Mahyuddin Khalid

emkay@salam.uitm.edu.my
ISLAMIC
BANKING AND
FINANCE
PRINCIPLES OF ISLAMIC FINANCE
 CONTENTS
2

 INVESTMENT AND FINANCING OF HALAL

ACTIVITIES
 PROFIT AND LOSS SHARING VS LENDER-
BORROWER RELATIONSHIP
 TRADE-BASED FINANCING VS INTEREST-
BASED INVESTMENT/LOAN
 PROHIBITION OF RIBA, GHARAR AND
MAYSIR
 PAYMENT OF ZAKAT
 INVESTMENT AND FINANCING OF HALAL ACTIVITIES
3

Financial serviced based on Riba

Gambling and gaming

Manufacture or sale of non-halal products

Manufacture or sale of tobacco-based or related

Impermissible to invest and product
give financing to related
activities Stockbroking or share trading in Shariah non-
compliant securities

Other activities that conflicts with Shariah

Entertainment activities that conflicts with

Shariah
Conventional insurance that containing of
gharar
 PROFIT AND LOSS SHARING VS LENDER-BORROWER
RELATIONSHIP
4
PROFIT LOSS SHARING
• First Tier
• Between bank and depositor
• The depositor are considered to be provider
of the capital (Rabb al mal)
• The bank functions as a working partner or
manager of funds (mudarib or amil)
• Second Tier
• Between bank and entrepreneur
• The entrepreneur is the manager of fund
• The bank functions as provider of capital
LENDER-BORROWER
RELATIONSHIP
• The relationship between a lender and a
borrower is governed by a loan contract
between them.
• Such a contract would specify all the
obligations of the two parties in every
possible future contingency.
• With respect to:
• The amount of repayment
• The interest rate on the remaining debt.
• A possible adjustment in the collateral
required by the lender.
• The actions (in particular investment
decisions) to be undertaken by the borrower.
 TRADE-BASED FINANCING VS INTEREST-BASED
INVESTMENT/LOAN
5
TRADE-BASED FINANCING
The bank has to purchase the
requested commodity before
selling it to the customer.
Price includes a known profit or
mark-up.
The mark-up in murabahah is
part of the sale price, it is set
only once and then it does not
change overtime.
Murabaha financing products are
fixed-rate products.
The rate, once determined for a
given contract, is not allowed to
float with changes in the interest
rates or any other rate.
CHARACTERISTICS INTEREST-BASED LOAN
Legal Nature of The customer is required to make
promise a unilateral promise to buy the
commodity from the bank, before
the bank makes the purchase.
Profit Rate Profit comes from the interest
rates.
Fixed and Floating rate Many conventional banking
products are floating-rate
products.
The rates on such loans are
automatically adjusted upwards
or downwards in line with
changes in interest rates.
 TRADE-BASED FINANCING VS INTEREST-BASED
INVESTMENT/LOAN
6

TRADE-BASED FINANCING CHARACTERISTICS INTEREST-BASED LOAN

Murabaha does not allow
such rescheduling as no
additional amount can be
charged for the same.
The amount of the
murabahah price remains
unchanged.
If it is given voluntarily, it is
allowed.
The rate of discount must not
be pre-specified in the
murabahah contract as a
condition.
It is not a right that the
debtor can claim.
Rescheduling of Loan rescheduling is
payment accompanied by
additional interest charge for
the timing differences.
Rebate on early Conventional financial
payment system grants the borrower a
discount or rebate if the
customer decides to pay
earlier than the scheduled
time.
 PROHIBITION OF RIBA

Definition of Riba on Trade transaction

• Unlawful gain derived from the quantitative

inequality of the counter-values in any transaction
purporting to effect the exchange of 2 or more
species which belong to the same genus(category)
and are governed by the same efficient cause(illah)

Definition of Riba on Loan transaction

• A predetermined excess or surplus over and above

the loan received by the creditor conditionally in
relation to a specified period

7
 EVIDENCE

 Al-Quran
 Al-Baqarah: 275

8
 EVIDENCE

 Hadith:
 From Jabir: The Prophet saw cursed the receiver and
the payer of usury, the one who records it and the two
witnesses to the transaction and said: “They are all
alike (in guilt and sin).
 From Abi Said al-Khudri: The Prophet saw said: gold
for gold, silver for silver, wheat for wheat, barley for
barley, dates for dates, salt for salt, like for like, and
hand to hand. Whoever pays more or takes more has
indulged in riba. Take taker and the giver are alike (in
guilt).

9
 ELEMENTS OF RIBA
10

Bargain to be
conditional on
the payment of
a
predetermined
surplus

Excess or surplus over

and above the loan capital
 REASONS FOR PROHIBITION OF RIBA
11

An exploitation
To prevent
of people needs.
injustice
Thus, they have
between
no choice but to
contracting
be involved in
parties
Riba

An exploitations
of people
Exploit the ignorance over
poor/ the types of
creditors commodities
involved in
transaction
 CATEGORIES OF RIBA
12

Categories of
Riba

Riba al-Buyu` Riba al-Dayn

(Trade Transaction) (Loan Transaction)

Riba al-Fadl Riba al-Qard

Riba al-Nasiah Riba al-Jahiliyah

 CATEGORIES OF RIBA
13

RIBA AL-
RIBA AL-DAYN
BUYU`
Riba al-Fadl Riba al-Qard
• Also known as Riba al-buyu’ that is riba by excess. • It is riba in debt or out of lending and borrowing.
• It applies to six items : gold, silver, date, raisin, wheat • It was originated from the transaction of a loan , and it
and barley and the like of them. is interest or payment charged due to the loan given.
• On the other words, it is the extra amount over the
above principal of the loan.

Riba al-Nasiah Riba al-Jahiliyah

• Its occurs whenever the creditor advanced loan on • It is Riba in loan.
some monthly interest in addition to the principal • It is when a loan contract is made or at rescheduling a
sums. previous debt.
• Increase due time • It is take place only in debts created via lending or
• On other words, this stipulated interest which the extended to a new maturity via rescheduling.
lender takes from the borrower to pay back the
capital.
• Second opinion- Any delay in the exchange of the
ribawi items from the same type and category
 RIBAWI ITEM
14

Gold

Salt Salt

Ribaw
Dates
i Item Silver

Barley/Oat Wheat
 ISLAMIC RULINGS ON RIBA IN
15
TRADE
  Category Type Exchange Quantity   Items

 1 Same Same Spot Equal in Regardless of Gold with Gold,

category type exchange quantity quality Wheat with Wheat

 2 Same Different Spot Inequality Equality is not a God with Silver

category type exchange is condition Wheat with Rice
permitted Salt with Dates

 3 Different Different Delayed is Inequality Time and Gold with Wheat

category type permitted is Quantity Factor RM with Dates
permitted is not a
condition
 ISLAMIC RULINGS ON RIBA IN
16
TRADE
  Category Type Exchange Quantity   Items

 4 Ribawi Items and Non- Delayed is Inequality is Time and RM with vehicles
Ribawi Items permitted permitted Quantity UD with furniture
Factor is not a
condition

 5 Between 2 Non- Delayed is Inequality is Time and Bricks with Sands

Ribawi Items permitted permitted Quantity Cloth with Patrols’
Factor is not a
condition
 PROHIBITION OF GHARAR
17

 Literally:
 Deceit, risk, fraud, uncertainty or hazard that may be lead
to destruction loss.
 Technically:
 When a matter that is concealed by one party.
 Occurs when a party undertake venture blindly
without sufficient knowledge
 Minor uncertainties can be permitted when there is a
necessary
 Both of contracting parties must have a perfect
knowledge regarding to transaction
 PROHIBITION OF GHARAR
18

Examples of Gharar related

transaction:
• Sell good that seller is not in position to
deliver.
• Sell unknown pages or known goods
against unknown price.
• Make a contract conditional on a unknown
event.
• Sell good on basis of false description.
• Sell good without proper examination.
• Gambling.
 TYPES OF GHARAR
19

Gharar Yasir Gharar Fahish

• This type of gharar is tolerate and • This type of gharar is not tolerate
will not invalidate a contract. and may result in contract
• Gharar yasir may include the voidability
following cases:
• The uncertainty is slight or
trival
• Contract is unilateral or
charitable (al tabarru’at) such as
gift or bequest
• There is a public need for the
transaction or contract
(consideration of maslahah)
 PROHIBITION OF MAYSIR
20

 Refers to the easy acquisition of wealth by chance,

whether or not it deprives the other’s right.
 Qimar means the game of chance in which one
gains at the cost of others.
 Issues that related to gambling:
 Contest using SMS
 The prize winning tickets
 Horse racing
 Lottery
 Crossword puzzles
 PAYMENT OF ZAKAT
21

 Meaning of zakat
 To grow
 To purify
 To improve
 Purpose of Zakat
 The foremost and primary is to distribute the wealth of the community
among the poor
 Removing the love of wealth from one’s heart, a spiritual disease that
could be detrimental to one’s Iman. Thus, it is a form of Tazkiya (self-
purification).
 Giving in the path of Allah acknowledging that whatever wealth one
possesses is in reality the Almighty’s, and giving a monetary sacrifice
for one’s lord.
 Prevention of monopolies in society.
 BENEFIT OF ZAKAT
22

 Enhances Volume of Production

 When Zakat is collected and distributed among the poor they spend it on various
consumer goods which increase the demand of various products of industries which
increases production of goods.
 Discourages Hoarding
 Zakat discourages hoarding because it is levied on hoarded wealth.
 Raises Savings
 Zakat is paid out of the accumulated wealth. the wealth owner must in saving ratio, in
order to prevent the level of his wealth from decreasing.
 Zakat increase level of income
 Zakat increase level of income due to circulation of wealth in the economy.
 Reduces inequality of Wealth
 Zakat is distributed among the poor from rich people so it reduces inequality of
wealth.
 Zakat ends poverty as Zakat is given to poor.
 Redistribution of National Income.
 CONDITION OF ZAKAT
23

 Zakat Performer Muslim

 Every Muslim who is of a certain age and owns enough assets is required to
pay zakat.
 Zakat Assets
 Full ownership. A Muslim only required to pay zakat if he or she has full and
legal ownership of an asset.
 It’s payable only on those assets acquired for the purpose of creating or
generate wealth.
 Zakat need only be paid on those assets that exceed a minimum value.
 Minimum value is termed Nisab.
 Completion of Haul
 Haul is defined as the completion period for zakat asset.
 The length of time:
 One Islamic Hijri year (1 year Hijri=354.5 days, 1 year Solar= 365.25 days)
 Zakat only payable on asset that have been held for at least this period.
 TYPES OF ZAKAT
24
Zakat Fitr
• Zakat Fitr is a one off payment that
is made once in every Muslim Hijri
calendar year at any time between
the first day of the month of
Ramadan and the first day of
Shawal.
• All Muslims are obliged to pay this,
regardless of their age, status or
wealth.
• The amount of zakat payable is
approximately 3kg of staple food in
the relevant country or an amount
of money that is equivalent to the
price of the food.
Zakat Al-Mal (on wealth)
• Zakat al-Mal is an annual payment
based on the amount of wealth
owned by a Muslim individual or
organization.
• This payment is obligatory upon
any Muslim individual or
organization that has completed the
requirement of Nisab (minimum
taxable amount) and Haul (one
Muslim Hijri calendar year).
• The payment is 2.5% out of the
total wealth deemed for zakat.
• Zakat al-Mal can be subdivided into
zakat on:
• Business, Rental Income,
Personal Income, Savings, Gold
and Silver,  Shares, Livestock,
Crop
 BENEFICIARIES OF ZAKAT
25

1. The poor (Faqir/Fuqara)

2. The needy (Miskeen)
3. The administrators of zakat (Amil)
4. The sympathizer (Muallaf) - Those who are inclined to enter or have
already converted to Islam.
5. To free slaves (Riqab)
6. Those who are in debt (Gharimin)
 Zakat can be used to pay off the debts of a person who has borrowed to pay
for basic necessities or those on financial problem.
7. For the causes of Allah (Fisabilillah)
 Zakat can be use to finance any form of struggle or work for the love of Allah.
8. Those who are stranded during a journey (Ibnus Sabil)
 Zakat can be used to help a traveller facing difficulties in continuing his
journey.
 ISLAMIC LEGAL MAXIM ( ‫عد‬M‫قوا‬MM‫لا‬
26
‫فقهية‬MM‫) لا‬
 Qawaid fiqhiyyah or Legal maxims are general rules which can
be applied in various cases that come under common rulings.
 Plays great role in the formation of Islamic law because they are
uses as principles to deduce rules of fiqh.
 Legal maxims are indeed general rules of fiqh, which can be
applied in various cases that come under the common rulings
e.g.. transactions, munakahat, evidence etc.
 Have a great role in the formation of Islamic law because they
are used as guidelines in finding the rules of fiqh but cannot be
accepted as sources of shariah.
 These maxims have solved most of the minor rules of fiqh and
without them these minor rules will have no standing ground
which will make it hard to solve them.
 FIVE MAJOR MAXIMS
27

Acts Are Judged By The Intention

‫األمور بمقاصدها‬
Behind Them
‫اليقين ال يزال‬
‫بالشك‬ Certainty Is Not Dispelled By Doubt
‫المشـقة تجلب‬
‫التيسير‬ Hardship Begets Facility

‫الضرار يزال‬
Harm Must Be Removed

‫العادة محكمة‬
Custom Is The Basis Of Judgement
 ACTS ARE JUDGED BY THE INTENTION BEHIND THEM
(‫مقاصدها‬
MMM‫ألمور ب‬MM‫) ا‬
28

 An act of any human being is judged in the light of

intention or the purpose it seeks to have effects.
 This means that the effect to be given to any
particular action or transaction must be in
accordance with the intent underlying such action
or transaction.
 E.g.:
 Banks declare their policy of financing customers on
non-interest bases it would be necessary to do so and
not merely continue the same practice and seeking to
rationalize it in Islamic terms such as mudharabah etc.
 CERTAINTY IS NOT DISPELLED BY DOUBT
( ‫شك‬MMM‫ب‬
MM‫زول لا‬MM‫ ي‬M‫يقينال‬MM‫) لا‬
29

 It is discusses about the principle that should be

followed if there is doubt in any matter particularly
in matters pertaining to Islamic law.
 This means that a fact established by law or proven
with evidence will remain so, until there is another
certainty that removes it.
 E.g.:
 A partner has no right to assume a minimum rate of
profit earned by his business partner and claim his
share in that profit as different from amount stated to
have been actually earned by the partner.
 HARDSHIP BEGETS FACILITY
‫ت‬
( M‫محظورا‬MM‫بيح لا‬
MMM‫ت ت‬M‫ضرورا‬MM‫) لا‬
30

 The maxim indicates that any ruling which implementation

causes hardship to a person or the action is unable to be
performed by a particular person for a specific acceptable
reason, then there are alternative and ways out that can be
resorted to in order to overcome the difficulties and hardship.
 Hardship- refer to surpass the normal limit and ability of a
person such as travel/sickness/ dharurah etc.
 E.g.:
 If the court orders the sale of assets of a negligent debtor to pay
his creditors, it must begin with the sale of his movable goods if
this would suffice to clear his debt, before selling his real
property.
 HARM MUST BE REMOVED
‫ل‬MM‫زا‬
( MM‫ضرار ي‬MM‫) لا‬
31

 The scholars have classified harm into two categories :

 Harm which is inflicted intentionally in order to cause
damage. This kind of harm is forbidden and the perpetrator
shall bear the consequences of his action.
 Harm which is cause unintentionally without any intention
to cause harm or damages to others.
 E.g.:
 A buyer of perishable goods absents himself without
taking possession of the purchased goods. The seller , in
order to protect himself and the buyer from loss, has a
right to unilaterally revoke the contract of sale and sell the
goods to some other party.
 CUSTOM IS THE BASIS OF JUDGEMENT
( ‫ادة محكمة‬MMM‫ا‬
‫) لع‬
32

 This maxim means the practices of the people

whether in their actions or sayings, regardless of
whether they are general practices of the people or
the practices of certain groups of people.
 E.g.:
 A person authorizes another to sell something on his
behalf without laying down conditions as to sale price
and unit of currency, the agent will be treated to be
bound by conventional rules of charging a reasonable
price and prevalent currency.
33 END OF CHAPTER