Applied Islamic Banking

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

Islam encourages the believers to engage in the business and trading and also exposed them in this sector which are compliance with the Shari’ah and not prohibited by Islam. As the world are going towards globalization, most of the business and trading activities expand internationally.

Regarding this matter, in this report we would like to emphasis on the essential supporting structure or the basis and fundamental system of the Shariah Framework on Islamic International Trading. This will explain about the objective and concept of the Shariah principles and some of the necessary knowledge that have to be recognized by traders to start a business.

The vital knowledge of trader that will be explained further is related to the Buying and Selling, Riba’, Sale with prepaid order, Rental, Qirad or Mudharabah and Partnership. This is such a guideline for the beginners before performing trading.

Furthermore, we will also discussed about the in equitability in business which include the impact on the general public and for the particular business as a whole. This assignment also reviews about certain part in the Islamic ethical philosophy. For instance, unities, equilibrium (‘Adl’), free will, responsibility (accountability) and benevolence (Ihsan).

Shariah is the Islamic general law which were derived from three resources which is the Quran (have been revealed by Allah S.W.T to our prophet Muhammad S.A.W), the Hadith (sayings of the prophet Muhammad) and the Sunnah (practice and traditions of the prophet Muhammad).

Framework means the essential supporting structure or basic system or also called as fundamental principles. So, the Shariah Framework on Islamic International Trade is more concerned on the principles in trading and business which are compliance with the teachings of Islam. Nevertheless, it also part of dealing with the economics.

According to Al- Ghazali, there can be two possible reasons for a person to participate in trading:

To seek the pleasure of Allah.

Islam have declares that human being is the finest of God creation among other creation, and because of that the universe and everything in this world have been created to meet and fulfilled the needs of man. Our beloved prophet Muhammad S.A.W have stated to the believer to involve ourselves in business. As the prophet said that by doing business it can generated almost two third of the income and it can also help to built up the ummah. However, all the believers have to bear in their minds that the business have to be compliance or according to the Shariah and must achieved the Islamic goals on trading activities.

To seek one’s livelihood

“The hand giving is better than the hand receiving”. Islam encourage Muslim to involved in trading because in spite of it is one of the way to gain income it is better not to be a welfare recipient only whether intentionally or unintentionally. By trading people can generate its own income to live in this world, to fulfill his necessities and also to help other people who are in need.

To increase one’s wealth

Necessities are the first that should be fulfilled. Islam encouraged accumulating and hoarding wealth over and above one’s needs but must be in line with the intention of spending the surplus of wealth for welfare and charity in the way of Allah.

Al-Ghazali have emphasized that the prerequisite of dominate knowledge in trading consists of the various types of contracts, which are related to the fiqh and knowledge of trading itself for any person and anyone who is planning to involved himself in trade and business. Regarding this matter, there are six forms of ‘aqad that must be known and understood by any trader.

Buying and selling.
Riba’
Sale with prepaid order.
Rental.
Qirad or Mudharabah.
Partnership.

‘Aqid that is the buyer and seller.
Ma’qud ‘alaih, the subject matter of the sale, in which there are six other conditions related to the subject of sale, which includes:

Cleanliness or purity
Being beneficial
Transferability ( does not appoint to the fish in the water, fetus which is still in the womb of the animal, wool that still on the body of the animal, milk that still not milked from the animal)
Knowledge of its nature or identity, number or amount and its other features.
Being in the possession of the owner, before the sale incurred.

Expression of the ‘aqad, whereby the offer and acceptance are clearly stated.

Trade is permitted but Riba’ is prohibited. There are several verses in the Holy Quran which condemn riba’ or interest in no uncertain terms and of them is:

“For those who devour usury will not stand except as stand one whom the evil by his touch hath driven to madness. That is because they say: Trade is like usury, but Allah hath permitted trade and forbidden usury” (Al-Baqarah: 275)

For those dealing in money transactions, that is gold and silver.
For those dealing in transaction of foodstuff.

Riba al-Nasiah ( deferment of payment for the purchase)

There does not exist a hand-to-hand transaction based on cash. In present day it also known as sale on credit. This ribawi elements occurred when there is unequal exchanged in quantity of the same materials. This would also include the case when the exchanged is made on credit. For example interest on loan for delay of payment.

Riba al-Fadl ( an excess in the exchange)

It is regarding the dishonest and unjust exchanges in business transaction. It applies to hand-to-hand purchase and sale commodities. It also covers all spot of transaction involving cash payment on one hand and immediate delivery of the goods on the other. For example, gold for gold, and silver for silver.

The amount paid is known, so that if the goods ordered are not available, then the correct amount of money can be returned to the intended purchaser.
The money is truly paid during the majlis for an ‘aqad of this form.
The goods ordered are known of its features.
The clarification of the features of the goods must be made to ensure that the true value of the goods is identified.
The period for the commodity to be made available is known.
The goods can be transfer or can be delivered in the time periods which have been determined. And if there are circumstances whereby the goods maybe postpone to be delivered or termination of ‘aqad then the money which have been paid can be refundable.
The place of delivery of goods must be identified.
The agreement is independent on other specific agreement or condition which can avoid the undertaking of the agreement.
The commodity or goods is not of something which is extremely of a great value or precious or rare to obtain or acquired.
The ‘aqad is not tied to foodstuff or naqad (gold and silver) for the reasons which have been discussed under the ribawi- related contract.

Riba’ in the exchanged of foodstuff occurs when foodstuffs of different kinds are exchanged. However, exchange that involved the same kind of foodstuff is permissible by safeguarding al-mumatsalah (equality) of the foodstuff exchanged.

Rent or hire is like price. As in the case of buying and selling, the ‘aqad or contract of rental or hiring must be clear, unambiguous and explicit. Renting or hiring must bring beneficial results and when hiring of human resources, for example for hiring labors or workers, there are several considerations that must be observed:

The value of work of the person which have been hired.
The work must be allowed by Shariah.
The person who has been hired must physically and spiritually capable of carrying the work which is appointed to him.
The person who has been hired must be informed about the nature and demand of the work.

“There are two rules of wages remuneration and profit. If wages are in cash, it must be fixed like the price of a thing sold. If remuneration is salary or rental, its kind and quantity should be fixed…The object of industry in business is to gain profit….The remuneration for a job must be fixed…The remuneration given to a broker is unlawful”.

In the Islamic modes of financing, it is the Profit Sharing ratio. It means that the bank will provides the entire capital needed for financing any project, while the entrepreneur offers his labor and expertise. The profit from the project will be shared among them at a certain fixed of ratio. However, for any losses it will be bear by the capital provider which is the bank itself without sharing with the entrepreneur.

The liability of the entrepreneur are only limited to his time and effort. It is a trustee finance contract. This can help the entrepreneur to start a business if they have problems in providing the capital to generate any business but the business have to be lawful and which is permissible by the Shariah.

Capital – Capital must be in the form of gold or silver or nowadays in the term of cash or share basis and must be carefully accounted and must be handed to the person whish is responsible for managing the business.
Profits – The profits must be share among the entrepreneur and the provider of the capital, bank. The profit should be known before undertaking the business. Predetermined profits for either party are not allowed.
The actions of trading (planning and decision making)

There should not be restricted by conditions for the commodities which to be traded and fixed time.

Al- Mufawadah, the capital invested by both parties is different but every profit and loss is share equally.
Al- Abdan, both parties only consider the partnership payment of work done, which mean that all payment after making the job will be divided among them without taking into consideration that the amount that they have been contribute by each party into the fund.
Al- Wujuh, one party will manage or works while the other partner who is well-known and respect in the society will only used his influence in the business without doing the job together.

However, all of this partnership are not valid, the valid form of partnership is:

Al-Inan, whereby the contribution of capital by the partners are mixed together other than dividing the capital according to the ratio of capital contributed. Both partner can used the capital for the business and agreed to divide the profit and loss according to the capital contributed.

This is an act of save or put away necessities, such as foodstuff. Sellers save or put away necessities until the price of the commodity rise up, so that they will gain more profit. Only after the price increase the hoarded commodity is sold. Al-Ghazali rules this as an act, which is haram in nature. This kind of action whether it is in International or local trade it is still not permissible to be practiced. However, it is makruh, to hoarding necessities in the situation which is the necessity is in surplus supply in the market or when degree of need is not significant, or here consumer do not intend to purchase the commodity except at a lower price. The emphasis in Islam is on cooperation rather than competition as the terms are understood in the present day. The Quran stated that:

Counterfeit money is money that has no gold or silver content. Used of counterfeit money is not allowed, but unknowingly using it in one’s buying and selling or exchanges of money will be exempted.

“It is the best of deeds for the authorities to differentiate between the deserving and undeserving and to do justice in the distribution of means of livelihood and of public offices”

The money need to be disposed if the money is returned to one who had use it, to avoid from fall into the others hand.
International or local trader must have knowledge in differentiating between the legal currency and false money to share the knowledge with others. As in the business activities in an Islamic society the moral consideration have to be recognized, as stated in the Quran:

“O ye apostle! Enjoy (all) things good and pure, and work righteousness. For I am well acquainted with (all) that ye do” (23:51)

Absence of motive of wanting to use it on others means that one is intent on limiting the recurrence of the deceit.
Economy can function smoothly since all transactions are facilitated without have to spend time to check the legitimacy of money exchanged between two hands.
Although counterfeit money has no gold or silver content, there may be used in business within country, which have a mixture of silver and copper. However, coins cannot be used within that country unless the gold or silver content of the coins known.

2.2 Business Action Causing Effect on the One’s Carrying out That Particular Business

There are four main aspects of acts of business that bring injurious losses to others that considered unjust:

Excessive and consequently misleading praises of one’s commodities.

This is equivalent to being misled and excited if the buyer purchases the commodity due to the praises. The deceit will be discovered, when the buyer refuses to purchase despite these praises which it leading to a loss of dignity for the seller. As Islam prohibits extravagances and excesses in expenditure and encourage moderation as mentioned in the Holy Quran:

“Verily spendthrifts are brothers of the evil ones; and the evil one is to his Lord (Himself) ungrateful” (17: 27)

Concealing defect of commodities

Good side and the defective side of commodity need to be revealed. Commodity cannot be displayed in Dark places with the intension of hiding possible defects. Good side and the defective of a damage commodity need to be revealed and shown.

Concealing the weight and measures.

To avoid the possibility of giving less due to the inaccurately of the weighing or measuring scale, al-Ghazali enjoins the former to add slightly more of the commodity to the weight or measure required.

Misinforming the buyer of the true prevailing price

This occurred when alleged cost price of a commodity is falsely stated and import of a commodity is intercepted before reaching the trading place. It also occurred when one manipulate the increase in the price of a commodity being bargained for. For example, assigning someone to pretend competing with the true buyer till the buyer has to purchase it at a higher price, which is above the fair price.

Shariah is a basic rule that it is obligatory upon all Muslim to obey, follow and practice. It is comprehensive guidelines which cover all aspects of practicing business whether it is international or local, between Muslim and Muslim, also between Muslim and non-Muslim. Islam clearly stated what prohibited or haram and what is halal; to make sure that their believers clarify it and understand all the rules that have been revealed. There are reasons behind all the haram and halal rules which need to be understood. The prohibition can cause harm to the individual as well as the societies. On the other hand, for the unforbidden thing (halal) will bring benefits to the individual as well as societies.

In our opinion, when the Quran legally prohibited riba’ it does not mean that it is irrelevant. The most important things are that, it will avoid exploitation and manipulation from the rich person. Furthermore, it is to avoid the rich become richer and poor people become poorer. This was the aim of prohibition of riba’ besides it encourage equitability and unity between ummah at large.

More over, in organizing or doing a business it has to be transparency between both parties; either they contribute more or less capital in the organization.

Lastly, the Islamic Shariah and framework in the Islamic international trade can maintain the stability and growth of the economy and states as the country will get blessed from Allah and gaining profit and income in a truth way as recommended in the Quran.