Islamic Banking Law

9/9/2015

ISLAMIC BANKING LAW

Mohd Johan Lee LLB, MCL (IIUM), MA (Econs) (KCL) Advocate & Solicitor (High Court Malaya) Peguam Syarie Advocate & Solicitor (Supreme Court Brunei)

Messrs. J. Lee & Associates

 Islamic banks are to promote, foster and develop the banking services and products based on Islamic principles  Islamic banks are also promoting establishment of investment companies or business enterprises so long as their activities are not forbidden by Islam

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 Sec 2 of the IBA  “Islamic bank means any company which carries on Islamic Banking business and holds a valid licence……”  “Islamic banking business means banking business whose aims and operations do not involve any element which is not approved by religion of Islam”

 Wide definition allows IB to do all banking business – commercial, finance, merchant  Opportunity for innovation in the business and product development  Consistent with the principle of “permissibility unless otherwise prohibited”

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 BAFIA confined the “banking business” into : (i) Receiving deposits – CA/SA etc (ii) Paying or collecting cheques (iii) To provide loan/finance

Islamic banking business” means the business of— (a) accepting Islamic deposits on current account, deposit account, savings account or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers; or (b)accepting money under an investment account; and (c)provision of finance; and (d)such other business as prescribed under section 3;

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 Riba free – money does not create money  Gharar free – uncertainties to be avoided  No Lender – borrower relationship  Trading & leasing relationship  Profit & Loss sharing  Requirement of mutual consent  Prohibition of fraud and deception

There are 2 modes of financing in IBF  Equity financing  Debt financing

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Financing needs

Own financing Financing from others

Equity Debt Financing Financing Takes place when the capital/equity of other The financing is effected by debt party is taken to Debt is given to the other party for undertake a commercial specific purpose project

Mode of Financing

Equity Financing Debt Financing

Uqud al Istirak Al- Bay/al Ijarah/al dayn (profit & loss sharing) (exchange/deferred Al-mudarabah contract) Al- musharakah BBA Murabahah Ijarah Istina’

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ISLAMIC BANK VS CONVENTIONAL BANK

No . ISLAMIC BANKING CONVENTIONAL BANKING The functions and operating modes of The functions and operating modes of 1. IBF are based on the principles of conventional banks are based on fully Islamic Shari’ah manmade principles It aims at maximizing profit but It aims at maximizing profit without 2. subject to Shari’ah restriction any restriction Participation in partnership business Lending money and getting it back is the fundamental function of the with compounding interest is the 3. Islamic banks. fundamental function of the conventional bank. The status of Islamic bank in relation The status of a conventional bank, in 4. to its clients is that of partners, relation to its client, is that of creditor investors and trader, buyer, seller and debtors.

COMMERCIAL BANKING Depositors

Deposits Lending for Needs fund FIs

IR@ 4% IR@ 7%

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ISLAMIC BANKING

Debt financing for Needsfund Depositors Wadiah (Numerous principles /current

FIs used

Depositors Equity investment Mudharaba h financing/Musy/mudh

 Banking is prohibited in Islam  Islamic banking is merely change in name  Islamic banking is expensive  Imitation of conventional product  Legal and political reality  Lack of knowledge and information  Technical issues

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 During the time of the Prophet (p.b.u.h)  ‘bailtul mal’ (public treasury) – to fund state responsibilities.  Did not generally accept deposits from public nor grant loans  Baitul Mal have extended loans to Caliph Umar’ son Abd Allah and Ubayd Allah which were used for trading.

 1963 – Mit Ghamr Local Savings Bank (Egypt)  1971 – Nassar Social Bank (Egypt)  1975 – Islamic Development Bank (Jeddah) & the Dubai Islamic Bank  1977- Faisal Islamic Bank of Sudan & Kuwait Finance House  1978 – Faisal Islamic Bank of Egypt & the Islamic Bank of Jordan

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Malaysia  1969 – Establishment of Pilgrims’ Fund Board (Lembaga Tabung Haji)  1983 - Bank Islam Malaysia Berhad (public listed on 17 Jan 1992).  The Islamic Banking Act 1983 (7 April 1983) supervised and regulated by BNM  1984 - Syarikat Takaful Sdn Bhd (TA 1983)

 1993 –BNM introduced a scheme known as “Skim Perbankan Tanpa Faedah” (SPTF) & Islamic banking window  1996 – amendment to sec 124 of the BAFIA allowing conventional banks in Malaysia to operate IBF  1997- The establishment of NSAC by the BNM  1998 – Interest- free Banking Scheme (SPTF) was upgraded to Islamic Banking Scheme – setting up of Islamic Banking Divisions replacing Islamic Banking Units to headed by senior level of management

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 1999 – Second Islamic Bank (BMMB)  2002 – Islamic Financial Services Board (IFSB) head office in Malaysia  2004 – establishment of Islamic banking subsidiary for conventional banks  2004 - grant of Islamic banking licenses to 3 other financial institutions (1 foreign & 2 local)

 2005: Entrance of Kuwait Finance House, Al Rajhi & Asian Finance (a consortium of Qatar Islamic Bank, RUSD Investment Bank Inc. & Global Investment House)  2008: International Islamic Banking licenses were issued to Unicorn International Islamic Bank, First Islamic Investment Bank Ltd (owned by PT. Bank Muamalat Indonesia) and Deutsche Bank Ag (2010), allow the bank to provide Islamic commercial and investment services denominated in foreign currencies.  2010: 5 new Islamic banking licenses to foreign banks (BNP Paribas SA, PT Bank Mandiri, National Bank of Abu Dhabi, Mizuho Bank and Sumitomo- Mitsui Banking Corporation) and the establishment of “Mega Islamic Bank” (to be announced)

 2012 – Islamic Financial Services Act

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STAGE 1 – (1983 STAGE 2 STAGE 3 -1992) (1993-2000) (2000-2010)

Institutional Building, activity generation/market Vibrancy . Financial Sector Masterplan (Islamic  Enactment of  Legislative financial hub) dedicated Act for amendment to allow . Islamic Financial Islamic banking window concepts Services Board  Full fledged Islamic NSAC  . Liberalization Islamic bank  Islamic interbank finance sector money market . Malaysia International Financial Centre 21

 In general, the framework of Islamic finance is the same framework used by the conventional finance practices.  These frameworks are, inter alia legal and regulatory framework, taxation framework, accounting and auditing standards, etc.  Might have different or additional framework, such as accounting and auditing standard, etc, due to its peculiarity.  In certain jurisdiction, Islamic banking and finance might be regulated by different sets of regulations, either separate or additional, e.g. IBA 1983 (Now = IFSA 2013)

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 However, Islamic Finance, as the name suggests, has another framework, which is considered the major element that differentiates IBF from the conventional banking and finance.  Any violation of this framework will definitely effect the validity of Islamic finance itself.  Shariah Compliance Framework

 Three main interrelated terminologies: Shariah, Fiqh & Muamalat  Shariah, when viewed from legal perspective is the fixed elements of Islamic law, i.e. what has been clearly stipulated and mentioned in the text. E.g. five time prayers, prohibition of riba’, etc.  As such, it is revealed in nature

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 Shariah, in this sense, is wide and encompassing various branches of Islam  Normally, it comes in its generality and it emphasizes only on the principles and not the detailed rules (not all the time)  It is the duty of the judge (qadi), mufti and jurisconsult (ulama’) to exert their intellectual efforts in deriving and applying these principles on certain given scenarios.  The result of human reasoning and understanding to the shariah is known as fiqh  Fixed v. Flexible  Agreements v. Differences

 However, in its general usage, it is called al-syariat al-Islamiyyah (Islamic law).  Islamic commercial law is one of the components of Islamic law  Other components of Islamic law include:  Islamic law of purification and worship  Islamic family law  Islamic criminal law  Islamic law of evidence and procedure  Islamic law of inheritance, etc  The main subjects of Islamic commercial law are commercial contracts and the rules governing them

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 Original rule of permissibility: - Initial legal ruling in commercial contract is permissibility - Contrary to acts of devotion (Ibadat) - No legal injunction is needed in sanctioning new contract - Every contract is considered lawful and acceptable if no principle of shari’ah is violated - Open a very wide door for further innovations

 Real Economic Activities  Transactions-oriented not loan-based.

 IBF or Islamic commercial law (fiqh al- muamalat) is part & parcel of Shari’ah  Basic concepts of fiqh al – muamalat:  Wealth is a trust & amanah from God  Prohibition of unjust & oppressive practices  Promotion of honesty, transparency, justice & fairness

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 Divinely revealed principles governing faith, conduct and legal injunctions.

Sources of Shari’ah

• Ijma’(consensus) Primary • Qiyas (anology) sources • Istihsan (juristic • Quran preference) • Sunnah • ‘Urf (customary practice) • Maslahah (public interest) • Istishab (presumption of continuity)

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Shari’ah Al Quran Sunnah

Decisive text Non-decisive text

Applied as it Judicial interpretations is (Ijtihad) according to recognized methodology Shari’ah ruling (usul al fiqh)

Fiqh ruling 31

Primary sources of Ijtihad

Quran SUNNAH QIYAS Divine The tradition of IJMA’ Analogical revelation that Prophet (in the The unanimous deductions/legal decision of the contains the form of saying, reasoning (ratio basic rules of practices, & tacit Muslim decidendi) of a ruling – law approval) that scholars (no comparison of a case not explains and dissenting covered by the text with a extends the opinions) case covered by the text Quranic on account of their injunctions common Shari’ah value (‘illah/cause) 32

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IJTIHAD  Ijtihad is the process of a systematic reasoning to reveal the rule of law . Making use of all one’s liability in the search for the legal status based on sources of Islamic law  Ijtihad - door to divergent opinions . The scholars may be derived to different ruling on the same issue due to differences of methodology/sources utilized in the process of ijtihad. . Resulted to different practices of Islamic Finance (on detail matters but not the basic principles). . The range of Islamic financial products is open to further expansion and re-interpretation by the scholars, as long as they are guided by the Shari’ah . Ijtihad is the important tool need to be utilised to explore the dynamicity of Islamic law.

PROHIBITIONS IN MUA’MALAT CONTRACTS

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 Conclusion of contract by mutual consent  The avoidance of riba’  The avoidance of gharar  The avoidance of transactions involving maysir (gambling)  The avoidance of transactions involving prohibited commodities

 Literally (lughatan) - excess, increase, expansion, growth

 Technically (istilahan):

 Definition 1: Every excess in return of which no reward or equivalent counter value is paid  Definition 2: Predetermined excess above the loan received by the creditor conditionally in relation to a specified period.

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“Those who eat riba will not stand (on the Day of judgment) except like the standing of Shaitan leading him to insanity. That is because they say: “Trading is only like riba,” whereas Allah has permitted trading and forbidden riba. So whosoever receives an admonition from his God and stops eating riba shall not be punished for the past; his case is for Allah (to judge). But whoever returns (to riba); such are the dweller of the Fire – they will abide therein.” (Surah al-Baqarah: Verse 275)

From Jabir RA, he said: “Rasulullah SAW cursed the receiver and the payer of riba, the one who records it and the two witnesses to the transaction and said: they are alike (in guilt).” (Narrated by Muslim)

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 The debtor borrowed money to be paid in certain time, and the amount is more than the amount borrowed – RIBA QARDH

 A creditor gives a periodic loan and takes monthly interest. The capital sum lasts until the expiration of the period. Upon expiry, if the debtor cannot pay, the period to pay back the capital will be extended and interest will be charged – RIBA QARDH

 Arising out of exchange contract (‘uqud mu’awadhat), a buyer must pay a consideration. If he fails to settle on time, the period will be extended by increasing the amount (principle + interest) – RIBA JAHILIYYAH or RIBA QARDH based on the agreement

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Occur out of an exchange between two ribawi materials in the same kind where the necessary rule(s) is (are) not observed Guided by the saying of Rasulullah SAW: ‘I LLAH (RATI O D ECI D ENDI) FOR PROHIBITIO N:

o Gold & silv er (and other thing s serve sam e purpose) - Medium of exchan ge Ubadah bin al-Samit RA nar r ated that Rasulullah SAW said: “Gold for gold, (curren cy) silver for silver, wheat for wheat, barley for barley, dates for dates, o Wheat, barley, salt for salt – li ke fo r like, equal fo r equal, and hand-to-hand (spot); if dates & salt - the commodities differ, then you may sell as you wish, provided that Staple foods the exchange is hand-to-hand or spot transaction.” (Narrated by Mus lim)

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 LITERALLY (LUGHATAN):  Deceit/ fraud (khid’ah), uncertainty, TYPES OF GHARAR danger/ risk, and peril/hazard (khatar) that might lead to destruction and loss. GHARAR FAHISH (Major/  TECHICALLY (ISTILAHAN): excessive gharar)  Uncertainty and ignorance of the contracting parties over the substance or attributes of the object of sale, or of doubt over its GHARAR YASIR (Minor existence and availability at the time Gharar) of contract (majlis al-’aqd).

GHARAR LA YUMKIN IHTIRAZ ‘ANHU (Unavoidable Gharar)

PROHIBITION OF GHARAR

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To avoid any dispute due to unfairness in dealing caused by the lack of knowledge.

“O believers! Do not eat up your property among yourselves unjustly; except it be a trade amongst you, by mutual consent.” (Surah al-Nisa’: Verse 29)

 Meaning of gharar: - Literally: risk, uncertainty, hazard - The sale of probable item whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling

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 Meaning: has a range of negative connotations, such as, uncertainty, deception, risk, hazard, ignorance etc.  If there is gharar, the contracting party/ies do not really understand the attributes / consequence of the contract  Under Islamic law, gharar is prohibited because its existence in the contract may deny the parties of equal bargaining power and they cannot make informed decisions; or if there is risks on deliverability of the object of the contract

Surah an- Nisa’: ayat 29 “ … squander not your property amongst yourself unjustly (batil) except it be a trade among you by mutual consent…”

Interpretative Efforts

What amounts to

Unjust (batil) Trade by Mutual Consent

Criteria Criteria ■ All illegal & defective elements in ■ Offer & Acceptance, indicating contracts including gharar & consent uncertainty ■ Elimination of mistake, fraud etc

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 The sunnah uses the word gharar and its derivatives much more extensively than the Qur`an in the sense that several new meanings are added  In relation to commercial transactions, the Prophet s.a.w. in many of his sayings directly prohibited the sale involving gharar (uncertainty) and jahalah (ignorance)  Thus, the prohibition of gharar is made conclusive by the sunnah / hadith of the Prophet s.a.w.  Examples: the prohibition of gharar sale (i.e., the sale contract affected by gharar), the prohibition of the sale of fish in the sea, bird in the air, unborn animals, lost items, etc.

 In Islamic law, gharar can be of two degrees:  Excessive or major (gharar fahish)  Minor and tolerable (gharar yasir)  Only major /excessive gharar will affect the validity of contracts, where it will render the contract void / voidable, depending on the degree of uncertainty  Gharar affects trading and exchange contracts (mu`awadat); not charitable and unilateral contracts  In banking & finance – gharar can be triggered e.g. – in the sale contract to create the indebtedness if the asset used is uncertain / vaguely identified; the trading of a securitised debt which is unconfirmed / not established, sale of insurance policy

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 Broadly speaking, gharar will effect the validity of contract if it occurs in these areas: - gharar in kind / type / attribute / quantity of the object - gharar due to delivery time - gharar due to the price/ mode of payment - doubt over the ability to deliver

 Gharar is excessive (gharar fahish)  Occurs in exchange contracts (‘uqud al- mu’awadat)  Effects the subject matter of the contract directly, not just the appendage  No public need (al-hajah al-’ammah) for the contract in discussion.

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 However, the subjectivity of this benchmark is very obvious  Demarcation on excessive and trivial gharar  Determining the public need? To what extend  Inevitably, this demarcation will be influenced by differences in time, societies, individual taste and preference, technology and the way certain transaction is conducted as well as regulatory framework.

 To prevent gharar, the parties to contract must have adequate knowledge and information on the subject matter: i- Their existence and deliverability ii- Its quality, quantity and attributes are known iii- Time –frame for payment and delivery

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 However, gharar is tolerable if: - i) it is trivial (gharar yasir) - ii) It occurs in other than exchange contracts, such as in gratuitous contracts. -iii) It happens to the ancillary object (appendages) only (not the principal and main subject matter of contract) - iv) the economic need for the contract embodying the risk is substantial

RIBA GHARAR  FIXED in theory and  NOT FIXED in application as its application application changes with the quality of knowledge, legal framework, technology etc.  Very much dynamic  Is about mental exercise

“These are the main challenges that we are facing, especially in our product development efforts”

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 Transaction involving the prohibited commodities (e.g pork & liquor) Surah al Maidah (5:3) Surah al Maidah (5:90)  Transactions involving gambling (maysir) Surah al Maidah (5:90)

 Riba can occur . All interest-based lending activities . Fixed return on deposits in conventional banking

 Gharar can be triggered . Asset used in the sale/ lease contract is uncertain/vaguely identified . Selling price or lease rental is known to the parties upon entering into the contracts etc . Investment in non-Shariah compliant companies, conventional bonds, etc.

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THEORY OF ‘AQAD

Barbati defined “aqad” in his kitab “Inayah ‘ala Fath al-Qadri”: “Legal relationship created by the conjunction of two declarations, from which flow legal consequences with regard to the subject matter”

Definition defines the essential elements of an ‘aqad:

1. The offer (ijab) and acceptance (qabul) executed are legally binding on parties in the contract; 2. The contracting parties; and 3. The subject matter of ‘aqad on which the aqad gives the effect. ‘Aqad can be translated as “contract”

“O believers! When you contract a debt for a fixed period, write it down. Let a scribe write in down in justice between you. Let not the scribe refuse to write, as Allah has taught him…” (Surah al-Baqarah: Verse 282)

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 Requirement of mutual consent based on al Quran (4:29): O you who believe, devour not your property among yourselves by unlawful means except that it be trading by your mutual consent.  Manifested through expression of the parties  No certain formalities in concluding contract  In general mutual consent is achieved if it is made freely by a competent person (puberty and prudence)

 The words Khilabah, ghishsh and tatfif has been used widely in Al Qur’an and the Sunnah to convey the meaning of fraud and cheating  It refers to maneuver practiced by one of the parties to induce a person to a contract without which he would have not entered it  It also refers to concealing the defects of and adulteration in merchandise.

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SHARIAH CONTRACTS IN ISLAMIC BANKING

SHARIAH CONTRACTS ACCORDING TO THEIR PURPOSES

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ISLAMIC BANKING MARKET SHARE AS AT 2009

Sales

Malaysia 16 29 Bahrain UK 14 Kuwait UAE 9 USA 4 4 7 Iran 6 7 4 Pakistan Saudi Arabia Others

 Increasing universal acceptance and popularity of Islamic financial products and services as well as continuous innovation to develop globally accepted and recognized Islamic financial products and services...estimated 1.6 billion Muslims worldwide and Islamic assets are set to hit more than USD1.03 trillion by 2012 (“The Banker 2009”).  Islamic finance has expanded at annual rate of 15- 20% with a presence spanning more than 75 countries with more than 300 Islamic financial institutions... robust growth.

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 As at June 2010, the country’s Islamic banking has accumulated a total of RM303 billion in assets or 19.6 per cent of the total assets of the banking sector which is RM1.5 trillion.  Islamic Sukuk garnered 57 per cent or RM172 billion of the total bond issuance of RM301.75 billion

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 UK –  Govt sets an objective to ‘entrench London as a global gateway for Islamic Finance.  5 FSA-approved Islamic banks and 2 Takaful operators.

 Hong Kong –  aims to become an Islamic finance hub Hang Seng Islamic China Index Fund in 2007 Shari’ah Advisory Council formed.

 Japan – new law allowing banks to do Islamic finance.

 France –  passed rules and regulations to support Islamic finance activities.  Considering licensing first Islamic bank

 Singapore –  established first Islamic bank  Introduced tax neutrality for Islamic finance  Aspiring to be centre for Islamic finance  Issued sukuk

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 Australia –  Islamic cooperative finance and mortgage established.  Consider to establish Islamic bank.

 Underlying principles utilised in devising products of IBF is very important as they separate IBF from conventional products.  Contrary to conventional finance, which is specification driven product, Islamic finance is more structure and principle based product  Rules and regulations will differ from one product to another, depending on the structure employed  In general, various underlying Shariah principles have been utilised in devising products of Islamic Banking and Finance.  They can be summarised as below: - Sale based products - Lease based products - Participatory products

- Fee based products 72

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 Banking products  IIMM products  Capital Market Products

Gratuitous Trading Investment Supporting Contracts Contracts Contracts Contracts

Gi ft Leasing Sale Mudarabah Kafalah

Waqf Musharakah Rahn Operational Bay` Loan Lease Bi thaman Ajil Hi walah (BBA) Ibra’ Fi nancial Wadiah Lease Murabahah Wakalah Salam Jualah

Istisna’ etc. Muqasah 74

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SOURCES OF APPLICATIONS FUND OF FUND

EQUITY DEBT FINANCING FINANCING

Mudharabah Sale based financing Lease Based Financing Fee Based Services Musharakah BBA / Murabahah -Ijarah Wakalah ‘Inah/Tawaruq/dayn -AITAB Kafalah Salam Istisna

Comsumer Corporate Banking Banking 76

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SALE BASED CONTRACTS IN ISLAMIC BANKING

 Sale is a bilateral contract – where the exchange is made between two subject matters (asset & price)  The purpose : the transfer of ownership  Rules of gharar and riba applied extensively on contract of sale

 Involves the exchange of: . commodity for another commodity (barter) . Commodity for money (trading) . Money for money (sarf- currency exchange)

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 Deferment could either be in subject matter or price Deferment in commodity : bay’ al-salam & Istina’ Deferment in Price : BBA

(c) Mohd Johan lee 2015 14 & 15/9/2015 MANNER OF PAYMENT  Cash sale Sale by immediate payment The price must be paid during the conclusion of the contract  Deferred payment sale by installment basis Lump sum payment in the future Periodically Other method agreed upon the parties In some contracts, the payment must be spot and deferment is not allowed, e.g bay’ al-dayn, salam, bay’ al ‘urbun

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REGULAR SALE (BAY’ AL MUSAWAMAH)

 Common sale, sat at  The seller to correctly negotiated price reveal the cost price at  No reference to the cost which the acquired the price of the commodity good (amanah)  The profit (or loss) is only  Example of trust sales: know to the seller Mark-up (murabahah) At- price sale (bay’ tawliyyah) TRUST SALE (‘UQUD AL-AMANAH)

 To finance the producer, manufacturer and the like Salam and Istisna’  To finance the customer to own a property All credit sales/deferred payment sales (bay’ mu’ajjal)  To provide commitment to purchase Bay’ al – ‘urbun  To obtain cash instead of property Al Inah & Tawarruq  To get the highest price Bay’ al –muzayadah (auction)

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 Classical : can be used to purchase various commodities as long as the manner of payment is deferred  Modern application: somehow wider than its classical application, used to finance various items such as : houses, land, motor vehicle, consumer good, share, overdraft facility, education financing package, personal financing, refinancing of an asset etc.

 Al Bai Bithaman Ajil /Bai al Muajjal= The sale with subsequent payment i.e. deferred payment  A transaction where the delivery of the goods is present yet the consideration sum is to be paid in the future  However the buyer and the seller must determine the mechanism of payment during the aqad

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 The most common practice in Malaysia is over the buying and selling of property

Seller Buyer

Consideration in 300 installments

 Banking Facility Instant Payment Seller/ RM150,000 Buyer/ 1 Customer Banker

= buyer Consideration = Seller in 300 Back to Back resell – installments RM350,000

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BBA WITH NOVATION (CONT) Vendor 1 Novation Payment Purchaser Banker /Customer

3 = buyer = Seller Consideration= deferred payment---monthly progressive installments

 Sale against deferred payment  It is a trade-deal in which the seller allows the buyer to pay the price of a commodity at a future date in lump sum or installments  Need not have reference to the profit margin

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 It is allowed under the concept of sale (bay')  Issue: whether the deferred price can be charged more than the spot price in BBA  Majority of Muslim scholars (Hanafis, Shafiis,al- Shawkani):

 BBA refers to sale with deferred payment  In Fiqh perspective:  Any sale, whether it is murabahah (mark-up sale) or normal sale (musawamah) can use the method of deferred (BBA) payment  As long as the contract involve the element of deferred payment of price, then it is called a BBA

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 Permit additional charge  Price of deferred sale could be higher than cash sale  Provided that the following conditions to be fulfilled:  The object of sale must come into the possession of the financier/bank before being handed over to the other party  In case of default or delay of the payment by the customer, the price can no longer be raised  If customer in financial difficulty, respite should be given to him & another date be fixed for the payment of the balance of the price

 Time for payment must be fixed & known to parties  The time for payment is calculated from the time of delivery of the thing sold  Regards should be made to the customary practice

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 Definition – the sale of a deferred item in exchange for an immediate (forward) price  Purpose of Salam – original purpose of a Salam was to meet the needs of small farmers who needed money to grow their crops and feed their family until the time of harvest  Salam as mode of financing – Salam has become a mode of financing used by Islamic banks and suitable as a mechanism to raise fund  Salam commodities – Salam contract is acceptable for fungible, generic goods only – not suitable for unique goods

 Banks and financial institutions may use Salam as a mode of financing especially to finance the agricultural sector.

 The bank asked the customer to produce and deliver certain commodity on the agreed date  The customer may be required to provide security for the contract (mortgage/guarantee)  In the case of default of delivery, the collateral will be used either to realize the required commodity by purchasing it from the market, or to recover the price advanced by the bank

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 In modern practice, the contract of Salam is normally done in a parallel way  After concluding the contract with the first client, the bank then enters into another contract of Salam with another client  In the first contract, the bank is the buyer, but in the second contract the bank is the seller

 Bank entered into a contract of Salam (on 31 June 2010) with supplier where supplier will deliver to the bank on 1 October 2010 – bags of paddy at a purchase price  The bank then entered into another contract of Salam with the client where the bank agreed to deliver 100 bags of paddy on 1 Oct 2010 at a selling price (purchase price with profit)

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Commodity to be delivered by the customer Supplier

Bank Bank paid the price in advance

Commodity to Client paid the selling price be delivered in advance by the bank Client

 Promise to buy from third party  in this arrangement, the bank after the contract of Salam with supplier, obtain a promise to purchase from a third party (client)  This promise should be unilateral in nature and it is not a sale  No advance payment is required  Once the bank requires the commodity, the bank will sell the commodity to the client at selling price

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Commodity to be delivered by the customer Supplier

BANK

Client promise to buy the Contract of sale is commodity at a selling price concluded once the commodity is Client obtained

 A financing contract which involves the sale and buy back transaction of an asset by a seller  The intention of bay’ al-’Inah is to obtain liquidity (cash) rather than acquiring the object of trading.  Bay’ ‘inah is so disputable, because majority of jurists, regard it illegal, as it is considered as a legal device (hilah) to taking riba’

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Property

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LEGALITY SAC of BNM in the Regional Shariah Scholars Dialogue on 29th June 2006 resolved that: 1. The permissibility of bai’ inah and tawarruq is still a matter of juristic disagreement among the Shariah scholars backed by their own basis of justifications. 2. Bai’ Inah contract is still necessary in the context of local Islamic finance development. However market players are required to strengthen and enhance the operational processes and documentation to comply with the features of bai’ inah as permitted; and 3. Since bai’ inah contract is still regarded as a matter of juristic disagreement among the Shariah scholars, it is more desirable that Islamic financial institutions to limit its use in products which face difficulty in structuring them based on other consensually accepted contracts.

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CONTRACT OF SALE (BAI’) – ‘INAH

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Permissible only if it Majority involves a third party Permissible (some of • Not permissible & no prior Shafi’ considered it • It is agreement to that reprehensible stipulated/conditio contract is made (makruh) nal sale (tawarruq)

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 Bay Inah consists of two sets of sale and purchase contracts that fulfill all the necessary requirements of a valid contracts  Total adherence to the external manifestation of the contract and no investigation to the inward intention.

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SHARIAH ADVISORY COUNCIL OF BANK NEGARA MALAYSIA’S RULING ON BAI’ INAH:

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 Banking FacilityInstant Payment Seller/ RM350,000 Buyer/ 1 Banker Customer

= Seller = buyer Back to Back Consideration repurchase – in 300 RM200,000 installments

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 One party sells his property to another for a higher price which is to be paid in the future on the condition that the latter will sell it back to the former on spot (for a lower price)  Or, one party sells his property to another for a price which is paid on spot on the condition that the latter will sell it back to the former for a higher price but to be paid in the future.

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 The underlying purpose is to obtain cash money. Legitimacy:  the Shafiis validated it as it conforms to all essential elements of a valid sale (though a number of Shafii jurists also considered it discouraged - makruh).  The majority disapproved it as it goes against the hadith (two sales in one) and also a legal trick to circumvent the prohibition of riba.  The Hanafis have however approved tri-partite Inah

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(c) Mohd Johan lee 2015 14 & 15/9/2015 TAWARRUQ VS ‘INAH Distinguish Factors Al – ‘Inah Al - Tawarruq Concept Purchase of a commodity Buying a commodity for a on deferred payment deferred payment and basis and it is then sold selling it to another for cash, at a price lower person other than initial than the purchase price, seller at a lower price for back to the original seller immediate payment Purpose To facilitate cash and To facilitate cash and liquidity shortage liquidity shortage

Parties Two parties involve for two Three parties (at least) transactions involve for two transactions (at least) Subject matter Return back to the original Transferredand seller possessed by third party

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CONTRACT OF SALE (BAI’) - DAYN

 What is “dayn” (debt)  a constructive property (mal hukm) established in the liability of the debtor • Sale of debt  Sale of future receivables for cash  Can “debt” be sold?  Yes  It is considered as property of value (mal mutaqawwim)  However, subject to jurists view on whether debt is “money” or “right”

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 The Malaysian SAC of SC  Middle Eastern Scholars  Allowed: Not allowed:  Arguments: Arguments:  Islamic debt is a good as Debt is nothing but a payment asset as it has haq maliy, as of monetary debt, and as such it therefore can be sold at remains monetary whatever price provided it is sold on spot Money for money exchange requires spot and equal  Also, the practice of sale of exchange debt at a discount is supported by the hadith : The Hadith on “discounting” “give a discount for early does not apply to a creditor payment” giving a discount to a third pary.

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 Islamic Accepted Bills  IAB is used as a result of securitizing a debt which may arise from Islamic financing  IAB is normally used for import or export financing facilities (IAB import & IAB export)  Bank draws Bill of Exchange on the debt to the customer  The BOE has its value (the bank’s selling price) & time of maturity  The BOE can be traded in the secondary market

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• Provides BBA financing to customer (RM500k) • Majority dates 20 yrs • Confirmed debt – installment payment

Bank Customer

FI may wait until maturity Bank sell the debt to FI (20 years) & gain RM100k With discounted price Or FI sells it to other at (RM400k) discount price (RN450k) Profit : RM100K) Financial Institution Profit : RM50k)

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 A deferred payment sale

 The subject matter must be owned by the seller at the time of sale

 The parties must clearly identify the mechanism of payment of the purchase consideration sum

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 The profit margin need not be stated

 As a sale, during the aqad there must be a transfer of ownership & possession

the purchase consideration must be fixed

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 A deferred payment sale

 The subject matter must be owned by the seller at the time of sale

 The parties must clearly identify the mechanism of payment of the purchase consideration sum

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 The profit margin need not be stated

 As a sale, during the aqad there must be a transfer of ownership & possession

the purchase consideration must be fixed

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BBA THIRD PARTY FINANCING

 Owner(s)  Customer(s)

 1. A & B  1. A

 2. A  2. A & B

 3. A or A & B  3. X or X & Y

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LETTER OF HIBAH (GIFT)

 Third Paty Banking Facility

Owner(s) 1

Instant Payment Buyer/ Seller/ RM150,000 2 4 Customer Banker

Owner(s)

= buyer Consideration = Seller in 300 Back to Back resell – installments RM350,000

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 LO  Facility Agreement  Asset Purchase Agreement  Asset Sale Agreement

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 Sale and Purchase Agreement between the Customer and the Banker–  Normally = Asset Sale Agreement  Customer purchase from Bank (thus Indebtedness)

 Subsequent (back to back) Sale and Purchase Agreement between the Banker and the Customer  Normally = Asset Purchase Agreement

 Charge/ Mortgage/ Lien/ Deed of Assignment

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Istisna

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Customer Manufacturer

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Customer Istisna’ 1

Financier Istisna’ 2

Contractor

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Customer Contractor Istisna’ Purchase Istisna’ Sale

Financier

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 This contract is also an exception to the general rule pertaining to the existence of the subject matter at the time of contract  This contract involves manufacturable goods only (commodities that cannot be manufactured e.g. fruits, grains etc are not suitable)  Payment of the price is flexible - need not be advanced at the time of contract only

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 Proper description of the goods ordered should be made  Time, place and mode of delivery of both the goods and price should be specified at the time of contract  This contract is suitable to finance the purchase of property which is still under construction

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 Originally the istisna' contract is not binding on neither party until the goods are made and accepted by the buyer (majority view in the Hanafi school)  However, in contemporary Islamic banking, it is accepted that istisna' is binding on both parties from the start (minority view in the Hanafi school)  As with other types of sale, parties in istisna' are free to fix the price as they wish, using e.g., cost- plus or mark-up approach

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 Payments for the price is flexible and can be delayed until delivery, or even beyond  However, to make matters easier, a schedule of progress payment may be agreed between the parties  In contemporary practice, Islamic banks may employ istisna' to finance manufacture and construction contracts - project financing

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 Classical Islamic law also allows the manufacturing party in an istisna‘ to sub- contract the manufacturing to a third party through a second istisna'  This arrangement is known as "back-to-back istisna"" or "parallel istisna'"  This structure has been used by contemporary Islamic banks to finance the purchase of major manufactured goods such as ships and airplanes

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 One party buys good that the other party undertakes to manufacture in according with the specification given in the contract

 Subject matter must be manufacturable goods only (not for commodities)

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 Subject matter not in existence at the time of contract

 Subject matter shall be identified by specification only and not by designation (because it is not in existence at the time of contract)

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 Contract to manufacture i.e. hire of person to do something

 Payment can be prompt, deferred or paid in installments. Normally it will be progressively in proportionate with the progress of the work completed

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 Manufacturer undertakes to make the goods with his own material. The buyer doesn’t have to supply any goods

 Ownership of the manufactured good remain with the manufacturer until and unless delivered

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 If it is by progressive payment, it is permissible for the seller to request security or deposit.

 The good need not be manufactured by the Seller. His obligation is to deliver the good to the buyer only

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 Delivery date does not have to be fixed. However, the buyer can include a final date of delivery after which the contract will be terminated

 Penalty for late payment (which is without prejudice to the termination right after cut off date) or liquidated damages for late delivery save in case of force majeure

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 Before the manufacturing or contrsution process has commenced, either party can terminate the contract.

 However, once the process has commenced, it is binding on both parties (i.e. irrevocable) if the constituent conditions and terms are satisfied

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- (ﻟﻐﺔ)  Istisna’ literally request to construct. 1. I stisna’ 1 – r equesting Bank to constr uct a specified type of asset - (اﺻطﻼﺣﺎ)  Technically 2. Under take to constr uct the asset agreement to sell to or & to deliver it in a specific per iod. buy from a customer a non-existent asset which is to be built 5. Bank deliver the according to the asset ultimate buyer’s specifications and is to 4. Contr actor deliver asset to the be delivered on a Bank specified future date at 3. I stisna’ 2/ Parallel I stisna’ – a predetermined selling Bank r equests sub-contr actor to price. constr uct the asset & to deliver it in a specific per iod.

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CONTRACT OF SALE (BAI’) – ISTISNA’

LEGALITY

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SPECIFIC SHARIAH REQUIREMENTS

An Istisna’ contract is valid if it complies with Shariah requirements of the contract and the (رﻛﻦ /i.e the essential elements (rukn .of rukn (ﺷﺮط /necessary conditions (syart

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SPECIFIC SHARIAH REQUIREMENTS

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SPECIFIC SHARIAH REQUIREMENTS

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 Legal/Security Documents  :  This Letter of Offer  Master Facility Agreement (Overdraft)  Istisna’ Purchase Agreement  Istisna’ Sale Agreement  Deed of Assignment  Power of Attorney  Debenture

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Murabahah & Tawaruq

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 Originate from the root word of ribh = to increase or profit  Sale of commodity at the cost price plus a known profit  Illustration:  Ibought this commodity for 10 RM and I am selling it at the profit of 2 dollars;  I am selling the commodity at the profit of 1RM for every 10 RM that I spent for its cost

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 = the sale at the cost + a known profit

Seller Buyer

Cos t + Profit Rm50 + Rm20

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 No dispute among the jurists on the validity of Bay’ al-murabahah  This is a form of sale (bay’)  Comes under the purview of “Allah has permitted sale and prohibited riba” (2:275)  The scholar prefer Musawamah over Murabahah. Why?

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 Customer expresses his wish to acquire goods through the Bank  Transaction between the Bank and Customer must be genuine  no prior contractual relationship between the Customer and the Supplier  the Supplier is not the Customer or the agent of the Customer

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CONTRACT OF SALE (BAI’) - MURABAHAH

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CONTRACT OF SALE (BAI’) - MURABAHAH

Prophet Muhammad SAW permitted the sale of goods at a price more than its purchase price. He says Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt – like for like, equal for equal and hand to hand (spot); if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand or spot transaction.”(Narrated by Ahmad and Muslim)

Ijmāc al-fuqahā’ on the permissibility of the Murābahah sale. Al-Kassāni has pointed out that the people inherited these kinds of sales (Murābahah) throughout the generations and ages without any protest of non-acceptance

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CONTRACT OF SALE (BAI’) - MURABAHAH

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MODUS OPERANDI (1) Customer PP - MPO

(3) Bank Sells & Delivers Asset CUSTOMER (4) Pays Price

Delivery Option

(2) Bank Buys & Receives Asset @ Customer Buys as the Purchasing Agent of the Bank - MPO SELLER

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BAY AL TAWARRUQ (COMMODITY MURABAHAH)

• A contract discussed by the ulama in the past especially, those of Hambali. • A transaction to get cash or liquidity through sale contract • Similar to Inah • An arrangement whereby a person who need of case bought some goods for deferred payment. • He then sole the goods to another party for case payment of a lower price.

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Ali Abu Sells Asset on deferred Sells Asset on cash payment term term

Kassim

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• Accepted by majority of the Ulama • Due to the presumption that parties intended to circumvent the prohibition of riba was quite remote in tawarrruq due to its tri-partite nature. • Yet ulama like Umar Abd Aziz and Shaybani chose to discourage it. • Ibn taymiyyah and Ibn Qayyim disallowed it and dismissed it as legal trick.

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 Different from Inah because the subject matter that has been sold in Tawarruq will not be resold back to the original owner.  Thus, Al tawarruq contract will need at least 3 separate parties.

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Bank Customer Sells Asset on deferred Sells Asset on spot payment term Us ing Murabaha (RM1100) Dealer B

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Dealer A

Purchase on spot (RM1,000) Sells Asset on deferred payment term using Murabaha(RM1100) Bank Customer

As agent sells Asset on spot on behalf of the Customer. Money collected banked into Cus tomer account Dealer B

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1) Bank obtains promise to buy from client 2) Bank buys commodities from broker A and pays cash. 3) Bank sells the commodities to client on deferred basis. 4) The client authorizes the bank as his agent to sells the commodities to commodities broker B on cash.

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(c) Mohd Johan lee 2015 14 & 15/9/2015 EXPLANATION (CONT) 5)The amount will be deposited into client's account. Client obtains liquidity and has liability to pay bank on deferred basis.

6)Client will pay the bank on deferred basis, according to their agreement  This model has been used by Islamic bank in Middle East to provide personal financing (personal loan) to their clients.  E.g. al-Tawarruq al-mubarak finance (Arab National Bank -Saudi Arabia), al-Khair financing (Abu Dhabi Islamic Bank- UAE), Amanah Personal Financing (HSBC Amanah), tasaheel (al-Manar - Kuwait)

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1) Bank obtains promise to buy from client 2) Bank buys commodities from broker A and pays cash 3) Bank sells the commodities to client on deferred basis. 4) The client authorises the bank as his agent to sells the commodities to commodities broker B on cash.

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(c) Mohd Johan lee 2015 14 & 15/9/2015 EXPLANATION (CONT) 5)The amount will be deposited into client's account. Client obtains liquidity and has liability to pay bank on deferred basis.

6)Client will pay the bank on deferred basis, according to their agreement  This model has been used by Islamic bank in Middle East to provide personal financing (personal loan) to their clients.  E.g. al-tawaruq al-mubarak finance (Arab National Bank -Saudi Arabia), al-Khair financing (Abu Dhabi Islamic Bank- UAE), Amanah Personal Financing (HSBC Amanah), tasaheel (al-Manar - Kuwait)

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Modern definition  BBA is a contract that refers to the sale and purchase transactions for the financing of an asset on a deferred and an installment basis with a pre-agreed payment period.  The sale price will include a profit margin which is disclosed to the customer (murabahah.

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 In modern practice BBA & Murabahah contracts are used in the same manner.  In some countries, the term Murabahah is used and in some countries the term BBA is used.  Malaysia practice:

 Murabahah is designed for short term financing & the payment is on bullet payment  BBA is for long term financing by installment o  No significant difference in term of modus operandi

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 Liquidity Instrument  Personal financing  Cash line  Overdraft  Credit card  Working capital financing  etc

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 Deposit & Investment Instrument  Commodity Murabahah Deposit- i

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 Step 1  The Customer has desire to purchase an asset i.e commodity and thus, enter into a binding promise (Wa'd Mulzim) for asset requisition to purchase the commodity from the Bank. In the meantime, the Customer also appointed the Bank as his restricted agent (in this context, it is referring to the specific Wakalah concept) to accept the commodity on his behalf. The Customer will issue a Purchase Requisition (which is irrevocable on issuance) to the Bank. The document comprises of the following elements:

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 a. Purchase Request, to the effect that the Customer has desire to purchase a commodity and requests to purchase the Underlying Commodity from the Bank;  b. Undertaking To Purchase (Wa'd Mulzim), to the effect that the Customer undertakes to purchase the Underlying Commodity from the Bank at the Selling Price upon the Bank having purchased the said Underlying Commodity from a commodity trader (i.e 1st Trader); and  c. Agency to Conclude Purchase, to the effect that the Customer will appoint the Bank as his restricted agent (under specific Wakalah concept) to conclude the purchase of the Underlying Commodity from the Bank and subsequently to enter into the Murabahah Sale Contract (on his behalf) with the Bank.

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 The Customer will also execute and deliver a Letter of Agency to the Bank whereby the Customer will appoint the Bank as his agent (under Wakalah concept) to sell the Underlying Commodity to another commodity trader (i.e 2nd Trader) upon conclusion of the Murabahah Sale Contract

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 Upon receipt by the Bank of the Purchase Requisition from the Customer and pursuant to the Purchase Request, the Bank will purchase the Underlying Commodity from a commodity trader at the cost price of the Underlying Commodity which shall be an amount equivalent to the Financing Amount.  The commodity trader will deliver the Underlying Commodity evidenced by the certificate together with the delivery order as evidence for the transfer of ownership to the Bank.

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 Pursuant to the Undertaking To Purchase (Wa'd Mulzim), the Bank will then sell the Underlying Commodity to the Customer at the Selling Price based on the Murabahah concept (Commodity Cost + Profit Margin) which shall be payable by the Customer to the Bank by way of installments or deferred payment or any other method in accordance with the manner as prescribed by the Bank.  Pursuant also to the Agency To Conclude Purchase, the Bank (as the Customer's restricted agent to accept on the Customer's behalf) will then conclude the purchase of the Underlying Commodity from the Bank and enter into the Murabahah Sale Contract

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 Step 4  The Murabahah contract concluded and the Customer appoints the Bank as an agent to sell the commodity to the second trader.  Step 5  Upon conclusion of Step 3 above and pursuant to the Letter of Agency, the Bank will then sell the Underlying Commodity to the second commodity trader at the Commodity Cost.

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 Step 6  The Bank will then disburse the sale proceeds, which will be an amount equivalent to the Financing Amount, received from such sale, into Customer's new account and used to settle the old account.

 Underlying Asset = Oleo chemical related products or any other Shariah compliance commodities

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 Agency Agreement  Waad  LO  Facility Agreement  Murubahah Sale Agreement

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Customer Appoints Bank as agent Bank Sells Asset on spot (Rm1000) Sells Asset on deferred payment term Us ing Murabaha Dealer B (RM1100)

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 Customer/ Depositor appoints Bank as an agent to purchase metal commodity from trader A on cash basis in an established metal commodity market  Bank as agent to Customer, buys commodity on spot from Dealer A  Customer then sells the commodities to the bank for a profit and on deferred payment.  The bank then sells the commodity to Dealer B on spot basis, which price is credited into the Islamic Deposit Account.

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 As agent to purchase the commodity on behalf of the customer, the bank receives cash from the customer which is deemed as deposit in the bank’s account.  By the purchase from Customer, the bank assumes liability (Cost +Profit of Customer) to be paid to be customer on maturity.  At the end of the transaction, the customer effectively gets some profits after investing money in the spot purchase of the commodities and selling them to the bank with a mark up on deferred payment basis.

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 Literal : sale of usufruct (bay’ al manfa’ah)  Technically: the transfer of usufruct for a consideration – rent or ujrah in the case of hire, and wages or ujr in the case of employment

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 Hadith from Said ibn Musayyib  “we used to lease out land for some portion of the agricultural products, and the Prophet (s.a.w) prohibited us from such practice. Instead he asked us to leas it out for gold or money”  Ijma’ of the companions of the Prophet  Legality of Ijarah based on real need for such transaction

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CONTRACT OF IJARAH

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CONTRACT OF IJARAH

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Purchase of asset Lessor Supplier delivery

Delivery of the leased asset

Payment of the rental Lessee

Delivery of the leased asset at the end of leasing period

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2. Client approaches the bank and obtain AITAB financing facility

BANK CLIENT

1. Client 3. The bank 4. The bank leases the car to the identifies the purchases the client at certain rental price with vehicle and car and pay the an option to purchase at the end pays deposit remaining of financing period (10%) purchase price CAR of the car (90%) DEALER

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It can be done in various ways:  The bank unilaterally promise to make a gift of the asset to the client at the end of the period  A promise upon the payment of the remaining installments  The final payment is considered the price of the car  A promise to sell for a token or other consideration (AITAB)

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 Two situations (a) Normal situation  call option (the right of the client to purchase)  Unilateral promise by the bank to sell /give the leased object to the customer (b) In the event of default, the bank has two options  Call back the facility and repossess the car  Put option (the right of the bank to sell) – by requiring the client to purchase the car at an agreed price

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 All liabilities and r isks pertaining to the leased asset ar e to be bor ne by the Bank including obligations to r estore any impair ment and damage to the leased asset ar ising from w ear and tear and natur al causes w hich ar e not due to the lessee’s misconduct or negligence.

 The lessee should car r y out oper ating or periodical (or dinary) maintenance

 The Bank insur es the leased asset (cost to be bor ne by the lessor ) for damages. The takaful/ insur ance cost can be included as par t of the fix ed lease r ental and cannot be charged separ ately to the lessee

 Despite of requirement in the BNM CAS that the Bank to cover m aintenance cost of the le ased asse t during the ijar ah te nure, the BNM allow s the Bank to follow m arke t practices.

 It is permissible for the Bank as lessor to sell the leased asset to a third party without consent of the lessee.

 If the lessee stops using the leased asset or r eturns it to the Bank w ithout the Bank’s consent, the r ental will continue to be due in r espect of the r emaining period of Ijārah, and the Bank may not lease the asset to another lessee for this period, but must keep it at the disposal of the curr ent lessee

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6) Early Settlement

 not permissible for one sided contract termination.

 it can be terminated unilaterally in certain circumstances:

 the Ijārah contract can also be terminated due to the following event of default (based on current clause on event of default in the BIMB’s Ijārah agreement).

7) Transfer of the ownership of the leased asset in IMB

 The method of transferring the title: A sale or a gift

 The document evidencing a promise of gift or sale should be independent of the contract of the Ijārah

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EQUITY FINANCING

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EQUITY DEBT FINANCING FINANCING

Mudharabah Sale based financing Lease Based FinancingFee Based Services Musharakah BBA / Murabahah -Ijarah Wakalah ‘Inah / dayn -AITAB Kafalah Salam Istisna

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Definition

 An agreement between a capital provider (rabbulmal) and an entrepreneur (mudharib) whereby the rabbul mal would contribute capital to the business which is to be managed by the mudharib.

 Profits generated by the business are shared accordance with the terms of the mudharabah agreement whilst losses to be borne solely by the rabbul mal unless the losses are due to the customer’s misconduct, negligence or breach of contracted terms.

Type of Mudharabah

Unrestricted Mudharabah - where the rabbul mal allows the mudharib to manage the capital without any restrictions. e.g. current account, savings account and General Investment Account(GIA)

Restricted Mudharabah - where the rabbul mal requires the mudharib to make investments subject to certain restrictions such as type of instrument, sector or country exposure. e.g. Specific Investment Account (SIA).

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Owner of Capital Entrepreneur (Rabbul Mal) (Mudhārib)

CONTRACT OF MUDHĀRABAH

Profit sh ared in Y% to ac cordan ce to pre-agr eed Rabbu l Mall propo rtions (X:Y)

X% to Mudhā rib

Outcome of Invests in Business Business Loss bor ne totally by rabbu l mal

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CONTRACT OF MUDHARABAH

LEGALITY

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1.Mudharabah Contrac t

Agreement must be in compliance with the rukn and syart of Mudharabah 2. Capital

Must be in the form of cash and cannot be in the form of debt

The Bank may issue Mudhārabah Investment Certificate as a proof of capital

It is not permissible for the Bank to guarantee to the depositor against losses except by a third party in case of misconduct and negligence.

3.Profit Alloc ation

Interim profit - can be distributed as long as the operation are profitable.

Profit allocation ratio and its calculation methodology must be c learly known and agreed by the parties

The Bank may use an indicative profit rate in mudhārabah deposit contract

The Bank can take precautionary steps by setting up Profit Equalisation Reserve (PER) and Investment Risk Reserve (IRR).

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4. Losses

Are borne only by the customer. The Bank does not bear any portion thereof unless the loss was due to his misconduct or negligence 5. Duties and Powers of the Bank (Mudhārib) The The Bank must c learly explain and ensure that customers understand and accept the mudhārabah contract adopted in the deposit products (BNM CAS requirement).

The Bank must provide adequate and timely product transparency and disclosure to depositors/ investors on risk and return of on profit sharing investment (PSIA) (BNM CAS requirement).

6. Charges, Profits and Benefits

The Bank is not entitled to charge a fee in addition to the profit (Contradiction between Bank Islam’s SSC decision and BNM SAC’s) and the Bank cannot impose administrative cost on depositors in mudhārabah deposit account.

The Bank is allowed to grant any reward or gift to the depositor in addition to the profit from the use of the fund

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7. Termination of the Contract

If the contract does not stipulate the period of the business venture, it can be unilaterally terminated.

If the period of business is explicitly stipulated, the contract can be terminated upon maturity or if both parties mutually agree or when the event of defaults occur

8.Dormant Account and Unclaimed Monies

The Bank may close a dormant account which has balance of RM 10 or less and the RM 10 is considered as service charge (Contradiction between Bank Islam’s SSC decision and BNM SAC’s)

10. Current Account Based on Combination of Mudharabah and Wadi’ah

The Bank acts as a mudharib and trustee (wadi’), while the depositor acts as a rabb al-mal and muwaddi’. Both parties must agree on the profit-sharing ratio at the time of opening the account. The guarantee on the deposit will only be given if the account balance does not satisfy the conditions of mudharabah. However, if the account balance complies with the conditions of mudharabah, the customer will have to bear all the risks of financial losses.

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CONTRACT OF MUSHARAKAH

(ﻣﺸﺎرﻛﺔ ) Definition of Mushārakah Contract

(ﻟﻐﺔ /Musharakah Mushārakah literally (lughatan it ,(اﺻﻄﻼﺣﺎ /means sharing. Technically (istilahan means a contract between two or more parties to contribute capital in various proportions to a partnership.

Profits generated by the partnership are shared in accordance with the terms of the mushārakah contract whilst losses are shared in proportion to the respective contributors’ shares of the capital.

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Rasūlullāh SAW himself travelled to Syām to trade with other people’s money including that of Sayyidatunā Khadijah binti Khuwailid RA

Suhayb narrated that Rasulullah SAW said:

“There is blessing in three transactions: credit sales, silent partnership (i.e. muqāradhah or mudhārabah), and mixing wheat and barley for home, not for trading” (Narrated by Ibnu Majah)

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(i) sharikat al – milk  proprietary partnership  concerned with joint ownership of property  any increase of the property should be shared by co – owners in proportion of the extent of their ownership (ii) Sharikat al – aqd commercial/ contractual partnership An agreement between two or more persons for common participation in capital & profits

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 (i) Finance partnership (sharikat al – amwal)  (ii) Labour partnership (sharikat al – a’mal)  (iii) creditworthiness/ reputation partership (sharikat al –wujuh)

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(c) Mohd Johan lee 2015 14 & 15/9/2015 NATURE OF SHARIKAT AL AQD a. Limited (I’nan) - partners liabilities & rights are subject to their proportion of investment – as per the agreement b. Unlimited (mufawadah) - Partners enjoy complete equality in the capital, management & other rights

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 The most important type of partnership  Mainly used in Islamic banking  Accepted by all Muslim jurists  Flexible – no strict conditions  Practical  Main features: does not require equality in investment no equality in personal status, distributions of profit and liabilities Relationship of partners is based on agency Gives the freedom to partners to conduct business in the area of commerce covered by their partnership

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 Shareholding  Shareholding of company  In the form of equity • Financing  Islamic banks provide equity financing to customers  In the form of retail or corporate financing

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 The share certificate evidences a form of capital contribution in a company  The investment in the shares can be in the form of mudharabah 0r musharakah  The shares can be sold at any price as it represents the assets owned by the company  The profit for the investors can be in the form of capital profits, or dividends, or both  Shari’ah stock selection must be done to ensure that companies invested in are only conducting Shari;ah compliant activities.

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 In the setting up of the Bank  Several investors agree to contribute certain amounts of money for the establishment of the bank  These shareholders are normally varied in their capital contributions/rights/liabilities

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 2 types of shareholders in private or public company: 1. Ordinary shareholder  Musharakah ordinary share  Rights and liabilities are limited to their shares to the company 2. Preference shareholder  Musharakah preference share  Non-cumulative, irredeemable, unconvertible

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 A partnership agreement whereby a business venture is entered into and managed by both parties.  However, any or all the parties have the right to waive that right. In case of waiving of right by all, a third party will be appointed as an agent to manage the venture.  Any profit arising will be shared according to predetermined ratios.  Losses however, will be shared in proportion with the capital investment contributed by each party.

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 The financier will provide 100% financing for the relevant project whilst the initiator of the project will manage it.  The financier cannot interfere in the management of the project, but can take up the follow-up and supervision task.  Both parties agree through negotiation on the ratio of the distribution of the profits generated from the project, if any.  If there is a loss in the project, the bank bears all losses.

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 The current practice in Malaysia is to use partnership (mudarabah) as the underlying contract in the Islamic investment account.  The customer and the bank will be sharing the profit according to certain ratio or percentage agreed at the time of the contract  The financial loss, if any, will be borne by the customer as capital provider.

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 General Investment Account (GIA)  Special Investment Account (SIA)

In GIA, the mudarabah arrangement is of a general mandate (mudarabah mutlaqah) and the ratio of profit sharing is more or less uniform/standard, advertised as a ready package between the bank and customer In GIA, the minimum investment amount is lower than the SIA.

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 In SIA, the mudarabah arrangement is of a specific mandate (mudarabah muqayyadah) for e.g., the customer can place restrictions to the bank as to the type of dealing, or project that the bank can enter into with the capital  The ratio of profit sharing can be negotiated between the customer and the bank  The minimum investment amount is higher than the GIA

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 A contract of partnership with declining / diminishing ownership  A form of Shirkah which creates an avenue for the capital investor to finally allow its partner to be free of the joint ownership after the initial investment period has been satisfied.  A hybrid of three contracts, namely:

 Shirkah (partnership)  Ijarah (lease)  Bay’ (Sale)

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• Customer and the Financier jointly acquire and own the property from the 1 Developer

• The financier purchases the property and leases the property to the 2 Customer on the basis of Ijarah

• The customer pays the rental • The rental price would be proportionate to the length of repayment 3 required by the Customer and subject to the agreement of the financier

• At the end of the rental, the Customer would acquire the full ownership of the property as the customer has repaid all of the 4 financier’s share.

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(c) Mohd Johan lee 2015 14 & 15/9/2015 DEFINITION  The term used to connote partnership contract is shirkah Literal meaning: intermingle, thus, the "intermingling of properties whereby one cannot be differentiated from the other"  Technical / legal meaning:  Maliki: the permission to transact (tasarruf) with the partnership property  Hanbali: the amalgamation of rights and freedom to use / transact (tasarruf)  ShafFi: the confirmation of the rights of two persons / more over a common property  Hanafi: a contract between two parties in relation to capital and profit

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 Surah al Nisa' (4:12):"... but if more than two, they share in a third...“

 Surah Sad (38:24):".. Truly many are partners (in business) who wrong each other; not so do those who believe and work deeds of righteousness, and how few are they?

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(c) Mohd Johan lee 2015 14 & 15/9/2015 SHARIAH LEGALITY  Hadith Qudsi. " I am the third of two partners so long as a partner does not betray his companion; if one of the partners does betray the other, I cease to be a partner to them."  Sunnah taqririyyah: the Prophet was reported to have approved some of the partnership contracts practiced by the people of his time  Ijma': the legality of shirkah in general is agreed by ijma' of the jurists; though they differ regarding the types and conditions of the permissible shirkah

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 Majority/ Jumhur: shirkah is not a binding contract, i.e., the partners have the option to terminate the contract as and when they wish to (‘aqd ghair lazim)  Shirkah entails that the partners hold a fiduciary position (amanah) in relation to the partnership property & capital; whereby, the exercise of necessary prudence and the avoidance of harm (darar) is the overriding principle

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 Offer & Acceptance  Made in the contract meeting (majlis al 'aqd)  Free from any defect due to mistake, cheating or coercion  Contracting parties  Capacity to contract {ahliyyah al ada'), e.g. sanity, puberty & prudence

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 Subject matter of Shirkah  •Capital & labour as agreed in the contract  Capital - in cash, except for Maliki who allows capital in the form of circulating or fixed assets  Capital - ready property (mal hadir), not absent-property {mal ghaib) - not immediately available for use by the partnership upon its commencement of business  Labour can be considered as capital by jumhur, except Shafi'I who considers capital to be limited to property {mal) only  Additional condition: purpose of shirkah should be lawful, not immoral / against public order

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 Capacity to accept agency (wakalah): • Partners must be capable of being agents to their colleagues

• The fixing of ratio of profit sharing: • Ratio of profit sharing must be fixed in advance, since distribution of profit is part of the subject matter of the contract; • Ignorance of the subject matter may render the contract void, thus, ratio of profit sharing must be known by all partners

 Fixing of profit must be in ratio, not fixed amount • Because the actual profit to be gained is not yet known • To fix the profit at a certain amount is incompatible with the very nature of shirkah (risk taking justifies gain taking)

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 Many ways of classification  Generally, two broad classification: • Shirkah al milk (proprietary partnership) - joint ownership of property • Shirkah al 'aqd (contractual partnership): • joint ownership is not necessary; • the emphasis is the joint exploitation of capital, and joint participation in profits and losses; based on the terms of the partnership contract

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(c) Mohd Johan lee 2015 14 & 15/9/2015 TYPES (CONT)  Based on type of capital, shirkah al 'aqd can be further subdivided into:  Shirkah al amwal (monetary capital)  Shirkah al a'mal (labour capital)  Shirkah al wujuh (reputation/creditworthiness as capital)  Based on terms of partnership contract:  Shirkah al mufawadah (unlimited investment partnership) - fuJL and equal authority to transact with partnership capital & property  Shirkah al "inan (limited investment partnership) - each partner may only transact with the capital according to the partnership agreement and to the extent of the joint capital 237

 From the many forms of shirkah, the commonly used types are:  Shirkah al 'inan with monetary capital (amwal) - commonly / commercially referred to as "musharakah"  Mudarabah/ qirad/ muqaradah

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(c) Mohd Johan lee 2015 14 & 15/9/2015 MEANINGS  Meaning of "musharakah":  "an arrangement whereby two or more persons contribute to the capital with their property for the purpose of trading with the joint capital, the profit of which, shall be shared among the partners"  Meaning of “mudarabah”:  "an arrangement whereby the owner of some property (termed as rabb al mat) gives a specified amount of capital to another person (termed as mudarib) who is to act as the entrepreneur to trade with the capital, the profit of which will be shared between the two parties according to the terms of their agreement. The losses will be borne by the rabb al mal as the financier, whilst the mudarib suffers the frustration of a fruitless effort"

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 Musharakah = joint venture/ partnership  = different from mudharabah because in Musharakah, both party shall contribute jointly in term of costs and effort whereas in Mudharabah, one party is the cost provider (rabb mal) while the other one is the worker (mudharib)  Both parties have the rights to receive the profit made

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 Musharakah = Joint participation (even 1%)  Mudharabah = Sponsored partnership  Equity Financing = the core and heart of islamic finance (mu’amalat)

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Musharakah Kassim Ali Joint Venture 70% 30%

Mudharabah Kassim Ali Expertise 100% Partnership

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 Note: Shafii and Maliki prefer the term qirad or muqaradah to connote mudarabah  Jurists differ whether mudarabah is a form of shirkah or not  Maliki and Hanbali consider mudarabah as a type of shirkah  Hanafi and Shafi'i consider mudarabah as an independent category of its own  All jurists unanimously agree on the legality of mudarabah based on evidences in the Quran, sunnah and ijma'

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 Elements of Mudarabah  The two contracting parties:  rabb al mal & mudarib  The subject matter:  capital, labour & profit  The offer & acceptance  Types of Mudarabah  Unlimited mandate mudarabah (mudarabah mutlaqah)  Limited mandate mudarabah (mudarabah muqayyadah

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 Both contracts presuppose:  contribution to capital,  the subsequent sharing of the profits and losses  The relationship between the partners is mainly based on the principle of agency (wakalah)  The distribution of profits and losses can be made based on the ratio of capital contribution

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 Alternatively, the profits can also be shared according to a ratio agreed in the contract between the parties  However, losses must always be based on the ratio of capital contribution  The maxim says: "profits are shared according to what has been agreed upon by the parties at the time of the contract, and losses are to be borne according to the ratio of capital contribution".

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 Mudarabah and musharakah are in line with the Shari'ah principles of justice, fairness and cooperation.  Mudarabah and musharakah also reaffirms the Islamic legal maxim (qa’idah fiqhiyyah) - "profit is with the undertaking of liability" (al ghunmu bil ghurmi)

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 Islamic investment account – mudarabah  Shareholding:  Private companies – musharakah/ mudarabah  Public companies – mudarabah/ musharakah  Unit trusts — musharakah / wakalah  Takaful (some model): between the takaful company and takaful participant - mudarabah  Asset financing - musharakah mutanaqisah

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 The most suitable contracts for project financing in meeting Shari`ah compliance requirements and contractual requirements, are equity based financing, e.g. mudarabah & musharakah  Both contracts are designed to mobilise capital, for later utilisation in specified project/s and according to contractually agreed terms  All parties may then share the profits generated according to the ratio of capital contribution or other contractually agreed ratio

 All parties also bear the risk of losses, whether in monetary form (for capital providers), or in term of loss of expected income (on the part of the manager)  Both mudarabah & musharakah also allocate and distribute the resources in the best and efficient manner, compared to lending with interest

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Contract of Mudarabah Financier Profit Sharing ratio – X:Y Company (Rabb al Mal) (Amil / Mudarib)

Y% to rabb al mal CAPITAL Profit shared in accordance to pre-agreed proportions (X:Y) X% to mudarib

Project Invests in Revenue project Loss borne Totally by rabb al mal 250

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Contract of Musharakah Capital contribution – X:Y Financier / Bank Company

• Profit: shared according to agreed ratio or X% according to ratio Capital of capital contribution • Loss shared according to ratio of capital Y% contribution

Project Invests in Revenue project

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 Capital contribution from both or one of the parties, as the case may be (musharakah viz-a-viz mudarabah)  Profit is neither certain nor fixed  Sharing in the profit and loss - equitable  Management of the running of the projects  Credit risk as well as business/performance risk (managing partner’s role)  Moral hazard and collateral-free  No issue of default payment

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 Unfortunately, both mudarabah and musharakah have so far failed to woo the choice of most financiers and investors because of the potentially higher risks born by the parties in the event of losses

 Most financiers and investors are also not equipped with the skill and expertise needed to effectively manage a mudarabah / musharakah venture, nor are they familiar with the risk management techniques for the two contracts

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 Moral hazard  Investors’ appetite and preference  Lack of expertise and skill in equity investment and management  Unfriendly accounting and taxation framework

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MUSHARAKAH MUTANAQISAH FINANCING

 This method of asset financing combines a number of contracts, i.e., partnership, leasing and sale contracts  The modus operandi of the product is as illustrated below:-

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Financier Customer

Provides Provides most of Asset to be acquired some financing financing e.g. 90% e.g. 10%

Both financier + customer become partners in the ow nership of asset (Shirkah al Milk) STEP ONE 257

Financier Customer Pay monthly installment partly as rental and partly as gradual 90% purchase price of part of 100% financier’s share in the Asset Financier’s Customer’s share Share decreasing increasing

0% 10%

Asset STEP TWO 258

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 Musharakah Mutanaqisah = a type of musharakah  Naqish = to diminish  Mutanaqisah = diminishable or redeemable  Musharakah Mutanaqisah = Joint venture where one partner has given the other partner the right to redeem/ diminish his share in the JV in such a way that in the end of the day, the shareholding will be 100% owned by the latter

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Property MM Ali Kassim 10% 90%

100% 0%

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Business M M Ali Kassim 10% 90%

Co XYZ

100% 0%

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 It is acceptable by virtue of various Quranic injunction and hadith as well as the practise of the Companions.

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 There must be a joint venture where the parties have contributed jointly into the venture

 The contribution need not be equal. It could even be 1%:99%

 The venture could be one where both parties will contribute their expertise/ labour. What about one where one party= of mere sleeping partner/ monetary partnership?

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CHARACTERISTIC OF (c) Mohd Johan lee 2015 14 & 15/9/2015 MUSHARAKAH MUTANAQISAH

 It could be over property ownership (in which case it is a Shirkah al Mulk) or over commercial or contractual transaction (in which case it is a Shirkah al ‘aqad)

 One of the partner must be given the right to redeem the entire ownership over the property or transaction from the other party

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 The redemption sum or formula shall be fixed in advance

 The timeframe to call on this option can be fixed or flexible

 Both parties will have the right to the property or venture until and unless the property or venture has been fully redeemed.

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 In case of a property MM, the occupying party shall bear the upkeep and maintenance of the property

 In case of a business venture MM, the parties shall also be entitles to receive their salary for the parts and roles they play in the management of the business

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Staff Financing Ali Uni 10% 90%

100% 0%

Property= Uni Trust = in favour of Uni Tenancy is by Uni for unspecified date (Month2 Month) No Charge Rental≠Redemption Indebtedness=on rental arrears

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ABC SCHEME Ali ABC 10% 90%

Co XYZ

100% 0% ABC = Preferential Shares and Special Shares

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Housing Facility Ali Banker 10% 90%

100% 0%

Property= Co-Proprietors but… Trust = in favour of Banker Tenancy is by the Partnership for facility duration With/ Without Charge Rental = Redemption Indebtedness=Defaults of instalment

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 Banker & purchaser (P) as owner of the property.

 P will give give his waad/promise (that he agrees Banker 's shares to diminish from time to time)

 Banker’s shares will diminish with payment/installment received from P until end of tenure.

 to avoid hassle of co-ownership, both parties will be the registered owner, but Banker stands as trustee for the partnership. (trust deed to be registered)

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ILLUSTRATION ON CURRENT(c) Mohd Johan STRUCTURE lee 2015 14 & 15/9/2015 (CONT)  why trustee? in order to secure Banker in event of default

 as trustee of the partnership and also owner of the property, Banker has the right to sell off the property to 3rd party by way of private treaty or auction etc.

 that's why neither charge nor assignment needed under this scheme! (however, some bankers still required charge as additional security)

 so, what will be the P right on the property?-right to utilise the property by a lease/ijarah agt.

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 event of default?  a)in the MM agt, there's a clause on "purchase undertakings" i.e P undertakes to purchase Banker 's shares (as the whole) in the event of default.  failure of P to perform his u'taking will result in the Banker exercising its right to sell off the property to 3rd party.  b) indebtedness?  will occur in the event of default  Banker may opt for selling off the property to 3rd party.  c) however, Banker may exercise its rights as trustee to sell off the property (even no indebtedness occurred!) and the proceeds/loss should be divided between partners according to shares ratio.  Banker has obtained blanket approval from FIC to acquire property.

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STRUCTURE PA Bank as PA to the MM Master partnership Facility Financing Agreement Ali Bank 10% 90%

Waad Ijarah Waad given by the Customer rent Customer to buy all the property of the bank’s share from the in the property partnership/ 100% 0% bank for the Trust Deed entire duration Trust given by the Charge of transfer form or lien partnership to whoever (caveat) registered as the proprietor 273

 Property MM  Musharakah Mutanaqisah Partnership/ Facility Agreement

 Trust deed

 Ijarah/ Lease/ Tenancy Agreement, if applicable

 Waad/ Promise

 Charge (Form 16A), if applicable

 Pre-executed Discharge (Form 16N) and Transfer form (Form 14A), if applicable 274

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CONTRACT OF WAKALAH (AGENCY)

 The term wakalah literally (lughatan) means “preservation” and “delegation of one’s affair to another  Wakalah consists of one person empowering other person to perform some acts for him, whereby the latter stands in the stead of the former in regard to such act. the person who ,(ﻣوﻛل / The first person is called the principal (muwakkil and the act is called ,(وﻛﯾل /stands in his stead is called the agent (wakil .(ﻣوﻛل ﻓﯾﮫ /the authorised act (muwakkal fihi ( وﻛﺎﻟﺔ ﻣﻄﻠﻘﺔ / Unrestricted wakalah (wakalah mutlaqah

(وﻛﺎﻟﺔ ﻣﻘﯿﺪة / Restricted wakalah (wakalah muqayyadah

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 In Islamic banking business, the wakalah contract may be formed in the following forms:

i. Bank is appointed by a customer to act as his agent (eg. LC)

ii. Bank appoints its customer as its agent. (MPO)

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1. Wakalah Contract

 The wakalah contracts must be separate and independence from the main contract (e.g. sale contract) on which it is required. 2. Reference to the Principal

 Must In the case of sale and leasing, the contract concluded by an agent need not to be made by reference to his principal. However, should the contract be made without reference to the principal, the rights and liabilities under the contract belong to the contracting partyi.e. the agent.

3. Duties of AgentTowards Principal

 Carry out the authorized act with ordinaryskill and diligence.

 Do not use his position for his personal interest and to the detriment of his principal

 Must keep proper accounts of all transactions connected with the wakalah

 Must not accept bribesor secretprofit.

 must act on trust (amanah).

 He must not take the principal’s property or any confidential he has acquired in the course of his appointment as an agent for his own benefit

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4. Remuneration and Reimbursement

 Where there is an express or implied agreement to pay, the agent can claim remuneration.

 In the case where he acts voluntarily, it is considered that he acts out of courtesy for the principal

 The remuneration can only be claimed when the authorized act has been completed. If the agent relinquished his agency without completing his duty, no payment needs to be paid by the principal

 The agent reserves the right to be reimbursed for all expense and indemnified against all losses and liabilities incurred by him whilst acting within the scope of the agency, even though there is no clause referring to it in the contract.

5. Action By Unauthorized Person/ Agent (Fuduli)

 Action of an unauthorized agent is dependent upon the ratification of the principal.

 When the unauthorized act is properly ratified, the ratification dated back to the time when

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6. Termination of Wakalah Contract

 The agent has fulfilled his duties or when the fixed period of the wakalah has expired

 Dismissal of the agent by the principal and the dismissal will not be effective until information thereof has been given to the agent

 Upon the agent giving up the agency.

 The death of either principalor the agent

 The agent or the principalbecomes insane or bankrupt

 The destruction of the subject matter or the authorized act

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Deposit taking based on wakalah • Bank acts a wakil to manage customers’ investment Letter of credit (LC) based on wakalah

 Bank as wakil to make payment to the negotiating bank\ Private banking investment  Bank as wakil to manage investment (wealth management) In murabahah financing  Bank as wakil to buy asset from vendor In tawarruq financing  Bank as wakil to sell and buy the commodity through the brokers

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EXPORTER IMPORTER

1. Applies for LC and places 100% 7. Client receive 4. Client provides doc deposit 3. Advice LC documents and receives payment

2. Issues LC ISSUING Advising/Negotiating BANK 5. Forwards Doc

6. Payment reimbursement

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CONTRACT OF KAFALAH (GUARANTEE)

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Quranic verse indicates the permissibility of the kafalah contract. ‘Abdullah bin ‘Abbas RA states that za’im is another word for kāfil i.e. guarantor:

“They said: We have lost the (golden) bowl of the king and for him who produces it is (the reward of) a camel load an d I will be bound by it (za’im).” (Surah Yusuf: Verse 72)

Al-Bukhari narrated that Salamah bin al-Akwa’ said:

“We were with the Rasulullah SAW when a deceased person was brought. They s aid: “Ya Rasulullah, perform prayers on him?” He said: “Has the deceased left anything?” They said: “No”. He said: “Is he in debt?” They said: “Three dinars.” He said: “Perform prayer on him” (while Rasulullah SAW did not perform the prayer). Abu Qutadah said: “Perform prayers on him Ya Rasulullah and I guarantee for his debt.” Then Rasulullah SAW performed prayers on him.”

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Kafālah (Guarantee) Contract

Permissible to incorporate a kafālah contract into the original contract (e.g. sale contract) or to be designated in a separate contract.

Permissible to include securities together with the kafālah in one contract.

Permissible to fix the duration of a guarantee or to set a ceiling on the amount to be guaranteed or to be restricted by a condition

Not permissible to issue a bank guarantee for customer who will use it to:

Acquire a non-Shariah compliant asset,

Acquire an asset to be used in non-Shariah compliant activities,

Perform non Shariah compliance activities,

Conclude non-Shariah compliant transaction.

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The Effect of Kafālah Contract

The Kafālah contract is binding on the guarantor.

The creditor/ beneficiary is entitled to claim the amount of his debt/ right from either the debtor/ guaranteed person or the guarantor and he has the choice of claiming his debt/ right from either of them

It is not permissible for the guarantor to seek compensation from the debtor/ guaranteed person prior to paying the guaranteed amount.

If the guarantor fulfils his obligations, he has a right to recourse from the debtor/ guaranteed person unless the guarantee is offered without the debtor’s request or consent

If the creditor discharges the debtor/ guaranteed person from his debt/ right, the guarantor is also discharged automatically from his liability.

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Several Guarantees

If a group of people jointly indebted under one particular account guarantees each other, it is permissible to take action against any one of them for the whole amount of the debt

If there are several guarantors of one debt who have become guarantors for such debt separately, action can be taken against any one of them for the whole amount of the debt.

If they become guarantors at one and the same time, action shall be taken against each one for his proportion of the debt. Guarantee Fee

It is permissible for the guarantor to take payment for the guarantee

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Termination of Guarantee Contract

If the debt/ right is paid/ performed to the beneficiary/ creditor either by the principal or guarantor.

If the beneficiary/ creditor absolves either the principal or the guarantor of the debt

 If the original contract in which the guarantee is required becomes null and void.

In the case where a guarantee is given to the creditor to secure payment for the purchase of a property, the contract is considered terminated if the creditor grants the property as a gift to the principal debtor

If either the debtor or guarantor transfers the liability for the debt through hiwalah to a third party, both parties are then absolved of the debt.

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Contract (اﻟﻮدﻳﻌﺔ)Definition of Wadī’ah

There are tw o categories of Wadī’ah contracts:

It refers to the contract of .(اﻟﻮدﻳﻌﺔ ﻳﺪ أﻣﺎﻧﺔ / Wadī’ah Yad Amānah (safe keeping depositing goods or moneys (known as `deposits’) with another person (custodian), w ho is not the ow ner, for safekeeping. It involves the follow ing conditions:

 The deposits are segregated physically according to depositors / account holders and they are not mingled.  The deposits are not utilized by the depositary  The depositary or the custodian does not impose any service charge / fee to the depositor.  The role of the depositary is to act as a trustee to the deposits. If the deposits under custody is accidentally missing or destroyed, the depositary is not obligated to replace or compensate it.

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It refers to the .(اﻟﻮدﻳﻌﺔ ﻳﺪ ﺿﻤﺎﻧﺔ / Wadī’ah Yad Dhamānah (guaranteed deposits deposits as above mentioned but followed with any or combination of the followings:

 Deposits are pooled together and not physically segregated according to depositors/ account holders  The deposits are utilized or used by the depositary, such as for investment or financing.  Service charge/ fee is imposed bythe depositaryon the deposits  In addition, the depositary must promise/ guarantee to return the deposits to the depositor upon request.

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The Wadī’ah contract is permissible based on Qur’ān, Hadīth and consensus of fuqahā’ :(إﺟﻤﺎع اﻟﻔﻘﮫﺎء)

 Allah SWT says: ْ َ َ َ إِ ﱠن ّ َا ﻳَﺄ ُﻣ ُﺮُﻛ ْﻢ أن ُﺗ ﱡﺆد ْوا اﻷﻣَﺎﻧَﺎتِ إِﻟَﻰ أ ْھﻠِﮫَﺎ “Verily, Allah commands that you should render back the trusts to those, to w homthey are due…” (Sūrah al-Nisā’: 58)  Prophet Muhammad SAW said: أد اﻷﻣﺎﻧﺔ إﻟﻰ اﺋﺘﻤﻨﻚ وﻻ ﺗﺨﻦ ﺧﺎﻧﻚ “Return trusts to the one who entrusted you, but do not betray the one w ho betrayed you.” (Narrated by Abu Daw ūd and al-Tirmidhī)

 Ijmāc al-fuqahā’ is also of the view that the deposit contract is permissible based on the need of asking others to hold one’s property/ money for safekeeping.

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Modus Operandi

 The customer places his money in the Bank for safe keeping. The Bank guarantees that the money is available to be withdrawn by the customer at any time.

 The Bank utilizes the money for its business activities such as financing or investment. Profit derived from the utilisation of the customer’s money belongs wholly to the Bank.

 The Bank at its sole discretion may shared the profit and pay .(اﻟﮫﺒﺔ) / to the depositor under the contract of hibah

 The following diagram shows the modus operandi of Wadī’ah contract in the deposit based products:

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Owner of fund CUSTODIAN Contract

Customer permission

Financing and Investment

Profit

o Discretion o Not promised

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Rukn (Tenet) Syart (Condition) Must be capable of accepting (اﻟﻤﻮدع) Depositor responsibilities:

.(ﻋﺎﻗﻞ / Sane (cāqil .

(راﺷﺪ/ Discerning (rāsyed .

.(ﺑﺎﻟﻎ/ Legal age (bāligh . . Not prohibited from entering into agreement such as a bankrupt.

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Rukn (Tenet) Syart (Condition)

The conditions are similar with (اﻟﻮدﻳﻊ) Depositary depositor except depositary can be individual (syakhsiyyah ţabīciyyah/ or (اﻟﺸﺨﺼﯿﺔ اﻟﻄﺒﯿﻌﯿﺔ organization (syakhsiyyah citibāriyyah / including (اﻟﺸﺨﺼﯿﺔاﻹﻋﺘﺒﺎرﻳﺔ bank.

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Rukn (Tenet) Syart (Condition) i. Must be capable of being (اﻟﻮدﻳﻌﺔ) Deposited object possessed and delivered. ii. Must have value.

Rukn (Tenet) Syart (Condition)

The contract; offer and i. The offer must be absolute .and decisive اﻟﺼﯿﻐﺔ: ) acceptance ii. Acceptance must match with .(اﻹﻳﺠﺎب واﻟﻘﺒﻮل the offer. The aacceptance may be verbal or may be implied through physical receipt or silence.

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Right of Safekeeping

 The Wadī’ah contract makes it binding to the Bank to safe keep the deposited object.

 If the money under custody is accidentally lost or destroyed, the Bank is obligated to replace or compensate it. Utilisation of Funds

 The Bank must ensure that the customer have given permission to the Bank to utilise the deposited funds.

 The Bank must return the fund as and when requested bythe depositor.

 If two or more depositors make a joint deposit and then one of them demands withdrawal of the deposit, the Bank shall honour the demand subject to conditions determined earlier in the contract.

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Charges, Profits and Benefits

 The Bank is entitled to charge a safekeeping fee to the depositor

 The Bank is prohibited from promising any profit / reward to the depositor (اﻟﮫﺒﺔ / from the use of the deposits. Promising profit, reward or gift (hibah .(رﺑﺎ اﻟﻘﺮض) will tantamount to rib ā qardh

 The depositor is prohibited from demanding any rewards for the safekeeping of the moneys with the Bank.

 Profits generated from the utilisation of the fund belong to the Bank.

 The Bank at its absolute discretion may reward (hibah) the depositors with a portion of the profits generated from the utilisation of the fund. The Bank may also reward the depositor in the form of benefits or gift.

 The gift includes souvenirs such as umbrella, diary, pen and others.

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Terminationof the Contract

 Either the Bank or depositors may cancel the contract at any time they w ish

 The contract can be terminated through any of the follow ing events:  Bank returns the deposits to the depositor irrespective of whether the latter requests it or not.  Death of the depositor or upon w inding up of the depositary.  If depositor becomes insane or coma. The contract is terminated since he/ she would lose his eligibility to continuethe contract. are imposed on the depositor due to mental (اﻟﮫﺠﺮ / If legal restrictions (hajr incompetence, bankruptcy and other legal restriction such as Anti Money Laundering Act (AMLA) and Biro Maklumat Cek (BMC) offender.  If the depositor transfers ownership of the deposits to other party.  If the outstanding balance transferred to the Registrar of Unclaimed Monies after being classified as Unclaimed Monies (inactive for a period of seven years) as required under the Unclaimed Monies Act 1985.

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(c) Mohd Johan lee 2015 14 & 15/9/2015 HIWALAH  Literal meaning : transfer/change  Legal definition:  Hanafi – the transfer of debt from the dhimmah of the principal creditor to the dhimmah of the transferee of debt (new creditor) by way of trust with him  Jumhur : the transfer of debt from one dhimmah to the other  AAOIFI – a transfer of debt from the transferor (muhil) to the payer (muhal ‘alayh) (Standard No 2)

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 Sunnah : “the delay to pay debt by the rich is a form of injustice. So, if somebody wealthy is asked to accept the transfer of debt, he should accept it”.  Majority interpret the hadith to mean recommendation of the acceptance of hawalah by the transferee

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 Parties to Hawalah  Transferor (muhil/orginal debtor) who makes the offer  Acceptance by both . transferee (muhal) . Beneficiary of the transfer (muhal ‘alayhi/payer) .AAOIFI - All consent of all parties  The debt must be known, valid and binding

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 Two ways:  Starts with offer from the principal creditor – transfer of right to the debt (hawalahal haq)  Most common form and allowed by jurists  Results in the change in the creditor  Comparable with sale of debt at par though most jurists regard hawalah as an independent contract not a form of sale of debt  Starts with the offer from the principal debtor – transfer of the debt (hawalahal dayn)  No change in the creditor but change in the debtor  Less common

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 Once the transfer of debt is completed, the transferor would be released from any obligation. The creditor can now claim his debt only from the transferee.  The transfer of debt establishes the creditor’s right to demand payment of the debt from the consignee.

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 Issuance of a cheque against a current account – the transferor (issuer of cheque) + the transferee (the bank) + beneficiary (the creditor of the cheque).  Travelers' cheques  Remittance (transfer of money)

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 When the hiwalah is cancelled before it becomes effective  When the transferee pays the debt to the creditor  When the creditor gives the debt as a gift to the transferee and the latter accepts it  When the creditor releases the transferee from the debt

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 Hanafi & Shafi’ – a transfer of ownership of mithli property from one party to another in exchange for a later payment of an equivalent amount  Malikis – a loan of something valuable granted only as a favour to be recovered back in the form in which it was granted.

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 Qard – a kind of gratuitous loan given to the needy people for a fixed period without requiring the payment interest, profit or reward.  The receiver of qard is only required to repay the original amount of the loan.  Hasan – an act which benefits person other than those from whom the act precedes without any obligation.  Qard al-hasan – beneficial loan or benevolent loan, gratuitous loan, interest free loan, beautiful loan. 308

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 In the Qur’an Allah says : “who is he who that will lend to All a goodly loan so that He may multiply it to him many times” And it is Allah that decreases or increases (your provisions), and unto Him you shall return” (al Baqarah (2) : 245

“Verily, those who give sadaqat, men and women, and lend Allah a goodly loan, it shall be increased manifold, and theirs shall be an honourable good reward (i.e. paradise)” (Al Hadid (57) : 18

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1. Parties Same as 2. Ijab & Qabul murabahah 3. The loan contract should be written down – majority : not obligatory but strongly recommended 4. Getting two witness –  to avoid dispute (‘and get two wintnesses out of your own men and if there are not two men, then a man and two women”)  Majority - recommended

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 Overdraft facilities  Current account  Qard or benevolent loan by depositor

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 Administrative and services charge – actual cost of giving the loan AAOIFI; Book cheque, ATM card; Not include indirect cost  Early demand to pay back : majority - the creditor can demand as the loan is voluntary  Guarantors  Liquidity management instrument based on qard – hibah – sole discretion of the borrower & no pre-condition clause

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Car manufacturer/ distributor 3. Send invoice 2.Place order 4. Bank disburses Bank

Authorize dealer/agent 1. Appoint agent

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HOUSE FINANCING WITH NOVATION AGREEMENT

Vendor 1. S&P

3. The financier be “in the Customer shoes” of the customer

2. Novation agreement Financier

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2. Customer comes to the bank for financing -bank purchases the house from the customer

BANK CUSTOMER

3. Subsequently Bank sells the house to customer 1.Customer purchases a house from the developer 4. Customer pays the selling price by installment DEVELOPER

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BROKER A BROKER B

6. Pays 5. Sells purchase price 1. Sells 2. Pays the purchase metal “X” of Metal “X” at Metal price at cost (RM100) at cost cost price price “X” on spot (RM100) on (RM100) spot

4. Pays the purchase price at cost plus profit (deferred) Depositor Islamic Bank 3. Sells metal “X” at cost plus profit (deferred)

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LEGAL & REGULATORY FRAMEWORK OF IBF

 Jurisdiction of Courts  Legal infrastructure  Islamic Banking Act 1983  Banking and Financial Institutions Act 1989  Central Bank of Malaysia Act 1958  Stamp Duty Act 1949  Real Property Gains Tax Act 1979  Government Investment Act 1983  Takaful Act

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 Courts jurisdiction is governed by Federal Constitutions of Malaysia  Art 121 : civil courts have no jurisdiction over matters within the jurisdiction of Shariah courts

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 List I (Federal list) of 9th Schedule . Civil & criminal procedures . Administration of justice . Contracts & mercantile laws . Arbitration . Etc

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 Para 1 of List II (State List) of 9th Schedule  Organization & procedures of Shariah Courts  Islamic Law  Personal law  Family law  No jurisdiction over criminal matters  Jurisdiction over person professing Islam

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 Lies in the Civil Court  Because of the following reasons:  IBF comes under contract & mercantile matters provided in Federal List (List I of 9th Schedule)  Islamic law (as provided in Para I, List II of 9th Shc) is limited only to persons professing religion of Islam, thus exclude other persons & “legal person” such as banks & FI  Legislation of IBF are all federal legislations

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 Islamic Banking Act 1983  Banking and Financial Institutions Act 1989  Central Bank of Malaysia Act 1958  Islamic Financial Services Act

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 Brief Act of 60 sections & 8 parts  Provides licensing & regulation of Islamic Banks  Establishment of BIMB & BMMB  Amendment in 2003  Important provisions – salient features of IBA: . Definition – sec 2 . Licensing – sec 3 . SAC – sec 13 . Financial requirements – part III

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 Limitation of sec 2 . No substantive laws on Islamic banking . Ambiguities in the definition – no guideline/detail explanation on transaction that is considered as IBF . The term “religion of Islam” is not defined – what mazhab to follow

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 Regulates IBs – grant license to carry on Islamic banking business  IB must be company having license from Minister of Finance  Company registered under Companies Act

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 Licensing requirements  Must carry Shariah compliant activities  Must establish Shariah Advisory Board to advice on its operations

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 License will not be granted if no SAC  Bank shall comply with the advice of SAC  SAC to seek advice of SAC of BNM  Uniformity of standard practice & product development between IBS.  SAC to ensure adherence of Shariah principles in the operation & product innovations

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FINANCIAL REQUIREMENTS & DUTIES (PART III)

 The IBA complies with prudential &financial requirements similar with conventional banks  Eg., capital adequacy framework, statutory reserves, liquidity framework, statistical reporting, audited financial reports, ownership control & management restriction on business.

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BANKING & FINANCIAL INSTITUTION ACT 1989

 Provides laws for licensing & regulation of institutions carrying banking & finance, merchant banking, discount house etc  In 1993, BNM allows conventional banking institutions to participate in IBF using existing structure  As a result, BAFIA was amended (sec 124) to :  i formalize the carrying on of Islamic banking business by conventional bank  Establishment of SAC to advise Islamic product

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 Sec 124  124 (1) licensed institution may carry Islamic banking business  124 (2) conventional bank carrying on Islamic banking business is subject to this Act  124 (3) – the institution must seek advisee of SAC  124 (4) – must comply with any written regulation & guidelines from BNM or other regulatory bodies  124 (5) the institution shall not be deemed an Islamic bank  124 (6) BAFIA shall not apply to Islamic Bank  124 (7) related terms:

 SAC refers to SAC of BM  Islamic banking business – same with IBA  Islamic financial business – any financial business which the aim & operations do not involve any element against Shariah

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 CBMA was amended in 1989 to facilitate IBF  Establishment of NSAC at BNM (sec 16B)  NSAC as the authority for ascertainment of Islamic law on IBF  Court may refer to NSAC of BNM in arbitration proceeding involving shariah issues  Decision of NSAC can be considered by court & binding on arbitrator

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 Legal establishment of SAC as the authority for ascertainment of Islamic law on IBF  Member of SAC may be appointed by Minister, on recommendation of the Bank  Qualification – people who have knowledge or experience in both Shariah, banking & finance other related disciplines  No member of the SAC shall become member of any Shariah advisory board of other banks

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 Bank shall consult SAC on IBF matters  IFI may refer to SAC for a ruling or advice  Court or arbitrator shall take into consideration of SAC decision  Decision of SAC are binding on court and arbitrator  Bank may establish a secretariat to assist SAC

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CENTRAL BANK MALAYSIA ACT 2009

Part VII (Section 51 till Section 60)

51. (1) The Bank may establish a Shariah Advisory Council on Islamic Finance which shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business.

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(c) Mohd Johan lee 2015 14 & 15/9/2015  55. (1) The Bank shall consult the Shariah Advisory Council on any matter relating to Islamic financial business  56. (1) Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arisesconcerning a Shariah matter, the court or the arbitrator, as the case may be, shall—  (a) take into consideration any published rulings of the Shariah Advisory Council; or  (b) refer such question to the Shariah Advisory Council for its ruling.

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(c) Mohd Johan lee 2015 14 & 15/9/2015  57. Any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56.  58. Where the ruling given by a Shariah body or committee constituted in Malaysia by an Islamic financial institution is different from the ruling given by the Shariah Advisory Council, the ruling of the Shariah Advisory Council shall prevail.

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IFSA 2013: AN IMPACT ON SHARIAH GOVERNANCE FRAMEWORK & SHARIAH COMMITTEE

 Codification of key elements of Shariah Governance Framework to promote compliance with Shariah:  Shariah Committee  Legislated establishment of Shariah Committee to advice Islamic financial institutions in ensuring its business affairs & activities comply with Shariah  Bank may approve single Shariah Committee for financial group if can establish it is capable of performing its functions effectively

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 Codification of duty on Islamic financial institutions to ensure its aims, operations, business, affairs and activities are in compliance with Shariah at all times  Compliance with rulings of Shariah Advisory Council a determinant of “compliance with Shariah”  Reporting obligations on non-Shariah compliances imposed on Islamic financial institutions  Bank empowered to assess rectification plan to address non-compliances  Backed by comprehensive enforcement tools to address non-compliances

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 28. Duty of institution to ensure compliance with Shariah.  (1) An institution shall at all times ensure that its aims and operations, business, affairs and activities are in compliance with Shariah.  (2) For the purposes of this Act, a compliance with any ruling of the Shariah Advisory Council in respect of any particular aim and operation, business, affair or activity shall be deemed to be a compliance with Shariah in respect of that aims and operations, business, affair or activity.

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 (3) Where an institution becomes aware that it is carrying on any of its business, affair or activity in a manner which is not in compliance with Shariah or the advice of its Shariah committee or the advice or ruling of the Shariah Advisory Council, the institution shall—  (a) immediately notify the and its Shariah committee of the fact;  (b) immediately cease from 340 carrying on such business, affair or

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 (4) The Bank may carry out an assessment as it thinks necessary to determine whether the institution has rectified the non-compliance referred to in subsection (3).  (5) Any person who contravenes subsection (1) or (3) commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both.

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 Duty of institution to ensure compliance with Shariah (s.28, IFSA)  Where an institution becomes aware that it is carrying on any of its business, affair or activity in a manner which is not in compliance with Shariah or the advice of its Shariah committee or the advice or ruling of the SAC, the institution shall —  (a) immediately notify BNM and its Shariah committee of the fact;  (b) immediately cease from carrying on such business, affair or activity and from taking on any other similar business, affair or activity; and  (c) within 30 days of becoming aware of such non- compliance or such further period as may be specified by BNM, submit to BNM a plan on the rectification of the non-compliance.

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 The Bank may carry out an assessment to determine whether the institution has rectified the non-compliance.

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 29. Power of Bank to specify standards on Shariah matters.  (1) The Bank may, in accordance with the advice or ruling of the Shariah Advisory Council, specify standards—  (a) on Shariah matters in respect of the carrying on of business, affair or activity by an institution which requires the ascertainment of Islamic law by the Shariah Advisory Council; and  (b) to give effect to the advice or rulings of the Shariah Advisory Council.

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(c) Mohd Johan lee 2015 14 & 15/9/2015  29(2)(a)(ii)  (2) In addition, the Bank may also specify standards relating to any of the following matters which does not require the ascertainment of Islamic law:  (a) Shariah governance including—  (i) functions and duties of the board of directors, senior officers and members of the Shariah committee of an institution in relation to compliance with Shariah;

Need to be read together with Shariah Governance Framework

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 (ii) fit and proper requirements or disqualifications of a member of a Shariah committee; and  (iii) internal Shariah compliance functions; and  (b) any other matter in relation to the business, affair and activity of an institution for the purposes of compliance with Shariah.

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 (3) Every institution, its director, chief executive officer, senior officer or member of a Shariah committee shall at all times comply with the standards specified by the Bank under subsections (1) and (2) which are applicable to such person.  (4) Every institution shall at all times —  (a) ensure that its internal policies and procedures on Shariah governance are consistent with the standards specified by the Bank under this section; and  (b) whether or not standards have been specified by the Bank under this section, manage its business, affairs and activities in a manner which is not contrary to Shariah.

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 (5) Every director, officer or a member of a Shariah committee of an institution shall at all times comply with the internal policies and procedures adopted by such institution to implement the standards specified by the Bank under subsection (1) or (2).  (6) Any person who fails to comply with any standards specified under subsection (1), commits an offence and shall, on conviction, be liable to imprisonmentfor a term not exceeding eight years or to a fine not exceeding twenty-five million ringgit or to both.

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SECTION 29  It empowers the Bank Negara to specify, in accordance with the advice of the Shariah Advisory Council, standards on Shariah matters which require the ascertainment of Islamic law by the Shariah Advisory Council or to give effect to the advice on rulings of the Shariah Advisory Council.  This Section also empowers the Bank Negara to specify standards on, Shariah governance such as functions and duties of key functionaries, fit and proper requirements or disqualification of a member of a Shariah committee, and on any other matters, for purposes of compliance with Shariah by the institution.

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 Further, an institution is also required to ensure that its internal policies and procedures on Shariah.  Subsection (5) further emphasize that the duty to ensure compliance with Shariah not only applicable to the directors and Shariah committees but also extended to all officers of the institution.

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S. 29 (6) (c) Mohd Johan lee 2015 14 & 15/9/2015

 Any person fails to comply with any standard fixed by BNM has committed an offence and shall be punishable with  Imprisonment of not more than 8 years;  or  Fine not more than 25 million Ringgit Malaysia  or both.

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 “standards” includes any obligation or requirement as specified by the Bank under this Act and such standards may contain any interpretative, incidental, supplemental, consequential and transitional provisions as the Bank considers appropriate.

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 Stamp Act 1949  Real Property Gains Tax Act 1976  Government Funding Act 2005  Takaful Act 1983

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 1989 – amendment to sec 14A – to avoid double stamp duty for Islamic financing documents.  Sec 14A – “where it is shown that a principal or primary security secures the repayment of moneys provided under a scheme of financing made according to the Syariah, duty chargeable thereon shall be calculated on the principal amount provided by the financier or financing body”

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 Stamp Duty (Exemption) (No. 5) Order 1984 (effective 1st Oct 1983)  All instruments for purchase of property under Murabahah & BBA – is subject to exemption of stamp duty  PPA – (property purchase agreement) – exempted (subsidiary)  PSA – on principle amount – not total selling price (cost + profit)

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 RPGTA – provides for imposition, assessment & collection of tax or gains/profits derived from disposal or acquisition of real property/shares in real property companies  Since BBA & Murabahah involve purchase & sale between bank & customer (legally the transaction amounts to acquisition & disposal)  1985 : amendment to sec 3 – avoid double taxation on IBF transactions.

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 Act to confer power to Government to receive moneys from Islamic banks for a fixed period  How?  By issuing Investment Certificates (MGIC)  No fixed return (unlike interest)  Government will give back profit in the form of:  Hibah/gift – qard hasan  Profit – sale (murabahah, BBA/bay’ inah)

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 Objective: “to provide for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities, and the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with Shariah and for related, consequential and incidental matters”.

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THANK YOU & WASSALAM

Mohd Johan Lee [email protected] [email protected] J. Lee & Associates A-16-13, Tower A,16th Floor, Menara UOA Bangsar, 5, Jalan Bangsar Utama 1, 59000 Kuala Lumpur Tel:+603-22881699 Fax:+603-22881799 Also at Kuala Terengganu & Penang

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