www.isra.

my

WHY IS ISRA IN TOWN?

ISRA the International Shari`ah Research

western experience, the financial industry

Academy is the new kid in town. As with

developed based on a very concrete

any new organization, people would be

framework or building blocks. Likewise,

anxious to understand its role and the

in Islamic finance we need to develop

value proposition it brings. In conjunction

the concrete theoretical framework that

with the launch of our maiden ISRA Bulletin,

underlie the whole practice (fundamental

we would like to shed light unto our

research) besides addressing the day to

background, why we are here and what

day issue (applied research), Dr. Asyraf

we offer. We will also take this opportunity

Wajdi Dusuki, ISRAs Head of Research

to dispel some of the misconceptions

Affairs, clarified. In other words, at ISRA

or queries that lingers in the mind of our

we have both the fundamental and

customers.

applied research because both are

Why is ISRA here?

industry resolve short term issues while

Amongst

important. Applied research will help the

the

most

frequently

fundamental research will help propel the

asked

industry towards orderly development.

question is Why is ISRA here? The best

person to answer this question is of course

in the industry, one must wonder, isnt that

our executive director, Dr. Akram Laldin.

what Shari`ah advisory boards do i.e. help

ISRA is here to fill up the gap that we

address these pressing issues? Having

have in the industry. On the ground i.e.

been a Shari`ah advisor himself, Dr. Akram

people in the industry may have certain

pointed a simple

concerns, how to address this issue, how

reason why

to address that issue. However, there is

relying

no dedicated institution that is doing this

on

job. We do have universities conducting

Shari`ah

research,

but

of

course

in

With regards to these pressing issues

the

higher

advisors

education institution, the research done

alone

is not focused on Islamic finance alone.

would

What we need is a focused research

not

be

where you address the burning issues in

the market. Therefore, in ISRA, this is the
mandate that is given to us, to identify the
pressing issues in the market, co-operate
with the academic and do research
on the area, he explained our role in
simple terms.

Does that mean we only focus

on applied research at ISRA?

When we talk about Islamic
finance, we cannot confine
ourselves to only focus on
research that addresses the
issue of the day. From the

Dr Akram Laldin, Executive Director

COVER STORY

International Shariah Research Academy for Islamic Finance

sufficient to help the industry with these

Within the six month of our operation

scattered here and there and it is not

pertinent issues. We have to understand

we have embarked on 15 research projects

classified. This is one of the challenges that

that the Shari`ah board, even though

and seven of these have been completed.

we are taking. We are extracting, without

they exist within the financial institutions,

For an update on our research projects

jeopardizing

there are many limitations. One, Shari`ah

please refer to the Research Update

and make the information accessible

advisors are part-timers. They have their

Section. One example of the pressing

according to topics. Lets say you want to

core-business; sometimes its teaching,

issue that we addressed in the banking

find something on Musharakah, you can

while some are attached to administrative

sector for instance is the dispute resolution

go to the Musharakah section and find

posts. So definitely their full time focus will

mechanism in Islamic banking. This is one of

details what are the products, what is

be more on their core job. Secondly and

the issues that sometime haunt people in

Musharakah Mutanaqisah, what are the

more importantly, even based on my own

the industry. Whenever there is any dispute

issues, what will happen upon default etc.

experience being on the Shari`ah advisory

and there is a need to bring the matter

We will try to make it as comprehensive

board, there is no in-depth research that

to court, players are not sure about the

as we can and furthermore we will try to

is being done to address the issue that

outcome. They are concerned if the judge

link this information with the fatwa that

is brought to us in the Shari`ah board

has proper awareness and knowledge with

is available on the different issues, Dr.

meeting. Probably there might be some of

regards to the details of Islamic banking.

Akram provided a glimpse of his vision for

the scholars that sit on the board that do

How shall we address this issue? One of

ISRAs research portal. This will facilitate

research, but these are more ad-hoc kind

the alternatives that we are proposing is to

information gathering by the industry and

of an arrangement. When you have an

strengthen the arbitration framework where

academia, and they can be assured that

issue, you try to see a number of references

the parties have the option to appoint an

the information are from a reliable source.

and discuss the various views and fatwa

arbitrator that they are comfortable with.

Of course we need to develop this bit by

and try to come out with a solution by

This will minimize the concern on whether

bit.

adapting to certain views. However there

the deciding person has the expertise. ISRA

is no deep analysis to determine which is

will conduct further research on this option

also like to a certain extent, harmonize

the best view, the strongest view and the

and hopefully this can help the industry

the different interpretation and views of

most practical view for example? So we

address the issue of dispute resolution.

Shariah that exists in the industry in the long

here at ISRA, it is our aim to provide the

Besides addressing the burning issues

run. We will achieve this via the Shari`ah

Shari`ah scholars the research findings and

in the short run, our immediate aim is to

parameter that we are developing. ISRA

resources in order to assist them in making

recruit the new breed of Shari`ah scholars,

is not a Shari`ah standard setting body. We

their decision, Dr. Akram elaborated.

Dr. Akram highlighted. By new breed of

do not issue fatwa, nor do we issue Shari`ah

What are our aims?

We have chartered our short term and long
term aims. As Dr. Akram pointed out in the
beginning, in the short run we are trying to
address the immediate issues that need
to be resolved. We have three research
units under Research Department at ISRA
banking, Takaful and capital markets, and
for the short run we focus on research in
pertinent issues in these different units. Our
approach in doing research is unique. As our
core business is to focus on applied research,
from the very beginning we engage with
the industry to ensure that we are focusing
on the right areas. Before embarking on a
research we would first obtain feedback from
the industry via the ISRA-Industry discussion
series. Based on their feedback we will
prioritize the research areas and assemble
our research team that comprise of experts
from the industry and the academia. ISRAs
researcher will be spearheading the team,
Dr. Asyraf provided the workings of ISRAs
research department.

the

intellectual

property,

Besides the research portal, ISRA would

Shari`ah scholars, we refer to those that

standards. How we are different from the

have the competency in Shari`ah, finance

standard setting body is that, standard

and legal knowledge. This will start from

setting body will come out with a particular

next year when we have our scholarship

standard. But we are looking beyond that.

fund.

five

We will try to set the parameter. We will

scholarships next year and we will identify

give the different alternatives that are

potential candidates who will major in

available which is within the parameter

Shari`ah, minor in finance and law. So they

(i.e. boundary) of Shari`ah. We are not

will be having these three specializations,

confining to just one school of thought

meaning

good

but we will provide all the views that are

knowledge in Shari`ah and reasonable

within the Shari`ah boundary. We are

knowledge in finance and law. So we

currently also working closely with BNM

We

have

that

budgeted

they

will

for

have

hope that when these people graduate,

to come up with something similar. With

they will be the new breed of Shari`ah

that, hopefully to a certain extent this will

scholars; probably the second generation

guide the market and nobody can claim

of the Shari`ah scholars who will have the

that they are superior or more Islamic than

ability to understand finance as well as

others as these practices are all within the

Shari`ah and law, Dr. Akram shared how

Shari`ah parameter, Dr. Akram pointed out

ISRA would help the industry tackle the

the features of the Shari`ah parameter.

daunting issue of limited Shari`ah scholars.

This is the harmonization that ISRA aiming

to achieve.

In the long term, one of our aims

is to develop ISRAs research portal; a

one-stop centre that people can refer

location

With regards to the geographical

to. On the internet you can find variety

international establishment ISRA will not

of information, but the information are

only to look at local issues but we will

that

we

focus

on,

as

an

COVER STORY
also look at international issues. In doing

As a proactive regulator, BNM has also

human resource, we have to we have

so, for next year we are trying to get

set up the Islamic Banking and Finance

included outsiders (both academicians

strategic alliances with other research

Institute Malaysia (IBFIM). Some people

and practitioners) to be part of our

organizations. For the past few months, we

are also curious as to how ISRA and

research team. Even when we coordinate,

have been in good contact with Bahrain

IBFIM are different? IBFIM is also a body

we are the authority in the output that we

Institute of Banking and Finance (BIBF),

established under BNM, but the main

get. Sometimes even we at ISRA forget

Islamic Research and Training Institute

focus of IBFIM is training and advisory.

that we are just 6 months old, Dr. Asyraf

(IRTI), Research Department of Emirates

Thats why they have the different training

pointed out. The expectation on ISRA is

Islamic Bank, Shariah Compliant Division

programmes for the industry. In ISRA we

high. But we take that as a motivation

of Ar-Rajhi Saudi and Durham University

dont conduct training, except for the

to achieve our aims. In charge of the

in the UK where they have a pool of

Shariah advisors where we will give them

research affairs, Dr. Asyraf elucidated

PhD students doing research on Islamic

updates and specific trainings. Besides

that the co-ordinating role of ISRA will

finance, Dr. Aysraf enlightened on ISRAs

that we dont have a structured training

always continue in the future because

strategic alliances thus far. InshaAllah

programme for anyone. On top of that,

we want every sphere of the system to

next year we plan to have at least two

IBFIM is also doing advisory work; advising

develop; not only the market, but also

overseas thematic workshops which will

on unit trust for example. In ISRA we dont

the academia. InshaAllah even when

discuss international pressing issues, he

do that. In addition, IBFIM is also a profit

ISRA has grown to a full fledge research

gave a glimpse of what ISRA has on the

making body, but ISRA is a non-profit

academy, having maybe 30 to 50 of

table for next year in the international

making institution because we have our

our own researchers, we will still provide

forefront.

endowment fund, Dr. Akram pointed out

grants for universities to conduct applied

the different role of ISRA and IBFIM.

research. We will still request the university

Simply put, ISRA is where Shari`ah and

to discuss the research area with the

How are we
different from other
institutions?
As

there

are

increasing

numbers

of

institutions set up to develop this growing

industry it is therefore imperative that
ISRA clarifies where we fit in the big
picture. What is our niche? How are we
different from other organizations? First
and foremost its important to establish
how ISRA and INCEIF complement each
other as both are under the umbrella of
BNM. Nonetheless INCEIF and ISRA focus
on different realms of the industry. First

market integrates. This is our niche. I think

industry. This is part of our mandate, he

we have the combination of Shari`ah

reminded.

people and the people in the industry that

is working together. This is the wonderful

everyone. I always emphasise on the

Simply put ISRA is here to assist

thing that we have at ISRA. We have

need for all of us to work together. Whether

the opportunity to bring these people

the Shari`ah scholars, the academician,

together so we can tap into their resources

the market players and the regulators. All

and expertise. This is the ultimate goal at

of us should be together. I believe that

ISRA because without the co-operation

when we are in a team, we can produce

of Shari`ah and market, there will be a lot

wonders and we can become the best in

of hindrances in the development of the

the global industry, Dr. Akram concluded

industry, our executive director stressed.

our vision, mission and hope for the future

to come, InshaAllah.

Our aspiration

of all I have to clarify that ISRA is within

Some people may perceive ISRA as

the set-up of INCEIF. However we are an

only a co-ordinating body, linking up

autonomous body within INCEIF. We meet

the academic and the industry. That is

with INCEIF at certain level of governance.

partially our role, says Dr. Akram. We

We share the same governing council

are here to bridge what never happened

and BOD. As it is now we also share the

before. This is an avenue that we are

same EXCO with INCEIF. We meet there.

opening for both the academic world

However we are autonomous in terms of

and

administration as well as funding. We have

Nonetheless ISRA does not

our own fund, Dr. Akram crystallized the

only do co-ordinating

organization structure and ISRAs meeting

work. We have our in-

point with INCEIF. The major difference

house

between INCEIF and ISRA is that, INCEIF

well.

is a university which offers academic

qualification. At ISRA we do not offer

being, due to the

academic qualification, we only conduct

limitation

research. We work closely with INCEIF

we have now,

definitely but we dont offer any academic

especially

qualification.

the

market.

research

he

added.

as

For the time

that

Dr Asyraf Wajdi,
Head of Research Affairs

SECTOR REPORT banking

International Shariah Research Academy for Islamic Finance

Novation Agreement from

the Islamic Perspective

By Dr. Uzaimah Ibrahim

Research Consultant, ISRA

In the recent 12 court cases judgement involving BBA house financing facilities in Malaysia, the high court judge,
Dato Wahab Patail, classified the BBA cases into two broad categories; BBA with novation agreements and BBA
without the novation agreements. The learned judge said that BBA with the novation agreements are bona fide sales
transaction while those without the novation agreements are not bona fide sales transaction. During the initial days of
Islamic banking in Malaysia, there was a novation agreement involved in house financing but this is not the case any
longer. Some opine that novation should never have been scrapped out from the Islamic home financing facility,
as it offers fairness to both parties, namely the banks and their customer. This article aims to discuss the features of a
novation agreement from the common law perspective and compare this to the Shari`ah viewpoint.

What is novation?

Novation is a settled principle of the

common law. It is an agreement that

enables substitution of either an obligation

to perform or a party of an existing
contract. It also includes a substitution
of a new debt for an old one, where the
old debt is extinguished by the new debt.
In some instances, novation may take
place when the original parties continue
their obligation to one another, but a new

case of non-performance by the new

stipulated date. As such, the bank shall

obligor;

be bound by all terms and conditions

The obligee maintain the same status

therein and shall perform all obligations

as in the original contract; and

on the part of the purchaser/customer.

The original contract is terminated.

In return, the bank is entitled to receive

the transfer of the property to affect the

Novation agreement
in Islamic financing
facilities
In the Islamic banking industry, initially,

agreement is substituted for the old one.

novation agreement was part and parcel

Thus, a Novation Agreement is the legal

of the Islamic home financing facility. The

instrument executed by all parties involved

executed documents for such facility

for the said substitutions.

mainly include;

A novation agreement is completed

Sale and Purchase Agreement, i.e.

and valid if all parties of the original

S&P (between the vendor/contractor

contract give their consent. The obligee

and the purchaser/banks customer);

(the party who benefits from the novation)

Novation

Agreement

(signed

must be given notice about the novation.

the

In addition, the obligor (the party who

customer and the bank); and

makes the novation) must make the new

vendor/contractor,

Property Sale Agreement (between

obligee aware and ensure that the latter

the

gives his consent.

customer).

by

purchaser/

bank

and

the

purchaser/

According to common law practices,

once a novation agreement is executed,

it shall have the following effects;

the bank agrees to become a party to the

Transfers all duties, obligations or

Sale and Purchase Agreement, in place of

benefits

original

the purchaser. This will be immediately be

contract from the original obligor to

followed by the Property Sale Agreement,

the new obligor;

whereby the bank sells the property to

The original obligor is free from the

the customer on deferred payment terms.

obligations that arise from the original

Being in place of the customer, the bank

contract;

is deemed to have been a party to the

The original obligor cannot be sued in

Sale and Purchase Agreement from the

arising

from

the

By executing the Novation Agreement,

banks ownership over the said property.

Executing the novation agreement

does not intend to terminate the original

contract, i.e. the S&P. The original contract
remains enforceable and binding, except
that it is now binding on the new obligor,
i.e. the bank. Perhaps such a difference
does not really matter in common law but
is a vital aspect that must be considered
from Shari`ah point of view.

Novation agreement
vis--vis Shari`ah
principles
Many claim that this agreement is similar to
the Shari`ah principles on Buyu al-amanah
(trust sales) that include Murabahah (markup sale), Tawliyyah (sale at cost price) and
Wadhiah (discounted sale). Some others
view novation as resembling Hiwalah
(transfer of debt), since it involves transfer
of contractual obligations. However, none
of these contracts fit well within the ambit
of novation agreement, as shown in the
table below:

SECTOR REPORT banking

Table 1: Comparison between novation and Buyu al-amanah

Novation Agreement
It does not constitute a new contract
of sale; it is merely an agreement to
substitute a contracting party of an
existing sale;
The terms and conditions of the
original contract (S&P) are binding
on the new obligor (the bank); and
It requires the consent of the original
obligee (the vendor/contractors).
Thus, this makes him a party of the
agreement.

EDITORIAL TEAM

Buyu al-amanah (trust sales)

These are sales at either mark-up
price, cost price or at a discount.
The terms may be different from the
first sale;
Since these sales are independent
from the first ones, the latter do not
bind the parties of the second sale;
and
The consent of the vendor of the
first sale is not required.

It is an agreement to substitute a
contracting party who is purchasing
a property. Thus, there is no
requirement of a party being a
debtor;
The original party (purchaser) is free
from the obligations arising from the
original contract; and
The new obligor becomes the
party of the original contract
retrospectively from the date of the
contract.

Editor
Shabnam Mokhtar
shabnam@isra.my
Features Editor
Mohammad Ashadi Mohd Zaini
ashadi@isra.my
Zaharuddin Muhamad
zaharuddin@isra.my

Table 2: Comparison between novation and Hiwalah

Novation Agreement

Advisors:
Dr. Mohamad Akram Laldin
Abu Bakar Sidek
Dr. Asyraf Wajdi Dato Dusuki

Hiwalah
It is an agreement allowing a
debtor to transfer his debt. Thus, it
is required that the transferor be a
debtor to transferee;
The transferee may still have a right
of recourse against the transferor
in cases of death and liquidation/
bankruptcy of the payer; and
The transfer of debt shall take effect
immediately upon the conclusion
of the contract.

Nusaibah Mohd Parid

nusaibah@isra.my
Coordinating Producers
Haji Abdul Rahim Haji Sairan
rahim@isra.my
Wan Aznira Wan Abdullah
aznira@isra.my
Coordinating Photographer
Noor Aznir Nizam Noordin
aznir@isra.my

Disclaimer:
While every care is taken in the
preparation of this publication, no
responsibility can be accepted for any
errors.

Conclusion
The above list of differences is not
exhaustive. There may be other
differences between a novation
agreement and Buyu al-amanah or
Hiwalah. Shari`ah compliance was not
the reason why novation agreement
was no longer used in the house
financing. Instead, the reason cited
was that the vendors/contractors felt
uneasy when they have to sign two
agreements, as well as to deal directly
with the banks. Hence, it is no longer
in use and the standard Bai Bithaman
Ajil home financing facility consists of a
Property Purchase Agreement and a

Property Sale Agreement only, which

are executed by the bank and its
customer. Moving forward, research
needs to be carried out to better
understand novation from Shari`ah
perspective. Is it sufficient to use
existing contracts in Islamic finance
to achieve the effect of novation or
is there a need to explore into new
contracts? If we need new contracts,
what shall be the features, rights and
obligation that it will carry? These
aspects need further research and
ISRA will certainly keep you posted
with the updates!

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acknowledgement of the source
is made. Notification of such use is
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Address:
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Email : info@isra.my
Website: www.isra.my

SECTOR REPORT capital market

International Shariah Research Academy for Islamic Finance

The relationship between

leakage in commodity
Murabahah and
Sukuk pricing

operation

CPO as for the case in Malaysia) and sells

Eastern market while it is a relatively new

this commodity to the client on a deferred

product in Malaysia. Although much

basis. The client as the owner of the

in

the

has been discussed and written about

commodity Murabahah (also known as
Tawarruq or reverse Murabahah), this
article aims to shed light into how the
leakage in commodity Murabahah may
affect the pricing of Sukuk.

activities

of

commodity

to help enhance our comprehension of

the matter and avoid creating confusion
in the market.
Diagram 2: Commodity Murabahah
employed in deposit mobilization
1.

commodity now sells the same commodity

2.

to another broker so he could obtain the

cash he was looking for and utilize it in his
operation. The ability to give the client the

3.

cash he was looking for renders popularity

to commodity Murabahah.

or

are some vital points that we must clarify

Middle

applied

original

Murabahah susceptible to leakage? These

bank buys commodities (metals on LME or

extensively

our

the Islamic finance industry? Is the whole

been

has

to

commodity Murabahah cause leakage in

R e search Consultant, ISRA

Murabahah

back

leakage are we referring to? How can

By Shabnam Mokhtar

Commodity

Going

apprehension in the introduction, what

4.

On the other hand, when using

Client buys commodity on spot basis

from broker A
Client sells the commodity to Islamic
bank using Murabaha on deferred
basis (cost + profit)
Islamic bank sells the metal to Broker
B on spot basis and obtain cash
Islamic bank makes the payment of
selling price upon maturity

commodity Murabahah as a deposit

Leakage in commodity
Murabahah

mobilizing instrument, since the client has

AAOIFI Shariah Standard No. 30 defines

first buy the metal (using the bank as his

Tawarruq as purchasing a commodity

agent) and then sell it to the Islamic bank

for a deferred price and selling it to a

on a deferred basis. Effectively the client

third party for a spot price so as to obtain

has made a placement that resembles

1.

2.

3.

4.

Islamic
bank
buys
commodity on spot basis
from broker A
Islamic bank sells the
commodity to Client
using Murabaha on
deferred basis (cost +
profit)
Client sells the metal to
Broker B on spot basis
and obtain cash
Client makes periodic
payment
to
Islamic
bank

the money and is looking for avenues to

place the fund and earn return, he would

Broker A

1
$

Client

Islamic
bank

Broker A

Broker B

Islamic
bank

The concern of abuse that allows

leakage of Islamic funds into conventional

Broker B

financial market only arises from the

3
$

Client

deposit taking activities, Badlisyah Abdul

Ghani, the CEO of CIMB Islamic clarified.
He highlighted that it is important to know
that there is nothing wrong with commodity

Diagram 1: Commodity Murabahah employed in financing

Murabahah as a financial product from

Shari`ah perspective. It is valid under the

cash. It can be applied to facilitate true

a fixed income deposit since now he will

Shari`ah principle of Tawarruq.

commodities trading or can be employed

be receiving a fixed return i.e. the mark

as a financing and deposit instrument

up charged in the selling price of the

Murabahah products out there that are

in the Islamic finance industry. Diagram

commodity. The Islamic bank would now

genuine and are managed in a 100%

structure

on-sell the commodity to another broker,

Shari`ah

of commodity Murabahah used in a

gets the cash and invests it elsewhere. This

the utilization of the proceeds from such

financing transaction. Simply put, if the

is illustrated in Diagram 2 below.

product. The wrongness of commodity

below

illustrates

basic

client is looking for funding, the Islamic

There

are

compliant

many

commodity

manner;

including

Murabahah arises only when the product

SECTOR REPORT capital market

is abused to facilitate collection of Islamic funds for usage in activities that ultimately

abusing banks commodity Murabahah

involves non-Shari`ah compliant activities and worst, investments in riba-based financial

product. When the banks who have these

instruments. This abuse leads to the leakage of Islamic funds into the conventional riba-

commodity Murabahah products is asked

based financial industry, the well-known banker elaborated.

where the funds are actually utilized and

for them to disclose their matching Islamic

Avenues that lead to leakage of

Islamic fund

assets they would respond that they are not

One must wonder how this leakage could creep into the deposit taking leg of

provision in the commodity Murabahah

commodity Murabahah? Referring to Diagram 2 above, when the Islamic bank has

agreement that states the proceeds are

sold the commodity to Broker B, it will obtain cash. The next question is, what does the

to be used for 100% Shari`ah compliant

Islamic bank do with the cash? Does it invest in its own operation (which is of course

purposes because they do not want to be

Shari`ah compliant) or does it enter into a back to back commodity Murabahah

trapped by the requirement, Badlisyah

transaction with a conventional bank? If the Islamic bank enters into parallel commodity

shared his experience in the market.

required to do so under law or regulation.

Many of them even refused to include a

Murabahah arrangement with a conventional bank, now the Islamic fund is placed with
a conventional bank.

The follow-up question would be, where does the conventional bank place this

fund? Does it have a Shari`ah compliant asset to invest in or does the conventional
bank utilize the Islamic fund to finance its conventional asset? The problem of leakage
would slither in when the conventional bank uses the proceeds it has obtained from
commodity Murabahah to finance its conventional activities or invest in non-Shari`ah
compliant activities. Simply put, the counterparty of the commodity Murabahah deposit
opens the avenue for leakage (via the utilization of proceed). The same problem may
occur if a client places the fund directly to an Islamic window of a conventional bank.
The phenomenon is depicted in Diagram 3 below.

Implication from
leakage of Islamic
funds
Why should the leakage of commodity
Murabahah be an important concern
to

the

Islamic

capital

(ICM)

market

participants? What will be the implication

from this leakage? According to Badlisyah,
ICM products are seen as tools to facilitate
effective

Diagram 3: Leakage in commodity Murabahah deposit placement

liquidity

management

for

Islamic banks and Islamic investors and

it competes directly with commodity

Broker A

1.

Client/IB buys commodity

on spot basis from broker A
Client/ IB sells the commodity
to conventional bank using
Murabaha on deferred
basis (cost + profit)
Conventional bank sells the
metal to Broker B on spot
basis and obtain cash

2.

3.

Client/
Islamic bank

Murabahah
and

success

products.
will

ICMs

replace

growth

commodity

Murabahah and prevent the leak while the

failure of ICM will benefit the commodity
Murabahah abuser. We can thus say that

there is negative relationship between

the demand for commodity Murabahah
and ICM instruments because both are

Broker B

Conventional
Bank

substitute product.

The leakage essentially causes the

demand for ICM product to be weak. Both

ICM product and commodity Murabahah

Leakage:
Where is this
proceed
invested

provides fixed income return however

commodity Murabahah typically provides
better return than ICM products as banks
can simply quote a higher return while
the return on ICM products depends on
credit rating and appetite of investors.

How deep is the leakage? In other

more than half of the amount is estimated

words, how severe is this problem? Although

being managed by conventional banks

a full fledge research would be needed to

with Islamic window under the commodity

ascertain the exact depth of the problem,

Murabahah products, which can be in the

Badlisyah provided some estimate of the

form of a fund or a treasury product.

outflow. He noted that out of the reported

US$1.3

Islamic

trillion

Islamic

funds

currently

managed in the Islamic finance industry,

The situation becomes worst when

banks

who

genuinely

take

Islamic funds innocently place it in the

As such, more Islamic banks and Islamic

investors prefer to place their investment in
commodity Murabahah, thus causing the
majority of Islamic funds to be placed in
conventional banks with Islamic windows.
This inadvertently will cause the market
demand for ICM product to become
smaller, Badlisyah enlightened.

SECTOR REPORT capital market

International Shariah Research Academy for Islamic Finance

He further explained that since the

conventional banks are now middleman for

the Islamic funds, the issuer of ICM product
is then dependent on the conventional
bank to take up any offering of new ICM
products. As a result the expected higher
price tension that you would expect
from a larger investor base (i.e. both
conventional and Islamic investors) is lost.
The cost of ICM products becomes higher
and becomes less attractive. Data shows
that the price for ICM product particularly
Sukuk are now about 20bps to 50bps more
expensive than conventional bonds in the

Badlisyah Abdul
Ghani, CEO,
CIMB Islamic

global debt capital market, Badlisyah

quoted.

Contrary to the global Sukuk market,

the Sukuk pricing in Malaysia has been

cited to be tighter than the conventional
bond. Badlisyah upholds that this is the

Conclusion

positive impact resulting from no leakage

Sukuk pricing is certainly an area that

affecting pricing in the Middle East Sukuk

in commodity Murabahah. All commodity

warrants attention for research and will

market. One needs to keep in mind that the

Murabahah products in Malaysia have to

benefit the issuer and investor in the

leakage may not be a direct independent

be managed in line with the Islamic Banking

Islamic

broader

variable that affects Sukuk pricing, it may

Act 1983 which requires 100% Shari`ah

research topic may look into factors

however be an intervening i.e. indirect

compliance in business operations. With

affecting Sukuk pricing. While there may

variable that affects the demand (or

no leakage into the conventional market,

be a number of other determinants that

investor base) for Sukuk. Therefore, besides

Islamic funds are forced to find Islamic

influence pricing, research should be

studying

assets. As a result, it adds to the demands

carried out to explore if the non-leakage

pricing, one could also embark on a study

for ICM products on top of demands from

in commodity Murabahah is one of the

to determine factors influencing Sukuk

conventional investor base. That is why in

reason contributing to tighter pricing in

demand, where the leakage may have a

Malaysia Sukuk is 3-20bps cheaper than

Malaysia. A comparative analysis could

more direct impact. Wait for ISRAs findings

conventional bond, he reasoned.

then be undertaken to evaluate factors

on the topic!

By DR

capital

market.

The

the

determinants

of

Sukuk

. ASYR

Interested
to buy copies of
ISRA books?
AF WA

JDI D

ATO

DUSUKI

Contact Haji Abdul Rahim Sairan

for further info and price!

rahim@isra.my

SECTOR REPORT - takaful

The Concept of Insurable

Interest from Shari`ah
Perspective

By Zaharuddin Muhamad
A s s ociate Researcher, ISRA

The term insurable interest was originally

coined in 1774, in conjunction with the Life
Insurance Act in Britain. Insurable interest

Life Insurance

the operation of claims in the Takaful

Everyone is considered to have an

sector for us to further understand this.

is an important pre-requisite for insurance

insurable interest in their own lives as

The Takaful buyers pay certain premium

contract because an insurance contract

well as the lives of their spouses and

(money) in order to enjoy certain benefit

without insurable interest is technically

dependents.

or protection in future. If the benefit in

The insurable interest only needs

future is paid in monetary forms, and there

aims to give some background on the

to exist at the time the policy is

was no property damages (life insurance

origin of the insurable interest concept in

purchased.

for example), this would result in exchange

null and void for all purposes. This article

Shari`ah compliant. We have to evaluate

the conventional space and evaluate the

concept from Shari`ah perspective.

Background of the
concept
There is no formal and authoritative
definition of insurable interest. In general,
a person who may suffer financial loss from
an event has an insurable interest in the
property or event. A common example
always cited to exemplify the concept is
as follows. If your house (that you own) is
damaged by fire, the value of your house
has been reduced, and thus you have
suffered a financial loss resulting from the
fire. By contrast, if your neighbours house
(which you do not own), is damaged by
fire, you have not suffered a financial loss.
You therefore have an insurable interest in
your own house but not in your neighbours
house. Thus you can insure your house, but
not your neighbours house. Diagram 1
below illustrates the concept of insurable
interest in the general and life insurance
category.

Diagram 1: The concept of insurable interest

The Life Assurance Act of 1774 in Britain

was enacted at a time when wagering
(gambling) contracts were still enforceable
at common law since it was passed before
the enactment of the Gaming Act of 1845.
The purpose of the Life Insurance Act was
therefore to prevent wagering under the
veil of insurance. Before the enactment
of the Act, there were instances where
some prominent leaders and celebrities
life were insured and eventually these
figures were found dead mysteriously. Just
imagine, if anyone could buy insurance
on a celebritys life for example, the
person would obtain a sum of money if the
celebrity dies. This would open up avenue
for life threatening moral hazards. The

the problem of riba.

In

cases

that

involves

property

damages, the exchange of money is

allowed because the payment of money
was actually a compensation for the
damage suffered. This is allowed by the
Maliki school and is known as Hibah
Bitthawaab. Nonetheless, in my opinion,
payment of money to compensate for
future damages, physical damages to a
persons body or any other payment that
is compulsory in Islam, does not qualify as
property damages that is specified in the
Maliki school. Therefore payments for these
types of claims should not come from the
participants premium pool.

The Act wanted to curb the risky moral

Insurable Interest
and Takaful Act in
Malaysia

hazard that could prevail in the society if

In Malaysia, the concept of insurable

just anyone could take insurance on any

interest

unrelated persons life or property.

Conventional Insurance Act 1996 to ensure

person who bought the insurance could

arrange for the death of the celebrity.

Insurable interest from

Shari`ah perspective

has

been

included

in

the

this Act conforms to the Contracts Act

1956. On the contrary, as far as the Takaful
Act 1984 is concerned, the concept of

The concept of insurable as described

insurable interest has yet been included in

above does not contradict with the

the Act.

You have an insurable interest in any

requirement of Shari`ah. However, for a

property you own or which in your

Takaful contract to be Shari`ah compliant,

reparation that happened in the recent

possession.

insurable interest is not the only element

BBA cases, it is proposed that the Takaful

The insurable interest must exist

that must be present. In other words,

Act include clauses on the importance of

both at the time the insurance is

the concept of insurable interest alone

the concept of insurable interest and a

purchased and at the time a loss

would not make a Takaful contract

Shari`ah guide to insurable interest.

General Insurance

of money for money and thus stumble into

occurs.

In order to avoid the same legal

10

EVENT UPDATES

International Shariah Research Academy for Islamic Finance

This year was a relatively short year for ISRA, as we had only half
year to charter our beginning. Nonetheless every month was filled
with activities reflecting the enthusiastic spirit of the team behind
the scene. Established on March 26th this year and after running
the errands to assemble the team, we first organized ISRA Tea Talk
in July for AIBIM members and with a group of Shari`ah advisors, to
introduce ISRA and garner support from both the market players
and the Shari`ah scholars. Other major events organized by ISRA
include among others the Thematic Workshops, Luncheon Talks,
Islamic Finance Seminar, MoUs, besides ISRAs participation in
events organized by the industry.

11

EVENT UPDATES

Following this, the month of August was

eight papers presented during the seminar as highlighted in Table 1 below. Sheikh Esam

filled with ISRA-Industry discussion series

M Ishaq, a well known Shari`ah advisor also joined the panel discussion during the seminar

to gauge the experts view on pressing

together with Badlisyah Abdul Ghani, CEO of CIMB Islamic and Dr. Aznan Hassan. The

issues in the market. The Takaful unit kick

papers, power points and video of the presentations can be downloaded at ISRAs

started the discussion series on August 19th

website: www.isra.my go to our download section! Dont forget to pay us a visit!

followed by the Banking unit on August

28th. After a short break in September

Fiqh Aulawiyyat in reTakaful - Risk-

due to the month of Ramadhan, ISRA

Based Capital (RBC) Standards in

organized its first thematic workshop on

Dispute Resolution in Islamic Banking on
30th October. The thematic workshop
involved
approach

focused
where

group

Mohamed

Planners Sdn. Bhd

Shari`ah Inspection in Surplus

Dr. Younes Soualhi

Current Implementation

Ismail

Ownership and Hibah Issues in Takaful

Mohamed Shariff, a renowned lawyer

- Classical Discourse and Current

from SKRINE presented a paper on the

Implementation

recent judgement of 12 BBA cases in the

Deputy Dean, IIUM Institute of Islamic

Banking and Finance
Dr. Azman Mat Nor
Assistant Professor, Kuliyyah Of
Economics & Management Sciences,
IIUM

first session followed by three discussion

What is the Future Outlook for Shari`ah

sessions. The participants in the thematic

Harmonization?

workshop were selected experts in the

Dr. Muhammad Syafii Antonio

Member, Shariah Advisory Council,
BNM

industry, former judge, Shari`ah panel and

Shari`ah Audit for Islamic Financial

academician to ensure feedbacks and

Services: The Needs and Challenges

inputs collated are concrete and relevant

Dr. Abdul Rahim Abdul Rahman

Associate Professor, IIUM Institute of
Islamic Banking and Finance

to the market. ISRA would soon publish a

The Status of Waad and its Implications

monograph that captures the presentation

in Contemporary Islamic Banking

and discussions of the Dispute Resolution

Dr. Nurdianawati Irwani Abdullah

Assistant Professor, Kuliyyah Of
Economics & Management Sciences,

thematic workshop. Make sure you keep

IIUM

your eyes on this! We welcome feedback

The Importance of Islamic Fixed

from the broader market participants and

Income Securities in Developing the

academia alike!

CEO, Independent Islamic Financial

Islamic Institutions.
Distribution Islamic Views and its

discussion

Azman Ismail

Islamic Financial Markets

November was the month of the

Shari`ah-Compliance or Shari`ah-

year as we had the inaugural ISRA Islamic

Driven Approach?: Towards Full

Finance Seminar (IIFS) and ISRA Launching

Shamsun Hussain
Director, Global Markets, CIMB
Islamic
Dr. Aznan Hassan
Shariah Advisor, Bursa Malaysia

Appreciation of the Philosophical Roots

officiated by the honourable prime minister

of Islam

of Malaysia, Datuk Seri Abdullah Ahmad

Badawi who was represented by the

Minister in the Prime Ministers Department

meeting and the International Shari`ah Scholars Dialogue (ISSD) gathering about 70

Datuk Seri Ahmad Zahid Hamidi. The

prominent Shari`ah scholars from around the globe. The objective of the dialogue is

governor of Bank Negara Malaysia, Tan

to enhance the existing collaboration efforts on Shari`ah matters and strengthen the

Sri Dr Zeti Akhtar Aziz was also present

framework for cooperation and harmonisation amongst Shari`ah scholars. It will thus

for the launching which was held on the

provide the opportunity to deliberate and exchange ideas on the latest development in

November 11th. During the launch, ISRA

Islamic finance. The Islamic capital market also held its ISRA-industry meeting discussing

also took the opportunity to sign a MoU

issues in the Sukuk market.

with AIBIM to co-operate on expanding

research and training development model
in Islamic Finance. Earlier in August ISRA has
already signed another MoU with MNRB
Re-Takaful to work together in developing
an alternative model for reTakaful.

The seminar received overwhelming

responses. We could still recall how we had

to explain to callers one day before the
event how we were already overbooked.
IIFS and the launching attracted around
400 participants from market players,
regulators and academia. There were

Last but not least, in the final month of the year ISRA organized the Council of Scholars

12

SPECIAL INTERVIEW

International Shariah Research Academy for Islamic Finance

financial system, our Islamic banking asset

Exclusive Interview with

Prof. Dato Dr. Abdul
Shukor Hussein

has not even reached 20% of the total

banking asset. This shows how young the
industry is. Therefore the struggle to create
awareness would continue for quite some
time in the future.

Secondly as I said before, how do we

convince people that our system is the

best? We have to be vigilant because
human being by nature tends to remember

Member, ISRA Council of Scholars

unpleasant events rather than the good

achievement we have attained. If there
is embezzlement or big write offs in the

In your opinion, how could ISRA contribute

Islamic finance. This is what we need to

to the development of the Islamic finance

move forward.

recall this easily, although it may have only

happened once in 5 years. Furthermore

industry?

we are facing increasing competition from

ISRA is exploring into a new area in

What are some pressing Shariah issues that

Islamic finance, into a high prestige

the industry is facing currently?

and finance. This is a novel and fresh

The Islamic financial system used to be

effort in Malaysia and I think there are

seen as an alternative to the conventional

not much focused efforts similar to this

system that has strong footing in the global

outside Malaysia. If ISRA blends three vital

economy. Nonetheless, with the current

ingredients in its operation; high calibre

financial meltdown in the conventional

researchers, opportunity to work with the

space,

industry and focus on the applied issues

propose the Islamic financial system as

in the market, ISRA can contribute to the

the mainstream system. Not merely an

systematic development of the Islamic

alternative anymore. In order to do this,

finance industry globally.

we have to think how we can convince

Based on my experience as the

people that we truly are a viable solution.

Chariman of the National Fatwa Council,

This is the challenge. I was overseas recently

the way we operate and make decision

and there is increasing interest even in the

nowadays are different. As the world

western world to look for an alternative

is growing in complexity, the decision

financial system. We at USIM have also

making in any organization must be based

received queries from interested parties to

on facts and sound research findings.

learn about the Islamic financial system.

As ISRAs operation is not focused only

This was not the case years ago. They

in Malaysia, the global Islamic finance

would not even want to ask what Islamic

industry will benefit from its findings as well.

finance is. What more studying about it.

There are at least two avenues where ISRA

The financial meltdown has changed this.

can help. Firstly, ISRA can help identity

People are more open to discover what

the current hurdles and hindrance in the

we have to offer. We have to seize this

industry and explore practical approaches

opportunity to improve and strengthen

to resolve the issues. This would be on the

our industry so it would be a concrete and

short run. Secondly, ISRA can also help in

complete financial system that may offer

the long term development of the industry.

solutions to the current financial turmoil.

we

have

an

opportunity

other nations in the world to become the

Islamic financial hub. We have to always
be on our best form to convince people

and contemporary research in Shari`ah

to

ISRA may help in assessing information on

we are the preeminent.

The next challenge is with regards to

the enforcement of our legal framework.

This is a very important aspect. In Malaysia,
although the religious matters are under
the

jurisdiction

What other challenges are we facing?

to be filled for the industry to advance?

These are some vital information needed

As a young industry, we are still struggling

to charter the future of this young industry.

in creating awareness amongst players

What is unique about ISRA is its ability to

and consumers. Even in Malaysia, if I may

blend theoretical and practical aspect of

categorize it as the most established Islamic

of

state

government,

commercial matters still fall under the

federal jurisdiction or the civil court system.
Islamic banking cases are not brought to
Shari`ah court. Foreign investors would
like to have certainty of law and would
want to see that their rights are protected.
We need ensure that our judicial system
have a consistent approach in providing
judgement to Islamic banking cases. This
is an imperative aspect that we must pay
attention to if we would like to see the
industry grow further.

What do you think the industry can do to

increase efficiency?
One approach is to develop the human
capital in the industry. Efficiency is about
minimizing cost and time. Lets take for
example the product development team
in a bank or even a team structuring
solutions

where the industry is currently at and where

we should be? What is the gap that needs

Islamic banks for example, people would

for

corporate

financing.

Its

often very challenging to make the

Shariah team member understand the
conventional product structure and need,
while its similarly challenging to make
the conventional banker to understand
Shari`ah requirement. If we can train

13

SPECIAL INTERVIEW
workforces with 2 in 1 skills (Shari`ah and

resources that we put in to educate our

competition

finance), we can save time and cost. We

consumers that halal encompasses the

Competition will push for improvement

for

the

Islamic

banks.

can save time because he understands

whole aspect of life, not only limited to

and development. In 5 years, even if we

the requirement of both worlds and we

food.

do not replace the conventional system,

can save cost as we can employ less

In relation to this it is important for us

we will InshaAllah develop tremendously.

people.

to understand the concept of halal and

With one condition though; we must co-

operate and work together.

Another sphere that the industry can

toyyibah. This is mentioned in the Quran.

improve is in the area of technology. In this

While halal refers to the permissibility

cyber-age, technology is imperative. The

from Shari`ah point of view, toyyibah

banks cant afford to just offer traditional

refers

services. For example people are moving

that must come with it. Take finance for

towards

system

example. Halal finance means amongst

For us to move the industry forward, we must

nowadays. Using cheque for payment was

other, riba-free finance. However, the

first have confidence in what we are doing

the method in the 80s. But now we merely

quality of services offered by the Islamic

today. Then we need to convince people.

see the physical money anymore. Fund

banks represents the toyyibah realm.

If we ourselves do not belief in what we

transfers are executed online. Business

If consumers have to wait two hours to

do, it will difficult to convince others. Then

people discuss ideas, but dont hand

withdraw money or 3 months to obtain

we need to live up to face competition

over physical cash anymore. The industry

approval for Islamic financing, there is

from the conventional players. We must

must therefore invest in technology. This

no element of toyyibah here. If we want

however never belittle other systems. We

may involve a big outlay of cost in the

to convince people that Islamic finance

must see this as a healthy competition.

beginning. Eventually the cost saving that

is the ultimate solution, the halal and

If our vision and mission is clear and we

technology brings will definitely increase

toyyibah aspect must be emphasized. If

emphasize on both halal and toyyibah,

efficiency.

we focus only on the halal aspect and

InshaAllah the consumer would see the

forgo the toyyibah part, we will eventually

value proposition of the industry. Then we

lose out to our competitors.

would garner solid support from them.

cashless

payment

Last but not least, we must constantly

seek improvement. We cant have a

to

the

accompanying

quality

perfect system overnight. We must start

somewhere

and

improve

along

the

way. Its detrimental if we ever feel we

Where do you see the Islamic finance

can stop from improving our industry. To

industry in the next 5 years?

achieve constant progression, the policy

makers or bankers need to consider three

With the financial meltdown in the

elements on a continuous basis Shari`ah,

conventional space coupled with

technology and the contemporary market

increasing interest and awareness

need. If we focus on these three elements,

about Islamic finance, I think this

InshaAllah well increase efficiency in a

is an opportunity for our industry

consistent manner.

to

flourish.

banks,
are

More

and

conventional

interested

in

Islamic

Moving on to the consumers, usually

banking. We can see this in

Muslims are very much concerned with

Malaysia. Conventional

halal food. But its not the same case when

banks

it comes to halal finance. Whats your

Islamic windows and

thought on this?

setting up Islamic

are

subsidiaries.
This is related to the level of awareness and

these mean

understanding in the society. If we look at

healthy

how our society has progressed, we can

slowly witness that people understand
halal is not limited to food only. True this
was the case before. But now there is
increasing discussion amongst the layman
about halal in textile, attire, make-up
and even beauty for example. People
are becoming increasingly aware about
halal finance too. Its a matter of time and

offering

All

more

banks,

What is your last note to our readers?

14

RESEARCH UPDATES

International Shariah Research Academy for Islamic Finance

Since its inception, ISRA has initiated a

number of research projects in the area of
Islamic banking, Takaful and Islamic capital
market,

comprising

of

ten

short-term

research projects and five medium-term

projects. Out of the 15, eight projects have
been successfully completed, as follows:

1. Report
on
the
governance
framework of the Malaysian Shariah
Advisory Council
2. Adaptation
of
the
concept
of Insurable Interest in Takaful
practices
3. Secondary Sukuk trading: Shari`ah
Issues and Solutions
4. Dhawabit (Parameters) for the
application of the principles of
Maslahah and Dharurah in Islamic
5.

6.

7.
8.

Finance
The role of the Shariah Advisory
Councils in regulating the activities
of Islamic Banks
Waqf Shares: exploring ways of
using shares, Sukuk, intangible rights
and usufructs as the subject matter
of Waqf
Tawarruq and its current method of
implementation
Islamic
securitization
and
its
contemporary applications.

As for the on-going projects, the areas that

are being researched are as follows:
1. Maqasid-driven investment guidelines;
2. Alternative model for ReTakaful;
3. Regulatory and legal reforms;
4. Alternative dispute resolution
mechanisms;
5. Review of legal cases in Islamic banking;

focus on this paper is on the Shari`ah

issues pertaining to secondary sukuk
trading, such as the trading of debtbased sukuk, the trading of sukuk in which
the underlying assets comprise tangible
assets, usufruct, cash and debts, and the
sale of sukuk at a discount. The paper
concludes by proposing several solutions
to address the aforementioned issues.

6. The Concept and Practice of Waad

(Undertaking/Promise); and
7. Equity-based sukuk.

As ISRA is an industry-driven research

centre, the research areas chosen by ISRA

are based on consultative discussions with
the industry players and regulators, as well
as Shari`ah advisors and academicians. The
discussions are done with an objective of
encouraging an exchange of ideas among
the stakeholders on the current issues facing
the Islamic financial services industry.
The discussion series would also serve as the
platform to discuss on methods by which
ISRA would be able to address those issues
through research efforts, which calls for the
co-operation of all parties, to ensure the
research outcomes would be able to meet
the relevant needs and requirements of the
industry.

With the active participation of scholar

academicians and banking experts, it

is envisaged that ISRA would be able to
produce research outputs that are in-

2. Dhawabit (Parameters) for the Application

of the Principles of Maslahah and Dharurah
in Islamic Finance

This research is an attempt to suggest
the parameters of and limits to the
application of maslahah and dharurah
in Islamic finance. It begins with the
definition of maslahah, dharurah and
dhawabit, their related concepts and a
summary of usuli views on its authority and
legality. It then discusses the parameters,
and their respective prerequisites.
Three prerequisites are proposed; first,
identification of the characteristics
of maslahah and dharurah; second,
identification of the core qualifications
of bodies or individuals proposing
the parameters; third, identification
of the maqasid of Islamic finance to
ensure adherence to the parameters
of maqasid. On the basis of these
prerequisites, the research proposes a
number of parameters. The research
ends with findings and recommendations
for a balanced and comprehensive
examination of this pressing issue.

depth, practical and most importantly, of

clear benefits to the global Islamic banking
system.

ABSTRACT OF PAPERS TO BE
PRESENTED AT INTERNATIONAL
SHARI`AH SCHOLAR DISCOURSE
(ISSD)
1. Circulation of Islamic Sukuk: The Shari`ah
Issues and its Possible Solutions

This paper aims to discuss on sukuk
trading in the secondary market, with
delineations on the general
guidelines
for
sukuk
trading
in
the
secondary
market,
and various Shari`ah
opinions with regards
to sukuk trading. The

3. Adaptation of the Concept of Insurable

Interest in Takaful Practices

This paper aims to explain the concept
of insurable interest and its application
and relevance to the Takaful industry.
The paper begins with a historical
background on the origin of this concept
and the reasons for its introduction. Next,
this paper elucidates on the common
misconceptions about insurable interest
and the differences between this concept
and other Takaful/insurance-related
concepts. Following that, the applications
of insurable interest in contemporary
Takaful practices are explained, together
with its Shuratic dimensions that aim
to ensure that all Shari`ah tenets are
complied with. The paper concludes by
proposing several steps to be undertaken
with regard to insurable interest, including
the amendment of relevant laws.

15

FATWA SECTION
Review of fatwas issued during Albaraka
Banking Groups 29th Symposium on the
Islamic Economics, which was held 6th
7th September 2008 (by Shaikh Abdullah
bin Sulaiman Mannea)
Fatwa no. 1/15: The Shari`ah ruling on agents
representing the two parties to a contract
it is permitted for a bank to appoint
its customer as an agent to purchase
commodity and then the same customer will
offer the commodity for sale, while he is in his
capacity as an agent for the bank. However,
if the customer sells to himself, whereby he is
taking charge of both sides of the contract,
it is permitted if the price is specified by the
principal (in this case, the bank).

This fatwa is related to two issues:
First: If the agent sells the commodity which
he has purchased to a third party, by virtue of
the agency conferred to him by the principal
who asked him to do so, there are no disputes
among the scholars against its validity; and
Second: If the agent sells the commodity to
himself, whereby he is taking charge of two
sides of the contract, this issue is argued
among the scholars. Some scholars permitted
it, if there are no doubtful elements, while
some did not permit it, on the grounds of
purification of the personality. Ibnu Qudamah
said in Al-muqni, It is not permitted for one
who is appointed as an agent in a sale to
sell to himself. He said in the Hashiyah, this is
the madhhab (of Hanbali) and the majority
also ruled the same. He further said, that in
the Hashiyah, This is because the custom in
sale is that one sells to another person, so it
is in a wakalah contract. Also, he is subject
to suspicious in selling, so it is in buying for
himself.

In another version reported from Imam
Ahmad, it is permissible for an agent to take
charge of both sides of the contract, if there
are no doubtful elements. He said in Al-muqni,
It is also reported from him, that is Imam
Ahmad that, it is permitted for an agent to
sell to himself, if he adds to the normal price,
with which the sale was done by auction, or
he appoints another person as an agent and
he will be one of the buyers. He mentioned
in the Hashiyah about the permissibility of the
agent to sell to himself; if he was permitted,
then it is permissible and he represents the
two sides of the contract. This is the most
authentic view.

However,
having
observed
that
representation of the two sides of a contract
by a customer in the banking transaction has
predominantly become mere form (not the
actual purpose of the contract), a situation

whereby neither buying nor selling was

executed by the agent and at the same
time, he obtains actual profit margin
through ribawi (interest-based) terms.
It is representation by an agent of both
sides of the contract that served as a
justification for the prohibition of tawarruq,
as practised by the banks.
In order to preserve the reputation of
Islamic banking, I am of the view that there
is a need to review the arrangement of
an agent taking both sides of a contract.
It should be prevented, in consideration
of transparency and to prevent criticisms
that Islamic banks are involved in interest
based-transactions and factors that
have the probability to lead to form in
transaction.
There are many examples to support
that it is permissible to declare something
as lawful and then recommend that it
should be prevented on the grounds of
precaution and avoiding ambiguities.
One example is bai inah , in which its
procedures are in accordance with a
valid sale, but having observed that there
is a trick to attract riba, the majority of the
scholars disallow it. Similarly, the case of
riba al-fadhli (riba, which is addition to the
original amount borrowed), having seen
it as a means that leads to riba al-nasiah,
the majority of scholars prohibited it.
Another example is the tradition
reported by Aishah, may Allah be
pleased with her, who said that, Sad
bin Abi Waqas and Abdu bin Zamah
reported to the Prophet s.a.w. in dispute
that occurred between them. Sad said,
O you the Apostle of Allah, this son
belongs to my brother called Utbah bin
Abi Waqas. He gave me a testate that
he (the son) is his child, you can see his

when he saw a strong resemblance with the

one who is not the bed owner. Here, we can
observe the fatwa that ruled that the sale is
valid if the agent sells to himself, at a specific
price, as determined by the principal. It is
apparent that when the principal determines
the price for the agent, it is not considered
as agency in sale, because the act of
determining the price by the principal is
considered as offer to sell, made by him to
the agent. If the agent communicates his
acceptance, then, the contract has been
concluded by offer and acceptance made
by the eligible parties. There is neither an
agent nor principal in the contract, but all
that took place is that the contract was
concluded between the two parties of a
valid contract, who are the seller and the
buyer.

resemblance. Indeed, the Prophet s.a.w.

saw a manifest resemblance with Utbah,
but ruled by saying he is yours O you
Abdu bin Zamah. A child belongs to the
bed while the adulterer owns nothing.
O you Saudah the daughter of Zamah,
veil yourself from him. She (Aishah) said,
he never saw Saudah throughout. In this
verdict, the Prophet s.a.w. attributed
the child to the bed owner as that is the
original presumption, and he attributed
him to who is not the owner of the bed
on the grounds of precaution, in order not
to violate principle of maharam (degree
of consanguinity either by birth or breast
feeding, precluding marriage).
The Prophet s.a.w. combined both
the original presumption and precaution

contract; agent of his principal in buying

and selling on behalf of the bank. Even
though some ulama permit it, if there are
no doubtful elements, suspicious of form
is in existence and it is more dangerous
than the suspicious involved by way of
negligence, if he buys or sells at less than
the normal price; and
4. It is not considered as taking charge
of both sides of the contract if the
principal sets the price, in which case it is
considered as offer and if accepted by
the client, the sale is completed primarily
from the seller and buying from the client.
In this regard, there is neither agent nor
principal. The contract was concluded
by its primary parties, i.e. the seller and
the buyer.

The summary of this fatwa is as follows:

1. It permitted for a client of the bank
to represent the bank in an agency
capacity, to buy the commodity required
by the client of behalf of the bank, and
then the client buys the commodity
from the bank, after the bank has taken
possession of the commodity. For this
type of transaction, there are no disputes
among the scholars;
2. It is not permitted for a client to take
charge of the two sides of the agency
contract, whereby he purchases the
commodity for the bank and in turn
sells it to himself, on behalf of the bank.
The impermissibility is upheld, in order to
avoid doubtful elements and protect
the Islamic banking system against
accusations that its products are merely
tools to justify riba;
3. A group of ulama prohibited an agent
from taking charge of both sides of a

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International Shariah Research Academy for Islamic Finance

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