IslamicIslamic LawLaw ofof BankingBanking andand TakafulTakaful

LAB3073LAB3073 DR.DR. ZULKIFLIZULKIFLI HASANHASAN ContentContent

 The Basis of the Introduction of Islamic Finance    Maisir  Risk  Islamic finance as a holistic ethical solution  UmarUmar b.b. alal --KhattabKhattab said,said, "There"There areare threethree things.things. IfIf 'sAllah's MessengerMessenger hadhad explainedexplained themthem clearly,clearly, itit wouldwould havehave beenbeen dearerdearer toto meme thanthan thethe worldworld andand whatwhat itit contains:contains: (These(These are)are) kalalakalala ,, ribariba ,, andand khilafakhilafa .. [[ SunanSunan IbnIbn MajahMajah ]] TheThe FallFall ofof thethe OttomanOttoman EmpireEmpire

 OttomanOttoman EmpireEmpire :: 12991299 --19221922  HighHigh InterestInterest LoanLoan withwith BritishBritish andand FranceFrance 1854:1854: ££3M3M interestinterest 6%,6%,  1855,1855, ££5M5M interestinterest 4%,4%,  1858,1858, ££5M5M interestinterest 6%6% andand ££8M8M interestinterest 6%.6%. RibaRiba

 First:First: InIn MeccaMecca QuranQuran AlAl RumRum 30:30: 3939 RibaRiba depriveddeprived wealthwealth ofof AllahAllah ’’ss blessing,blessing, charitycharity raisedraised itit manifoldlymanifoldly  Second:Second: InIn MedinaMedina 11 st HH QuranQuran AlAl NisaNisa :: 161:Severely161:Severely disapproveddisapproved oror ribariba  Third:Third: 22 nd H.H. AlAl ImranImran :: 130130 --131.131. EnjoiningEnjoining muslimmuslim toto keepkeep awayaway fromfrom ribariba ..  Final:Final: 99 daysdays beforebefore thethe demisedemise ofof thethe prophet.prophet. 2:2: 275275 --281.281.  TheThe NobleNoble Qur'anQur'an -- AlAl --BaqarahBaqarah 275275 --281281  275.275. ThoseThose whowho eateat RibâRibâ (usury)(usury) willwill notnot standstand (on(on thethe DayDay ofof Resurrection)Resurrection) exceptexcept likelike thethe standingstanding ofof aa personperson beatenbeaten byby ShaitânShaitân (Satan)(Satan) leadingleading himhim toto insanity.insanity. ThatThat isis becausebecause theythey say:say: "Trading"Trading isis onlyonly likelike RibâRibâ (usury),"(usury)," whereaswhereas AllâhAllâh hashas permittedpermitted tradingtrading andand forbiddenforbidden RibâRibâ (usury).(usury). SoSo whosoeverwhosoever receivesreceives anan admonitionadmonition fromfrom hhisis LordLord andand stopsstops eatingeating RibâRibâ (usury)(usury) shallshall notnot bebe punishedpunished forfor thethe past;past; hishis casecase isis forfor AllâhAllâh (to(to judge);judge); butbut whoeverwhoever returnsreturns [to[to RibâRibâ (usury)],(usury)], suchsuch areare thethe dwellersdwellers ofof thethe FireFire -- theythey willwill abideabide therein.therein.  276.276. AllâhAllâh willwill destroydestroy RibâRibâ (usury)(usury) andand willwill givegive increaseincrease forfor SadaqâtSadaqât (deeds(deeds ofof charity,charity, alms,alms, etc.)etc.) AndAnd AllâhAllâh likeslikes notnot thethe disbelievers,disbelievers, sinners.sinners.  277.277. TrulyTruly thosethose whowho believe,believe, andand dodo deedsdeeds ofof righteousness,righteousness, andand performperform AsAs --SalâtSalât ((IqâmatIqâmat --asas --SalâtSalât ),), andand givegive ZakâtZakât ,, theythey willwill havehave theirtheir rewardreward withwith theirtheir Lord.Lord. OnOn themthem shallshall bebe nono fear,fear, nornor shallshall theythey grieve.grieve. َ  ٓ َ َ ٰٰٓٓ َ َ َ ــ  َِِ َ ٱذنٱذن َ َ َ َ ُ ُ ْ ءا واْ ءا وا ُ ُ ْ ٱ واْ ٱ وا  َٱَٱ َ َ ََ ُُْوذرواْوذروا ََ  َ َ ِ ِ َ َ    َِِ َ نن ََٰٰٓ ْٱرواْٱروا ِِإنإن ُ ُ ُُ" م" م ۡۡ ِ ِ ِِ ََؤ نؤ ن  ۡ ۡۡ  َ َ ِ ِ &*ن&*ن ۡۡمم َ َ ۡ َ َ ُُ ْ ()'واْ ()'وا ََ ََُ ُ ْ&ذ واْ&ذ وا َِِ َ ۡۡ ۟۟ ٍ ٍ %رب%رب َ َ نن  ِٱِٱ َ َ ََورور ُ ُ ِ ِ 2ِِو1ۦ 2ۖو1ۦ ۖ ََ ِِوإنوإن ُ ُ ُُۡۡ ۡ ۡ  م  م ََ ََۡۡ&'.ُم&'.ُم ُ ُ ُ ُ ُُرءوس رءوس  ََ ۡۡ ََ ِِ ۡۡأوٲ.ُمأوٲ.ُم ََو ۡ ۡ َ َ 66 ََ ۡ ِِ ُ ُ َ َ ظ'ون ظ'ون َ َ َ َ و6و6 ََََُُُُۡ ظ'ون ظ'ون   278.278. OO yeye whowho believe!believe! FearFear Allah,Allah, andand givegive upup whatwhat remainsremains ofof youryour demanddemand forfor usury,usury, ifif yeye areare IndeedIndeed believers.believers.  279.279. IfIf yeye dodo not,not, taketake noticenotice ofof warwar fromfrom AllahAllah anandd HisHis Messenger:Messenger: butbut ifif yeye turnturn back,back, yeye shallshall havehave youryour capitalcapital sums;sums; DealDeal notnot unjustly,unjustly, andand yeye shallshall notnot bebe dealtdealt withwith unjustly.unjustly.  "Hakim"Hakim relatesrelates onon thethe authorityauthority ofof IbnIbn Mas'udMas'ud thatthat thethe ProphetProphet said,said, '' RibaRiba isis ofof seventyseventy threethree kinds,kinds, thethe lightestlightest inin seriousnessseriousness ofof whichwhich isis asas badbad asas one'sone's marryingmarrying hishis ownown mother;mother; forfor thethe MuslimMuslim whowho practicespractices ribariba goesgoes mad.'mad.' "" (Related(Related byby IbnIbn MajahMajah )) RibaRiba

 Excess,Excess, expansion,expansion, increase,increase, additionaddition oror growthgrowth  Technically,Technically, unlawfulunlawful gaingain derivedderived fromfrom thethe quantitativequantitative inequalityinequality ofof thethe countercounter --valuesvalues inin anyany transactiontransaction purportingpurporting toto affectaffect thethe exchangeexchange ofof twotwo oror moremore speciesspecies whichwhich belongsbelongs toto thethe samesame genusgenus andand areare governedgoverned byby thethe samesame efficientefficient cause.cause.

RibaRiba onon loanloan contractcontract

 RibaRiba alal duyunduyun -- occursoccurs inin lendinglending andand borrowing.borrowing.  RibaRiba alal nasiahnasiah (to(to delay):delay): excessexcess duedue toto delaydelay inin paymentpayment  RibaRiba alal QuranQuran  AnyAny unjustifiedunjustified incrementincrement inin borrowingborrowing oror lendinglending moneymoney whetherwhether inin kindkind oror cashcash overover andand aboveabove thethe principalprincipal amountamount asas aa conditioncondition stipulatedstipulated oror agreedagreed btnbtn thethe parties.parties. RibaRiba inin ExchangeExchange ContractsContracts

 RibaRiba alal BuyuBuyu :: occursoccurs fromfrom tradingtrading oror exchangeexchange transactionstransactions inin whichwhich aa commoditycommodity isis exchangedexchanged forfor thethe samesame commoditycommodity fromfrom thethe ribawiribawi commoditiescommodities inin unequalunequal amountamount and/orand/or delaydelay forfor thethe deliverydelivery ofof oneone ofof thethe commodities.commodities.  RibaRiba alal fadlfadl  RibaRiba alal SunnahSunnah RibaRiba alal BuyuBuyu

 UbadahUbadah bb SamitSamit thatthat thethe ProphetProphet said:said: GoldGold forfor gold,gold, silversilver forfor silver,silver, wheatwheat forfor wheat,wheat, barleybarley foforr barley,barley, datesdates forfor datesdates andand saltsalt forfor salt,salt, likelike forfor like,like, equalequal forfor equalequal andand handhand toto hand,hand, ifif thethe commoditiescommodities differ,differ, thenthen youyou maymay sellsell asas youyou wishwish providedprovided thatthat thethe exchangeexchange isis handhand toto handhand ((SahihSahih Muslim)Muslim) RibaRiba alal BuyuBuyu

 1.1. ItIt mustmust bebe aa spotspot transaction:transaction: IfIf oneone ofof thethe commoditiescommodities areare delayed,delayed, ribariba alal buyubuyu occursoccurs  2.2. ItIt mustmust bebe equalequal countercounter --value.value. 2kg2kg ofof wheatwheat withwith 22 kgkg ofof wheat.wheat. HadithHadith UbadahUbadah

 1.1. MediumMedium ofof exchange:exchange: goldgold andand silversilver andand currencycurrency  2.2. FoodFood stuff:stuff: Barley,Barley, datesdates andand salt.salt.  ShafieShafie :: EdibleEdible  HanafiHanafi :: saleablesaleable byby thethe measurementmeasurement ofof weightweight oror capacitycapacity  MalikiMaliki :: staplestaple foodstuffsfoodstuffs andand preservablepreservable HadithHadith UbadahUbadah

 IfIf goldgold forfor gold:gold: EqualityEquality andand spotspot deliverydelivery  IfIf wheatwheat forfor wheat:wheat: EE andand S.S.  IfIf goldgold forfor silver:silver: SpotSpot deliverydelivery  IfIf wheatwheat forfor dates:dates: SpotSpot deliverydelivery  IfIf goldgold forfor wheat:wheat: WillingWilling sellerseller willingwilling buyerbuyer IllustrationIllustration forfor currencycurrency

 RM100RM100 andand RM100=RM100= onon thethe spotspot =No=No ribariba  RM100RM100 andand RM100=delay=RM100=delay= RibaRiba  RM100RM100 andand RM150=excess=RM150=excess= RibaRiba  RM380RM380 andand USD100=USD100= onon thethe spot=Nospot=No ribariba  RM380RM380 andand USD100=delay=USD100=delay= RibaRiba  MoneyMoney isis notnot aa commodity.commodity. MoneyMoney isis aa mediummedium ofof exchange,exchange, storestore andand measuremeasure ofof value.value. IllustrationIllustration forfor FoodFood

 10kg10kg RiceRice andand 1010 kgkg rice=onrice=on thethe spot=Nospot=No ribariba  10kg10kg ricerice andand 1010 kgkg rice=delay=rice=delay= ribariba  10kg10kg ricerice andand 1515 kgkg rice=onrice=on thethe spot=spot= RibaRiba  10kg10kg ricerice andand 1515 kgkg wheat=spot=Nowheat=spot=No ribariba  10kg10kg ricerice andand 15kg15kg wheat=delay=wheat=delay= ribariba ReasonReason oror RationaleRationale

 1.1. ViolateViolate thethe equityequity aspectaspect ofof economiceconomic organizatorganization.ion.  2.2. TheThe inflexibilityinflexibility ofof anan interestinterest --basedbased systemsystem isis aa lossloss situationsituation cancan leadlead toto aa bankruptciesbankruptcies inin lossloss ofof productiveproductive potentialpotential andand unemployment.unemployment.  3.3. SecuritySecurity orientedoriented vsvs growthgrowth oriented.oriented.  4.4. discouragediscourage innovation.innovation.  5.5. WrongfulWrongful appropriationappropriation ofof otherother ’’ss property.property. (Allow(Allow throughthrough contractcontract egeg partnership,partnership, muawadhatmuawadhat ,, ibraibra ,, hibahhibah ,, waqfwaqf ,, willwill andand inheritance).inheritance). GhararGharar

 Risk,Risk, uncertaintyuncertainty andand hazardhazard  IbnIbn QayyimQayyim :: asas aa salesale inin whichwhich thethe vendorvendor isis notnot inin positionposition toto handhand overover thethe SMSM toto thethe buyerbuyer whetherwhether thethe SMSM isis inin existenceexistence oror not.not.  WZ:WZ: ContractContract whichwhich containscontains aa riskrisk toto anyany ofof thethe partiesparties whichwhich couldcould leadlead toto hishis lossloss ofof properties.properties. GhararGharar

 SurahSurah alal Nisa:29Nisa:29 ““ OO youyou whowho believe?believe? EatEat notnot youryour propertyproperty amongamong yourselvesyourselves unjustlyunjustly byby falsehoodfalsehood andand deception,deception, exceptexcept itit bebe aa tradetrade amongstamongst youyou byby mutualmutual consentconsent ””..  TheThe worldworld batilbatil unjustlyunjustly includeinclude allall categoriescategories ofof illegalillegal andand defectivedefective elementselements inin commercialcommercial contracts,contracts, includingincluding thatthat ofof aa gharargharar .. HadithHadith

 AbuAbu HurayrahHurayrah narratednarrated thatthat thethe ProphetProphet prohibitedprohibited allall salessales onon gharargharar .. RationaleRationale

 RuleRule ofof justicejustice andand fairfair dealingsdealings  ToTo avoidavoid oppressionoppression andand injusticeinjustice andand lossloss ofof propertiesproperties  MayMay infringeinfringe thethe rulerule ofof mutualmutual consent,consent, duedue toto inadequateinadequate knowledge.knowledge.  ToTo avoidavoid futurefuture disputes.disputes. TypesTypes ofof GhararGharar

 NonNon --existenceexistence ofof thethe exchangedexchanged countercounter --valuesvalues oror thethe controlcontrol ofof thethe partiesparties overover thethe SMSM toto bebe exchanged.exchanged.  InadequacyInadequacy oror inaccuracyinaccuracy ofof information:information: NonNon disclosure.disclosure. EgEg characteristicscharacteristics ofof thethe exchangedexchanged countercounter value,value, itsits species,species, quantities,quantities, datadata ofof futurefuture delivery,.delivery,.  UndueUndue complexitycomplexity ofof thethe contracts.contracts. EgEg twotwo salessales inin one.one. DegreeDegree ofof GhararGharar

 GhararGharar yasiryasir :: MinorMinor gharargharar :: unavoidableunavoidable gharargharar duedue toto thethe naturenature ofof thethe subjectsubject mattermatter withoutwithout causingcausing considerableconsiderable damagedamage toto oneone ofof thethe partiesparties willwill notnot affectaffect thethe validityvalidity ofof thethe contraccontract.t.  GhararGharar fahishfahish :: MajorMajor gharargharar :: ImportantImportant andand materialmaterial information.information. ContractContract isis void.void. MaysirMaysir

 QimarQimar  InvolvesInvolves bettingbetting wherebywhereby thethe winnerwinner willwill taketake thethe entireentire betbet andand thethe loserloser willwill loselose hishis bet.bet.  GamesGames ofof purepure chancechance wherewhere anyany partyparty mightmight gaingain atat thethe expenseexpense ofof thethe lossloss ofof thethe party.party. undesirableundesirable andand detestable.detestable.

 TheyThey askask theethee concerningconcerning winewine andand gambling.gambling. Say:Say: InIn themthem isis aa greatgreat sinsin andand somesome benefitbenefit forfor men.men. TheThe sinsin isis greatergreater thanthan thethe benefit.benefit. (2:219)(2:219) DeclaredDeclared UnlawfulUnlawful

 O you who believe! Intoxicants and gambling, (dedication of) stones and arrows are abomination of Shaytaan ’s handiwork: Abstain from it so that you may prosper. Shaytaan's plan is (but) to excite enmity and hatred between you, with intoxicants and gambling, and binder you from the remembrance of Allah , and from prayer: Will you not then abstain? (5: 90,91) RiskRisk (( KhatarKhatar ))

 NotNot everyevery riskrisk --takingtaking isis prohibitedprohibited  IslamIslam hadhad PermittedPermitted salesale duedue toto fairnessfairness inin riskrisk andand return.return.  Sale:Sale: assumesassumes riskrisk --takingtaking (market(market riskrisk thethe sellerseller deservesdeserves thethe profitprofit fromfrom thethe sale).sale). RibaRiba isis prohibitedprohibited becausebecause itit involvesinvolves profitingprofiting withoutwithout takingtaking oror sharingsharing inin relatedrelated risk.risk. RationaleRationale

 MajallahMajallah alal AhkamAhkam AlAl AdliyahAdliyah inin 1876.1876.  ArticleArticle 85:85: thethe benefitbenefit ofof aa thingthing isis aa returnreturn forfor thethe liabilityliability forfor lossloss arisingarising fromfrom thatthat thing.thing.  ArtArt 87:87: TheThe detrimentdetriment isis asas aa returnreturn forfor thethe benefit.benefit.  ArtiArti 88:88: thethe burdenburden isis inin proportionproportion toto thethe benefitbenefit andand thethe benefitbenefit inin proportionproportion toto thethe burden.burden.  AlAl kharajkharaj bidhamanbidhaman :: thethe rightright toto thethe returnreturn isis justifiablejustifiable byby assumingassuming thethe riskrisk ofof loss.loss. TypesTypes ofof RisksRisks (( FiqhFiqh ))

 1.1. EntrepreneurialEntrepreneurial riskrisk whichwhich mightmight occuroccur asas partpart ofof thethe normalnormal coursecourse ofof business:business: PraiseworthyPraiseworthy  2.2. RiskRisk duedue toto possibilitypossibility ofof thethe occurrenceoccurrence ofof naturalnatural disastersdisasters andand calamities:calamities: AllowedAllowed ifif byby wayway ofof cooperative.cooperative.  3.3. UnnecessaryUnnecessary risk.risk. AriseArise fromfrom gamegame ofof chance.chance. Prohibited.Prohibited. TypesTypes ofof RisksRisks Types of Risk Roles of BOD and Senior Management Credit Risk •Strategy for financing and recognize the potential credit exposu res. •Carry out due diligence review •Appropriate methodologies for measuring and reporting credit ris k exposure •Shariah -compliant credit risk mitigating techniques Equity Investment •Strategy for risk characteristics of equity investments Risk •Appropriate valuation methodologies •Establish exit strategies in respect of equity investment activi ties Market Risk •Appropriate framework for market risk management in respect of a ll assets held Liquidity Risk •Appropriate liquidity management framework •Able to assume that liquidity risk commensurate with their abili ty to have sufficient recourse to Shariah -compliant funds to mitigate such risks Rate of Return •Comprehensive risk management and reporting process to assess th e Risk potential impacts of market factors affecting rates of returns o n assets in comparison with the expected returns for IAH Operational Risk •Adequate system and controls to ensure Shariah compliance •Appropriate mechanism to safeguard the interest of all fund prov iders. EthicsEthics

 Tenet bound: • Fundamental tenets are derived from Shariah o Absence of interest-based transactions O Avoidance of economic activity involving speculation o Prohibition on production of goods and services which contradict the values of  Principles based: • Concept is grounded in ethics and values  Principles akin to ethical investing o Emphasis on risk-sharing and partnership contracts o Credit and debt products are not encouraged ContCont ……

 Real economy linked: • Islamic finance offers an alternative financing paradigm o Asset-backed transactions with investments in real, durable assets o Stability from linking financial services to the productive, real economy o Restrains consumer indebtedness as credit is linked to real assets  Society Service • Islamic banking is community banking o Serving communities, not markets o Open to all-faith clients o Instruments of poverty-reduction are inherent part of Islamic finance ( & qard hasan)