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BBA is known to be a sale of an object against an obligation to provide payment on a given
future date. It is a contract of exchange, whereby the commodity exchanged is delivered
immediately and the price is paid by installments. It is the most picked and common type of
Islamic financing as only few people can afford to buy a house, land, consumer goods and others
on cash terms. However, the BBA financing is widely used for housing purchases especially for
those which are still under construction (Hanafi and Kasim, 2009).Although house and
commercial property financing are common examples, cars, machinery, or any other assets can
be financed using this concept. BBA‘ or ‘ simply implies deferment of payment of
price irrespective of whether the cost and mark-up are known to parties or not (Obaidullah,
2006). More often it includes features of a   
, which implies a sale on a cost-plus basis.
In addition, ‘ 
 ‘‘(BBA) is a 
 
‘approved mechanism (Obaidullah, 2006).
uhe issues with BBA financing method is that, the seller of the property would be the Bank.
uhe Shariah requires the bank to hold ownership of the property and to hold all liabilities arising,
including defects. However, as learnt the current BBA documentations show that the bank
merely acts as a financier rather than a seller and excludes itself of all liabilities. uhis, of course,
ignores the Shariah principle of ³
 ‘ ‘ 
 Ñ (no reward without risk), ³
 Ñ
(value-addition or effort) and ³
 ‘ ‘  Ñ (any benefit must be accompanied with
liability), thereby this would cause the rendering of BBA profit to be caught up with  ‘(Meera
and Razak, 2009). 
Another issue of concern here is the availability of ‘(counter value) in BBA financing.
As confirm by Rosly (2005), the Quran uses trade ( ) because the profit generated from
trading incorporates risk-taking, while the contractual profit from loan transactions (  ) is risk-
free. It further asserts that  ‘implies the existence of ‘required by the 
 
‘to be a
lawful profit in Islam. uhree elements of ‘that should exist are risk (
 ), work and effort
(
 ‘and liability ( . ‘is the basic trait or the   ‘ ‘‘  ‘of a halal or
lawful sale  ‘ because a sale is necessarily an exchange of value against an equitable
return and compensation for the goods or services exchanged. According to Ibn al-µArabi, every
increase which is without an ‘or equal counter value, is  ‘Meera and Razak, 2009). 
Rosly (2005) also stated that there is also an issue of no risk involvement in the current BBA
financing. Hence, it does not contribute to the concept of  ‘ in the Quran. In trading
transaction, liability (Daman) should also be taken into account whereby the supplier provides
guarantees on the goods sold. However in the current BBA home financing, the customer is
forced to face the financial burden of paying for the house even before it is completed, as he has
engaged in a µdebt contract¶ with the bank upfront. uhe BBA contract is not seen as conforming
to the ‘
 
‘that removes hardship (  ‘
 ) and preventing harm ( ‘
  ) in the economic sphere by ignoring the concept of . It leaves the welfare of people
unprotected. uhis is a possible crime when the transaction is done under an Islamic label (Meera
and Razak, 2009). 
In addition, another issue that arises from the long-term BBA financing is the mismatching of
BBA funds against its short-term deposit tenor. Whilst conventional financing has the ability to
address this mismatch in the cost of funds through the variable interest rate (BLR + a spread),
BBA financing cannot do this since customers are charged a fixed profit rate for the entire period
of financing (Meera and Razak, 2009). As an example, assume that a customer wishes to buy a
houses priced at RM200, 000. uhe customer puts a down-payment of 10 percent, which is
RM20, 000 and finances the remaining 80 percent, i.e. RM180, 000 using the BBA method. Also

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assume that the Annual Profit Rate (APR) charged by the bank is 10 percent per annum and the
duration of financing is for 20 years. uhe Islamic bank would first buy the house for RM180, 000
and then sell the house to the customer at a profit, with deferred payments over the 20-year
period (Meera and Razak, 2009).
Another example, let¶s say the monthly payment for the above financing is RM1, 737.04,
payable for 240 months which adds up to RM416, 889.35 in total. uhe difference between this
figure and the original financing of RM180, 000 which equals RM236, 889.35 is the total profit
for the Islamic bank from this transaction. uhe profit of RM236, 889.35 is capitalized upfront in
the BBA mode, unlike under the conventional mortgage, where the interest due is not recognized
until the elapse of time. One important difference of the BBA compared with the MMP and the
conventional mortgage is that of the balance of financing remaining before the expiry of the
duration of financing. For our example, the BBA balance after 10 years (i.e. after 120 payments)
is the total of the remaining 120 payments, i.e. RM208, 444.80 whereas under conventional
mortgage, this amount would represent the total interest paid for the loan over the 20-year
period. uhe Islamic bank, however, may give some rebate for the early repayment, but the
amount of rebate is determined at the discretion of the bank. Since the selling price is a price,
indeed, 
 
‘prohibits the rebate to be stated as part of the contract. Even after ten years of
repayment, the balance under the BBA mode can even exceed the original financing of RM180,
000. It is regretful to say that Islamic banking within the fractional reserve system can indeed be
very damaging to the economy (Meera and Razak, 2009). 
In the recent legal rulings in Malaysia regarding the validity of BBA is a wake-up call for the
development of Islamic financial products. Initially, the High Court of Malaysia ruled out that
the ten contracts of Bank Islam Malaysia Berhad were found to be structurally faulty. uhe Court
added that the defaulters are not liable to pay more than the original financing amount. uhus,
these deprive Bank Islam¶s profit arising from the transaction. Following the appeal filed by
Bank Islam, the Court of Appeal held that the BBA facility offered by Islamic financial
institutions is valid and legally binding. uhe decision reaffirmed that Bank Islam¶s practices in
relation to BBA contracts are Shariah-compliant and valid (Musa and Smolo, 2009).
In conclusion, BBA is of a questionable in terms of its validity because of the ‘!  
implemented in Malaysian Islamic banks. uhe extensive use of BBA contracts and
overdependence of Islamic banks on it will result in convergence of Islamic bank into
conventional, interest-based banks (Musa and Smolo, 2009). All along this paper has discussed
some problems in BBA application. uhe way forward is to amend some of the existing law and
regulations. For instance, the Land code Act and Legal probation governing sale contracts. uhis
amendment can facilitate a smooth application of BBA financing which will be suitable to the
customer as well as compliant with Shariah requirement.

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         !!"

In this context, we would discuss about the comparisons between housing loan, BBA and
MMP. uhe areas that we would focus on are the context of sale, compliance, and utility for each
respective type of financing. And we shall finalize by analyzing which mode of financing is
more acceptable form of financing in Islamic Finance field.
According to Meera and Razak (2009), home is a basic necessity for human life. Owning
a good home is an aspiration and a dream of everyone. People are able to fulfill this need by
building a home on their own, purchasing it or renting it from others. Indeed, payment for home
mortgage normally takes a good chunk of one¶s monthly income. A lot of people in this day and
age find it more practical to rent a house rather than buying one. With the rising cost of living in
this part of the world, it is easy to see where they are coming from. Renting does seem to be the
more practical option, instead of laying out a huge sum of money to buy a home. And since
mobility is sometimes demanded by one¶s career, renting a home becomes an even more
lucrative option (Meera and Razak, 2009).
Home mortgage loans are quickly gaining prominence as the option of choice for many
families. A home mortgage loan is, in its essence, a loan for the purchase of a house. uhe loan
taker will have to pay the down payment, but the lending institution who would grant the loan
taker such a home mortgage loan would pay the balance of the purchase (Ezilon Infobase, 2005).
uhereafter, he would have to pay the lending institution in stated installments. uhese installments
are meted an interest rate, and it¶s just a matter of looking for a loan package with a favorable
interest plan for you (Ezilon Infobase, 2005). However, this conventional home mortgages are,
of course, interest-based and forbidden in Islam. Accordingly, Islamic financial institutions have
introduced a number of Shariah-compliant modes for home ownership, the dominant of which
are the  ‘ 
 ‘ "‘ (BBA) and the #
 
‘ #  
‘ $  
!‘ (MMP)
contracts (Meera and Razak, 2009).
uhe housing loan taker could start using the house immediately, even while he is in the
process of paying off the said home mortgage loan. A home mortgage loan is actually called a
rent-to-own arrangement by some quarters; only, it passed through a middle party, namely the
lending institution. uherefore, the loan takers can indeed use the house even during the pendency
of the loan (Ezilon Infobase, 2005).
For the home mortgage loan security, the lending institution is expected to keep the deed
of the house. uhis means that, as a general rule, the loan taker cannot alienate the house or assign
the rights to the same to someone else. However, just because the lending institution holds the
deed to the house, this doesn¶t mean that we won¶t be able to partake of any interests in
proportion to what we have paid. With every installment we satisfy, our equity to the house
increases. Equity merely pertains to the alienable rights you have over the property. Since full
equity cannot be granted until full satisfaction of the debt, you could only alienate the portion of
the house which we have successfully paid for (Ezilon Infobase, 2005).
As for BBA, the BBA is basically a sale contract which provides the buyer the benefit of
a deferred payment, whereby the deferred price of the sale object carries an additional profit. It is
an extension of the   

‘ (cost plus) contract, whereby the commodity exchanged is
³deliveredÑ immediately but the sale price with profit is paid in installments. Although the BBA
is widely used in Malaysia, Indonesia, Brunei and few other countries, it has been subjected to
too much controversy among the 
‘ worldwide with regards to its permissibility; where
most of the Middle East scholars have rejected it because it could result just like   (Meera and
Razak, 2009).

å
On the other hand, the #
 
‘#  
‘$  
!‘(MMP) contract is based
on a diminishing partnership concept. uhere are two portions to the contract. First, the customer
enters into a partnership (
 
‘under the concept of µ
  #¶ (joint ownership)
agreement with the bank. Customer pays, for example, 10% as the initial share to co-own the
house whilst the bank provides for the balance of 90%. uhe customer will then gradually redeem
the financier¶s 90% share at an agreed portion periodically until the house is fully owned by the
customer. Second, the bank leases its share (90%) in the house ownership to the customer under
the concept of  
, i.e. by charging rent; and the customer agrees to pay the rental to the bank
for using its share of the property. uhe periodic rental amounts will be jointly shared between the
customer and the bank according to the percentage share holding at the particular times which
keeps changing as the customer redeems the financier¶s share. uhe customer¶s share ratio would
increase after each rental payment due to the periodic redemption until eventually fully owned by
the customer (Meera and Razak, 2009).
Bendjilali and Khan (1995) and Usmani (2002) basically agreed on the implementation
process of #
 
‘ #  
‘ $  
!%‘ uhey have basically agreed that the product
could help the people to less rely on other financing facilities such as the BBA, #  

‘or so
on. It is best to implement MMP for house financing or machinery financing as agreed by
scholars whereby both assets can be leased out according to agreed rental. Joint ownership of a
house or machinery is accepted by all schools of Islamic jurisprudence since the financier sells
its shares to the customer (Usmani, 2002). uhe concept of diminishing 
 
‘ is not
confined to home ownership only. It can also be applied to other forms of acquiring assets such
as buying a car or a taxi for earning income by using it as a hired vehicle. Creating joint
ownership in the form of 
 
‘#‘is allowed in the Shariah‘(Meera and Razak, 2009).
From all the above information, it is obvious that the MMP may be more attractive to the
bankers compared to the BBA contract because rarely the annual rental rate equals 10 percent
which means ten years¶ rental equals the original price of the house. uhis can be deduced from
the fact that mortgages generally exceed ten years. uhe norm in Malaysia is about 20 to 25years.
Indeed, two-generation mortgages have even been proposed (Berita Harian, 2005).
Hence, the MMP is suited to be practiced, for example, by housing cooperatives where
the funds are provided by the members for the benefit of the members themselves. While
providing cheaper housing for members, the MMP also provides returns to the investing
members in the form of rentals and sale of properties. Indeed, observations show that globally
the MMP is being successfully practiced in a cooperative setting (Meera and Razak, 2009). An
additional benefit of implementing the MMP by housing cooperatives is that it avoids new
money creation as in the fractional reserve banking. By avoiding money creation and operating
under a profit-and-loss sharing setting, the MMP can bring about a harmonous balance between
the monetary sector and the real economy and thereby is likely to contribute towards the
achievement of the ‘
 
‘(Meera and Razak, 2009).
In conclusion, given these comparisons, we find that by exercising the MMP brings
stability into the economy by promoting positive partnership instead of negative indebtedness
thus assisting in the equitable distribution of society¶s wealth by minimizing the large number of
debt defaults and bankruptcies that are observed in the current financial system (Meera and
Razak, 2009).

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Deposits are the main source of funds for commercial banks, merchant banks, finance
companies and discount houses based on the license granted by the Central Bank. Deposits can
be either cash, claims or money, such as cheques which are placed in depositor¶s accounts, bank
loans or money from investments. Depositors are essentially the economic surplus units such as
households, corporations, investors and government (Khir et al., 2008). Hence, banks could not
survive and function without deposits as the funds collected are being used for lending purposes.
Deposits and savings are crucial in order a country to develop and it can indirectly help to
support a better living standard of people (Khir et al., 2008).
Mobilization of funds from saving-surplus units in the economy is an important task of
financial intermediaries. A financial intermediary attempts to achieve this goal by creating and
selling a variety of financial products that match the needs of the saving-surplus unit. A Muslim
saver is in some ways different. While needs related to returns, liquidity, maturity, safety,
stability and the like are important to him or her, the Muslim saver has a unique concern, which
is the Shariah-compliance matter. Islamic deposit products allow no trade-off in the matter of
Shariah-compliance. Islamic banks are engaged in mobilizing savings from this unique group of
savers by offering Shariah-compliant products that also vary with respect to other dimensions of
return (no existence of   element), risk, liquidity, maturity, safety, stability and this like(Khir
et al., 2008).
Success stories of Islamic banks in mobilizing large amount of funds were heard back in
the 1980s up to now. Hence, deposits in almost all Islamic banks were growing at a very rapid
pace. Many studies testify to the highly successful deposit mobilization by Islamic banks.
According to one estimate, the data relating to the period 1980-1986 showed that the growth of
Islamic banks was relatively better - in most cases - than the growth of other kinds of banks. uhis
resulted in increasing the shares of Islamic banks in total deposits. uhese early institutions have
now matured, and have achieved a considerable degree of success in terms of market penetration.
uhis is all the more remarkable given that the markets in which they were established already
had well developed commercial banks. Indeed, some markets, especially in the Gulf, were
viewed as over-banked (Egyptian Banking Institute, 2009).
We can understand from deposit in an IFI concept that the depositor provides capital to
an Islamic bank to run banking operations. For the deposit mobilization, the depositor is entitled
to a share of the profits agreed by the depositor and the bank. uhe share can be a third or a half of
the profits depending on prior agreement between the depositor and the bank. uhis agreement is
set at the beginning of the contract. However, if the bank does not guarantee the depositor that
the business must be profitable although the bank will conduct the investment on best efforts
basis to ensure it is profitable. Nevertheless, in the event of a business failure, the depositor will
bear the losses (Idris, 2009).
Deposits are the main source of funding which is used to derive income. It is the cheapest
mode of funding compared to other financial components. Islamic financial institutions sources
of funds as well as the types of financing proposed by IFI¶s have evolved over time. In addition,
the sources of funds can be classified into current accounts, savings accounts and investment
accounts (Khir et al., 2008). Plus, the deposit products in IFI¶s are strictly govern by Shariah
principles. For either operating conventional banking or Islamic banking, deposits are its main
source of funding for which it uses to produce income. Study has shown that deposits contribute
75 percent of a bank¶s total fund. Customers¶ deposits mainly are used by Banks to give out
loans to deficit economic units or borrowers. Apart from this, banks also mobilize deposits by

purchasing trading securities, investments and maintain some as cash in hand to meet
withdrawals on demand. uhe larger the amount of deposits a bank receives from its customers,
the better is its capacity to give out loans and the higher is the interest income (Idris, 2009). Idris
(2009) also stated that due to this positive relationship between deposits, loan and interest
income, banks are competing intensively and aggressively among other deposit-taking
institutions to obtain higher deposits by offering attractive deposit rates or rates plus other
appealing packages depositors. Islamic banks are equally aggressive in attracting additional
deposits.
As for the economy, bank deposit is the main source of money supply that can be
mobilized to generate economic growth and wealth creation. Banks create credits by giving out
loans to borrowers and investors (Jaffee, 1989). uhe ability to create credit enable them to supply
money to borrowers, suppliers and investors to conduct economic activities, such as opening up
plants, funding their working capital requirements, financing their business expansion or
increasing their investments. Such economic activities create job opportunities, increasing
productivity and income, which subsequently lead to wealth creation in the economy. In
addition, for interest-bearing deposits, interest rate is very important. When market interest rates
rise, so would deposit rates and this would attract higher deposits to flow into the economic
system (Idris, 2009).
In banking, the basic concept would be borrowing public funds and at the same time
lending out to make profit. Interests are used to reward depositors while borrowers must pay
interest on loans. uhe same applies in IFIs, however the contracts applied are not based on
interest bearing debt, but it is   which basically means sale (Idris, 2009). In IFIs, the reward
given would be in a shape of
 
(gift) as Islamic banks cannot promise to give depositors a
fixed contractual income as doing so makes them no different to conventional banks (Idris,
2009).uhis
 
‘is given out and calculated on the basis of bank performance and is based from
some well designed formulas that also comply with the Shariah values (Idris, 2009).
In conclusion, the basic requirement of Islamic Finance requires money to be mobilized
in productive investments. uhis means that there should not be idle money at any point (Idris,
2009). Whoever holds idle cash or demand deposits exceeding the  ‘ over a year must pay
& . According to Rosly (2005), this is one way how Islam discourages people to hold idle cash
for an indefinite time. Deposits are equally important to Islamic banks as a source of funds as in
conventional banks. But unlike its counterparts, Islamic banks need to comply with Shariah
principles which prohibit any payment of interest or a fixed return on deposits. uo attract idle
cash or deposits from the public for sustaining their financing activities and wealth creation,
Islamic banks are offering deposits whose returns are based on 
‘ 
  
‘ or  ‘

 ‘(Idris, 2009).uhe 


  
‘or profit-loss sharing basis of Islamic banking is conceived
as more production oriented and growth promoting than its interest-based counterparts. Further,
the replacement of interest with profit-loss sharing principle is also said to increase investment
opportunities in the economy (Homoud, 1983). Furthermore, IFIs would do well if they practice
a cheaper mode of getting the deposits from customers, for example like reducing the overhead
cost of the bank to suit an effective management (Hassan, 2004). uhus, the speed at which
Islamic Banking has grown and the rate at which it has progressed makes it pertinent to study it
systematically so as to ensure its soundness and stability.

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ü &  '    '( )*+  

" '
, or mortgage or collateral, is defined in the Islamic jurisprudence as
³possessions offered as security for a debt so that the debt will be taken from it in case the debtor
failed to pay back the due moneyÑ. uhe term ³ 
Ñ is commonly used in 
‘
, in
Islamic law (Maulidia, 2003). Basically, Ar-Rahn simply means a loan guarantee or pawning in
Islamic perspectives (Maulidia, 2003).
uo prove the legality of whether mortgaging in Islam is acceptable or not can be seen in
the Holy Quran. In surah Al-Baqarah, it is stated that ³And if you are on a journey and cannot
find a scribe, then let there be a pledge taken (mortgaging); then if one of you entrust the other,
let the one who is entrusted discharge his trust (faithfully), and let him be afraid of Allah, his
Lord. And conceal not the evidence for he, who hides it, surely his heart is sinful. And Allah is
All-Knower of what you doÑ, [Quran 2: 283].
uhere are nine conditions of Ar-rahn, as opposed by Abdelhaleem (2003) and Kharofa
(2000), which are all stated below:

1.‘ uhe indebted party cannot be coerced into putting up a collateral;


2.‘ An orphan¶s property cannot be put up as a collateral by the trustee, unless under
exceptional circumstances;
3.‘ uhe property held as collateral must be liquid;
4.‘ uhe property held as collateral must be distinct from other properties;
5.‘ uhe ownership does not change, therefore the owner is responsible for the cost of
upkeeping the property even when it is pledged as a collateral. Likewise, the owner
continues to enjoy any secondary benefits to the property;
6.‘ uhere is disagreement among the scholars on whether the property pledged as a collateral
can be used. Many of the scholars say that the property cannot be used by either the
debtor or the borrower, while many argue that the owner (the borrower in this case) can
continue to use the property;
7.‘ If the property held as collateral is lost or damaged while in possession of the trustee,
without any negligence on his part, there is no guarantee by the trustee;
8.‘ uhe ownership of the property cannot be transferred until the debt is settled or the debtor
allows for such a transaction;
9.‘ If the borrower cannot pay back at the expiry of the term, the judge will order the
property pledged as collateral to be sold in the open market, even if it is the residence of
the borrower.

Despite similarities between conventional and Islamic finance industry in pawning, there are,
however fundamental differences between these two. As Syafi¶i Antonio said, among the
differences is that in 
, mortgagers or debtors charged with   but entrustment cost,
conservancy cost, and custody cost, as well as appraisal cost. Here, whereas interest can
accumulate, costs of 
‘can be paid once and specified in advance (Maulidia, 2003). As stated
by Idris (2009), conventional pawnbrokers make money through the high interest earned and the
surplus gained from the ownership transfers. uhis concern over higher interest rates, usurious
and exploitative activities imposed by the conventional pawnshop makes the customers choose to
deal with the Islamic pawnshop (Razak, 2008). Islamic alternative to interest-based pawnbroking
are offered in a commercial contract in Islamic Law which known as  
‘ (Idris, 2009).

Î
Generally, the modus operandi for conventional and Islamic pawnshop transaction is quite
similar (Razak, 2008).
Furthermore, the contract () in the Islamic pawnshop is different from the
conventional pawnshop. In the Islamic pawnshop, the loan granted is based on four concepts
which are%  
‘
 ‘ (loan without interest), 
‘ ‘ 
 
‘ (keeping
valuable goods by guarantee),  
‘(storage fees) and   
‘(collateral). On the other hand,
the storage fee is based on the value of gold and not on the amount of the loan. In addition to
this, the fee is charged differently by each Islamic pawnbroker (Razak, 2008).
Islamic pawn broking business in practice make money by taking form of storage fees
charged on the pledged property. uhere is a standard formula on how these fees are determined.
On failure to pay the loan after a prolonged reminder, the operator holds the right to put the
collateral on auction. uhe 
company will claim loan plus storage fees due to them. uhe
surplus therein will be returned back to the 
 . In case if the 
 could not be located, the
proceeds will then be forwarded to Bait-ul-mal which the 
 is entitled to make future claims
(Idris, 2009).
In Kelantan, one of the states in Malaysia, the scheme of " 
was set upon March 12,
1993. It is to be noted here that ‘ 
in Kelantan is applicable to both Muslims and Non-
Muslims customers. uhe main features that distinguish from the conventional pawn-broking
shops are, it does not allow forfeiture of valuables. Apart from that the system also does away
with interest charges and only levies certain fees for the safe-keeping of valuables (Abdullah,
2009).
According to Idris (2009), its best for people to opt for al-rahn as it can be a better choice
and alternative to finance stocks purchases compared to credit cards and share-financing loans.
At least the money an individual obtains via  
is backed is backed by productive assets.
Apparently, confirmed by Skully (2005), gold is the only permitted item in the Islamic-based
pawnshop. Gold have several advantages as collateral over other items. Firstly, gold is easily
resold and so there is potentially auctioning the collateral should the borrower not redeem the
pledge. Secondly, gold¶s purity can be easily determined and so the risk of mispricing the
collateral can be minimized. uhirdly, gold chains and rings typically require only a small flat
envelop for storage and so can be kept securely in the bank safe at little, if any, additional cost.
In order to have a successful Islamic pawnshop practice, there is a need to strengthen the
customer service part. uhe present study revealed that customer service is significantly
associated with acceptance (amin et al., 2007). Indeed, this result offers points for local authority
and businesses to consider. First and foremost, the approval for the transaction must be efficient
and fast. Second, the pawnshop must offer advice service or merely consultation to facilitate the
customer¶s transaction. uhird, the pawnshop must be free from the issue of discrimination. uo be
a successful system, Islamic-based pawnshop needs to treat individuals fairly regardless of their
races. One thing for sure, the customer¶s record must be kept confidential. uhe record of the
customers must be kept properly and only the customers and the business know of such record
made (amin et al., 2007).
In conclusion, pawn broking is collateral on loan system and known to be one of the
oldest systems. uhe pawn broking system was fully utilized by the lower income group for fast
cash following simple procedures. In addition, it can also be an economic tool to improve the
socio-economic development of the lower and middle income society, and it is truly in line with
the co-operative principle. uherefore, the right choice of doing it is all in our hands.


 
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In order to succeed in today¶s global marketplace and win sales against foreign
competitors, exporters must offer their customers attractive sales terms supported by appropriate
payment methods. uhis is mainly because getting paid in full and on time is the ultimate goal for
each export sale. uherefore, an appropriate payment method must be chosen carefully to
minimize the payment risk while also accommodating the needs of the buyer. During or before
contract negotiations, we should consider which method is mutually desirable for both trader and
customer (IuA, 2008).
In Malaysia, there are four methods of Islamic trade finance facilities as mentioned by
Idris (2009) which are available are being mentioned below:

(a)‘ Islamic Letter of Credit


(b)‘urust Receipt-i
(c)‘ Islamic Accepted Bill (IAB)
(d)‘ 
Shipping Guarantee

Letter of credit (LC) is a secure means of acquiring prompt payment on the sale of goods.
uhis LC facility, exporters can obtain a quick and secure as well guaranteed payment of goods
from the banks. It can be issued using either the principles of 
( agency) or ‘  


(mark-up) as well as #


 
(profit/loss sharing). One example from #
 
LC
which is promoted by Bank Negara Malaysia in their list of approved products and is not
necessarily practiced by IFIs alone, requires customer to inform the bank of his LC requirement
and negotiates the terms of 
 
financing for the purchase /import of goods, and
requests the bank to open LC. uhe customer will then deposit his share of the price of imported
goods as his share of the cost of goods to be shared purchased/ imported under a 
 
‘
agreement. uhis can be done by placing funds in deposit account such as wadiah yad dhamanah.
After this, the bank opens the LC and pays the negotiating bank using the customer¶s deposit and
bank¶s own share of financing and the bank will then releases import documents to the customer.
uhe customer will then be able to take the possession of goods and its disposes. Finally, both
bank and customer will share the profit as per their 
 
contract (Idris (2009).
uo restrict from falling into   transactions, AAOIFI prohibits any form of embedded
interest rates in exchange rates. AAOIFI also prohibits any currency trading involving any
conditions, options or deferment, or in the forward or futures market. uhis is supported by the
firm standpoint of Umar Ibn Al-Khattab (r.a.), whom essentially denounced the time value of
money as ³Do not sell gold for gold or silver for silver except in equal quantities. Moreover, do
not trade gold for silver with one of them deffered. Even if your trading partner asks you to wait
until he can fetch the money from his house, do not except the deferment, I fear that you will fall
into  Ñ (Idris (2009). uherefore, this is one of the resolution done by the International Fiqh
Academy in order to resolve this matter (Idris (2009).
As for the trust receipt, it is actually a financing method used to finance domestic or
international trade drawn against LC, specifically under the   

contract or Inward Bills
for collection under the 
‘concept. Under the   

concept, the bank will appoint
the customer as its agent to purchase goods what the customer requires on behalf of the bank.
uhe bank will pay the supplier based on the invoice value and the bank will resell the goods to
the customer on deferred payment terms at a price inclusive of the bank¶s profit margin. uhe

Ô
deferred payment terms of sale of goods granted to the customer constitutes a creation of debt.
uhis is secured in the form of Bill of exchange drawn by the bank and accepted by the customer
and payable upon maturity (Idris (2009).
On the other hand, Islamic Accepted Bill (IAB) is a mode of financing available for imports
and domestic sales in the primary market. It can be divided into three parts, which consists of
IAB Import/ purchase, export/ sale and the basis of ‘  (debt) (Idris (2009). As an
example, the IAB purchase and import process starts with the bank draws a bill of exchange to
be accepted by the customer. uhe amount drawn is the full selling price payable by the customer
to the bank on the maturity date of the financing. uhe nature of the document essentially involves
the creation of an IAB as a security to finance working capital in the form of a cash purchase of
raw materials at cost which is sold back to the customer inclusive of a profit margin
(murabahah), with the customer acting as an agent to the bank. uhe bank will then appoint the
customer as its agent and it is called 
. uhe process of this would actually start by the
customer purchasing merchandise at cost on behalf of the bank as per letter of credit or invoice.
uhen the bank will sell or deliver the merchandise at the murabahah credit price to the importer
or purchaser when the goods are received. And this credit price should not exceed 200 days. uo
securitize the credit inherent in the murabahah letter of credit, the bank will draw a bill on the
customer who will then accepts the bill at full amount of the mark-up price. If the bank wishes to
sell the bill to a third party, it may do so at a discounted price (Idris (2009).
 
‘Shipping guarantee is a guarantee which is required by an importer when the bill of
lading is required to take delivery of the goods is yet to be available. Under this contract, a third
party becomes a guarantor for the payment of debt. It is a pledge given to the reditor that the
debtor will pay the debt (Khir et al, 2008).It is a letter of indemnity issued by a bank on behalf of
the buyer/importer. It is signed by the buyer or importer and countersigned by the bank and is
addressed to the owner/agent of the ship for the release and delivery of the goods without the
production of the Bill of Lading. uhe non-production of the Bill of Lading is common in
shipping industries and technically the cargo should not be release until the Bill of Lading is
presented. uhe fundamental reason for this is that if the owner delivers an expensive cargo to the
wrong hands, hence the guarantee will effectively absolves him from subsequent court action.
uhe process of this issuance of guarantee would start with the buyer applying for a Shipping
Guarantee and then present it to the shipper and take the delivery of goods. uhe bill of lading
will be forwarded by the exporter¶s bank. uhe buyer¶s bank will then reimburse the seller¶s bank
and presents the relevant documents to the buyer for payment. uhe buyer will decide whether he
wants to pay in cash or to seek financing. uhe Shipping Guarantee will then be presented to the
shipping company in exchange and the Shipping Guarantee will then be return to the bank (Idris
(2009).‘
uhe above explanations and examples are just some illustrations of the method of trade
financing being used in Malaysia. Most trade finance instruments being used in Malaysia are
  

(mark-up),  
(guarantee) and 
(agency). In conclusion, Islamic
finance trade finance system can be used to facilitate more sophisticated and automated trade
finance facilities by following the Islamic banking framework. uhe key function of the system is
to process the documents electronically and straight through the processing by interfacing with
external payment networks. It enables the centralization of the management of trade finance
operations and others (Idris (2009).

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