CHAPTER 6

PRINCIPLES PRODUCTS AND SERVICES

OF ISLAMIC FINANCE
 CHAPTER OUTLINED

Objectives of Establishment and Business Philosophy of

Islamic Banks
Operational Principles of Islamic Banks
Objectives of Establishment and Business Philosophy
of Islamic Banks
• Do not involve the element of riba or
interest
• Founded on both religion and profit
factors

• Accordance with Syariah

• Profit maximization
• Must consolidate and find the proper
equilibrium between religion which
emphasizes tauhid and moral dimension
and business dimension which place
importance on profit
• To the philosophies and business
 Operational Principles of Islamic Banks

Murabahah Musyaraka
Musyaraka
• Al ijarah Wadiah h
h
Thumma • Ar-Rahn mutanaqis Hiwalah
• Mudhara
Al Bai • Bai ah Istisna
bah
(AITAB) Bithama Bai al dayn Ujr
• Bai
• Qard n Ajil Bai al inah
Salam
Hassan Bai istijar
 MUSYARAKAH

• The Arabic word musharakah is a derivative from the root word sharaka
which literally means sharing and mixing shares of two or more parties to
make them interchangeable.
A partnership agreement between two or more individuals or bodies.
Better known as Syarikat or as a grouping of capital.
Divide by two categories. Syarikah al mulk and syarikat ‘aqad.
 1. MUSYARAKAH

Musharakah

Sharikah al-Mulk Sharikah al-’Aqd

(Ownership (Contractual
partnership) partnership)

Sharikah Al- Sharikah Sharikah Al-

Sharikah Sharikah Al-Wujuh
Sharikah Amwal Al-’Amal Mudarabah
Jabr (partnership in
Ikhtiyar (Partnership (partnership in (Profit-sharing
(Faraid) goodwill or credit)
in capital) labour) partnership

Sharikah Al-
Sharikah Al-’Inan
Mufawadah (capital
(General
share/equal share
partnership)
partnership)
 Partnership in Holding / ownership (Sharikah al Milk)

• Basic element: is the mix of ownership, either by choice (ikhtiyar) or mandatorily (jabr). It
occurs when two or more people are joint owners of one thing.
• There is no formal sharikah contract concluded between the parties involved.
• 2 categories of sharikah al mulk:
• a) Sharikah Ikhtiyar
• The ownership is established based on the acts of the partners such as an asset that has
been jointly purchased by them or they become new owners of a asset as a result of a will
or a gift.
• b) Sharikah Jabr
• The ownership established mandatorily and not due to the acts of the partners. For
example, they become new owner of assets through inheritance.
 Partnership by contract (Sharikah Al-Aqd)
Agreement between 2 or more parties to combine their assets, labour or liabilities for the
purpose of making a profit.
• a) Sharikah Al-Amwal (Partnership in capital)
• All partners contribute capital for the company.
• It consist 2 categories:
• 1- sharikah Al-Inan (General partnership)
Each partner contributes a specific amount of money in a manner that gives each one a right
to deal in assets of partnership.
Profit distributed according to p/ship agreement while losses are borne in accordance with
the contribution of each partner to the capital.
• 2) Sharikah Al Mufawadah (Equal partnership)
Two or more persons form a partnership whereby they are equal to each other in respect of
capital, profit and freedom of disposal.
• B) Sharikah Al-Amal (Partnership in services / labour)
Agreement between 2 or more person to provide services pertaining to a profession, vocation
or skilled trade or to render some services or professional advice or to manufacture goods and
to share profits according to an agreed upon ratio.
• C) Sharikah Al-Wujuh (partnership in goodwill or credit)
p/ship in creditworthiness (partnership of liability)
It is a bilateral agreement between 2 or more parties to conclude a partnership to buy assets
on credit on the basis of their reputation for the purpose of making profit, whereby they
undertake to fulfil their obligations according to the percentages determined by the parties.
 MODUS OPERANDI / MODES OF FINANCING (SYIRKAT PERSPECTIVE)

1 Agreed to perform a Musharakah

by PSR 60:40
• TENETS / ESSENTIAL
 
a. Shareholders
Shareholder B
Shareholder A
Return on
b. Capital
4
Profit and
Loss
Return on
Profit and
c. Project
Loss
2
d. Offer and acceptance (ijab and qabul)
Contribute
Contribute
capital
•  
capital RM20m RM10m

3 SYARIKAT
(CAPITAL = RM30M
BUSINESS / PROJECT)
 s
• Flex
ibilit
y DISADVANTAGE:
• Cost
• Joint and several liabilities of partners
effec
tive • Conflict of profits
• Com • Conflicts in decision makings
binat • Death partner
ion • Limit the extent of the company
of • Dependence of decision
skill • Unlimited liability
s • Handling
• Abil • Inexperienced management
ity
to
rise
fund
s
• Effe
 2. Mudarabah
• Definition: is a partnership in profit whereby one party (rabbul mal) provides
capital and the other party (mudarib) provides labour.
• TENETS / ESSENTIAL
• a. Owner of capital (Rabbul al mal)
• b. entrepreneur
• c. Capital
• d. Project
• e. Profit/loss
• f. Offer and Acceptance
 SYARIAH PRINCIPLES

1. A contract between two parties

2. Depositor place a specified sum of money at the bank for a stipulated of time
agreed predetermined ratio of profit.
3. The bank entrusted to utilize the deposit in it financing and investment project
without any intervention from the depositor.
4. Profit earned on the investment will be distributed between the two parties
according to the profit distribution ratio determined at the point of aqad or
contract.
5. Loss, if any, will be borne totally buy the depositor.
 3. MURABAHAH

LITERAL
r oo t w o r d “ al-
The
ans
ribh” which me
s e in c a p it a l or
increa TECHNICAL
g.
profit of tradin A sale in which the mark
up is disclosed to the
purchaser as per the
seller’s purchase price
for a trust sale for a
certain specific asset.
• TENETS / ESSENTIAL • SYARIAH PRINCIPLES
a. Seller 1. Seller must reveal the cost of the
commodity / merchandise
b. Buyer 2. The selling price ( mark-up price ) must be
c. Commodity / Merchandise agreed by both parties
d. Price 3. The contract can be revoked if there is any
dispute arises against the price of
e. Offer and Acceptance commodity / merchandise quoted by the
seller.
 CONDITIONS OF
MURABAHAH

• Product must be clearly defined including its type, quantity,

and other descriptions.
Product and selling price
• Selling price: its cost and profit must also be disclosed
clearly and truthfully.

• Seller/financier: responsible for supplying the product

ordered by the buyer.
• Buyer/customer: obligated to pay for the product he/she
Contracting parties
purchased according to agreed terms of the agreement.
• Both must be adults, rationale, intelligent and can be held
accountable.

• It shall contain the 2 important elements mentioned : cost

price and rate of profit.
Offer and acceptance
• The original price must be fungible. The price at which the
seller obtained the goods must be measured by weight.
MODUS OPERANDI / MODES OF FINANCING
 1. Rebate in the event of default
- Whether the bank must give rebate to the customer
incase of default or to give early settlement or not
2. Disclosure of cost price
ISSUES RELATED TO - The seller is obliged to disclose the actual cost. If the
MURABAHAH exact cost cannot be ascertained or unknown, it is
impossible to have murabahah contract

3. Use of the interest rate as a benchmark

- Many IFI do murabahah financing to determine profit
or mark up on the basis of current interest rate using
conventional interest rate benchmark or rating
 Formerly known as al-bai bithaman ajil, refers to sale
with deferred payment.
Works like a murabahah contract, but with payment
generally made on a deferred basis.
4. BAI BITHAMAN AJIL
(BBA) It is a contract whereby the commodity is delivered
immediately and the price is paid by instalments.
The payment is delayed to a fixed and stipulated period
of time. The selling price includes the cost price plus an
agreed profit margin which will increase depending on
the length of period over which the deferment is agreed
upon.
 Tenets / essential

1) Seller
2) Buyer
3) Merchandise / asset
4) Price
5) Contract (offer and acceptance)
 5. MUSYARAKAH MUTANAQISAH

 Musyarakah mutanaqisah means that the

Definition: A contract of diminishing partnership whereby involved
partnership between two parties, two parties that are the customer as
where one partner gradually buys entrepreneur and banks as capital
the whole parts of the property. provider.
Mutanaqisah means a  MM consist of a Musyarakah
diminishing. Diminishing means (Partnership) contract and an Ijarah
decrease or reduce (Rental) contract where the equity of the
financier follows a diminishing balance
method.
 COMPARISON BETWEEN BBA AND MMP
BBA
Debt financing
More complicated. Buyer only can own the
asset after the full payment of tenure has been
made.
The return of the BBA is based on the fixed
selling price.
The customer almost paying four times the
original cost as it may be burdened for the lower
income group particularly.
Many may be of the opinion that BBA is similar
to conventional loans.
MMP
A joint ownership
More flexible, can owned the property earlier
than by redeeming earlier principle sum of the
bank without the need to compute the rebates.
The bank needs not bind to a fixed profit rate
throughout the financing tenor. The rental can
be revised based periodically to reflect the
current market situation.
There is no interest charge or advance profit
involved as it based on the concept of rental
payments and redeeming the bank’s shares in
the property.
It is accepted internationally as shariah
complaints.
 Elements of MM

1. Shareholders
• The application of MM is in
2. Asset
i. Home financing 3. Capital
ii. Agriculture machinery and financing 4. Rental payment
5. Ijab Qabul (Sighah)= Offer &
iii. Storage facility construction/shed Acceptance
iv. Transport for vehicles
 en
evo
tw
len
ot
par
loa
ties
n
Re
for
pay
soc
me The borrower
ial
nt can pay more
wel
is than the
far
for amount
e
the borrowed so
or
sa long as it is
for
me not stated by
sho
am 6. QARDH AL
contract
rt-
ou
ter HASSAN
nt
m
as
bri
the
dgi
bor
ng
Qardh

ro
Hassan
 OBJECTIVES OF QARDH HASSAN

To help the needy To mobilize wealth among To eradicate unemployment

fellow people people in the society problem from the society
 Definition: Contracts between owner of the
goods and the custodian of the goods which bank
as a wadi (custodian) will kept the property of
Muwaddi’ (depositor) safely and protect goods
from being stolen or destroyed 7. AL WADIAH
 Legality of Wadiah
• Wadiah (deposit) is among the permissible contracts and dealings in Islam. Its
legality is enshrined in the Quran, Hadith and Ijma’.
• Allah s.w.t says: “if you trust one another, then let him who is trusted fulfil his
trust, and let him be conscious of God, his Sustainer” (Al Quran, 2.283)
• “Indeed, Allah commands you to render trust to whom they are due and when
you judge between people, to judge with justice”(Al Quran, 4:58)
• The meaning of the above verses has been strengthened by the saying of the
Prophet p.b.u.h: “And perform the trust (amanah) to those who entrusted you
and do not betray those who betrayed you”. (Sunan Abi Dawud, 3/290).
 Types of Al Wadiah
Wadiah Yad Amanah

Wadiah Yad Dhamanah

• Bank or custodian act as trustee to take
care of the funds
• No guarantee on return of the funds in the
event of loss due to theft, fire, flood, and
other natural disaster
• The different kind of items will kept
differently
Wadiah Yad Amanah (Trustee)
• Bank as a custodian will act as below:
i. Not mixing or pooling the properties
under custody
ii. Not using the property
iii. Not charging any fees for safe custody
• Bank guarantees the refund of property
kept with the bank or custodian.
• Bank will returns (replaces) the
properties to the owner if there were lost
or destroyed.
• Customer allow custody to utilize its fund Wadiah Yad Dhamanah
provided that all profit and losses from (Guarantee)
the utilizing of the funds is the
responsibility by the bank.
• However, bank may gives some incentives
in the form of bonuses (hibah) to the
customer provided that amount is not
agrees in advance, but it is granted
voluntarily.
Salam literally means giving, advance, or
leaving
Technically, Bay al Salam contract refers
to a sale contract whereby the seller 8. Bay Al Salam
undertakes to sell some commodities to (forward sale)
the buyer at an agreed future date in
exchange for a price fully paid in
advance on a spot basis.
Basic Rules and Conditions of a Salam Contract

Conditions
Conditions related to
related to the price
the date (Ra’sal
and place Mal)
of delivery

Condition
related to the
purchased
commodity
(musallam fih)
 • The price must be clearly determined and paid in full
by the buyer at the time of concluding the sale to avoid
1. Conditions related to a later dispute.
the price (Ra’sal Mal) • The seller on the other hand must take possession of
the price in full before leaving

2. Condition related to • The commodities whose quality or quantity is not

determined by specification cannot be sold through a
the purchased salam contract.
commodity (musallam • The quantity of commodity must be agreed upon in
fih) unequivocal terms.

3. Condition related to
• The exact date and place of delivery must be specified
the date and place of in the contract.
delivery
 Istisna’ which derived from the word
Istasna’a means to request someone to
9. Bay al Istisna’ manufacture an asset8. Bay al Istisna’
(manufacturing (manufacturing
Technically, bay al istisna’ sale) as a
is defined
sale) contractual agreement with a manufacturer
to produce items with specified
descriptions at a determined price, and
manufactured from his own materials with
his own effort.
Basic Rules and Conditions of a Istisna’
Contract
The object in istisna’
The object to be contract must be
manufactured must something that
be precisely people are familiar
determined in its with and usually
type, kind, quality commissioned on
and quantity the basis of an
istisna’ contract
 10. Al Ijarah(lease)
Literally, ijarah is the reward given for service rendered.
Technically, ijarah is a contract for the transfer of ownership
of a usufruct for compensation. Thus, the contract of lease is
a kind of contract of financial exchange.
 PILLARS OF
IJARAH
Muajjir : Give something for hire

Musta’jir: Who takes on hire

Ma’jur: Things given for rent

Al-Manfaah: Benefit from a thing

Ujrah: Price /Fee for payment

Sighah: Ijab & Qabul

 TYPES

Based on Subject Matter of Leased Asset

IJARAH AMAL
-To lease out of work or self skills
-Employee (work for interest of particular

employer), independent contractor

(offer
services)
IJARAH MAWSUFA FI AL-DHIMMAH
- Asset need to be described in advance
- Leased asset is not available during contract
- Asset delivered on a future agreed date
 RIGHT APPLY IN AL IJARAH

1.Khiyar al-ru’ya 2. Khiyar al-’ayb

3. Khiyar al-shart 4. Fasakh

MONTHLY LEASE CALCULATION
 11. AR RAHN
Literally , rahn is an Arabic noun derived from the word rahana
which means either constancy and continuity, or holding and
binding.
Technically: termed as pawning, mortgage, collateral, charge,
lien and pledge, refer to taking a property as a security against a
debt, whereby the secured property can be utilised to repay the
debt in the case of non-payment.
Rahn is a charitable contract as it does not require any financial
obligation on the part of the murtahin (i.e., creditor) when rahin
(i.e., debtor) gives him the pawned object.
 OBJECTIVE OF AR RAHNU
• To provide a fast, riba free microcredit financing facilities to the small traders to meet their
working capital needs.
• To provide an alternative source of financing from the conventional scheme.
• To allow individual to fulfill their financing needs without having to resort to other expensive
means such as loan sharks, money lenders and interest based loan.
• To act as a means of fast and less cumbersome financing
• To develop the socio-economic well being of the poor by acting as a source of
• a. Capital to small business
• b. Financing educational needs
• c. Development of agriculture and village industries
• To increase the number of financial instrument under Islamic banking and finance in line with the
government aspiration for a complete and comprehensive Islamic financial system in Malaysia
TABLE OF AR RAHN VALUATION
 12. BAI AL DAYN (SALE OF DEBT)

Means debt trading and its refers to the financing of debts.

Financing is made based on sale and purchase of trade documents.
Bay al dayn can be contracted on a spot basis at a cash price or on
a credit basis at a deferred price.
Provided for the purpose of production, trade and services.
Transactions can only be done on documents which authentically
show that trade does exist.
 TYPES OF BAY’ AL DAYN
• 1. Sale of debt to the debtor on a cash basis
• Example: Ahmad owes Muhammad RM500 and Muhammad sells the
debt to Ahmad for a portion of the land owned by Ahmad.
• 2. Sale of debt to the non-debtor on a cash basis
• Example: Yusof owes Ahmad RM5,000. Ahmad then sells the debt
(RM5,000) to Zaid for a motorbike on a spot basis.
• 3. Sale of debt to a debtor for a deferred price
• Example: Yusof owes Ahmad RM5,000. Ahmad then buys a car from
Yusuf and the price is the debt (RM5,000) itself payable after 10
months.
• 4. Sale of debt to a non-debtor for a deferred price
• Example: Ahmad owes Ali RM500. Ali then sells the debt (RM500) to
Azman for a book payable after 20days.
 BAY AL-INAH

LITERAL :-
TECHNICAL :-

Loan or advance payment The selling of an asset with a

mark up price on deferred
payment, with the intention to
sell the same asset to the debtor
with lower cash price, which the
meant to settle his debt
 CONDITIONS OF BAY AL-INAH
• The Shariah Advisory Council of Bank Negara
1. Malaysia resolved that bay al-inah is
permissible.

• Market players are required to strengthen and

enhance their operational processes and
2. documentation to comply with the features of
bay al-inah as permitted.

• The transaction of bay al-inah must strictly

follow the mechanism which is accepted by the
school of Shafi’i.
3. • The transacted item must not a ribawi item.
• The buyer must receive (take possession) the
good before selling it back to the original seller.
MODUS OPERANDI OF BAY
AL-INAH
14. BAI ISTIJAR
A sale and purchase contract whereby an agreement is made between
two parties, the seller and buyer.

15. HIWALAH
 Literally, derived from word tahwil which means shifting from one place
to another (intiqal).
 Technically: Means transfer of debt from one person (debtor) to another
person.
 Types of Hiwalah: - restricted Hiwalah (Hiwalah Muqayyadah)
- unrestricted Hiwalah (Hiwalah Mutlaqah)
 16. Al UJR

Fees and commission charges for services rendered.