Islamic Financial Policies in Malaysia

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

Introduction

Through this financing we would see how Bank Islam manage their financing techniques and try to differentiate the different types of financing under the two major categories as mention earlier. Financing such as Mudharabah, Ijarah and Al_rahn and others will be discussing more as we go along.

Also this paper will discussing the connection of takaful with the financing techniques offered by the Bank, because in making finance we would like to know the coverage that the bank can offer, so that why takaful is introduced by the bank in 29 th, November to cater for the coverage needed by the people.

The primary goal of Islamic Banking and finance is the development of economic resources and regulations of the monetary and financial policies of the Muslim Ummah in accordance with the Syariah. Islam has a unitary approach to life. It considers man to be an integral whole. In other words, the numerous functions that he performs, e.g. economic, political, social, in line by his moral values, by his cultural heritage and above all, by his religious belief.

CENTRAL IDEA

Financing is crucial for an entrepreneur who wish to start new venture, or simply we could give an example a person who wish to start a new business or to buy a new house, a new car or maybe for personal financing. Since it is an important decision, so each person must make the right decision in determining the right kind of financing that would not only give the best method of finanving but also provide him or her with the coverage if things does not turns out to be what they expected.

Therefore, Bank Islam has introduced their own version of financing to cater for the society in need, especially the Muslims. They are very skeptical with the contents of the conventional type of financing. The idea of Islamic financing is to provide the financing and also to provide the coverage for the participants. An additional benefit is to encourage Muslims entrepreneur to expand their business and compete in the market with other Non-Muslims entrepreneur.

Besides, takaful also provided as the coverage to the participants if they face problems with their business or unable to repay their loans due to the unforeseen circumstances. The coverage provided is directly related with the type of financing offered by the bank.

APPLICATION OF ISLAMIC FINANCING IN ISLAMIC BANKING

Debt Financing

Al-Rahn (Rahnu)

Ar-Rahn means to hold a maal as a mortgage to a loan in such a way that the loan can be settled from the value of the mortgaged maal in case of default or inability to pay. Islamic banks are like other conventional bank, which prefer to secure a loan either through personal surety (guarantor) or a pledge.

Syariah Ruling

The Quran also supports the idea of furnishing a pledge against a debt. It is laid down in Surah al- Baqarah 2:283;

“…And if you are on a journey and cannot find a scribe, pledges (may be taken) in hand, but if trust one another, then let them who is fulfill his trust, and let him be conscious of god, his sustainer…”

In Majelle Article 701 defines Al-Rahn as “…to make a property a security in Respect of a right of claim, the payment in full of which from that property is permitted”

Hadith:

Narrated by Bukhari and Muslim from Aishah r.a. “Verily the Messenger of Allah SAW bought some food from Yahudi and he mortgaged an iron armour”.

Application of Al-Rahnu

Al-Rahnu is used for the shorter period of loan. This scheme will enable a person to obtain an immediate amount of money for financing. Bank Islam Malaysia Berhad (BIMB) collaborated with the Yayasan Pembangunan Ekonomi Malaysia (YPEIM) in introducing this scheme. Customer will have to offer collaterals such as gold bar or gold jewelers without the precious stone.

BIMB plays a role in the field of al-rahn/mortgage to guarantee the safety of customer’s properties while dealing with customers, such as managing debts, selling with deferred payment which the liability of the second party in guarantee. So, BIMB could use al-Rahn or mortgage to the customer.

A person can secure a loan of the maximum amount of RM 5,000.00 or up to the 60% of the market value of the collaterals or the gold whichever is lower.

E.g. The gold cost price= RM 10,000.00*60%=RM 6,000.00

Still the loan is limited to only RM 25,000.00.

The amount of financing is up to 6 month only.

The process that is taken to secure the loan is:

The Bank charges a fee for the custody of the collateral.

This scheme can be related to the General Takaful that is, the Takaful Mortgage Plan. The Takaful will guarantee the payment of financing due the event of death or other circumstances.

Al-Ijarah

It literally means to give something on rent. Technically, ijarah means employing the services of a person on wages given to him as a consideration for his hired services or transferring the usufruct of a particular property to another person on a rent claimed from him. There are two types of Ijarah, ijarah al-Ain and ijarah al’amal.

Syariah Ruling

Al-Quran mention about Ijarah:

Surah Al-Saff verse 2

“O you who believe, why do you profess what you not practice?” (61:2)

Surah Al-Saff verse 3

“Saying what you do not practice is odios to God.” (6:3)

Surah Al-Qasas verse 26

“Trully the best men for you to employ is the man who is strong and trusty.”(28:26)

Hadith:

Prophet Muhammad said that, “Give the employee his due wage before his sweat dries.”

Al-Ijma’:

All scholars from sahabah time agree that ijarah is permissible since people need benefits.

Application of Ijarah

In the direct leasing financing, the lessee is required to pay the amount equivalent to the purchase/market price of the object, as the lease rent. This contract is called the “Hire Purchase Finance” (Ijarah thumma al-iktina/Bay).

The process as follows:

The asset cost = RM 100,000.00 Duration of rental = 20 years

RM 100,000.00/20/12 = RM 416.67

Payment/month = RM 416.67.

This relates to the General Takaful of Takaful for house owners, where they have a coverage if they arrive to the point that they would not be able to pay, then cost will be bears by others participants first.

Al-Qard (loan contract)

Qard literally means to cut that means it cut part of the lender’s property. Technically, it is a contract of payment to be repaid with the same.

Syariah Rulling

Syariah disallows a bank to prescribe profit at the time of contract. Hadith provides that, “Every loan which is draws benefit is Riba”. Therefore, contract of loan in Islamic finance is called benevolent loan (Qard al-hasan). But it is recommended for the borrower to give something in return for the benevolent act of the bank. The two hadith of the prophet are self-explanatory:

In another narration by Anas that Prophet Muhammad SAW said which mean;

“I saw on the night I was journeyed, written on the door of ‘al-Jannah’: ‘sadaqah’ is rewarded ten folds its amount; whereas a loan is preferred to charity. He answered; a begger asks for (something) and he has (which means he is not in real need). A debtor will ask for a loan unless he is in real need.”

In narration by Ibn Mas’ud that Prophet said which means;

“Not so a Muslim whenever he gives loan (al-qardh) twice, except it is like one sadaqah”.

From the narration of Abu Hurairah, who said that the Prophet said: “Whoever relieved/banish from a Muslim a burden/ sorrow of this world, Allah will relieve fromhim a burden/sorrow of the next world, and whoever make someone in an impoverished circumstances happy, Allah will make him happy in this world and in the next world; and Allah is ever ready to help his servant(man) if the servant is ever ready to help his fellowman”.

Another hadith related with qard is,

Prophet said, whoever performs a good deed to you, you should reciprocate. If you can’t afford to do so, pray to Allah for his pleasure to express your gratitude.

Application of Qard In Modern Islamic Banking

Currently, the practice of Qard al-hasanah is limited to discharging a bank social or charitable obligation and in buying Government Investment Certificates (GICs).

Personal financing practices Qard al hasanah.

Al-Murabahah (mark-up lump payment sale)

Murabahah derived from the word ribah that means profit or gain. Murabahah is generally defined as a sales plus profit margin, which is the profit margin or mark-up is created purely due to time.

Many Islamic banks and financial institutions are using Murabahah as an Islamic mode of financing. This term is commonly used in the economic circles today as a method of banking operations, even though the original concept of “Murabahah” is different from the normal assumption.

In Murabahah, if seller agrees with his buyer to provide a specific commodity with a certain amount of profit added to his cost, it is called Murabahah transaction. This profit may be in the form of a fixed lump sum or based on a percentage. Payment in Murabahah can be done either on spot or at a future date as agreed by the parties. Murabahah is different from other kinds of sale because the seller in Murabahah expressly tells the buyer how much cost he has incurred and how much profit he is going to charge in addition to that cost.

The term “Murabahah” means a sale. Islamic banks and financial institutions use this kind of sale by adding some other concepts to it as a mode of financing. The validity of such transactions, however, depends on some condition, which should be duly observed to make them acceptable in Syariah.

Bank Islam normally buys the asset at the market price, and then sells back to the consumers at the cost or selling price, here there are no risk-taking, which is the element of gharar and value addition riba. Bank can add the value of risk-taking or ghurmi, for example in risk taking, the bank must hold legal ownership before it can sell the goods to customer. With legal ownership, it bears the risk of not making a sale if the customer changes his mind, which he is the customer, has the right to do so. Without legal ownership, the bank is functioning a financier and this is not what the Quran intended it to be. In addition to the ownership factor, the bank is also must honor the customer option to reject the good for damages if the goods were found defective or not delivered within specification.

Application of Murabahah

Vehicle Financing

This type of financing will enable a customer to own the car that they desire. With the deferred payment customer will be able to the full amount. The financing is applicable to any national or non-national cars.

As in General Takaful, there is the coverage for the Commercial vehicle. Customers who do not make any claims can have two benefits;

Murabahah trust receipt, the bank provides the source of financing while in conventional trust receipt is set up as trade financing loan. In Islamic trust receipt, the bank buys the goods from supplier and sells it again to customer at a credit price. Customer will pay in lump sum. The mark-u or profit is equal to credit price minus cash price. For example:

Al- Bai’ Bithaman Ajil (BBA) (deferred /credit sale)

Al- Bai’ Bithaman Ajil is very similar to Murabahah. BBA is a long-term credit sale/deferred sale where payments are paid by installment. Profit created from BBA is halal or permissible exchange is based on a sale contract. Rules of BBA are:

The diagram above shows that the practice of BBA. From the above diagram, a customer named Mr Muhammad decides to buy goods from owner or seller but he does not have enough money to pay in cash. [This can be shown in point (1) ]

Bank purchases asset from the owner at RM 40 000. [Point (2)] Bank sells the asset to Mr Muhammad at RM40 000 + profit margin. This is the selling price. [Point (3)]. Customer repays the selling price by installment in 5 years. Profit margin is RM 14 000. So selling price is RM 54000. From this we can see that Mr Muhammad has to pay RM 900.00 a month. [Point (4)]

The different between murabahah and BBA:

The al-Baiti home financing offered by the bank will enable the customer to own their dream house. Under the Bai-Bithaman Ajil can deferred their payment with equal monthly payment.

Application of Al-Bai-Bithaman Ajil

House Financing (al-Baiti)

This relates to the Takaful in two types:

EQUITY FINANCING

Al-Mudharabah

Mudharabah also known as Qirad or Muqaradah. It is a special kind of contract of partnership based on risk and profit sharing in which one party provides funds (Rabbul Mal) and the other provides work and management (Mudharib)

Syariah rulings

The scholars of all schools of Fiqh are in agreement that al- Mudharabah are allowable based on the indications from al-Quran, as-Sunnah, al-Ijma’, and al-Qiyaas.

Allah said in surah al-Muzammil (73:20)  

…and others traveling through the land, seeking of Allah’s bounty. Surah al-Jum’ah(62:10)

 …and when the prayer is finished, then you may disperse through the land and seek of the bounty of Allah. Surah al- Baqarah(2:195)

“and spend of your substance in the cause of God, and make not your own hands contribute to (your) destruction; but do good; for God loveth those who do good”.

All the above verse indicates that the contract of mudharabah is allowed upon the wealth.

Hadith:

From the hadith narrated by Ibn Abbas who said, which means; ‘Sayidna Abbas bin Abdul Mutalib when he handed over his wealth for Mudharabah, he made a condition to his friend (the worker/mudharib) not to trade his wealth overseas, in the valley and not to use the wealth to buy animals. If the condition is broken the worker is responsible for any loss. The Mudharabah and its condition came to the knowledge of the Prophet SAW and his approved.

In another hadith narrated by Ibn Majah, from Suhaib r.a. that the Prophet s.a.w. said which means: “Three things in which there are blessing (from Allah); sale barley for home (consumption) and not for trade”.

There is other trade arrangement in the form of Mudharabah approved by Umar (therefore became his sunnah) and in another it became a consensus of the companion.

Application of Al-Mudharabah in Islamic Banking

In Mudharabah banking, there actually be two separate contract between three parties; the suppliers of the capital (depositor or Rabbulmal), the intermediary links (banks) and the users of capital (mudharibs or manager).

The first contract is, banks will receive deposits of various kinds from the public on the basis of Mudharabah and will have the share of profit (or loss) with them on certain mutually agreed terms. The second contract is when bank then used this funds by advancing loans to individual businessmen or firms on the same principle of profit sharing with them .To have more understanding of the principles of Mudharabah in an Islamic banking system, we can use diagrammatic illustration below.

In contract of Mudharabah above, depositor (rabbulmal) put the money into the bank as a capital. Eg.10 000.Then the bank gives the money as an investment in second tier. In second tier profit will be shared between bank and entrepreneur say, at a ratio of 45:55 (45% for bank and 55% for entrepreneur. If the contract is gain, bank receives $45 for every $100 profit and entrepreneur receives $55 for every $100 profit. In first tier, profit will be shared between bank and depositor at a ratio say 55:45. (55% and 45% respectively.) The bank gets $55 and depositor gets $45 for every $100 profit of business.

According to example above, total investment of the Mudharabah bank is $10,000 and net profit from the business enterprise is e.g. $1000. In second tier the entrepreneur will get net profit $550 (55%*1000) and Mudharabah bank get net profit $450 (45%*1000).

Now, bank has to share profit with the depositor at the same ratio. So, Mudharabah bank receives $247.5 (55% of $450) and depositor receives $202.5 (45% of $450). At last depositor will get $10202.5 (10,000 + 202.5) from the business. (Gain)

If loss, for example Mudharabah bank invest $10,000 to entrepreneur and get $8000.The loss will be bear to depositor (rabbulmal) not entrepreneur (mudharib).

Issue on the practice of Mudharabah in prohibition of interest

Prohibition of interest to be substituted by the practice of Mudharabah will be able to channel more funds. Engaging in Mudharabah would satisfy the ethical and Islamic requirements of using funds productively, and not involve in riba’. It may draw funds currently held under the matters by devout Muslims dissatisfied with conventional banking. The Different between the Mudharabah bank and conventional bank in term of interest are as below.

If there is gain in Mudharabah bank, payment will be calculating based on profit. For example, when rabbul mal give $10,000 to Mudharib with a profit ratio 40:60, Mudharib will give $400 for $1000 profit to rabbul mal. Means that, rabbul mal will receive $10400 as a return. If business incurred loss, it will be bear by rabbul mal.

In Conventional banks, when they give loan to entrepreneur, eg $10,000 with fixed interest such as 4% per annum. Entrepreneur has to pay principle as well as the fixed interest regardless he/she gain profit or incurred loss. In this case, Entrepreneur must pay $104 to bank.

In the both examples above, clearly state that concept of Mudharabah is suitable to practice nowadays because profit not based on interest. In Conventional bank, because interest is fixed, so it will make burden to entrepreneur if the business incurred losses.

Another objection is that, when the interest rate is reduced to a very low rate under an interest free economy, there will be a great rush on the bank for contracting loans causing the demand for money exceeds the supply. Then there will be an addition to the total quantity on the money market, which will lead to inflation with all its consequences.

Musharakah

Musharakah is originated from the discussion of shirkah (company of partnership) Shariah defined Musharakah as a participative arrangement in which two or more person enter into a contract of business participate in the management of the project have right in favor of any specific partner.

It is divided into two forms:

According to the equity participations the bank will be one of the shareholders of the company. This is similar to the venture capital investment. Usually, this happens for newly set company and also the existing company which bank has a representative who sit on the bank board of directors. Bank will receive return in term of dividend and or any disposal of shareholding.

Where as for the joint venture projects, the bank will finance any of the selected projects of the company and will share the profit and loss of that particular project based on the agreed ratios.

Causes of Failure Of the Islamic Banks adopting Musyarakah’

Al Wadiah

Al-Wadiah can be defined as contract of trust or safe keeping. There are two types of Al-Wadiah contract.

The former is more practical in the modern bank currently.

There are two wadiah account involve in Bank Islam which are current account and saving account. For saving account, Bank Islam can use customer’s money to invest in short term project. Bank Islam is responsible to the safety of money in the concept of guarantee (Yad-Dhamanah).

While the same thing for current account, however Bank Islam has less opportunity to use / invest the money because owner will take back his wadiah at any time he / she likes by using cheque. By the way, Bank Islam can charge some amount of payment on current account.

Application of Al-Wadiah

The bank accept Deposits from its customers looking for safe custody of their funds and absolute convenience in their use in the form of current account or saving account. The bank request permission (written in the contract) from customers to make use of their funds so long as these funds remain with the bank. The customers to may withdraw a part or the whole of their balance at any time and the bank guarantees the deposits at all times and circumstances. In return all profits generated from the depositor’s money belong to the bank.

RECOMMENDATIONS

Recommendations to the individual as well as the community

The objective of the financing that is offered by Bank Islam Malaysia is to cater for the growing demand among the Muslims society. This is because there are not much financing institutions that offers this types of financing that based on the Shariah laws. As a Muslim entrepreneur we should take this opportunity to expand our business to compete with other entrepreneur or finance our asset buying so that we could afford to own the asset that we desired.

With the different kind of financing offered, a person will be able to involve in the business that is purely under the Shariah, and not worried of the source of money that they get for financing. This is the great opportunity that Muslims society should not be missing.

Recommendations to the organization (Bank Islam Malaysia Berhad).

The bank itself should play an important role in communicating to the people about their financing facility. This is because not many people aware of this opportunity that are being offered. Sometimes people are very skeptical of the benefit that they could get if they used the Islamic type of financing. So, Bank Islam should be very aggressive in advertising and communicating their products and benefit that the society could get. Therefore some recommended promotions that they should concerns:

CONCLUSION

Regarding the survey report, the financing that are offered by the Bank Islam is important for us, especially in Muslim society. It is the continuous effort that other banking should provide financing that follows the rules of Shariah. Based, on the benefits that are offered, it is likely that the demand for this type of financing will increase in the future. Thus it will benefit the bank also the Muslim society as a whole, and also will give confidence to the society of our Muslims products and the significant that it products does not harm the Ummah. The product also has a benefit that is superior to other banking product, that it provides no gharar, interest taking and value addition. So, we as Muslims should also encourage our fellow friends to use this type of financing in their daily dealings, by providing the real benefits they could realize from it. Islamic banking started with the advent of Islam. The nature of Islamic banking and Islamic Finance cannot be understood in isolation form Islam as the center, and as the way of life. Islam is a complete way of life and Islamic Finance is very important aspect of that way of life. In fact, an Islamic society needs Islamic Finance. Muslims community leaders are calling for Islamic retail bank products in this country. The financial needs of this country’s Muslim community are estimate at approximately $80 billion, with an expected growth of 15%. Malaysian banking is targeting 5% of its banking system to provide Islamic banking products by the year 2000. Most financial institutions namely commercial banks, finance companies and merchant banks, were now required to operate Islamic banking windows side by side with the interest-free banking system. It is clear that Islamic banking is wider in its scope and more suited to the human needs than the system based on the secular system of economics. Islamic banking is in evolution. We have to continuously strive to develop and redefine its boundaries by providing better services as well as products. It also has to help the cause of Islamization of the society. It is hoped that with the interest of the government and with the support of the people, the challenges will be met and goals will be achieved.