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Dr. Dr. MohdMohd FuadFuad MohdMohd SallehSalleh20102010

General Principles in Islamic Mu`amalah

• All exchange should be with consent of the parties concerned

• Full ownership and eligibility of the contractual parties –voluntary, no misstatements and no mistakes

• The contract object must be clearly mentioned: the types, the amount, can be surrended, useful and clean (pure) according to Islamic syari`ahamount, can be surrended, useful and clean (pure) according to Islamic syari`ah

• Free from riba’, gambling (al-maisir), preventable ambiguity or uncertainty (al-gharar) and other prohibited action

• Free from oppression: excessive profit (Ghabn al-Fahsy), hoard (Ihtikar), blockade from the market (Talaqqi al-Rukban).

Mohd Fuad May 2010

Why Islamic Finance

• The Islamic Ruling (Syari`ah) specifies rules that relate to:

� the allocation of resources

�property rights

�production and consumption

�the workings of markets

�the distribution of income and wealth

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The Rules Relate to:

� The allocation of resources

� Islam looks at wealth as life sustaining, to be used efficiently

“Give not unto the foolish your wealth which Allah has made a means of support for you”. (Quran, 4:4).

� Property rights

� Private ownership is affirmed but viewed as a trust� Private ownership is affirmed but viewed as a trust

“Believe in Allah and His messenger, and spend of that whereof He hath made you trustees.” (Quran, 57:7).

� Muslims are obligated to fulfill contracts and keep their promises:

“O you who believe fulfill your undertakings”. (Quran, 5:1)

Mohd Fuad May 2010

The Rules Relate to:

• Production and consumption

� Use of wealth and exercise of freedom of enterprise is

constrained by the obligation not to harm others. The Prophet ruled:

“No injury, and no inflicting of injury”. (Ibn Maja, Sunan: chapter “No injury, and no inflicting of injury”. (Ibn Maja, Sunan: chapter on Ahkam)

Mohd Fuad May 2010

The Rules Relate to:

• The workings of markets

� Islam encourages enterprise, efforts to create wealth, which

has been characterized as God’s bounty:

“And when prayer is ended, then disperse in the land and seek Allah’s Bounty”. (Quran, 62:10)Allah’s Bounty”. (Quran, 62:10)

� All exchange should be with willing consent of the parties

concerned:

“O you who believe squander not your wealth among yourself in vanity except it be a trade by mutual consent”. (Quran, 4:29)

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The Rules Relate to:

• The distribution of income and wealth

� Obligation to care for others and share with them

“O you who believe squander not your wealth among yourself in vanity except it be a trade by mutual consent”. (Quran, 4:29)

� This is symbolized by the well-known duty of paying Zakat or � This is symbolized by the well-known duty of paying Zakat or

poor tax

� This is a spirit of a cooperative and helpful behavior .

“Who hath created life and death that He may try you, which of

you is best in conduct”. (Quran, 67:2).

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TWO TYPES OF FINANCING

�Equity Financing (Sharing of capital)

�Al-Sharikah

�Al-Mudharabah�Al-Mudharabah

�Debt Financing (Loan)

�Al-Murabahah

�Al-Qard al-Hassan

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EQUITY FINANCING

Al-SharikahAl-Sharikah

(Partnership Contract)

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Definition: A contract between two or more parties, entrepreneur and investor, who share their capital, reputation, or expertise to share profit and loss.

Two Catagories:i. Sharikah al-Aqd or al-`Uqudi. Sharikah al-Aqd or al-`Uqud

– contract between two parties to share capital or assets

ii. Sharikah al-Milk or al-Amlak– ownership on an assets by two parties without using as-Sharikah contract.

Mohd Fuad May 2010

Three Types of Sharikah al-Aqd :

i. Assets Partnership (Sharikah al-Amwal) capital sharing in terms of assets.

ii. Labor Partnership (Sharikah al-Amal or al-Abdan) capital sharing in terms of expertise Abdan) capital sharing in terms of expertise or skills.

iii. Reputation Partnership (Sharikah al-Wujuh)capital sharing in terms of reputation or goodwill.

Mohd Fuad May 2010

Methods of Al-Sharikah :

Hanafi�Sharikah al-Mufawadah

Equal share or contribution, profit sharing and management. Each shareholder become a gurantor to each other.

Maliki�Sharikah al-Inan

Sharing of assets or capital to run a business and profit will be shared amongst themselves.

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AL-MUDHARABAH

(Profit Sharing Contract)(Profit Sharing Contract)

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DEFINITION :

• A contract of profit sharing between the capital owner or the investor (Ra’s al-mal) to give the assets to the entrepreneur (al-‘Mudharrib) to be used in business with the ‘Mudharrib) to be used in business with the condition that profit will be shared justfully.

Mohd Fuad May 2010

Two Types of Mudharabah

1) Complete (al-Mutlaqah)where the assets or capital are given tobe used in business without anyrestriction or condition.

2) Conditional (al-Muqayyadah)the assets or capital are given with somerestrictions or conditions.

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DEBT FINANCINGDEBT FINANCING

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DEBT FINANCINGDEBT FINANCING

��Bay’ alBay’ al--Murabahah Murabahah (cost plus) .(cost plus) .

��Bay’ alBay’ al--Salam Salam (future contract or deferred(future contract or deferred--

delivery sale)delivery sale)

��Bay’ alBay’ al--Istisna’ Istisna’ (contract to build or make)(contract to build or make)

��alal--IjarahIjarah (Leasing)(Leasing)��alal--IjarahIjarah (Leasing)(Leasing)

��Bay’ biBay’ bi--Thaman ‘Ajil or Bay’ alThaman ‘Ajil or Bay’ al--Mu’ajjal Mu’ajjal

or Bay’ alor Bay’ al--Taqsit Taqsit (Deferred / installment payment)(Deferred / installment payment)

��Qard alQard al--Hassan Hassan

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�Borrower need only to repay the total loan (principle) without any additional amount.

�No profit

�The only loan type permitted by syari`ah.

QARD AL-HASAN

�The only loan type permitted by syari`ah.

�The purpose is for economic and social justice.

�Loan is only to help the people who are in need..

�Islam encourage the borrower to pay more as a gift and not determined by the money-lender.

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Forbidden Activities

• Activities that are considered harmful to society:

– Alcohol.

– Pork production.

– Illegal / intoxicating drugs.– Illegal / intoxicating drugs.

– Gambling.

– Pornography.

– Arms production.

Mohd Fuad May 2010

Flexibility of Islamic finance• It is not dogmatic rule-making.

• Attitude is: “how can we make this happen?”, “Lets do business.”

• Exceptions are permitted (but not encouraged) • Exceptions are permitted (but not encouraged) when no alternatives exist.

– Example: Investing in the common stock of leveraged firms is permitted, but the amount of leverage permitted is limited and that portion of investor return must be “purified.”

Mohd Fuad May 2010

The Islamic Market

• 20% of the world population.

• Not just “furriners” – domestically, between 6 million and 8 million people.

• 2.3 million households.• 2.3 million households.

• Rapid growth – 6% annual.

• Young, highly educated, professional.

• Affluent - above average income.

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Google search on

‘Islamic Banking’

yields this on the first

page.

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Equity Investment

• Acceptable if the firm does not engage in prohibited practices mentioned above.

• Some leeway is possible – previous mention of riba.riba.

• Dow Jones Islamic Indexes.

• Listing of firms providing Islamic investments in bibliography.

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http://www.ftse.com/indices_marketdata/global_islamic/index_home.jsp

http://www.djindexes.com/mdsidx/index.cfm?event=showIslamic

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Sukuk – Islamic “Bonds”

• Conventional bonds are riba, and are forbidden.

• But, again, a transacation structured on an asset base is permitted.

• A series of payments arising from an asset-based transaction may be traded at a market price!transaction may be traded at a market price!

• This type of arrangement is referred to as Sukuk, sometimes called “Islamic bonds.”

Mohd Fuad May 2010

http://www.noriba.com/sukuk.htm

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are needed to see this picture.

http://www.euromoneybooks.com/default.asp?page=4&productID=3099

Mohd Fuad May 2010

Takaful - Islamic Insurance

� Principle of gharar, or avoidance of risk / uncertainty / gambling.

� Gharar does not apply to reasonable, unavoidable business risk.

� Also, standard Insurance contracts often have interest component.

� It is quite acceptable, however, to form a mutual group for self-help and risk avoidance.

Mohd Fuad May 2010

Takaful - Islamic Insurance

� Resolution of the problem is that the mutual form of insurance can be made Islamically acceptable.

� Stock Insurance companies are not acceptable.� Stock Insurance companies are not acceptable.

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http://www.takaful-malaysia.com/ (Malaysia)

http://www.imanlinc.com/ (U.S.A)

http://www.takaful.com/ (Indonesia)

Mohd Fuad May 2010

Conclusion

� Islamic finance is not just for Muslims!

� Already a sizeable but underserved market, both domestic and international.

� Rapidly growing and developing.

� Opportunity to do well while doing good!

Mohd Fuad May 2010

That’s it for today…today…

Wassalam

Mohd Fuad May 2010