Rosarezakusuma07’s Blog

May 30, 2009

INTRODUCTION TO ISLAMIC BANKING & FINANCE

Filed under: Uncategorized — rosarezakusuma07 @ 3:42 am

Islam & Mu’amalah

Islam is a religion that offers guidance on aqidah (faith and belief), shari’ah (practices and activities) and akhlak (moralities and ethichs).

Islam is a perfect religion for mankind showing the path of life. Thus,islam is composed of legal maxim and rules to be adhered and practiced by the followers in all field and life activities. The laws and rules aimed at ensuring happiness in both this world and the life here after.

Mu’amalah which is about man-to-man activities. Mu’amalat deals with three categories of life activities of mankind namely political, economic and social activities. Banking and financing dealings of mankind however is the crucial activities within the economic activities.

History and Development of Islamic Banking

In the years beginning from early 1973, intensive effort from amongst the muslims through out the world who are learned in fiqah, economy and banking have collectively thought over the framework of banking business based on Islamic laws and rules known as shari’ah. Beginning from these effort, a number of Islamic banks in various countries in the world have been established.

In the 1975 first modern Islamic banking have been established, the bank is Dubai Islamic Banking. After that time, there have been much more serious effort in establishing Islamic banking in many Islamic country and non-muslim countries in Asia, Europe and America. This is than followed by the establishment of international Islamic banks association with is head quarter in Jeddah aimed at having a platform for cooperation.

Development of Islamic Banking in Malaysia

The establishment of Islamic bank in Malaysia is resulted by the government effort and the Muslim in this country in upholding the Islamic laws and rules of shari’ah in the field of banking and finance dealings. In 1980, Bumiputra Economic Congress has approved a resolution that urged the government to allow Lembaga Urusan Tabungan Haji (LUTH) to establish an Islamic bank to mobilize and invest fund from the Muslim community.

On 30 July 1981, the government has established and appointed members of committee known as Jawatankuasa Pemandu Kebansaan Bank Islam chaired by Y.M Raja Tan Sri Mohar bin Raja Badiozaman and LUTH was appointed as in secretariat.

That effort was the first of its kind in the South East Asia, which has led to the formation of the first Islamic commercial bank, Bank Islamic commercial bank, Bank Islam Malaysia Berhad in 1983. The primary objective f or the formation of the first commercial bank, bank Malaysia Berhad was to strive in its operation as a commercial bank based on shari’ah laws in facilitating and banking services to both the Muslim and non-Muslim societies in this country by achieving strength capacity to the develop from time to time.

Islamic Commercial system

1. Siasah Sector (Public sector)

Siasah sector include maintenance of law and order, justice and defence. This sector also responsible for promulgation and implantation of economic policies, and this sector also responsible for the management of properties under the state’s ownership.

2. Tijarah sector (Private sector)

Tijarah (private) sector deals with creation of wealth in such dealings, one shall involve with economic activities of production, consumption, and distribution etceteras.

Various fiqh or mu’amalah contract are governing the conduct of the dealings namely trustee profit sharing contract, joint-venture profit sharing contract, sale and purchased contract, ijarah, al-rahnu.

3. Ijtimak sector (social welfare)

Ijtimak sector involves with the function of providing Islamic social security such as al-takaful al-ijtima’i. the possible institution could be a public sector entities, such as charitable organization and individuals.

Riba or Interest

Riba or usury is defined as extra or excess in lending and borrowing or additional in term of weight or measurement in an exchange or a buy and sell transactions. It also relates to deferment of time of delivering a ribawi or interest bearing items in the process of an exchange.

Generally, riba in lending and borrowing is the extra amount of money that is either imposed by the lender on the borrower in the contract and/or promised by the borrower in the contract.

The Syari’ah ruling as regard to riba is that, the act of giving, taking as well managing riba is prohibited. This is stated in the Qur’an in verse 278 and 279 of Surah Al Baqarah.

In an earlier verse in the Qur’an, verse 275 of Surah of Al-Baqarah, it is stated that, “… but Allah has permitted trade and forbidden usuary…”.

The sources of interest are as follow:

Firstly, it could be arising from a loan or debt either in the form of simple interest or compounding interest.

Secondly, it could be arising from a buy and sell transaction, where in such an exchange, the weight or measurement is unknown or not predetermine.

Thirdly, it could be arising from an exchange of currencies or any ribawi item, where it involves in deferment of the delivery of each one of the currencies or ribawi items.

The ribawi items are classified based on two bases namely the currencies or medium of exchange and foodstuffs.

The ribawi items that are in the category of currencies are;

  • Gold
  • Silver
  • Currencies such as Ringgit Malaysia, United States Dollar, British Pound, Singapore Dollar, Australian Dollar, Hongkong Dollar and Japanese Yen etceteras.

Whilst, the ribawi items that are categorized based on foodstuffs are;

  • Grain such as rice, wheat, corn
  • Meat such as beef, mutton, chicken and fish
  • Vegetable such as tomato and bean
  • Fruit such as dates and grape
  • Condiment such as salt, sugar and medicines.

Classifications of syari’ah ruling on Riba:

Classifications of syari’a ruling on Riba

Nature of ribawi item

Example

Ruling

Same kind of same basis

10 g of 916-gold for 10g of 750-gold

10kg of bahmati rice for 10kg of Super special rice

Payment must be on cash term.

Items must be of the same weights, measurements or numbers of unit

Different kind of the same basis

1gm of gold for RM40

USD1, 000 for RM3, 800

5kg of rice for 7.5kg of wheat.

1 tonne of palm oil for

2 tonnes of sugar

Payment must be on cash term.

Difference in weights, measurements or number of units is allowed.

Different kinds different basis

20kg of dates for 1gm of gold.

30kg of wheat for USD10

1 tonne of palm oil for RMI, 500

No rule is imposed. Therefore, difference in weights, measurements or number of units is allowed.

Types of riba

Riba or usury or interest is of two kinds namely;

i. Riba duyun

It is the kind of riba created out of lending and borrowing activities.

Riba duyun is of two types namely riba qardh which is imposed as a term and condition in a lending and borrowing. Another type is riba jahiliyah, which is compounding interest on any default of loan.

ii. Riba buyu’u

This kind of riba is created out of trading transaction. It occurs out of an exchange between two ribawi materials or items of the same category where the necessary rules are not observed. It is also of two types namely riba fadhl and riba nasiah or riba yad.

As for riba fadhl, the ribawi materials exchanged are of different weights, measurements or numbers. Whilst, riba nasiah or riba yad occurs when payment of the prices and delivery of the goods are made at two different times, not immediate or when the exchange is not made on concurrent basis.

As such generally, there are four types of riba. The first two are riba qard and riba jahiliyah, which arise from deposits, loan, or debt transactions. The next two are riba fadhl and riba nasiah or yad, which arise from an exchange or buy and sell transactions.

1) Riba Qard

This is simple interest or known to be benefit of any kind to the owner of deposits, debts, or loans as stipulated in the term and conditions of loan agreement.

2) Riba Jahiliyah

This is compounding interest or known to be benefit on the interest amount when a debtor fails to repay the loan whitin the stipulated period.

3) Riba Fadhl

It is something additional or different in measurement in relation to an exchange or buy and sell of ribawi items. Such as coins and ringgit of the same currencies.

4) Riba Nasiah/Riba Yad

It si deferment of time of delivery of any ribawi items in the course of an exchange or buy and sell.

Principles of Mu’amalah

Permissible mu’amalat are of three types namely trading contracts, contracts of participation and supporting contracts. In ensuring the legitimacy of each of the contracts, one has to observe the following maxim of mu’amalah.

i. Al-riba (usury)

ii. Al-gharar (ambiguous or uncertain)

iii. Al-maisir (speculative)

iv. The forbidden (prohibited or unallowed or not permissible)

Gharar is divided into two types namely gharar yasir and gharar fahish. Gharar yasir is minor ambiguity, whilst gharar fahish refers to excessive ambiguity that may cause a contract to be invalid.

Types of mu’amalah contracts

  1. Trading contracts

A trading contract is concluded based on two types of mu’amalah transactions namely cash sale and credit sale transactions.

The cash sale is referred to as al-bai’ al-mutlaqah. Other concept to facilitate cash sale includes al-sarf to facilitate exchange of a currency with another such as an exchange between Euro Dollar with Ringgit Malaysian.

The credit sale transactions aimed at accommodating debt financing to the buyer.

  1. Contracts of participations

This class of contracts is to facilitate equity financing or investment activities of financial institutions. The concepts rendered in concluding the contracts include musharakah, mudharabah, musaqat, mukhabarah and muzara’ah.

  1. Capital or fund mobilization contracts

The concepts can be rendered for mobilization of funds by the financial institutions include wadi’ah yad amanah, wadi’ah yad dhamanah, musharakah and mudharabah.

  1. Other supporting contracts

  1. Other supporting contracts in Islamic business, particularly in Islamic financial businesses are aimed at providing wider spectrum of banking services. Such contracts are concluded by rendering various concepts which include rahnu, kafalah, wakalah, wadiah, qard hasan, hiwalah, tabarru’, hibah, waqaf, ibra’ muqassah etceteras.

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