus creates creation of additional stock of real wealth from: wealth (a) Additional values from goods sold. (b) Increase in utility through exchange Prohibited in Islam Unequal counter-values Profit Profit is the return on trade, which is the result of difference between revenue and cost, encompassing the effort and risk undertaken by the entrepreneur. Permitted in Islam Equal counter-values

Does not include real investment

Will increase in time

-2011 Shujko

Other topics
Five principles of Muamalah
1. 2. 3. 4. 5. IntentionHardship defect faciltiy.choice of two choose the easy one Harm should not be inflicted or reciprocated Certainty cannot be removed by doubt Customs. E.g practices
Mutual agreement Avoidance of Prohibited items: sales & purchase in any transaction, riba,,..Halaal contract Avoidance Ghararuncertainty, doubt Capacity of parties. Existing of subject matter
-2011 Shujko 10

Principles of muamalah
1. 2.

3. 4. 5.

1. 2. as a loan which is returned at the end of the agreed period without any interest or share in the profit or loss of the business 1. 2. Repaid vs pure charity 18 times vs 10 times 3. 4. 5. 6. 7. 8.

1. 2.
3.

Misinterpretation of concept .Administrative cost/management fee Inflation

To help the needy Establish better relationship among the poor & the rich people Mobilise wealth among people in the society To perfrom a good deed..by s.a.w Strengthen the nation economy Facilitate the poor to create new job mkt & bus. Venture Establish caring society Remove social & economical discrimination in soeicety

Definition

Difference bet Qh& Sadaqah

objectives

Critical issues

qard ul-hasan

examples Characteristics

Rules

Dubai Islamic Bank offers alqard ul-hasan Islamic Republic of Iran

1. 2. 3.

4. 5.

6.

flexible ..no collateral. Documentary procedures simple Loans are usually small in size, approval procedures rapid and disbursement quick no interest charges involved The fund has easy access to capital contributors and borrowers because of its local base The fund managers, who are drawn from capital contributors, are fully -2011 accountable Shujko

1. 2. 3. 4. 5.

Legal capacity of both parties Offer & acceptance Date of payment Contract should be writing Two witnesses

11

1. Conditions: 1. the seller discloses the cost to the buyer 2. and adds a known profit 3. Payment: at spot, installment, in lump sum after certain time. 4. No rabaawi items, No burter systems..gold for gold 5. Valid contractshariah complaint 2. 3.

Sale price should be determined. Sale must be unconditional.

Is a sales of a commodity at the price the seller has purchased it, with the addition of a stated profit known to both the seller & buyer. It is a cost-plus-profit sales.

Assets to be sold: a) Should not be used for unIslamic purpose. b) Should be in ownership of the seller at the time of sale; physical or constructive. 5. Asset to be sold must exist. 6. Contracting parties 7. Offer/ acceptance

1.

2.

Based on trust (amanah), cost/profit known Musawamah- cost/pfofit is not known

Definition Conditions

Elements
1. Customer & financial institu sign a master agreemnt FI appoint the customer as an agent Customer purchase on behalf of FI Inform to FI about the purchase FI accept the offer and sales are concluded & ownership is transferred

1. 2.

Quran- And Allah has permitted trade 2:275 Phrophet (S.A.W) purchase a femal camel from abu bakruse as transportation to mirage to Madinah.

Difference w other sales

Murabaha

2. 3. 4. 5.

Quran & sunnah

Early settlement Defaults on payment Prohibited element

Majority of jurists says it is not permissible to give discounts. 1. 2. 3. 4. 5. Price cannot be increased. In malaysia 1% can be charged once Middle east payment on charitable fund Not stated in income Can claim actual loss

5 Steps

Issues
1. 2. 3. 4. 5. The issue of promise Using collateral The guarantee third party Rescheduling of payment Securitization

Financing overhead exp To obtain fund without intention Third party conttract

Check the footnotes

-2011 Shujko

12

A form of partnership where one party provides the funds while the other party provides expertise. The people who bring in money are called "Rab-ul-Maal" while the management and work is an exclusive responsibility of the "Mudarib".

The profit sharing ratio is determined at the time of entering into the Mudarabah agreement whereas in case of loss it is borne by the Rab-ulMal only.

1.

1.

2.

Quran: others travelling through the land, seeking Allahs bounty 73:20. Has be practised before the prohpets S.A.W received the first revelaation and did not rise or show any objections.

1. Al-Mudarabah Al-Muqayyada: Rab-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah)

2. Al Mudarabah Al Mutlaqah: However if Rabul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah).

Definition Mudarabah

Types mudarabah

Rules mudarabah

Quran & sunnah

Mudarabah (equity)
In relation to nature of the contract : Terminate unilaterally. Cannot terminate whn commence ... Capital: Rabul Mal Money or assets , Management Shariah complainte activities Exclusive mgt right. Loss sharing. profit sharing Primary objective Agreed rate No pre-determined condition Losses liability exceeds the value of the assets at a point Negligence can cover loss. 13

Risk characteristic

Enhanced features

1. 2. 3. 4.

Credit risk Country risk Operation Process

1. 2. 3. Origination & Execution Third party guarantee Termination

-2011 Shujko

a contract of deferred payment sale i.e. the sale of goods on deferred payment basis at an agreed selling price, which includes a profit margin agreed by both parties

1.
2. All the components to determine the selling price have to be fixed because the selling price has to be fixed at the time the contract is made. Hence, the profit rate for the BBA financing is fixed throughout the period of financing

3. 4.

Definition

characteristics

Customer identifies the asset to be purchased. Bank determines the requirements of the customer, in relation to the financing period and nature of repayment. Bank purchases the assets concerned. Bank subsequently sells the relevant asset/property to the customer at an agreed price, which consist of: Actual cost of the asset to the bank i.e. financing amount; banks profit margin. Customer is to settle the payment by installment payment through out the financing /period

advantages

Bai Bithaman Ajil

BBA house financing

Conv: loan is given on the basis of debtor/creditor relationship amount of loan is being charged interest quoted at a certain percentage above the base lending rate (BLR) over the loan period BBA: a seller-buyer relationship will be established and the selling price is fixed upfront agreed installments will remain fixed throughout the financing perio customers interest rate risk is eliminated

legal documents
1. 2. 3. 4. 5. 6. 7. 8. 9. The total cost of the property purchased is determined at the time of contract or aqad. There is no additional or hidden cost that will change the price of the property purchased. The transaction is transparent. There is no element of uncertainties or Gharar. Customers will know exactly when the financing will end. There will be no compounding of arrears and outstanding penalty charges. Presently, there is no additional/penalty charge on outstanding miscellaneous charges. Repayment is not subjected to fluctuation of the BLR. Allows better financial planning.

BBA Vs conventional

1. 2. 3. 4. 5. 6.

Letter of offer Property sale agreement Property purchase agreement Legal charge or, Assignment and power of attorney Or any other Islamic financing documents

-2011 Shujko

14

a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business.

The elements of Musharakah includes: offer and acceptance, Contracting parties (two or more contracting parties), subject matter of the agreement (capital and work). cash, gold, silver or its equivalent in value. capital may consist of trading assets such as goods, property and equipment.

1. 2. 3. 4. 5.

Legal capacity of both parties Offer & acceptance Date of payment Contract should be writing Two witnesses

Quran & sunnah

Musharakah means relationship established under acontract by the mutual consent of the parties for sharing of profits and losses, arising from a jointenterprise or venture. Investments come from all partners/shareholdershereinafter referred to as partners. Profits shall be distributed in the proportion mutuallyagreed In the contract. Exisiting of parters Capability of Partners Distribution of profit Sharing losses Termination of musharakah

Definition

Elements & conditions

1. 2.

Rules

Quran: help one another in righteousness and piety 5:2 Sunnah: I am the 3 in parthner as long as ther is no defector.

Musharaka (equity)

Types
1. Musharaka inan- unequal shares partnership Mufawadah- equal shares partnership

Risk characteristic

rules with regard to p&l

2.

1. Loss is distributed exactly according to the ratio of investment and the profit is divided according to the agreement of the partners 2. 3. 4. 5.

1. 2. 3. 4.

Credit risk Country risk Operation Process

profit sharing ratio for each partner must be determined in proportion to the actual profit accrued not allowed to fix a lump sum amount for anyone of the partners or any rate of profit tied up with his investment profit based on his capital percentage If investor is working his profit sharing could be higher Sleeping partnr profit sharing should not be more then cpatial contribution

-2011 Shujko

15

Musharakah Mutanaqisah

Check the footnotes

-2011 Shujko 16

1.

2. Ijara (leasing): 1. One party lease an asset for a specific amount of time & cost from another party, usually a bank. 2. Bank bear all the risk

Quran: o my father, Hire him, varily the best of men for you to hire is the strong, the trustworthy 28:267 Sunnah: pay the hired worker his wages before his sweat dries off

1. 2. 3. 4. 5. 6. 7.

Usufruct & services Asset. Ownership Usage rights Liabilities Lease period Rental amount

Definition
Acceptability: Islam allows Ijara on the basis of Facilitating the public who does not want to own the assets.

Quran & sunnah

Features
How can lessee own the product Ijarah Muntahia bi al-Tamlik or Al-Ijarah Thumma al-Bai

Ijarah

Ijarah Mawsufah fi al-Zimmah -the asset needs to be described in detail in advance but is not available at the time of the contract. The asset must be delivered on a future agreed date. Ijarah (leasing) Refers to a contract under which the lessor leases equipment, building or other facilities to a client at an agreed rental rate and pre-determined lease period upon the aqad (contract). The ownership of the leased equipment remains in the hand of a lessor. 1. 2. 3. 4. 5.

Enhanced Features of the contract

Ijarah Muntahia bi al-Tamlik The ownership is transferred at the end of lease period. Default & compensation Promise Cancellation & termination Selling of leased asset Takaful for ijarah

Usage of Ijarh 1) Property financing, 2) vehicle financing, 3) project financing, 4) personal financing 5) structured products

-2011 Shujko

17

Bai Inah is a mode of financing wherein the financier sells goods to the customer on credit terms, with a mark up of the price, and subsequently purchases the same goods from the customer at the spot price.

1. 2.

Ina: between two parties Tawarruq: between 3 parties,

Is a transaction based on the purchasing of a commodity on credit and selling it to a person other then the initial seller for lower price in the form of cash 1. 2. 3. 4. 5. Whey are mutawarriq sales of commodity at a lower price? The ruling of Tawarruq Conditions The steps Diff. regulated tawarruq & giqhi tawarruq Areas of application

Definition

Difference bet Twa. & bai inah

Other topics

6.

Tawarruq Commodities Murabahah

examples

1. 2.

Classical tawarruq/ or real t Organised tawarruq or manage t

Types
An example of the current utilisation of tawarruq is as offered by HSBC Amanah's Personal Finance, where the customer buys metals from the bank at a pre-agreed profit margin (which sum is payable in instalments), and then sells the metals on the customer's behalf to an international broker (wthe proceeds of which sale is transferred into the customer's account

-2011 Shujko
See the footnotes

18

Ijarah Muntohia Bitamleek

It is a lease whereby the bank will buy and lease out equipment required by the customer for an agreed rental fee. However, it differs from Ijarah in that such an arrangement provides an option for the customer to acquire the ownership at the end of a specified period The bank may also enter into a sale and leaseback agreement with the customer whereby the bank will purchase the asset from the customer and leaseback under Ijarah or Ijarah Muntohia Bittamleek arrangement.The accounting implications for the bank will remain the same as for Ijarah / Ijarah Muntohia Bittamleek transactions. Ijarah Muntohia Bittamleek concludes with the legal title in the leased asset being passed to the lessee. This includes the following types:
gift (transfer of legal title for no consideration) transfer of legal title (sale) at the end of a lease for a token consideration or other amount as specified in the lease contract transfer of legal title (sale) prior to the end of the lease term for a price that is equivalent to the remaining Ijarah instalments applicable under gradual transfer of legal title (sale) of the leased asset. offer and acceptance two parties: the bank as lessor (the owner of the leased asset) and the client as lessee (the party who reaps the services of the leased asset) the object of the Ijarah contract, which includes the rental amount and the service (transferred to the lessee).

Ijarah and Ijarah Muntohia Bittamleek contracts have three major elements:

-2011 Shujko

19

Al bai principles- sales & pur

Subject matter
Existence Condition

Possession & ownership Avoidance of riba Avoidance of gharar Delivery of the asset Trade based on shariah principles Legal capacity Mutual consent The object should be know to both parties The price of the object should be known to both parties.
-2011 Shujko 20

Difficulty for islamic banking

Human resources Thinking paradigm Working in conventional banking envrionment Infra structure..

-2011 Shujko

21

Late charge
We may charge an administration fee for any late or partial payments but this cannot be charged to cover opportunity cost. f the fee paid is more than our actual expenses incurred, we will donate the excess to a public charit Not allowed in shariah Not as a source of income. Charitable contribution for default payments. Other methods:
E.g. nadhuru Take actual loss Publish names on gazette Thauzeeru

-2011 Shujko

22

Parallel Istisna
Salam: Ariculture Have to pay in advance Istisna: Manufacturing Agree on product details Paymentsspot or installment if job is not started..wasy can cancle the agreemnt.

-2011 Shujko

23

BBA

Two party No need to mention the cost

Three party-agent Wasy approach bank, bank appoint wasy as an agent to find a developer. Three party-non agent Pay down payment & sell to the bank. Bank re-sell to wasy at markup Other points: No need to disclose any cost or profit

-2011 Shujko

24

May 2009- q1.b

House price 265000 Bank pays 240000 Downpayment 25000 ***** Instalment 1: 1350*12*3=48600 1500*12*2=36000 1815*12*20=435600 Profit: 520200-240000= 280200
-2011 Shujko 25

May 2009. sec b.1

Project total: rm 12 milllion Captial sharing 60:40 bank & customer Profit sharing 30:70 bank & customers Ans: a)2mill *.3=.6mill b)2*.7= 1.4 million c) .6*4/12*.6*100=33% d)1.4*4/12*.4*100=116.71 e) Primary source for Ijtihad: Quran & Sunnah
-2011 Shujko 26

May 2009. sec b.2

Project rm 3 million Profit 500k a) b) c) d) e) .4*500k=200k .6*500k=300k 200k*4=800k/3000k=26.6% 300k*4/3000k=40% Murabah.either cash or deffered payment, profit disclosed Bbadiffered payment, profit no need to disclose
-2011 Shujko 27

May 2009b.3
Cost 3500253.87 Booking fee 500253.87 Upfront payment 3mill *25%= 750k Balance 2250000

A) 2.25mill * .025*3+2.25*.025*2=393750 B) 2.225/5=450k*3=1350k Cost price + profit/no. of yerar =1350k+168750(2.25*.025*3)/36 450k*2+(2.25*.05*2)/24 C) add the above two
-2011 Shujko 28

Jan 2011.sa.2
Project cost 500k 10% mgt fee onprofit Sales 900k Toal exp 250k Capital bnk & dev 90:10 Profit bnk & dev 80:20

a) 900-500-250=150-15=135/ bank 108: dev 27 b) Profit 15+27=42 c) bank 108/450*100=24%; dev 27/50*100=54%
-2011 Shujko 29

Sep 2009-se-b-2
Customer 1.8 million; bank 1.2

-2011 Shujko

30

Case 1: murabaha payment Spot payment Deffered payment Rules 1. Subject matter must exisit 2. Subjet mater should be in the ownership 3. Subject matter must be phiscal & constructive 4. Sales must be instant and absolute 5. Should have valuesubject matter 6. Subject matter should identified to the buyer 7. Delivery certainty 8. Certainty of price 9. Sales must be unconditional

1.
2.

3. 4.

Case 1

Customer identifies the asset to be purchased. Bank determines the requirements of the customer, in relation to the financing period and nature of repayment. Bank purchases the assets concerned. Bank subsequently sells the relevant asset/property to the customer at an agreed price, which consist of: Actual cost of the asset to the bank i.e. financing amount; banks profit margin. Customer is to settle the payment by installment payment through out the financing /period

CASE 1 & 2

Case 2

-2011 Shujko

31

Bay al dayn
Bay al-dayn is an Arabic term for sale of debt as originated from two words; bay which means sale, while dayn means debt. As far as bay al-dayn is concerned, it simply means a sale and purchase transaction of a quality debt. The selling of debts is to avoid the occurrence of ribabetween two debts and also to avoid any kinds of gharar andmakhatara which may arise at the level of inability of a buyer from possessing what he has bought as it is not permitted that the buyer sold before actual receipt of the purchased item. there is a transparent regulatory system in the capital market to safeguard the maslahah (public interest) of the market participants..malaysia Opinion of the past Islamic jurists Hanafi Mazhab: Hanafis are unanimous in not permitting bay al-dayn with reason that the debt is in the form of mal hukmi (intangible property) and the buyer takes great risk because he cannot own the item bought and the seller can not deliver the item sold.
Maliki Mazhab: The Malikis allow bay al-dayn subject to certain conditions as follows:
a) Expediting the payment; b) Debtor present at the place of sale; c) Debtor confirms the debt; d) Debtor belongs to the group that is bound by law so that he is able to redeem his debt; e) Payment is not the same type as dayn, and it fit so, and the rate should be the same to avoid riba; f) The debt cannot be created from the sale of currency (gold and silver) to be delivered in future date; g) The dayn should be goods that are saleable even before they are received. This is to ensure that thedayn is not of the food type which cannot be traded before qabadh occur; and h) There should be no enmity between the buyer and seller, which can create difficulties to the debtor.

Shafii Mazhab: The Shafii allows the selling of debt to a third party if thedayn was mustaqir (guaranteed) and was sold in exchange for goods that must be delivered immediately. The debt is sold; it must be paid in cash or tangible assets as agreed.

-2011 Shujko

32

Concept of Brotherhood
The believers are but brothers. (The Holy Quran, 49:10) Strengthing brotherhood: zakath, Sadagh, Qadr al hassan, Help those who are in debtease of debt The brotherhood of muslim guarantee the safety and well begin of society at large. Conditions:
.First, the relationship must be established purely for the sake of Allah. This requires the brothers to abandon any type of personal interest that they might hope to gain through their relationship. must be paired with Iman and Taqwa. should be of the Islamic manner and style. The fourth condition is that mutual advice for the sake of Allah should be built on cooperation and meeting each other's needs in both comfortable and difficult times.

-2011 Shujko

33

Concept of brotherhood
Strengthening the Ties of Brotherhood
Here, dear brother, are some tips that may help deepen the bond of brotherhood between you and your brothers: 1) Should you love a brother, tell him so. 2) When you meet one of your brothers, hasten to smile and shake hands with him. 3) If you take leave of a brother, ask him to make du'aa' for you. 4) Visit your brother often and on a regular basis. 5) When special occasions arise, congratulate your brother and join him in rejoicing A Muslim can find delight and great benefit in loving his brothers for the sake of Allah(A.W.J.) as is clear from the following sayings of the Prophet Muhammad (pbuh). The true believer savors faith by loving others for the sake of Allah(S.W.T.). Three traits, if found in a person, allow him to taste the sweetness of faith; one trait is to love a person for nothing else but to please Allah(A.W.J.). Allah surrounds the person who loves for His sake with His mercy and protects him from the great trials on the Day of Judgment. Love for the sake of Allah(S.W.T.) brings joy and peace to the Muslim. Brothers who love each for Allah have hearts overflowing with peace and tranquility and faces that shimmer with light and happiness. Love for the sake of Allah is a trustworthy handhold of faith that never breaks; whoever clings to it is saved. Love for the sake of Allah is a sign of a perfect Deen and a pure heart and conscience.

Some Benefits of Loving Your Brothers for the Sake of Allah

-2011 Shujko

34

Brotherhood Vs conventional
Brotherhood:

Convention:
Profit base Interest source of income Time value of money Money as a commodity Man made law CSR as marketing
-2011 Shujko 35

Qadr al hasan Zakath Sadagah CSR- reviled source Riba Gharar Quran & Sunnah Money is a unit of wealth

Clarification areas
deposit products offered in Islamic Financial Institutions based on Mudharabah deposit.
Wadia yadamana & wadia yad damana

Wadiah-based liability products

???

Mudaraba:
The debt owed to him by Ali. He also requested Ali to collect the debt owed to him by his good friend, Osman.

Musharaka element & conditions Is it necessary, from the shariah perspective, that the house purchased under Bai Bithaman Ajil (BBA) financing to be charged to the bank? Support your answer with some argumentations. 9/10
-2011 Shujko 36