These Short Essays are partial fulfilment of Paper

IB1006 of Part 1 of

Certified Islamic Finance Professional (CIFP)

INCEIF
Student Name: MASNIZA BINTI MAISHAM

Student ID: 1000098

IB1006 – Short Essays written by Masniza Maisham CIFP 2010

Question No. 1: Examine critically the legality (ie halal and haram) of consumer financing
products based on BBA, Inah and Tawarruq contract from the Maqasid Al-Shariah
perspective.

Answer:

It is important to understand first the meaning of Maqasid Al-Shariah? Maqasid Al-Shariah can be
defined to be the objectives and rationale of Shariah in which a comprehensive and careful

examination of the Shariah rulings are conducted demanding an understanding that Shariah
aims at protecting and preserving public interests (maslahah) in all aspects and segments of
life.
Maqasid Al‐Shariah is divided into three major categories according to its inner strength
and all the Islamic legal ruling refers to realize one of these categories namely:

i) The necessities or essentials (daruriyyat);

ii) The needs (hajiyyat);
iii) The complementary (tahsiniyyat);

The category of hajiyyat is most of the permissible in business transactions, such as the
exemption of the advance payment in the Islamic business transaction (salam), this type of
contract is allowed and granted by law in order to facilitate transactions, because this
business operation is needed in the trade.

Maqasid Al-Shariah serves to do two essential things which are tahsil, concerning to
securing benefit (manfaah) and ibqa, concerning to repelling of harm (madarrah) as
directed by the Lawgiver. As such, innovation in Islamic finance and all undertakings to test
the legality of a new product must readily comply with the purpose Maqasid Al-Shariah.

The Maqasid Al-Shariah will also assure that an Islamic financial institution will
provide products and services that can repel the harm (madarrah) commonly found in the
Western banking products and services. If the harm is still apparent in the Islamic financing

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

product, it must be abolished by any means. Otherwise, the product will not reflect the true
ideals of Islam.

We can say that Maqasid Al-Shariah governs and regulates the Shariah principles of
the Islamic finance. It is very important from Maqasid Al‐Shariah perspective to keep the
circulation of wealth in the business transactions and avoid all types of monopoly of
monetary in few hands of people.

This objective was clearly stated in the Qur’an:

“O you who have attained faith, do not devour one another’s possessions wrongfully not
even by way of trade based on mutual agreement, and do not destroy one another” (Surah
An Nisa’ : 29).

Prophet Muhammad s.a.w had also made a statement saying, “No Muslim’s property should
be allowed to be taken from him without his own accord”.

It is very clearly to convey from these text and statement the importance and the
value of protection of the wealth, whether for individual people or for the community and
society. The statement shows as well the great sin of any aggressive action against the
wealth of property of the community.

The halal and haram of actions pertaining to the consumer financing products based
from Bai’ Bithaman Ajil (BBA), Bai’ Inah and Tawarruq offered by the Islamic banking are
fully determined by the legality of contract (al-aqd).

Firstly, we shall look into BBA which means ‘deferred installment sale’. Bai’ means
buy or sell for instance an exchange of asset (mal) with another asset (mal). Thaman means
price and Ta’jil means deferred payment or installment.

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

In practice, Islamic bank offers this type of contract to finance customers who
acquire an asset or a property. For example, home financing, land financing and machine
financing. Customers will make payment by installment for specific period.

Some jurists believe that BBA is against Maqasid Al-Shariah due to these reasons:

1) the practice of increasing the price due to the deferment in the payment which is
considered as riba’
2) the practice involves two sales in one which is prohibited

However, both of these reasons are disputable. Most jurists like Al-Kasani, Ibn Abidin, Ibn
Rushd and Al-Nawawi believe that increasing the price due to the deferment in the payment
is allowed. It is only considered to be amounting to riba’ where the subject matter is money
on both sides. Hence, in BBA, it is allowed for a seller to fix two prices of asset/merchandise
that is cash price and credit price and giving an option to a buyer to buy asset/merchandise
at any of the two prices.

As for the two sales in one issue, the combining together of two contracts in BBA
practice, in a way that the conclusion of one contract is contingent upon the conclusion of
the other. This is allowed according to an interpretation in the Hadith.

It seems that BBA is in accordance with the Maqasid Al-Shariah. However, there are
issues on how the BBA is being practiced by Islamic banks in Malaysia. The legal
documentation shows the BBA currently practised is more to a Bai’ Inah contract as a whole.
This is because of the legal documentation shows that the purchase and sale agreement are
made between the bank and the customer. In the actual BBA, the purchase agreement is
between the bank and the developer and the sale agreement shall be made between the
bank and the customer.

Another issue in BBA is the issue of possession (al-qabd). It is argued that since BBA
is actually a kind of sale contract, the transfer of ownership and taking of possession must
truly happen. We can however consider the practicality of this matter and the execution of
purchase and sale agreement in the facility should result in transfer of ownership,
irrespective of whether the registration of the transfer is made or otherwise.

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

Next, let us look into Bai’ Inah contract. Bai’ Inah means a sale contract with
immediate repurchase. According to some Malikis, al-inah was derived from the root word
of al-'aunu which means assistance. It is called bai' inah because the seller assists the buyer
in obtaining his need. Other Malikis jurists were of the opinion that al-inah was derived
from the word al-'ain which refers to cash. According to this view, it was called bai' inah
since the main purpose of executing the contract is to obtain cash.

As such, Bai’ Inah contract is used for products which does not involve merchandise
to be acquired by customers such as credit card, overdrafts, personal financing and more.

Most jurists believe that Bai’ Inah is against Maqasid Al-Shariah due to its buy-back
sale-based on legal tricks to obtain cash which is unlawful They justified that the practice of
the contract was seen merely as legal stratagem (hiah) to legalise riba’. However, Shafi’ee
school believes that Bai’ Inah contract is valid (sahih) as long as the contract is properly
concluded in which the unlawful intention of both parties is immaterial and therefore, it
does not invalidate their acts unless expressed in that act. But later, they discourage
practising this contract.

We can see now that Islamic banks in Malaysia are starting to use other alternatives
to replace the existing Bai’ Inah products. It seems that there is the element of gharar in its
implementation.

The last controversial contract is Tawarruq. In Malaysia, Tawarruq is an alternative to

replace Bai’ Inah. Tawarruq is derived from the word paper and dirham coined from silver or
money minted from dirham. Its plural is ‘awraaq’ i.e. ‘paper replacing monies/paper
money’. It was so called, because the buyers of a certain commodity sell that commodity
using paper, with the purpose of getting the paper (liquidity) and not the commodity.

Most jurists are believes that the Tawarruq currently practised today by the Islamic
banks so-called organized Tawarruq (tawarruq munazzam) is against Maqasid Al-Shariah.
They said that it resembles tripartite Inah which is yet another legal stratagem. In April
2009, OIC Fiqh Academy resolved that Tawarruq is impermissible or disallowed.

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

In the organized Tawarruq, the bank will act as the customer’s agent to sell back his
commodity which is difficult for the customer to take or to have his disposal on. This is the
reason why the jurists disallow the practise of Tawarruq since forced-sale is prohibited by
Shariah.

However, the reason why forced sale is prohibited is unclear in tawarruq, particularly
in the banking application. According to Al-Khattabi, “Forced sale is made for two reasons,
one of which is that a person is forced to the contract, in which the contract does not hold.
The second is that a person is forced to sell on credit, which burdens him. That makes him
sell what he has at a loss, for reasons of necessity. As a human, he should have been left to
sell his properties. But he pronounces, borrows and he was deferred to pay the debt,
whenever he is in a good condition.”

We are clear that the Shariah prohibit all the elements that may lead to injustice
business such as bribery, fraud and deception, gambling, uncertainty (gharar), riba’, and so
on to ensure the establishment of the justice. However, Shariah encourage all type of
business activities which create justice and benefit to the business community and social life
as well.

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

Question No. 2: Emar Corporation wishes to raise $150 million Shariah compliant capital to
set up a power plant in Sudan. Critically discuss whether it should issue sukuks or common
stocks to raise capital.

Answer:

Sukuk is plural word for sakk which represents either a proportional or an undivided interest
in an asset or pool of assets. Sukuk was extensively used by the Muslim societies of the
middle ages as papers representing financial obligations originating from trade and other
commercial activities. However, the present structures of sukuk are different from the sukuk
originally used and are similar to the conventional concept of securitization.

Issuing Sukuk are investing in assets--not currency. The return on such assets takes
the form of rent, and is evenly spread over the rental period. The productivity of the asset
forms the basis of the fixed income stream and the return on investment. Given that there is
an asset underlying the value of the certificate, there may be, depending on the value of the
asset, more security for the investors involved, accounting for the additional appeal of
Sukuk as a method of financing for investors.

Sukuk and stocks are both securities, but the major difference between the two is
that stockholders have an equity stake in the company (i.e., they are owners), whereas
sukuk holders have a creditor stake in the company (i.e., they are lenders). Another
difference is that sukuk usually have a defined term, or maturity, after which the sukuk is
redeemed, whereas stocks may be outstanding indefinitely.

In my opinion, Emar Corporation should issue sukuk. They may issue Ijarah Sukuk as
practised by Guthrie in 2001 and Government in Malaysia in 2002.

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

Assuming that Emar Corporation (Obligator) sells certain assets to an established

special purpose vehicle (SPV) at an agreed pre-determined purchase price. The SPV raises
financing by issuing sukuk certificates in an amount equal to purchase price. A lease
agreement is signed between SPV and the Obligator for a fixed period of time, where the
obligator leases back the assets as lessee. The proceeds from this issuance were utilized to
finance the construction and development of the power plant.

Each certificate holder has an undivided beneficiary right to the land parcel (which is
the power plant). Under the arrangement, the SPV buys the parcels from the Obligator and
re-sells them to the buyers of the issues. It does so by buying the beneficiary rights and
keeping them as a trust and issuing trust certificates (known as sukuk) to the investors.

The SPV, on behalf of the investor, leases the land parcel back to the Obligator in
conformity with the Master Ijarah Agreement. SPV receives periodic rentals from the
Obligator. These are distributed among the investors i.e. sukuk holders.

At maturity or on dissolution event, the SPV sells the assets back to the Obligator at
a pre-determined value.

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

Question No. 3: Discuss the concept of future value and time value of money, explain what
are the Sharia ’ opinion on these matter.

Answer:

The Future Value of a single sum formula serves as a means of valuation. It tells us what
something will be worth at a future date. This "something" can be an asset or a liability. For
example, if we have RM1,000 in the bank account today and we deposit RM20 every week
for a month. How much shall we have in the bank account at that time?

We can say that future value is merely a calculation assuming that we shall
accumulate the money in the future until a specific date by considering any formula or
variables. There are no Shariah issues on future value.

There is a time value of money, it is not correct to assume otherwise because the
practices and contracts permissible in Islam do exhibit this merit of money, we can however
say that there are Islamic ways to incorporate time value of money in financial transactions.

Time allows one the opportunity to postpone consumption and earn profit. Not
having the opportunity to earn profit is called opportunity cost.

Islam does not grant a time value for money in contracts if money were exchanged
for money; that is the basis of banning interest. However, the mark-up in murabaha or BBA
are allowed on the ground that “time has a share in price” (lil zamani hazzun fil thaman).
The price on two points in time is changed (increased) by induction of your money, asset is
same, therefore this change in price can’t be attributed towards asset or some other thing
but the time value of money only, it is very Islamic.

In conclusion, any excess amount charged against deferred payment is riba' only
when money is exchanged for money, since the excess is charged only against time. The
proof lies in the fact that, if the debtor fails to repay at the stipulated time, he is charged
extra money. In contrast, where a commodity is being exchanged for money, the seller may

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

take into consideration various factors (like the supply and demand situation, quality, utility,
special features and so on) as well as the time of deferred payment. It is true that the seller
may take account of the time factor in increasing the price of his commodity in a credit sale,
but the increased price is being fixed for the commodity and not exclusively for the time
element.

Time is not the exclusive consideration in fixing the price; therefore once the price is
fixed it relates to the commodity and not to the time. For the same reason, if the purchaser
fails to pay at the agreed time, the price would remain the same and under no
circumstances would the seller be allowed to charge more than is actually owed.

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IB1006 – Short Essays written by Masniza Maisham CIFP 2010

Question No. 4: Please explain critically Shariah compliant stocks screening methodologies.

Answer:

Stock screening is a process of determining whether a stock or security is Shariah compliant

or not. There are two Shariah compliant stocks screening methodologies namely Core
Screening of Stock and Financial Screening of Stock. These screening methodologies are
used to ensure that the companies produce goods and services that are free from elements
prohibited in the Quran such as interest (riba’), uncertainty (gharar), intoxicants, non-halal
commodity and illicit sex (zina).

In Core Screening of Stock, Shariah Advisory Council (SAC) at Security Commission

sets additional criteria for screening for companies which are not totally shielded from the
prohibited elements. The criteria are as follows:

i) Haram activities relatively very small

ii) Image of a company – well-behaved
iii) Core activities provide general benefit (maslahah) to the people
iv) Haram element must be very small on the basis of common plight (umum
balwa), custom (urf), and rights of non-Muslim community
v) Level of interest income from money market instrument is less than 5%

As for Financial Screening of Stock, it is concerning the financial activities of the

company. There are three different approaches conducted by Security Commission Malaysia
(SCM), Dow Jones Islamic Index and Financial Time Stock Exchange (FTSE). Each approach
identified the Core activities and set the Financial Ratio Filtering for each of the activities.

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