ISLAMIC BANKING MANAGEMENT BWBS3043

Introduction

The
The The

objectives of Islamic banking

philosophy of Islamic business principles of Islamic banking operation

Conclusion

 To

discuss the relationship between Islamic Financial System with Islam and Syariah. To explain the objectives of Islamic banking system. To elaborate upon the Islamic Laws and principles which have been applied in Islamic Banking system. To recognize the difference of the laws and principles concerned, either the concepts or applications.

 To

promote, foster and develop the banking services and product based on Islamic principles. Promoting the establishment of investment companies or other business enterprise as long as the activities of these companies are not forbidden by Islam. The main principles of Islamic banking comprise of prohibition of interest in all forms of transactions, and undertaking business and trade activities on the basis of fair and legitimate profit.

 Like

any other business entity, Islamic banks are

expected to make a profit from their operations.

It is considered unjust for Islamic banks if they are

unable to provide sufficient returns to the depositors who entrusted their money to Islamic banks.
Making

a profit from business is allowed in Islam.

Therefore,

Islamic banks have to incorporate

both profit and morality into their objectives.

 The

objective of Dar Al-Maal Al-Islamic Trust: To provide contemporary Islamic financial services, helping to execute their financial dealings in strict respect of the ethical individual and social values of Islamic Shariah, without contravening the heavenly imposed prohibition of dealing in riba. To serve all Muslim communities in mobilizing and utilizing the financial resources needed for their true economic development and prosperity within the principles of Islamic justices. To serve the Islamic communities and other nations by strengthening the fraternal bonds through mutually beneficial financial relationships for economic development and the enhanced environment for peace.

 Bank
to

Islam Malaysia Berhads (BIMB) corporate objective:

The

Islamic principles mentioned here are essentially those belonging to the body of Shariah rules on commercial transactions that relate to banking and finance. The banks efforts to provide these banking facilities and services are undertaken within the framework of its viability and capability to continuously grow and expand (BIMB, 1985).

provide banking facilities and services in accordance with Islamic principles to all Muslims as well as the populations of Malaysia.

1.

Allah SWT is the creator of everything on earth and

2. 3. 4. 5.

in the heavens. A Muslim entrepreneur is considered only a vice-regent on earth. Eliminating the element of usury or riba. Trade must be conducted in a faithful and trustworthy manner. Islam has always emphasized lawful earning of livelihood. All unlawful means of acquiring wealth are prohibited.

6.

7.

8. 9.

Spend money for the welfare of the people and not on wasteful or pleasurable activities. In dealing with customers, Islamic banks are expected to conduct the transactions for the benefit of both. Islamic banks must treat their customers equally. The accumulation of profit without utilization for the betterment of the community is forbidden.

Shariah literally means way to water the source of all life and signifies the way to God, as given by God. Shariah is the code of law derived from the Koran and from the teachings and example of Prophet Mohammed (Pbuh) i.e. sunnah. Shariah has its correlation with the words din and millah. Shariah covers the total way of life that includes faith and practices, personal behaviours, as well as legal and social transactions.

The name of this Shariah is Islam. Shariah can be divided to three main branches (i.e aqidah, fiqh and akhlaq). Aqidah means a strong belief in a persons heart in Allah s.w.t. and His last prophet, Muhammad peace be upon him (p.b.u.h). Fiqh concerns all aspects of all forms of practical actions by a Muslim. Akhlaq covers all aspects of Muslim behaviour, attitude and work ethics with which he performs his practical actions. It consists of man to man and man to Allah s.w.t. relationships.

The Islamic jurisprudence is called fiqh. Islamic jurisprudence, Fiqh ( )in Arabic, is a science of practicles rules which derived from specific evidence from al-Quran and al-sunnah. There are four Sunni schools or mazhab of fiqh. Fiqh is divided into two parts: the study of the sources and methodology (usul al-fiqh - roots of the law) and the practical rules (furu' al-fiqh - branches of the law).

Later on, the word Shariah or Shariah law is used generally to describe the Islamic jurisprudence or fiqh. Fiqh (i.e.Islamic jurisprudence or Shariah law) comprise two types of relationships.

Ibadat i.e relationship with god. Ibadat is concerned with the practicalities of a Muslims worship of Allah. Muamalat i.e. relationship with human being. Muamalat is concerned with the man to man relationship.

Wajib (Obligatory): The terms wajib conveys an imperative and binding demand addressed to the mukallaf in respect of doing something. Action upon something wajib leads to reward, while omitting it leads to punishment in this world and in the hereafter. Sunnah/ mandub/ mustahab(recommended): Mandub denotes a demand to perform deeds which is, however, not binding on a mukallaf. To comply with the demand earns the mukallaf spiritual reward, but no punishment is inflicted for failure to perform.

Mubah/ jaiz (permissible): Mubah is where the Lawgiver has granted a choice of omission or commission, without blame or praise for either. Haram (prohibited): Haram is the omission required in binding and certain terms. Committing a haram deed is punishable, and omitting it is rewarded. For example, riba is prohibited to every Muslim. Makruh (reprehensible): Makruh is a demand which requires the mukallaf to avoid something, but not in strictly prohibited terms. Committing in makruh deeds is not punishable, although omitting it is rewarded.

ISLAM AKIDAH SYARIAH AKHLAK

IBADAH
Political activities

MUAMALAT
Economic activities Social activities

Banking and financial activities

The relationship between Islamic financial system with Islam and Syariah

Principles of Shariah in Islamic Banking

Muslim jurists suggested a numbers of shariah principles which can be classified into four categories: i. Profit and loss sharing principles a. mudarabah b. musyarakah ii. Fees or charges based principles a. Murabahah b. Bay al-Muajjal/ bay bithaman ajil c. Ijarah/ al-ujr/ Ijarah wa iqtina d. al-Wakalah . iii. Free service principle (Qard hasan) iv. Ancillary principles a. Wadiah b. Rahn

Contracts in Islamic Law

Contracts of Exchange

Charitable contracts

Trust contracts Wadhiah Murabahah Tauliah bay' salam sarf syarikah

Bargaining contracts ijarah

Wakalah
Hiwalah

Qard hasan
hibah

sadaqah
istisna' Rahn wakalah Mudarabah

kafalah
Wadiah

Inan

Mufawadah

Abdan

Wujuh

Al-Mudharabah Al-Musyarakah Al-Murabahah Al-Ijarah Al-ijarah thumma alBai Bai al-Inah Bai al-Dayn Al-Qard al-Hasan Al-Wadiah

Bai

al-Salam Bai' Al-Istisna Bai' Al-Istijrar Al-Bai bithaman Ajil Al-Rahnu Al-Hiwalah Al-Kafalah Al-Sarf

Mudarabah is the form of partnership where one of the contracting parties, called the sahib al-mal or the rabb al-mal (the financier), provides a specified amount of capital and acts like a sleeping partner, while the other party, called mudarib (entrepreneur), provides the entrepreneurship and management for carrying on any venture, trade, industry or service with the objectives of earning profits.

The

mudarib is in the nature of a trustee as well as an agent of the business. As a trustee he is required to act with prudence and in good faith and is responsible for losses incurred due to his willful negligence. As an agent he is expected to employ and manage the capital in such a manner without violating the values of Islam.

The

mudarabah agreement could also be consummated between several financiers and entrepreneurs
Arabic terms are used to designate this kind of business organization: i. qirad ( ), ii. Muqaradah (), and iii. mudarabah ()

Three

 Types In the

of al-Mudarabah : unrestricted or restricted. unrestricted case, the mudarabah agreement does not specify the period, the place of business, the specific line of trade, industry or service, and the suppliers or customers to be dealt with. In the case of restricted mudarabah, the mudarib must respect the restrictions imposed by sahib almal. If the mudarib acts contrary to these restrictions, he is alone responsible for the consequences. In the case of mudarabah restricted by time, the mudarabah is dissolved with the expiry of the specified time period.

 In

the case of unrestricted mudarabah, the mudarib has an open mandate and is authorized to do everything necessitated by the mudarabah in the ordinary course of business. If he guilty of willful negligence, fraud or misrepresentation, he is himself responsible for the consequences, and the resulting loss, if any, cannot be charged to the mudarabah account.

 The

net profit is to be divided between sahib almal and the mudarib in accordance with a just proportion agreed in advance and explicitly specified in the mudarabah agreement. There cannot be a distribution of profits until the losses have been written off and the equity of the sahib al-mal has been fully restored.

 All

losses incurred in the ordinary course of business must be charged against profit before they can be charged against the equity of sahib al-mal. The general principle is that the sahib al-mal risks only his capital while the mudarib risks only his time and effort.

Bank

1. Bank provides capital to customer e.g. RM 7 MILLION. Both parties agree on profit sharing ratio (e.g. 60:40) i.e. 60% of gross profit to be distributed to customer 40% to bank

Customer

40%

2. PROJECT

60%
3. PROFIT

100%

LOSS

Musyarakah

or sharikah or shirkah can be defined as a form of partnership where two or more persons combine either their capital or labour together, to share the profits, enjoying similar rights and liabilities. There is a consensus of opinion among the jurists of all schools of thought (including Hanafiyyah, Malikiyyah, Shafiiyyah and Hanbaliyah) that musyarakah is a valid and legitimate contract in Islam.

Musharakah
Sharikah Al-Aqd (Contractual Partnership)

(Ownership Partneship)

Sharikah Al-Milk

Sharikah Ikhtiyar

Sharikah Jabr (Faraid)

Sharikah Al-Amwal (Partnership in Capital)

Sharikah Al-amal (Partnership in labour)

Sharikah Al- Wujuh (Partnership in goodwill or credit)

Sharikah AlMudharabah (Profit Sharing Partnership)

Sharikah AlMufawadah (Capital Share/Eequal share partnership)

Sharikah Al- Inan (General Partnership)

Types of Musyarakah in Islamic Law

(cont..)

1. Sharikah al-milk (Partnership in Holding/ Ownership)

-Mix of ownership either by choice (ikhtiyar) or mandatorily (Jabr) -No formal Sharikah contract concluded between the parties involved (a)Sharikah Ikhtiyar: The ownership is established based on

the acts of the partners such as an asset that has been jointly purchased by them @ they become new owners of an asset as a result of a will or a gift. (b) Sharikah Jabr: The ownership is established mandatorily and not due to the acts of the partners. Ie: They become new owners of an asset through inheritance

Types of Musyarakah in Islamic Law

(cont..)

2. Shirkah al-Uqud (contractual partnership)

Shirkah al-Uqud can be considered a proper partnership because parties concerned have willingly entered into a contractual agreement for joint investment and the sharing of profits and risks. Ie: Musharakah Mutanaqisah

Types of Musyarakah in Islamic Law

(cont..)

i.

Shirkah al-Uqud has been divided into four kinds: Al-Inan (General Partnership) -Partnership between 2++ parties whereby each partners contribute a specific amount of money. -Accordingly their share in profits may be unequal, but this must be clearly specified in the partnership contract . -Their share in losses would be in accordance with the capital contribution.

Types of Musyarakah in Islamic Law

(cont..)
ii.

Al-Mufawadah (Equal Partnership) - 2++ form a partnership whereby the partners are equal to each other in their capital contribution, their ability to undertake responsibility and their share of profits and losses. They have full authority to act on behalf of the others and are jointly and severally responsible for the liabilities of their partnership business, provided that such liabilities have been incurred in the ordinary course of business.

Types of Musyarakah in Islamic Law

(cont..)
ii.

Al-Abdan (labour, skill and management) The partners contribute their skills and efforts to the management of the business without contributing to their capital. Al-Wujuh (goodwill, credit-worthiness and contracts) The partners use their goodwill, their creditworthiness and their contracts for promoting their business without contributing to the capital.

iv.

Bank

1. Bank and customer provide capital for the project e.g: RM 6 million from bank & RM 4 million from customer. Both parties agree on profit sharing ratio (e.g: 70:30) i.e 70% of gross profit to be distributed to customer; 30% to bank 2. PROJECT

Customer

30%

70%

60%

3. PROFIT

40%

CAPITAL LOSS

Musharakah Mutanaqisah
A form of partnership in which one of the partners promises (wad) to buy the equity share of the other partner gradually untill the title of the equity is completely transferred to him. Ie : Islamic Home Financing

An al-Ijarah contract is where the financier buys and leases equipment or other assets to the business owner for a fee or more often called rental income, or where the agent serves the customer for a fees or commissions (al-ujr). The duration of the lease, or the type of work, as well as the fee must be set in advance and mutually agreed in both rental income (al-ijarah) and al-ujr.

Al-Ijarah

(cont..)

The basic security under the ijarah arrangement is the ownership of the equipment. The title of ownership to the equipment remains with the leasing company and in case of serious default the equipment is repossessed.

Conditions related to Al-Ijarah Contract

i. The service that the asset is

supposed to provide and for which it is being rented should be definitely and clearly known to both parties; ii. The asset remains in the ownership of the lessor who is responsible for its maintenance so that it continues to give the service for which it was rented;

Al-Ijarah

(cont..)

iii.

iv.

The leasing contract is terminated as soon as the asset ceases to give the service for which it was rented. If the asset becomes damaged during the period of the contract, the contract will remain valid; and The price of an asset that may be sold to the lessee at the expiry of the contract cannot be pre-determined. It can be determined only at the time of the expiry of the contract.

42

Ijarah Muntahia Bittamleek

Definition

Ijarah Muntahia Bittamleek or Ijarah Wa Iqtina is a form of lease contract that offers the lessee an option to own the asset at the end of the lease period. In other words, the Ijarah contract that ends up with the transfer of ownership of leased assets to the lessee.
Ijarah Muntahia Bittamleek can be in the following forms:

a.Ijarah Muntahia Bittamleek through gift, i.e. the transfer of legal title for no consideration.
b.Ijarah Muntahia Bittamleek through transfer of legal title at the end of a lease for a token consideration or other amount as specified in the lease.

c.Ijarah Muntahia Bittamleek through transfer of legal title prior to the end of the lease term for a price that is equivalent to the remaining Ijarah instalments.
d.Ijarah Muntahia Bittamleek through gradual transfer of legal title of the leased

asset.

44

Ijarah Thumma Al-Bai (AITAB)

Definition Ijarah Thumma Al-Bai (AITAB) is one of the categories of lease, which ends with the sale of the asset, where the legal title of the leased asset will be transferred to the Customer upon full settlement or early settlement of the contract value. AITAB consists of two different contracts: Contract of Leasing or Ijarah Contract of Sale or Bai

1. Leasing is a contract whereby the owner of something transfers its usufruct to another person for an agreed period, at an agreed consideration. 2. The subject of lease must have a valuable use. Therefore, things having no usufruct at all cannot be leased. 3. It is necessary for a valid contract of lease that the corpus of the leased property remains in the ownership of the seller, and only its usufruct is transferred to the lessee. Thus, anything which cannot be used without consuming cannot be leased out. Therefore, the lease cannot be effected in respect of money, eatables, fuel and ammunition etc. because their use is not possible unless they are consumed. If anything of this nature is leased out, it will be deemed to be a loan and all the rules concerning the transaction of loan shall accordingly apply. Any rent charged on this invalid lease shall be an interest charged on a loan.
46

4. As the corpus of the leased property remains in the ownership of the lessor, all the liabilities emerging from the ownership shall be borne by the lessor, but the liabilities referable to the use of the property shall be borne by the lessee. Example: A has leased his house to B. The taxes referable to the property shall be borne by A, while the water tax, electricity bills and all expenses referable to the use of the house shall be borne by B, the lessee. 5. The period of lease must be determined in clear terms. 6. The lessee cannot use the leased asset for any purpose other than the purpose specified in the lease agreement. If no such purpose is specified in the agreement, the lessee can use it for whatever purpose it is used in the normal course. However if he wishes to use it for an abnormal purpose, he cannot do so unless the lessor allows him in express terms.

47

7. It is necessary for a valid lease that the leased asset is fully identified by the parties. Example: A said to B. I lease you one of my two shops. B agreed. The lease is void, unless the leased shop is clearly determined and identified. Determination of Rental 8. The rental must be determined at the time of contract for the whole period of lease. It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of effecting a lease. If the rent for a subsequent phase of the lease period has not been determined or has been left at the option of the lessor, the lease is not valid.

48

Example (1) : A leases his house to B for a total period of 5 years. The rent for the first year is fixed as Rs. 2000/- per month and it is agreed that the rent of every subsequent year shall be 10% more than the previous one. The lease is valid. Example (2): In the above example, A puts a condition in the agreement that the rent of Rs. 2000/per month is fixed for the first year only. The rent for the subsequent years shall be fixed each year at the option of the lessor. The lease is void, because the rent is uncertain.

The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah, if both parties agree to it, provided that all other conditions of a valid lease prescribed by the Shariah are fully adhered to.
49

Al-Ujr is payment for services rendered. The difference between the al-ijarah and al-ujr

Al-Ujr: Refers to commissions or fees charged for services provided by bank. The Islamic banking concepts are further developed as underlying contracts of wide range of products and services offered by Malaysian Islamic banking as illustrated in Table-A.

TABLE-A: Range of Fee-based Islamic Banking Products and Services in Malaysia

Treasury/Money market investment: Foreign exchange Ujr

Card services:
Debit card-I Ujr

Banking services: ATM service Cashiers order Ujr Ujr

Demand draft
Standing instruction Stock broking services Telegraphic transfer/fund transfer Travelers cheques

Ujr
Ujr Ujr Ujr Ujr

Telebanking

Ujr

Murabahah is generally defined as the sale of commodity for the price at which the vendor has purchased it, with the addition of a stated profit known to both the vendor and the purchaser. It is a cost-plus-profit contract.

Al-Murabahah

(cont..)

Islamic financial institutions aim to make use of murabahah in circumstances where they will purchase raw materials, goods or equipment etc. and sell them to a client at cost, plus a negotiated profit margin to be paid normally by installment. The legality of murabahah is not questioned by any of the schools of law. There are of course differences in the details.

 The

simplest possible e.g emerges when the transaction involves two parties only, i.e Bank and the Customer. Bank is also vendor and sells the Asset(s) to its Customers on deferred payment basis. Shariah perspective it is an ideal e.g and its profits are fully justified because Bank assumes all risks as Vendor/Trader.

The

From

Example: Murabahah flow

2

Customer 3

Bank/Vendor

Phase 1: The customer approaches Bank (Vendor) and identifies Asset(s) and collects relevant information including cost and profit. Phase 2: Bank sells Asset(s) to the Customer, transfer risk and ownership to the Customer at certain Murabaha Price. Phase 3: Customer pays Murabaha Price in lump sum or in installments on agreed dates.

 This

transaction allows the sale of a product on the basis of deferred payment in installments or in lumpsum payment. The price of the product is agreed between the buyer and the seller at the time of the sale and cannot include any charges for deferring payments.

This contract refers to the sale of goods on a deferred payment basis; a deferred payment sale. Islamic banks use it as a mode of financing for purchase and sale or deferred payment of consumer goods. Technically, this financing facility is based on the activities of buying and selling. There is no interest charged. Equipment or goods required by the customer are purchased by the bank which subsequently sells the goods to the customer at an agreed higher price; payment is deferred and the customer is allowed to settle payment either by installments or in a lump sum within a pre-agreed period. The deferred payment price which is the banks sale price includes a profit mark-up for the bank agreed by both parties. Similar to a Murabaha contract, but with payment on a deferred basis known as Murabaha Muajjal.

59

 when

a customer approaches an Islamic bank to finance a purchase through murabahah, the payment of the price is usually deferred and most commonly paid in installment; and this arrangement is known as bay bithaman ajil or bay al-muajjal. It is basically a trade-deal in which the seller allows the buyer to pay the price of a commodity at a future date in lump sum or installments. As compare to murabahah, the bank need not disclose the profit margin they may earn in bay bithaman ajil transaction.

 In

the bay al-inah, the customer purchases an asset from the bank at a credit price (mark-up price) and sells it back in lower price to the same party at a cash price. This buy-back agreement will ensure that the customer will receive the money in cash while bank will be paid a prefixed or contracted amount in a future date. Debt payment will be maid by installment or in lumpsum payment. The difference between cash and mark-up price will represent the profit due to the bank (financier).

Bay al-Inah

(cont..)

Customer purchases asset valued RM 50 000 from bank at a credit price

Customer

Bank

The customer sells it back to the bank at RM40 000 in cash price

 The

profit is referred to the difference between the sell and the buy back prices (RM50,000 RM40,000) in the bay' al-Inah transaction executed earlier. In other words, through the act of selling assets to customer, Bank is actually entitled RM10,000 of profit. However, the profit is only claimed on customer when she struggles to pay her debt on time. The maximum additional payment however is fixed (RM10,000 in our example).

65

Bay Al-Inah in Islamic Credit Card

1
Bank 2 Wadiah Account Customer

Bank sells asset to the customer on deferred payment within a certain period of time (credit card expiry date) Customer subsequently sells the asset back to the bank for a lower amount (equal to credit limit) in cash

This amount will be credited into a marginal wadiah account (Customers special account)at the bank for the customers use. Whenever the customer uses the credit card, the amount shall be paid by deducting it from this account. Once the customer has made a repayment, the amount will be topped-up.

 It

means debt-trading. The sale of debt- where the debt must arise out of a contract of exchange or uqud almuawadat al-maliyyah such as asset sale (base on bay bithaman Ajil) or trade financing (based on Murabahah). The sale of debt (i.e. commercial certificates, notes or bonds) to another party. Only documents evidencing real debts arising bona fide commercial transactions can be traded.

Bay Al-Dayn in Islamic Bonds

1 Sell Asset RM 200mil (Cash) Issuer Investor

2
3

Sell Back RM 220mil (Credit)

Payment + Debt certificates

Sold PNs (Primary Notes) at par value redeemable 4 upon maturity to guarantee repayment of capital (200 mil cash) 5 Sold SNs (Secondary Notes) at par value redeemable at time agreed upon. (20 mil Installments over certain period of time)

 In

this transaction the buyer pays the seller the full negotiated price of a specific product which the seller promises to deliver at a specified future date. This transaction is limited to products whose quality and quantity can be fully specified at the time the contract is made.

Parallel Salam Structure

Bank

Seller

Buyer

i. Bay al-salam cannot be affected on a particular commodity or on a product of a particular field or farm. For instance, if the seller undertakes to supply the barley of a particular field, or the fruit of a particular tree, the bay al-salam will not be valid. This is because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and given such possibility, the delivery remains uncertain. ii. It is necessary that the quality of the object of sale is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned. Also, the exact date and place of delivery must be specified in the contract
72

iii. Bay al-salam can be affected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of bay al-salam. For example, precious stones cannot be sold on the basis of bay al-salam. This is because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specifications is not generally possible; iv. It is necessary for the validity of bay al-salam that the buyer pays the price in full to the seller at the time of affecting the sale. It is necessary because in the absence of full payment by the buyer, it will be tantamount to sale of a debt against a debt. v. Bay al-salam cannot be affected in respect of things, which must be delivered at spot. For instance, if wheat is purchased in exchange of barley, it is necessary that the delivery of both be simultaneous.
73

 An

agreement between the client and the supplier, where the supplier agrees to a supply a particular product on an on going basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment. It is equally applicable for a contract between a wholesaler and retailer for the supply of a number of agreed assets. It is a type of Bay al-Salam.

contract of acquisition of goods by specific or order. Where the price is paid progressively in accordance with the progress of job completion. Literally the word istisna is a derivative from the root word sana or to manufacture or to construct something. Istisna is an order or request to manufacture something, whereby the requestor invited, induced or caused another to make or manufacture some goods for him. Technically, it is a contract to purchase for a definite price something that may be manufactured later on according to agreed specifications between the parties

i. The subject matter should be well defined without ambiguity with respect to quality, quantity and other relevant characteristics. This follows since the object to be manufactured is an object of sale, which must be known by specifying those aspects. Therefore, if any of those aspects of the object of the contract is not specified, the contract would be rendered defective due to ignorance that may lead to legal dispute. ii. The subject matter should normally be used by the people (e.g. jewelry, shoes, pots, means of transportation, etc.). The istisna is not proper if the subject matter is rarely used by the people; iii. There is no specific term of deferment is specified. Hanafi school ruled that if the parties to the contract specify a term of deferment, the istisna becomes defective and the contract is converted to a bay al-salam that must satisfy all the other conditions of the latter contract;

iv. The price of the subject matter of istisna is known at the time of the conclusion of the contract. The price could not be increased or decreased on account of the normal increase or decrease in commodity prices or the cost of labor. v. The manufacturer must undertake to construct the goods with his own material. If the buyer supplies the raw material to be manufactured it is considered then as Ijarah, instead of istisna. It is not permitted for the manufacturer to stipulate in the contract of istisna that he will not be liable for defects in the subject matter. The reason for this prohibition is that istisna is a sale of specified goods to be delivered in future, while the exclusion of liability as to defects is valid only in the sale of particular identified goods.

It refers to currency exchange, i.e. buying and selling of foreign currencies. Ibn Rushd examines the three forms of sale that can arise in a market where goods and money are in existence: "when two commodities are exchanged, one may serve as a currency and the other as a priced commodity, or both may be currencies. When a currency is exchanged for a currency the sale is called 'sarf', and when a currency is exchanged for a priced commodity, the transaction is sale proper ('bay'). Similar is the sale of a priced commodity for another priced commodity (barter).

 The

rules of bay al-sarf derive largely from the well known hadith: "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

 1)

both parties must take possession of the exchanging from each other at the instance of the contract before depart from the place of the contract. 2) the contract must be regard as binding without any option (to subsequently cancel the contract within a specified or unspecified period or an option to regard the contract as nonbinding unless ratified subsequently within a specified or unspecified period). 3) none of the parties must defer the reciprocal payment due in return for taking possession provided by the opposite party

 Wadiah

is the deposit of goods or funds with another person, who is not the owner, for safekeeping. As wadiah is a trust, the depository becomes the guarantor, who guarantees the return of the whole amount of the deposits, or any part thereof, outstanding in the account of depositors, when demanded. The depository is not entitled to use the funds without permission from depositors.

Al Wadiah refers to funds deposited with a depository (the Bank) for safekeeping. Wadiah is a trust, whereby the depository becomes the guarantor or custodian and guarantees the repayment of the entire deposit upon demand. Deposits are placed in trusteeship with the Bank. You appoint a Bank as the trustee and guarantor for the safekeeping of your deposit. While your money is under the Banks responsibility, the funds will be placed in investments that are within the Syariah guidelines. The Bank will guarantee the full payment of such funds or part thereof whenever needed. Features: Gift/Hibah in the form of dividends may be given upon the goodwill of the Bank; based on the credit balance in the account provided there are returns from the investment and from the returns on investment which is then credited into an account.

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 Qard

hassan means an interest-free loan, which is the only loan permitted by shariah principles. Funds are advanced without any profit or charge for humanitarian and welfare purposes. Repayments are made over a period agreed by both parties. A levy of a modest service charge on such a loan is permissible provided it is based on the actual cost of administering the loan.

A) Both parties should be legally (shari'ah) capable to enter into the qard contract. To enter into a contract, parties will be baligh and 'aqil. B) Ijab (offer) and qabul (acceptance) of the qard must be clearly made before entering into the loan contract. C) The date of payment must be specified: It is also agreed among the Muslim jurists that the date of payment should be mentioned in the loan agreement. If no date is specified, the transaction may lead to ambiguity and dispute in future among the lender and the borrower. D) The loan contract should be written down. This ruling is based on a Qura'nic injunction. As Allah (s.w.t) says; "O you who believe! when you deal with each other in transactions involving future obligations for a fixed period of time reduce them in writing." [Al-Baqarah (2): 282]

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E) Administrative fee / Service charge: if al-qard alhasan is given by any bank or other institutions, they may require service charge or administrative fee. However, there is no scope for an individual lender to demand this charge unless any amount incurred due to procedural requirements of the loan agreement, such as lawyer's fee, stamp duty etc. F) Extra Payment: It is very clear that in the loan agreement, there will be no condition for extra payment, otherwise, it will be riba . It is however, advisable for the debtor to give some sort of gift to the creditor as a sign of appreciation of his voluntary deed.

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situation where a person (authorizer) nominates or appoints another person to act on his behalf to purchase something. The authorizer (Muwakkil) have to place a deposit to the full amount of the price of goods to be purchased / imported which the agent (wakil) or entrusted person accepts under the contract of Wadiah. The agent (wakil) pays to the third party utilising the customers deposits to buy the goods. The Wakil (agent) is free whether to take al-ujr (commission) or not, but al-ujr must be mentioned and the amount must be stated earlier.

guarantee provided by a person to the owner of goods, who had placed or deposited his goods with a third party. The guarantor and the third party must meet any subsequent claim by the owner for his goods.

Kafalah

Kafalah Bi Al- Mal

Kafalah Bi Al-Nafs

Kafalah bi Al-Dayn

Kafalah Bi Al-Ayn

Kafalah Bi Al-Darak

Generally, kafalah may be divided into two types: Kafalah bi mal is a guarantee to return an asset to its owner Kafalah bi nafs is a guarantee to bring someone to specific authority such as the judiciary.

Kafalah bi mal can further be classified into three main categories, as follows: Kafalah bi dayn is a guarantee for the repayment of another partys loan obligation. It means that when a debtor fails to meet his obligation to repay a loan, then the guarantor will assume this obligation.

Kafalah bi ayn or kafalah bi taslim is a guarantee of payment of an item or a guarantee of delivery in a transaction. For example, in a sale and purchase contract, the guarantor agrees to guarantee the delivery of the item to be sold to the purchaser. In the event the seller fails to honour his obligation according to the agreement, the guarantor will be responsible for the delivery. Kafalah bi darak is a guarantee that an asset is free from any encumbrances. This guarantee is used especially for transactions that involve the transfer of titles or rights to ensure that an asset is free from any encumbrances. For example, if A claims and is able to prove that the item bought by B belongs to A, then it will be the guarantors responsibility to ensure that B gets back the value of his purchase which has been paid to seller A.

 It

means debt transfer. It refers to a transfer of funds (debt) from the depositor's (debtor's) account to the receiver's (creditor's) account where a commission may be charged for such a service. It is applicable to remittances.

 It

means collateralised borrowing. It refers to an arrangement whereby a valuable asset is placed as a collateral for a debt. The collateral may be disposed in the event of default. It is being applied for Islamic Pawning, currently offered by Bank Islam Malaysia Bhd and Bank Kerjasama Rakyat Malaysia Bhd

Categories of contracts which adopted by Islamic bank

Strongly Islamic Musyarakah Bay' Istisna' Wadiah

Wakalah

Weakly Islamic Bay' al-Inah Hiwalah (with fee) Kafalah (with fee) mufawadah

Mudarabah Bay al-Salam Sarf Qard hasan

Hibah

Ijarah

Murabahah

 The

development of philosophies and objectives in Islamic banking are in line with the principles of Islamic business as highlighted in the al-Quran and Sunnah. As institutions whose foundations are based on Islamic doctrines, Islamic banks must conforms to Islamic rules and regulations. Islamic business entities are required to engage themselves in legitimate and lawful business, and to fulfill all obligations and responsibilities. Islamic bank have to uphold both profit and moral principles.