fundamental of islamic banking - principles of islamic banking

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Fundamental of Islamic Banking - Principles of Islamic Banking

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  • 1.ISLAMIC BANKING AND FINANCE Mahyuddin Khalid emkay@salam.uitm.edu.my PRINCIPLES OF ISLAMIC BANKING

2. CONTENTS INVESTMENT AND FINANCING OF HALAL ACTIVITIES PROFIT AND LOSS SHARING VS LENDER- BORROWER RELATIONSHIP TRADE-BASED FINANCING VS INTEREST- BASED INVESTMENT/LOAN PROHIBITION OF RIBA, GHARAR AND MAYSIR PAYMENT OF ZAKAT 2 3. INVESTMENT AND FINANCING OF HALAL ACTIVITIES Impermissible to invest and give financing to related activities Financial serviced based on Riba Gambling and gaming Manufacture or sale of non-halal products Manufacture or sale of tobacco-based or related product Stockbroking or share trading in Shariah non- compliant securities Other activities that conflicts with Shariah Entertainment activities that conflicts with Shariah Conventional insurance that containing of gharar 3 4. PROFIT AND LOSS SHARING VS LENDER-BORROWER RELATIONSHIP PROFIT LOSS SHARING First Tier Between bank and depositor The depositor are considered to be provider of the capital (Rabb al mal) The bank functions as a working partner or manager of funds (mudarib or amil) Second Tier Between bank and entrepreneur The entrepreneur is the manager of fund The bank functions as provider of capital LENDER-BORROWER RELATIONSHIP The relationship between a lender and a borrower is governed by a loan contract between them. Such a contract would specify all the obligations of the two parties in every possible future contingency. With respect to: The amount of repayment The interest rate on the remaining debt. A possible adjustment in the collateral required by the lender. The actions (in particular investment decisions) to be undertaken by the borrower. 4 5. TRADE-BASED FINANCING VS INTEREST-BASED INVESTMENT/LOAN TRADE-BASED FINANCING CHARACTERISTICS INTEREST-BASED LOAN The bank has to purchase the requested commodity before selling it to the customer. Legal Nature of promise The customer is required to make a unilateral promise to buy the commodity from the bank, before the bank makes the purchase. Price includes a known profit or mark-up. The mark-up in murabahah is part of the sale price, it is set only once and then it does not change overtime. Profit Rate Profit comes from the interest rates. Murabaha financing products are fixed-rate products. The rate, once determined for a given contract, is not allowed to float with changes in the interest rates or any other rate. Fixed and Floating rate Many conventional banking products are floating-rate products. The rates on such loans are automatically adjusted upwards or downwards in line with changes in interest rates. 5 6. TRADE-BASED FINANCING VS INTEREST-BASED INVESTMENT/LOAN TRADE-BASED FINANCING CHARACTERISTICS INTEREST-BASED LOAN Murabaha does not allow such rescheduling as no additional amount can be charged for the same. The amount of the murabahah price remains unchanged. Rescheduling of payment Loan rescheduling is accompanied by additional interest charge for the timing differences. If it is given voluntarily, it is allowed. The rate of discount must not be pre-specified in the murabahah contract as a condition. It is not a right that the debtor can claim. Rebate on early payment Conventional financial system grants the borrower a discount or rebate if the customer decides to pay earlier than the scheduled time. 6 7. Unlawful gain derived from the quantitative inequality of the counter-values in any transaction purporting to effect the exchange of 2 or more species which belong to the same genus(category) and are governed by the same efficient cause(illah) Definition of Riba on Trade transaction A predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period Definition of Riba on Loan transaction PROHIBITION OF RIBA 7 8. Al-Quran Al-Baqarah: 275 EVIDENCE 8 9. Hadith: From Jabir: The Prophet saw cursed the receiver and the payer of usury, the one who records it and the two witnesses to the transaction and said: They are all alike (in guilt and sin). From Abi Said al-Khudri: The Prophet saw said: gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, and hand to hand. Whoever pays more or takes more has indulged in riba. Take taker and the giver are alike (in guilt). EVIDENCE 9 10. ELEMENTS OF RIBA Excess or surplus over and above the loan capital Bargain to be conditional on the payment of a predetermined surplus Determination of this surplus in relation to time 10 11. REASONS FOR PROHIBITION OF RIBA To prevent injustice between contracting parties Exploit the poor/ creditors An exploitations of people ignorance over the types of commodities involved in transaction An exploitation of people needs. Thus, they have no choice but to be involved in Riba 11 12. CATEGORIES OF RIBA Categories of Riba Riba al-Buyu` (Trade Transaction) Riba al-Fadl Riba al-Nasiah Riba al-Dayn (Loan Transaction) Riba al-Qard Riba al- Jahiliyah 12 13. CATEGORIES OF RIBA RIBA AL-BUYU` Riba al-Fadl 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. 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 RIBA AL-DAYN Riba al-Qard 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. 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. 13 14. RIBAWI ITEM Ribawi Item Gold Salt Silver WheatBarley/Oat Dates Salt 14 15. 15 ISLAMIC RULINGS ON RIBA IN TRADE Category Type Exchange Quantity Items 1 Same category Same type Spot exchange Equal in quantity Regardless of quality Gold with Gold, Wheat with Wheat 2 Same category Different type Spot exchange Inequality is permitted Equality is not a condition God with Silver Wheat with Rice Salt with Dates 3 Different category Different type Delayed is permitted Inequality is permitted Time and Quantity Factor is not a condition Gold with Wheat RM with Dates 16. 16 ISLAMIC RULINGS ON RIBA IN TRADE Category Type Exchange Quantity Items 4 Ribawi Items and Non- Ribawi Items Delayed is permitted Inequality is permitted Time and Quantity Factor is not a condition RM with vehicles UD with furniture 5 Between 2 Non- Ribawi Items Delayed is permitted Inequality is permitted Time and Quantity Factor is not a condition Bricks with Sands Cloth with Patrols 17. PROHIBITION OF GHARAR Literally: Deceit, risk, fraud, uncertainty or hazard that may be lead to destruction loss. Technically: When a matter that is concealed by one party. Occurs when a party undertake venture blindly without sufficient knowledge Minor uncertainties can be permitted when there is a necessary Both of contracting parties must have a perfect knowledge regarding to transaction 17 18. PROHIBITION OF GHARAR Sell good that seller is not in position to deliver. Sell unknown pages or known goods against unknown price. Make a contract conditional on a unknown event. Sell good on basis of false description. Sell good without proper examination. Gambling. Examples of Gharar related transaction: 18 19. TYPES OF GHARAR Gharar Yasir This type of gharar is tolerate and will not invalidate a contract. Gharar yasir may include the following cases: The uncertainty is slight or trival Contract is unilateral or charitable (al tabarruat) such as gift or bequest There is a public need for the transaction or contract (consideration of maslahah) Gharar Fahish This type of gharar is not tolerate and may result in contract voidability 19 20. PROHIBITION OF MAYSIR Refers to the easy acquisition of wealth by chance, whether or not it deprives the others right. Qimar means the game of chance in which one gains at the cost of others. Issues that related to gambling: Contest using SMS The prize winning tickets Horse racing Lottery Crossword puzzles 20 21. PAYMENT OF ZAKAT Meaning of zakat To grow To purify To improve Purpose of Zakat The foremost and primary is to distribute the wealth of the community among the poor Removing the love of wealth from ones heart, a spiritual disease that could be detrimental to ones Iman. Thus, it is a form of Tazkiya (self-purification). Giving in the path of Allah acknowledging that whatever wealth one possesses is in reality the Almightys, and giving a monetary sacrifice for ones lord. Prevention of monopolies in society. 21 22. BENEFIT OF ZAKAT Enhances Volume of Production When 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. Discourages Hoarding Zakat discourages hoarding because it is levied on hoarded wealth. Raises Savings Zakat 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. Zakat increase level of income Zakat increase level of income due to circulation of wealth in the economy. Reduces inequality of Wealth Zakat is distributed among the poor from rich people so it reduces inequality of wealth. Zakat ends poverty as Zakat is given to poor. Redistribution of National Income. 22 23. CONDITION OF ZAKAT Zakat Performer Muslim Every Muslim who is of a certain age and owns enough assets is required to pay zakat. Zakat