CHAPTER 4
PRINCIPLES OF ISLAMIC BANKING
Mohammad Salleh Abd Saha
Razizi bin Tarmuji
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CONTENTS
• 4.1 Investment and financing of HALAL
activities.
• 4.2 Profit and loss sharing VS Lender-borrower
relationship.
• 4.3 Trade-based financing VS Interest-based
investment/loan.
• 4.4 Prohibition of Riba, Gharar and Maysir.
• 4.5 Payment of zakat.
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4.1 Investment and financing of HALAL
activities.
Impermissible to
invest and give
financing to company
Financial serviced based on
Riba.
Conventional insurance that
containing of gharar.
Gambling and gaming.
Manufacture or sale of nonhalal products.
Entertainment activities that
conflicts with Shariah.
Manufacture or sale of
tobacco-based or related
product.
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Stockbroking or share trading in
Shariah non-compliant securities.
Other activities that conflicts
with Shariah.
4.2 Profit and loss sharing VS Lenderborrower relationship.
FIRST
TIER
-Between bank
and depositor.
SECOND
TIER
-Between bank
and
entrepreneur.
-The depositor are
considered to be
provider of the
capital (Rabb al
mar)
-The
entrepreneur is
the manager of
fund.
-The bank
functions as a
working partner
or manager of
funds (mudarib or
amil)
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-The bank
functions as
provider of
capital.
Al-Mudharabah (Profit Sharing)
• It can be define as a joint venture profit
sharing contract.
• The contract are between capital provider and
the entrepreneur
• Mudharabah term: The expression making or
performing a journey (Ad-Darb fil Ard).
• Agent(entrepreneur) gets profit by performing
his hard work and efforts in the long journeys.
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Mudarabah Contract
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Pillars of Mudharabah
•
•
•
•
Sahibul Mal : owner of capital, fund provider
Mudharib : Entrepreneur
Ra’sul Mal : Capital
Al-Amal or Mashru’ : Business ventures or
project
• Ribh : Predetermined share of profit
• Sighah : Offer and acceptance
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Al-Musharakah (Profit-Loss Sharing)
 The word is derived from sharaka or to share
 Al Shirkah cover in its meaning:
a. shirkah al-mulk (joint ownership of common
property)
b. Shirkah al-aqad (contractual partnership in a business
in a business according to a mutual consent).
• a partnership or joint venture for an economic activity
between the bank and one or more clients. In this
joint venture, all parties may contribute some (not
necessarily equal) percentage of all three factors of
economic
production
(capital,
labor,
and
entrepreneurship).
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The Musharakah Contract
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4.3 Trade-based financing VS
Interest-based investment/loan.
Trade-based Financing
 Murabaha is a contract of sale where the seller discloses to the buyer the
actual cost of the item to be sold in addition to the profit margin (mark up)
added, to be mutually agreed upon with the buyer.
 Murabaha financing is a widely used contract in contemporary Islamic
banking and finance; and it is limited to cases where the customer actually
needs to purchase some commodity.
 Murabaha is an agreement wherein the bank purchases, at the request of a
customer, a specified item, and then sells it to him at a mutually agreed
marked-up price.
 Payment for goods under murabaha may be made either on cash basis or
under deferred payment terms. Although common usage of murabaha in
trade financing is typically done by way of deferred payment, by definition,
murabaha is not exclusively a deferred payment sales.
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Murabahah in Islamic Banking
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Subject of Murabaha (Item for Sale)
 S—ubject of sale must be specifically known and identified.
 S—ubject of sale must be in existence at the time of sale, and must be
owned by the seller at time of sale.
 —
Subject of sale cannot be for haram use or forbidden commodities
 —
Subject of sale must be something of value and classified as
property in fiqh. This may raise several important fiqh issues, such
as, whether “rights” qualify as property or not.
 —
Sale must be instant and must not be attributed to a future date.
 —
Terms of delivery must be specified and certain.
 —
Sale must be unconditional and must not be contingent on a future
event or fulfillment of a condition that is external to the transaction.
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Difference Trade-based Financing and
Interest-based Investment/loan
Trade-based Financing
Interest-based
investment/loan
Legal Nature of promise
The bank has to purchase the requested
commodity before selling it to
the customer.
Profit Rate
Price includes a known profit or mark-up.
The mark-up in murabaha is part of the
sale price, it is set only once and then it
does not change overtime.
The customer is required to make a
unilateral promise to buy the
commodity from the bank, before the
bank makes the purchase.
Profit comes from the interest rates.
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Fixed and Floating rate
Murabaha financing products are fixedrate products. The rate, once determined
for a given contract, is not allowed to float
with changes in the interest rates or any
other rate.
Rescheduling of payment
Murabaha does not allow such
rescheduling as no additional amount
can be charged for the same. The amount
of the murabaha price remains
unchanged.
Rebate on early payment
If it is given voluntarily, it is allowed. The
rate of discount must not be pre-specified
in the murabaha contract as a condition.
It is not a right that the debtor can claim.
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.
loan rescheduling is accompanied by
additional interest charge for the timing
differences.
Conventional financial system grants the
borrower a discount or rebate
if the customer decides to pay earlier
than the scheduled time.
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4.4 Prohibition of Riba , Gharar and
Maysir
Riba literally is as means to increase, to
grow, to exceed, to be more than.
In the other words, it is refer to surplus of
income which lender receives from the
borrower, over and above the principal
amount, as a reward for waiting or parting
with the liquid part of his capital for a
specific period of time.
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Evidence from al-Quran
• Those who consume interest cannot stand [on the Day of
Resurrection] except as one stands who is being beaten by Satan
into insanity. That is because they say, "Trade is [just] like interest."
But Allah has permitted trade and has forbidden interest. ( alBaqarah:275)
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O you who have believed, fear Allah and give up what
remains [due to you] of interest, if you should be
believers. Al-Baqarah:278
And if you do not, then be informed of a war [against you]
from Allah and His Messenger. But if you repent, you may
have your principal – [thus] you do no wrong, nor are you
wronged (279) al-Baqarah
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Evidence from Prophet Tradition (al-Sunnah)
The Prophet said, "Avoid the seven great destructive sins." The people
enquire, "O Allah's Apostle! What are they? "He said, "To join others in
worship along with Allah, to practice sorcery, to kill the life which Allah has
forbidden except for a just cause, (according to Islamic law), to eat up
Riba (usury), to eat up an orphan's wealth, to give back to the enemy and
fleeing from the battlefield at the time of fighting, and to accuse, chaste
women, who never even think of anything touching chastity and are good
believers. [Sahih al-Bukhari, Sahih al-Muslim]
From Ibn Masood (ra): The Prophet (pbuh) said: "Riba has seventy
three segments, the least serious being equivalent to a man committing
adultery with his own mother." [Ibn Majah, Hakim].
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Three elements of Riba
Excess or surplus
over and above the
loan capital
Determination of
this surplus in
relation to time
Bargain to be
conditional on
the payment of a
predetermined
surplus
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To prevent injustice between
contracting parties
An exploitation of
people needs. Thus,
they have no choice
but to be involved in
Riba.
Reasons
for
Prohibition
of Riba
An exploitations of people
ignorance over the types of
commodities involved in
transaction
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Exploit the
poor/creditors
Types of Riba
Riba al-fadl
Riba al-Buyu`
(arising from sales)
Riba al-nasiah
Riba al-qard
Riba al-Dayn
(arising from debt)
Riba al-Jahiliyah
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Riba al-fadl
Riba al-nasiah
 Also known as Riba albuyu’ that is riba by excess.
 It applies to six items :
gold, silver,date,
raisin,wheat and barley
and the like of them.
 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
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Riba al-Qard
Riba al-Jahiliyah
 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.
 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 .
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‫هللا صلَّى‬
‫• عن عبادة بن الصامت رضي هللا عنه قال رسول هِ‬
‫هللاه عليه وسلَّمِ ‪:‬‬
‫ِ‬
‫الذهب بالذهب‪ ،‬والفضة بالفضة‪ ،‬والبر بالبر‪ ،‬والشعير‬
‫لا بمثل‪ ،‬سواء‬
‫بالشعير‪ ،‬والتمر بالتمر‪ ،‬والملح بالملح‪ ،‬مث ِ‬
‫بسواء‪ ،‬يداا بيد‪ ،‬فإذا اختلفت هذه األصناف فبيعوا كيف شئتم؛‬
‫إذا كان يداا بيد‬
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• 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
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gold
salt
Dates
Salt
RIBAWI
ITEM
Barley/oat
Wheat
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Silver
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
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Minor
uncertainti
es can be
permitted
when
there is a
necessary
Both of
contracting
parties
must have
a perfect
knowledge
regarding
to
transaction
Examples Transaction include 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.
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Types of Gharar
Gharar
Fahish
• this type of gharar is not tolerate and may
result in contract voidability
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
tabarru’at) such as gift or bequest
• There is a public need for the transaction or
contract (consideration of maslahah)
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Maysir
Refers to the easy acquisition of
wealth by chance,whether or not it
deprives the other’s right.
Qimar means the game of chance in
which one gains at the cost of others.
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Issues that related to gambling
Contest using
sms
Lottery
The prize
winning
tickets
Horse racing
Crossworld
puzzles
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Objectives restriction of gambling
 It teach us to work for earning a living and not
depend on chance and luck.
 Individual property is sacred, it may not be taken
unless given willingly or by lawful exchange.
 Gamblers develop hater and enmity toward one
another.
 Gambling make a person more greedy.
 It takes away from the remembrance of Allah.
 To avoid wasting.
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Payment of Zakat
To
purify
To
improve
To grow
MEANING
OF ZAKAH
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Purpose and Benefit of Zakat
• The foremost and primary is to distribute the wealth
of the community among the poor
• Removing the love of wealth from one’s heart, a
spiritual disease that could be detrimental to one’s
Iman. Thus, it is a form of Tazkiya (self-purification).
• 3) Giving in the path of Allah acknowledging that
whatever wealth one possesses is in reality the
Almighty’s, and giving a monetary sacrifice for one’s
lord.
• 4) Prevention of monopolies in society.
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1 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.
2 Discourages Hoarding
Zakat discourages hoarding because it is levied on hoarded wealth.
3 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.
4 Zakat increase level of income
Zakat increase level of income due to circulation of wealth in the economy.
5 Raises investment
Zakat Raises investment due to increase in consumption and production of goods.
6 reduces chances of recession
Zakat increases circulation of wealth which reduces chances of recession.
7 Reduces inequality of Wealth
Zakat is distributed among the poors from rich people so it reduces inequality of wealth.
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•
8 Raises Income level
Distribution of Zakat acts as an unemployment tool. Zakat is given to poor it increases his
income level.
9 Raises Demand for necessities
Zakat Raises demand for necessities because poor buys things with Zakat of his needs.
10 Raises Standard of Living
Zakat Raises standard of living of a poor person.
11 Reduces unemployment
Zakat reduces unemployment and helps poors to do business with amount of Zakat.
12 End Poverty
Zakat ends poverty as Zakat is given to poors.
13 Redistribution of National Income.
14 Reduces Crimes.
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Condition of Zakah
Zakah
Performer
Muslim
Zakah
Assets
• Every Muslim who is of a certain age and owns
enough assets is required to pay zakat.
• Full ownership. A muslim only required to
pay zakat if he or she has full and legal
ownership of an asset.
• It’s payable only on those assets acquired
for the purpose of creating or generate
wealth.
• Zakat need only be paid on those assets
that exceed a minimum value.
• Minimum value is termed Nisab.
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Completion of Haul
• Haul is defined as the completion period for
zakah asset.
• The length of time:
one islamic Hijri year (1 year Hijri=354.5 days,
1 year Solar= 365.25 days)
• Zakah only payable on asset that have been
held for at least this period.
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Types of Zakat
Zakah Fitr
• Zakah Fitr is a one off payment that is made once in
every Muslim Hijri calendar year at any time
between the first day of the month of Ramadhan and
the first day of Shawal.
• All Muslims are obliged to pay this, regardless of
their age, status or wealth.
• The amount of zakah payable is approximately 3kg of
staple food in the relevant country or an amount of
money that is equivalent to the price of the food.
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• Zakah Al-Mal (on wealth)
• Zakah al-Mal is an annual payment based on the amount of
wealth owned by a Muslim individual or organization. This
payment is obligatory upon any Muslim individual or
organization that has completed the requirement of Nisab
(minimum taxable amount) and Haul (one Muslim Hijri
calendar year). The payment is 2.5% out of the total wealth
deemed for zakah.
• Zakah al-Mal can be subdivided into zakah on:
Business, Rental Income,Personal Income, Savings, Gold and
Silver, Shares,Livestock, Crop
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Beneficiaries of zakah
Zakah expenditures are only for the poor and for the
needy and for those employed to collect [zakah] and for
bringing hearts together [for Islam] and for freeing
captives [or slaves] and for those in debt and for the
cause of Allah and for the [stranded] traveler - an
obligation [imposed] by Allah . And Allah is Knowing and
Wise.
Surah At-Taubah
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Beneficiaries of zakah
The poor
(faqir/Fuqara)
• Those without any means of
livelihood and material possessions.
The needy
(Miskeen)
• Those without sufficient means of
livelihood to meet their necessities.
The
• Those appointed to manage and
administrators of
administer zakah.
zakah (Amil)
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The
sympathiser
(Muallaf)
To free slaves
(Riqab)
Those who
are in debt
(Gharimin)
• Those who are inclined to enter or have already
converted to islam.
• Zakah can be used to free slaves or captives.
• Zakah can be used to pay off the debts of a person
who has borrowed to pay for basic necessities so
that he/she can lead a normal life.
• Zakat can also be distributed to those on financial
problem.
• e.g: bankrupcy due to the loss of employment and
heavy debt.
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For the causes of
Allah (Fisabilillah)
• Zakah can be use to finance any form of
struggle or work for the love of Allah.
• e.g: Da’wah, building & developing society’s
infrastucture and sponsoring a student’s
educational expenses.
Those who are
stranded during a
journey (Ibnus
Sabil)
• Zakah cn be used to help a traveller facing
diffilcuties in continuing his journey.
• e.g: loss of money or breake down of vehicles,
the repair which he cannot afford.
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Islamic Legal Maxim
)‫( القواعدِالفقهية‬
“General rules which apply to all
of their related particulars”
Legal maxim is closely relate to
the maqasid and provide useful
insights into the goals and
purpose of shari’a.
Represent an important area of
fiqh literature, as their study
imparts strategic knowledge of
their subject matter and helps the
reader gain insight into the
general character and attributes
of the shari’a
It’s like legal theory, are designed
primarily for better
understanding of their subject
matter, rather than for
enforcement.
Particularly and inspiring in the
vision they impart for the search
particularly of new solutions
through ijtihad.
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Matter are
determined
according to
intention
Harm shall
not be
inflicted nor
reciprocated
5 major
maxim
Hardship
begets
facility
What is
certain
cannot be
removed by
doubt
Custom is
arbitrary
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Matter are determined according to Intention
)‫(األمورِبمقاصدها‬
• An act of any human being is judged in the light of
intention or the purpose it seeks to have effects.
• This means that the effect to be given to any
particular action or transaction must be in
accordance with the intent underlying such action or
transaction.
• Eg: banks declare their policy of financing customers
on non-interest bases it would be necessary to do so
and not merely continue the same practice and
seeking to rationalise it in Islamic terms such as
mudharabah etc.
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Hardship begets facility
)‫(الضروراتِتبيحِالمحظورات‬
• The maxim indicates that any ruling which
implementation causes hardship to a person
or the action is unable to be performed by a
particular person for a specific acceptable
reason, then there are alternative and ways
out that can be resorted to in order to
overcome the difficulties and hardship.
• Hardship- refer to surpass the normal limit
and ability of a person such as
travel/sickness/dharurah etc.
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• Eg: if the court orders the sale of assets of a
negligent debtor to pay his creditors, it must
begin with the sale of his movable goods if
this would suffice to clear his debt, before
selling his real property.
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What is certain cannot be removed by doubt
)‫( اليقينِالِيزولِبالشك‬
• It is discusses about the principle that should be
followed if there is doubt in any matter particularly in
matters pertaining to Islamic law.
• This means that a fact established by law or proven
with evidence will remain so, until there is another
certainty that removes it.
• Eg: a partner has no right to assume a minimum rate
of profit earned by his business partner and claim his
share in that profit as different from amount stated
to have been actually earned by the partner.
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Custom is arbitrary
)‫( العادةِمحكمة‬
• This maxim means the practices of the people
whether in their actions or sayings, regardless of
whether they are general practices of the people or
the practices of certain groups of people.
• Eg: a person authories another to sell something on
his behalf without laying down conditions as to sale
price and unit of currency, the agent will be treated
to be bound by conventional rules of charging a
reasonable price and prevalent currency.
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Harm shall not be inflicted nor reciprocated
)‫( الِضررِوالِضرار‬
The scholars have classified harm into two
categories :
• Harm which is inflicted intentionally in order
to cause damage. This kind of harm is
forbidden and the perpetrator shall bear the
consequences of his action.
• Harm which is cause unintentionally without
any intention to cause harm or damages to
others.
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• Eg: the buyer of perishable goods absents
himself without taking possession of the
purchased goods. The seller , in order to
protect himself and the buyer from loss, has a
right to unilaterally revoke the contract of sale
and sell the goods to some other party.
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No Reward without risk
)‫(الغرم بالغنم‬
• Anyone cannot expect to make profit without
associating it with risk in his undertakings.
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PAST YEAR QUESTION
APRIL 2011
QUESTION 3
a) Discuss FOUR(4) differences between alMudharabah and al-Musharakah.
(8 marks)
b) Demonstrate the mode of operation of alMudharabah and al-Musharakah equity
financing.
(10 marks)
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APRIL 20L0
QUESTION 5
a) Define these terms :
i) Gharar
ii) Maysir
iii) Zakat
iv) Mudharabah
v) Musyarakah
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OCTOBER 2010
QUESTION 4
a) Define the literal and technical meaning of
Mudharabah and Musyarakah.
QUESTION 6
a) Explain riba in Islam and classification.
b) Discuss THREE(3) differences between riba’
profit.
c) Elaborate FOUR(4) rationale behind the
prohibition of Riba’.
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QUESTION 5
The prohibition of riba originated from
debt(duyun) and sale(buyu’).
Based of the above statement:
a) Define Riba al-Duyu(debt) and Riba alsale(buyu’).
(4 marks)
b) State the conditions of increase and delay in
Riba al-Fadl.
(9 marks)
c) Explain the chronologies of prohibition of
Riba in the Qur’an.
(12 marks)
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0CTOBER 2OO9
QUESTION 4
b) Explain classification of Riba. (8 marks)
c) Explain THREE (3) differences trade and
riba.(9 marks)
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