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Dr. Asyraf Wajdi Dusuki
Head, Research Affairs International Shari’ah Research Academy for Islamic Finance (ISRA)
Colloquiu m On Islamic Finance
Understanding the Nature of Banking Business Why Islamic Finance? Salient Features of Islamic Finance What Does it Mean By Shariah Compliant? Form vs. Substance
g. bank) Deficit Units • Individuals • Businesses • Government Return on investment & savings Return on financing Bank’s Liabilities Bank’s Assets 3 .Bank as a Financial Intermediary Savings & Investment Financing Surplus Units • Individuals • Businesses • Government Financial Intermediary (e.
Nature of Banking Business Assets Liabilities Long-term contract Short-term Contract Illiquid Highly Liquid Inflexibility Withdrawal On Demand Expose to wide array of Risks Risk free 4 .
Why Do We Need To Have Islamic Finance? 5 .
To Comply with Shariah! 6 .
Conceptual Balance Sheet of an Islamic Bank Assets Trade Finance (Mudarabah/ BBA) Asset-backed Securities (Ijarah/Salam/Istisna) Fund Management (Mudarabah/ Special Mudarabah/Musyarakah) Fee-based Services/ Advisory (Wakalah/Jualah/Kafalah) Liabilities Custodial Services (Amanah/Wadiah) Deposits/Investments (Mudarabah/ Wakalah) Fund Management/ Private Equity Venture Capital (Special Mudarabah/ Musyarakah) Capital Owners’ Equity (Musyarakah) 7 .
Murabahah – cost-plus sale. al-Qard BBA – deferred sale. Ijarah Muntahia Bitamleek Sales-based Contracts Lease-based Contracts Equity-based Contracts Mudarabah. Wakalah (agency) Musyarakah Mutanaqisah (Dimishing Partnership). Bai alTawarruq Ijarah Wa Iqtina. Musyarakah Fee-based Contracts Kafalah/Dhaman (Guarantee). Mudarabah. Bai al-Inah. Wadiah Yad Dhamanah. AITAB etc. Ijarah Thumma Al-Bai’. Promise/Undertaking Wa`ad Hybrid Contracts 8 .Deposit-taking Contracts Various forms of Islamic Contracts used in Banking Wadi’ah Yad Amanah.
a man needs to abide with Shariah! Every Transactions Must Be Shari`ah Compliant! What Does it Mean By Shari`ah Compliance? 9 .In a nutshell as a Muslim.
• Fulfilling the legal documentation requirement • Focusing on the legal form of a contract 10 .SHARIAH-COMPLIANT IS NOT JUST ABOUT: • Satisfying the mechanics of financial operation.
requirements and conditions the INTENTION of the contractors.VALIDITY vs. PERMISSIBILITY Validity is based on the FORM of the contract While Permissibility is based A Valid Contract is not necessarily PERMISSABLE (HALAL) VALID(SAHIH) Halal (Permissable) on the SUBSTANCE of the contractisand contract that used contract that meets its to obtain Halal (Permissible) ends. 11 Financial Contract MUST be BOTH HALAL (Permissable) & SAHIH (Valid) .
Shariah-Compliant Requires • Financial Contract to be Shariah compliant both in terms of FORM and SUBSTANCE • Operation to be Shariah compliant • Islamic banking to be more ethical • Socially Responsible 12 .
Commodity Murabahah Deposit Placement US$ 1 Million on spot Broker A Where is this proceed invested? Client/Islamic Bank US$ 1.1 Million deferred US$ 1 Million on spot Broker B Conventonal Bank .
Result the issue of “legal form vs. • Misunderstanding some schools’ position. Buy-back Sale (Bay’ al-inah) and Bay` al-Tawarruq. economic substance” becomes the point of contention in determining the permissibility of certain financial instruments. some schools base it on form. 14 . • E. others on substance. • Substance is the essence or essential nature of something. As for contract validity.Form and Substance • Form is the structure of something.g. • All schools of Islamic Law base contract permissibility on substance and intention. • Result: In contemporary Islamic banking and finance.
when the substance is interest-bearing debt. Or.e. 15 . Profit should be obtained by virtue of real economic activities not by lending.The Criterion of the Non-Shari’ah Compliant Transaction • When a financing mode is structured in such a way that secures a guaranteed profit to the financier without taking any risks. i.g. lease… . • This will render the transaction impermissible regardless of its legal form. sale. • Rationale: Money should not generate money by itself. when the financier acts in reality as a creditor who provides money without being involved in the investment process. e.
What to compromise the Form or the Substance? 1. Classical Jurists have compromised Form in many examples. Some of today’s practices in Islamic Finance have just implied the opposite. 16 • . • • Form and technicalities can be compromised if the substance is sound. maintaining the form at the expense of the substance. The objective of Form is to help ensure the compliance of the substance with the Shari’ah. which implies that maintaining the form of a contract is not meant for itself.
a dealer sells to another dealer a property if the later agrees to sell him his property.g. • E.Form and technicalities can be compromised • This (compromising the form as long as the substance is Shari’ah compliant) can be used in validating many applications. • One important application is: Validating multiple contracts in one transaction as long as this transaction will not lead to Riba or will not be used to circumvent the Shari’ah. 17 .
َم َحوَعيبلاُ للا ّلحاو َ َر ّ ا ّرلا ب ِ “Allah permits trading but prohibits Riba” (2:275) HOW TO MAKE MONEY IN ISLAM? ُل ِمُعْ َبلا ام ِا ُولاق َ َن ا ّ ث ي ا ّرلا َب ِ “They said that indeed trading is just like riba” (2:275) RIBA NO COUNTER-VALUE PROFITS What’s The Difference? WITH COUNTER-VALUE (`IWAD) Effort (Al-Kasb) Risk (Al-Ghurm) Liability (Al-Dhaman) 18 .
Accurate Info. Freedom from Gharar Promote Brotherhood Freedom from Dharar Freedom to Contract Characteristics of Shariah-compliant Banking and Financial System Freedom from Price control & Manipulation A system grounded on moral and ethics Entitlement to Transaction at Fair Price Freedom from Qimar & Maysir 19 .Promote Maslahah Freedom from Riba Entitlement to Equal. Adequate.
Jalan Raja Laut. Annexe Block. 50350 KL T: +603 2781 4211 F: +603 2692 4094 M: +6012 6188005 www.وا ا و ًا Dr Asyraf Wajdi Dato' Dusuki Head of Research Affairs International Shari'ah Research Academy for Islamic Finance (ISRA) 2nd Floor.isra.my 20 . Menara Tun Razak.