APPLICATION OF WA‘D (PROMISE) IN ISLAMIC BANKING PRODUCTS: A STUDY IN MALAYSIA AND BANGLADESH MD. FARUK ABDULLAH ACADEMY OF ISLAMIC STUDIES UNIVERSITY OF MALAYA KUALA LUMPUR 2016 APPLICATION OF WA‘D (PROMISE) IN ISLAMIC BANKING PRODUCTS: A STUDY IN MALAYSIA AND BANGLADESH MD. FARUK ABDULLAH ACADEMY OF ISLAMIC STUDIES UNIVERSITY OF MALAYA KUALA LUMPUR 2016 APPLICATION OF WA‘D (PROMISE) IN ISLAMIC BANKING PRODUCTS: A STUDY IN MALAYSIA AND BANGLADESH MD. FARUK ABDULLAH THESIS SUBMITTED IN FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY ACADEMY OF ISLAMIC STUDIES UNIVERSITY OF MALAYA KUALA LUMPUR 2016 UNIVERSITY OF MALAYA ORIGINAL LITERARY WORK DECLARATION Name of Candidate: Md. Faruk Abdullah (I.C/Passport No: AF6658390) Registration/Matric No: IHA120003 Name of Degree: Doctor of Philosophy Title of Project Paper/Research Report/Dissertation/Thesis (“this Work”): Application of Wa‘d (Promise) in Islamic Banking Products: a Study in Malaysia and Bangladesh Field of Study: Islamic Economics I do solemnly and sincerely declare that: (1) I am the sole author/writer of this Work; (2) This Work is original; (3) Any use of any work in which copyright exists was done by way of fair dealing and for permitted purposes and any excerpt or extract from, or reference to or reproduction of any copyright work has been disclosed expressly and sufficiently and the title of the Work and its authorship have been acknowledged in this Work; (4) I do not have any actual knowledge nor do I ought reasonably to know that the making of this work constitutes an infringement of any copyright work; (5) I hereby assign all and every rights in the copyright to this Work to the University of Malaya (“UM”), who henceforth shall be owner of the copyright in this Work and that any reproduction or use in any form or by any means whatsoever is prohibited without the written consent of UM having been first had and obtained; (6) I am fully aware that if in the course of making this Work I have infringed any copyright whether intentionally or otherwise, I may be subject to legal action or any other action as may be determined by UM. Candidate’s Signature Date: Subscribed and solemnly declared before, Witness’s Signature Date: Name: Designation: ABSTRACT This research considers the practice of wa‘d in Islamic banking products in Malaysia and Bangladesh and compares between them. It discusses the Shari‘ah issues and other challenges in the practice of wa‘d. Finally, it determines the prospects of wa‘d-based products in both countries. It adopts a qualitative case study approach while choosing three Islamic banks in each country for case study. Along with library research and document analysis, it conducts interviews with Islamic banking practitioners and Shari‘ah scholars. It follows thematic and a comparative method to analyse the data. The findings of this study show that Malaysia has innovated numerous products based on wa‘d while Bangladesh has a limited number of products. The major challenge of wa‘d in Malaysia is Shari‘ah issues. However, this study concludes that Malaysian practice of wa‘d is free from the issues of Shari‘ah claimed by a few studies. Nevertheless, Malaysia should have a legal provision for wa‘d in the Contract Act and a guideline for the practice of wa‘d. In the case of Bangladesh, the major challenges of wa‘d are (1) the strictness of the Shari‘ah scholars, (2) lack of product development initiative, (3) and the absence of a legal provision for wa‘d. However, both countries have significant potential to develop a number of Islamic retail-banking and treasury products through using wa‘d. iii ABSTRAK Kajian ini bertujuan untuk menilai amalan aplikasi wa'd dalam produk perbankan Islam di Malaysia dan Bangladesh serta membuat perbandingan di antara keduanya. Ia akan membincangkan mengenai isu-isu Syariah dan cabaran-cabaran lain dalam pengaplikasiannya. Kajian ini juga dilakukan adalah untuk mengetahui prospek-prospek bagi produk berasaskan wa'd di kedua-dua buah negara iaitu Malaysia dan Bangladesh. Kajian ini menggunakan pendekatan kajian kes kualitatif dengan memilih tiga buah perbankan Islam di setiap negara sebagai kajian kes. Di samping kajian perpustakaan dan analisis dokumen, temu bual juga dilakukan dengan pengamal perbankan Islam dan para ilmuan Syariah. Kaedah tematik dan analisis perbandingan digunakan untuk menganalisis data. Hasil kajian menunjukkan bahawa Malaysia telah memperkenalkan banyak produk berasaskan wa'd sementara Bangladesh mempunyai bilangan produk yang terhad. Cabaran utama aplikasi wa'd di Malaysia adalah berkaitan isu-isu Syariah. Walau bagaimanapun, melalui hasil kajian ini dapat disimpulkan bahawa amalan aplikasi wa'd di Malaysia bebas daripada isu-isu Syariah seperti yang dibincangkan oleh beberapa kajian lepas. Namun begitu, Malaysia perlu mempunyai peruntukan undang-undang dalam Akta Kontrak serta garis panduan untuk amalan aplikasi wa'd di perbankan Islam di Malaysia. Dalam kes Bangladesh, cabaran utama wa'd adalah: (1) ketegasan para ilmuan Syariah, (2) kekurangan inisiatif pembangunan produk (3) dan tiada peruntukan undang-undang bagi wa'd. Walau bagaimanapun, kedua-dua negara mempunyai potensi besar dalam membangunkan produk-produk perbankan runcit Islam dan perbendaharaan melalui penggunaan wa'd. iv ACKNOWLEDGEMENTS All Praises to Allah (SWT) who has given me the strength and guidance to complete this work. May this humble work be dedicated to Allah (SWT) as a good deed for His pleasure. I am extremely grateful to my parents Md. Abdul Highe and Shanaj Begum who inspired and continuously supported me throughout the duration of this doctoral program. I would like to express my deepest gratitude to my supervisor Dr. Asmak Ab Rahman for her continuous guidance and encouragement which have provided the basis for this thesis. She would frequently give appointments to see her despite her busy schedule. Her knowledge and experience shared during the duration of this research were extremely useful. Moreover, she was very supportive to overcome the challenges faced during the completion of this thesis. Sincere gratitude is extended to the International Shari‘ah Research Academy for Islamic Finance (ISRA) who awarded me the Shari‘ah scholarship award. Without this scholarship, it would have been very difficult to pursue my PhD program. I would like to express my gratitude to all the interviewees of this research which includes the Shari‘ah scholars and Islamic banking practitioners. Special thanks are extended to those who have helped me conduct the interviews. I am grateful to my wife Sham Irzatul Mohd Nazri and my son Ammar. It would not be possible to finish this research without their enduring patience and support. Special thanks are conveyed to my friends who have helped me carry out this research. Moreover, sincere thanks are extended to all academic and administrative staff at the Department of Shariah and Economics and the Academy of Islamic Studies. v TABLE OF CONTENTS Title Page i Original Literary Work Declaration ii Abstract iii Abstrak iv Acknowledgements v Table of Contents vi List of Tables xvi List of Figures xvii Transliteration Table xix List of Abbreviations xx List of Appendices xxiii CHAPTER 1: INTRODUCTION 1 1.1. Introduction 1 1.2. Research Background 3 1.3. Problem Statement 8 1.4. Research Questions 10 1.5. Research Objectives 11 1.6. Scope of the Research 11 1.7. Significance of the Research 13 1.8. Literature Review 14 1.8.1. Islamic Banking in Malaysia 16 1.8.2. Islamic Banking in Bangladesh 18 1.8.3. Comparison of Islamic Banking between Malaysia and Bangladesh 20 vi 1.8.4. Comparison between Malaysian and Bangladeshi Banking Sectors 20 1.8.5. The Theory of Wa‘d 20 1.8.5.1. Definition of Wa‘d and Its Status in the Shari‘ah 21 1.8.5.2. Wa‘d and the Common Law 24 1.8.6. The Application of Wa‘d 27 1.8.6.1. The Application of Wa‘d in Islamic Banking Products 27 1.8.6.2. The Application of Wa‘d in Sukuk 29 1.8.6.3. The Application of Wa‘d in Islamic Derivatives 30 1.9. Research Methodology 31 1.9.1. Rationale for Qualitative Approach 32 1.9.2. The Comparative Case Study Approach 33 1.9.3. Data Collection Method 34 1.9.3.1. Library Research 34 1.9.3.2. Document Analysis 35 1.9.3.3. Interview 36 1.9.4. Data Analysis Method 39 1.9.4.1. Thematic Analysis 40 1.9.4.2. Comparative Analysis 41 1.9.5. Limitations of Research Methods 41 1.10. Organisation of the Thesis 42 1.11. Conclusion 43 CHAPTER 2: THE THEORY OF WA‘D 44 2.1. Introduction 44 2.2. The Definition of Wa‘d 44 2.2.1. The Literal Definition of Wa‘d 45 vii 2.2.2. The Technical Definition of Wa‘d 47 2.2.2.1. Classical Scholars’ Definition of Wa‘d 47 2.2.2.2. Contemporary Scholars’ Definition of Wa‘d 48 2.2.3. Wa‘d and ‘Aqd (Contract) 49 2.2.4. Wa‘d and ‘Ahd 51 2.2.5. Wa‘d and Nudhur (Vow) 51 2.2.6. Wa‘d and Ju‘alah 52 2.2.7. Different Features of Wa‘d (Muwa‘adah and Wa‘dan) 52 2.2.7.1. Definition of Muwa‘adah 53 2.2.7.2. Definition of Wa‘dan 54 2.3. The Status of Wa‘d, Muwa‘adah and Wa‘dan in the Shari‘ah 56 2.3.1. The Status of Wa‘d in the Shari‘ah 56 2.3.1.1. Shari‘ah Ruling on Using Wa‘d in Exchange Contracts (Mu‘awadat) 57 2.3.1.2.