ENMF 0244 Chapter 9 Overview of Islamic Finance PDF

CHAPTER 9 OVERVIEW OF ISLAMIC FINANCE LEARNING OUTCOMES ¡ Explain the element of Maqasid Shariah ¡ Compare three prohibitions in Islamic Finance ¡ Discover major milestone of Islamic Finance both Malaysian and at global experiences (Level 3) CONTENT ¡ Islamic finance and Maqasid Al-Shariah ¡ Ba...

CHAPTER 9 OVERVIEW OF ISLAMIC FINANCE LEARNING OUTCOMES ¡ Explain the element of Maqasid Shariah ¡ Compare three prohibitions in Islamic Finance ¡ Discover major milestone of Islamic Finance both Malaysian and at global experiences (Level 3) CONTENT ¡ Islamic finance and Maqasid Al-Shariah ¡ Basic prohibitions in Islamic finance ¡ Riba, gharar and maysir ¡ Major milestone of Islamic finance ISLAMIC FINANCE: BACKGROUND AND INTRODUCTION ¡ “Financial services that are intended to adhere the Islamic law (Shari’ah)” ¡ Always prevails justice than unilateral profits ISLAMIC FINANCE: THE DIFFERENCE FROM CONVENTIONAL FINANCE ¡ Islamic finance is different than conventional finance in the following aspects: ¡ Framework; ¡ underlying features; ¡ contractual relationships; ¡ mechanism; and ¡ implications FRAMEWORK OF ISLAMIC FINANCE ¡ The Shariah (Fiqh muamalat); ¡ Primary sources for rules and practices: Al-Quran and As-Sunnah; ¡ Secondary sources: ijma’, qiyas and ijtihad. BACK SHARIAH AL-ISLAMIYYAH “The standards of conduct that Muslims must follow in their life” MAQASID AL-SHARIAH ¡ The objective of the Shariah are: ¡ The realization of benefit to the people, ¡ concerning their affairs both in this world and the hereafter, and ¡ protecting them against harm and evil. ¡ Aims to protect the maslahah. MASLAHAH (PUBLIC INTEREST) ¡ The essentials (Daruriyyah) ¡ The complementary (Hajiyyah) ¡ The embellishment (Tahsiniyyah) DARURIYYAT ¡ Matters on which the religion and worldly affairs of the people depend upon. ¡ Neglect of the matters will lead to total disruption and disorder. ¡ Must be protected and safeguarded by individuals or by the government authorities DARURIYYAT: THE FIVE PRESERVATIONS ¡ Religion ¡ Life ¡ Lineage ¡ Intellect ¡ Wealth PROTECTION OF RELIGION ¡ The most important protection. ¡ Obligatory among Muslims to protect. ¡ Personal level: the ibadah (prayers, fast, zakat, hajj) ¡ General level: the defense of Islam and the faith against the enemy of Islam. BACK PROTECTION OF LIFE ¡ Essential to all, it is a gift from Allah to all human being. ¡ Example: Prohibition of killing, suicide and imposition of qisas (retaliation). BACK PROTECTION OF LINEAGE ¡ Reflects the importance of protecting dignity. ¡ Lineage in Islamic law: one of the most fundamental human rights that every individual inherits from his or her family. ¡ Islam regulates the relationship between men and women; ¡ Prohibition of adultery, prostitution and khalwat ¡ Encouragement of marriage ¡ To mitigate social issues related to illegitimate heirs BACK PROTECTION OF INTELLECT ¡ The responsibility as a khalifah is given to man because of his intellect – implies the importance of intellect. ¡ To safeguard from anything that might harm the ability and function of the brain ¡ consumption of liquor and drugs. BACK PROTECTION OF WEALTH ¡ Ownership of wealth must be legally recognized ¡ To generate, accumulate, preserve and distribute wealth in a just and fair manner. ¡ Punishments for stealing the property of others ¡ Prohibition of riba’, gambling and other forbidden activities. BACK UP HAJIYYAT “The kinds of interests in which neglecting them leads to hardship to the individual or community, but it does not lead to total disruption” HAJIYYAT ¡ Shari’ah aims at facilitating life or removing hardships ¡ Includes all provisions of Shari’ah that: ¡ facilitates life; and ¡ removes hardships ¡ Examples: Rukhsah for travelers and the sick UP TAHSINIYYAT ¡ Embellishments that lead to improvement and attraction. ¡ Does not interrupt the normal life or cause hardship in its absence ¡ Examples: use of luxury cars, living in big mansion and the likes. APPLICATION OF MAQASID AL-SHARIAH IN THE WORLD OF FINANCE ¡ There is a hierarchical basis to the types maslahah and within the elements of Daruriyyat; ¡ Financial instruments must be Shariah compliant, ¡ Outcome of any financial project must not go against any preservation of five elements in daruriyyat. PART 2: BASIC PROHIBITIONS IN ISLAMIC FINANCE (RIBA) ¡ Usury (unreasonably high rates of interest). ¡ Definition: ¡ Literal: increase, addition, expansion, or growth. ¡ Technical: predetermined excess over the loan received in a specified period, regardless of whether the increase or growth is large or small. QURANIC VERSES ON THE PROHIBITION OF RIBA ¡ Surah Al-Baqarah: 275, “But Allah has permitted trade and has forbidden interest.” ¡ Ali Imran:130, “O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.” ¡ Others: Al-Baqarah: 276-278, An-Nisa’:161 and Ar-Rum: 39 ¡ Allah has warned those who disregard the prohibition of interest to be the enemy of Allah and the Prophet Muhammad S.A.W. HADITH ON THE PROHIBITION OF RIBA Narrated 'Umar bin Al-Khattab: Allah's Apostle said, "The bartering of gold for silver is Riba, (usury), except if it is from hand to hand and equal in amount, and wheat grain for wheat grain is usury except if it is from hand to hand and equal in amount, and dates for dates is usury except if it is from hand to hand and equal in amount, and barley for barley is usury except if it is from hand to hand and equal in amount." (Translation of Sahih Bukhari, No.344) TYPES OF RIBA ¡ Riba al-nasiah ¡ Literally means postponement. ¡ Practiced in conventional loans. ¡ Repayment is postponed for an increased over the principal amount. RIBA AL-NASIAH: EXAMPLE Saif borrows RM10,000 from X for an agreed period of 1 year. However, he cannot pay in time. X put condition for Saif to pay an additional amount of RM500 to receive a credit extension. Now the current debt is RM10,500, however, if Saif continuously fails to pay and asks for postponement again, the debt will increase to RM11,000. TYPES OF RIBA ¡ Riba al-fadl ¡ Literally excess in term of quantity. ¡ Exchange of unequal amount of the same commodity; or ¡ when the amount is equal but one of the commodities is delivered later. RIBA AL-FADL: EXAMPLE ¡ Exchanging 5 grams of gold (grade 916) with 6 grams of gold (grade 750). This is haram because both items should be of equal weight. ¡ Exchanging or selling 10 grams of basmati rice with 15 grams of A1 graded rice. This is also haram because both items should weigh 10 grams. ¡ Examples of commodity which has effects on riba are gold, silver, wheat, barley, dates and salt. RIBA AL-FADL: HADITH Ubadah ibn-e-Thabit (RA) narrated that Holy Prophet (SAWW) said: ¡ “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt;” ¡ “like for like, equal for equal, and hand-to-hand;” ¡ “if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand.” IMPLICATIONS OF THE HADITH ¡ The exchange should be made on the spot; and ¡ The amount of the exchange commodities must be equal. PROHIBITIONS OF RIBA: THE RATIONALE ¡ To promote economically just, socially fair and ethically and correct economic behavior; ¡ Riba’ violates the principle of property rights; ¡ Promotion of profit-and-risk-sharing; ¡ Act of lending is an act of charity. Lending should be a benevolent act. If money is needed other than for commercial purposes (thus, risk sharing), such need should not be exploited where the borrower is put under undue burden. PROHIBITIONS OF RIBA: THE RATIONALE (CONT) ¡ To charge interest from someone who is constrained to borrow to meet his essential consumption requirement is considered an exploitative practice in Islam; ¡ Interest can lead to injustice and exploitation in society. The Qur’an (2:279) characterizes it as unfair, as implied by the word zulm (oppression, exploitation, opposite of adl i.e. justice) RIBA IN BANKING ¡ Riba or interest is the predetermined interest collected by the bank, which the bank receives over and above the principal amount that has been lent out to the borrower. ¡ Example: An individual borrow money of RM50,000 from a bank and later he will need to repay the principal amount plus the interest charged. PART 2: BASIC PROHIBITIONS IN ISLAMIC FINANCE (GHARAR) ¡ Definition: ¡ Literal: uncertainty, ambiguity. ¡ Technical: the sale of probable item whose existence or characteristic are not certain. ¡ Gharar happens when the parties are unaware of what they will receive when they enter into a contract. LEGAL BASIS ON THE PROHIBITION OF GHARAR “ A n d d e v o u r n o t o n e a n o t h e r ’s p o s s e s s i o n s wrongfully, and neither employ legal artifices with a view to devouring sinfully, and knowingly, anything that by right belongs to others” (2:188) LEGAL BASIS ON THE PROHIBITION OF GHARAR “O you who believe! Eat not up your property among yourselves in vanities: But let there be amongst you traffic and trade by mutual goodwill nor kill (or destroy) yourselves; for verily Allah has been to you Most Merciful!” (4:59) LEGAL BASIS ON THE PROHIBITION OF GHARAR “Ahmad and Ibn Majah narrated on the authority of Abu-said Al-Khudriy: Muhammad (S.A.W) has forbidden the purchase of the unborn animal in its mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver”. LEGAL BASIS ON THE PROHIBITION OF GHARAR “Narrated Hakim ibn Hizam: Hakim asked the Prophet: Apostle O Allah, a man comes to me and wants me to sell him something which is not in my possession. Should I buy it for him from the market? He replied: Do not sell what you possess. AVOIDING GHARAR ¡ Pillars of transaction must exist: ¡ offer, acceptance, parties and subject matter; ¡ The quantity and the quality of the subject matter must be made known to contracting parties; ¡ Other details such as: ¡ the price, the date of payment and date of delivery of the subject matter must be made known to contracting parties. EXAMPLE OF GHARAR IN A TRANSACTION Arif sells an asset when the asset is not yet in his possession. There will be possibility that he may not be able to deliver it. In this situation, the transfer of ownership or rights cannot be executed as agreed between parties. FACTORS OF GHARAR ¡ Absence or Incomplete Ownership ¡ Non-Possession of The Object ¡ Insertion of Ambigous Stipulation PART 2: BASIC PROHIBITIONS IN ISLAMIC FINANCE (MAYSIR) ¡ Definition: ¡ Literal: derived from ‘yasira’ (to be easy) and ‘yassara’ (to succeed). ¡ Technical: the easy method used in order to obtain something or the acquisition of wealth by chance, whether or not it deprives the other’s right. It includes all kinds of gambling. MAYSIR (CONT) ¡ Maysir or gambling can be said to be a game of change and luck that involves the exchange of money or other valuables upon the uncertainty. ¡ Ibn Qayyim al-Jawziyyah opines that the maysir consisting of two players who compete with elements of gain and loss where the winner obtains gain from the loss of the other. LEGAL BASIS ON THE PROHIBITION OF MAYSIR ¡ Surah Al-Maidah verse 90 “O you who believe! Intoxicants (all kinds of alchoholic drinks), and gambling, and AlAnsab, and Al- Azlam (arrows for seeking luck or decision) are an abomination of Shaitan’s handiwork. So, avoid that in order that you may be successful.” LEGAL BASIS ON THE PROHIBITION OF MAYSIR ¡ Surah Al-Baqarah verse 219 “O you who believe! Intoxicants (all kinds of alchoholic drinks), and gambling, and AlAnsab, and Al- Azlam (arrows for seeking luck or decision) are an abomination of Shaitan’s handiwork. So, avoid that in order that you may be successful.” “They ask you about wine and gambling. Say, "In them is great sin and [yet,some] benefit for people. But their sin is greater than their benefit." And they ask you what they should spend. Say, "The excess [beyond needs]." Thus, Allah makes clear to you the verses [of revelation] that you might give thought.” FACTORS OF MAYSIR IN A CONTRACT ¡ Creation of risk for its own sake. ¡ Combative relationship between two contracting parties. ¡ Risk of a total loss or complete gain for one party alone and the loss means the gain for the other. ¡ Game of pure chance (no economic activity) and the gambler acquire wealth without effort. RATIONALE OF PROHIBITION OF MAYSIR ¡ It can create hatred and anger between members in the society. ¡ Risk of losing a lot of money and leave individuals heavily in debt. ¡ Destroy family institution. RATIONALE OF PROHIBITION OF MAYSIR (CONT) ¡ Individuals could become addicted to gambling which may prevents them from performing their prayers and other obligation. ¡ Lead to the dissatisfactions from either the loser or the winner on the outcome of the contract. PART 3: MAJOR MILESTONE OF ISLAMIC FINANCE (GLOBAL) ¡ Emergence of Islamic Banking ¡ Introduction of Takaful ¡ Establishment of the standard-setting bodies for Islamic financial institutions ¡ Global Sukuk Issuance ¡ Islamic Finance Education ¡ International Islamic Financial Centres PART 3: MAJOR MILESTONE OF ISLAMIC FINANCE (MALAYSIA) ¡ Establishment of Bank Islam Malaysia Berhad (BIMB) ¡ Introduction of Islamic Banking Act 1983 ¡ Formation of the Shariah Advisory Council (SAC) ¡ Launch of the Kuala Lumpur Islamic Financial Market (KLIBOR) ¡ Creation of the Labuan International Business and Financial Centre (Labuan IBFC) PART 3: MAJOR MILESTONE OF ISLAMIC FINANCE (MALAYSIA) ¡ Sukuk Market Development ¡ Establishment of the International Centre for Education in Islamic Finance (INCEIF) ¡ Launch of Islamic REITs ¡ Introduction of Islamic Financial Planning Services (IFPS) ¡ Expansion of Islamic Banking and Takaful (Islamic Insurance) END OF SLIDES