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Fiqh and Muamalat

BAI` `INAH

RESOLUTION

The SAC, at its 5th meeting on 29 January 1997, passed a resolution that
bai` `inah is a principle that is permissible in the Islamic capital market in
Malaysia.

INTRODUCTION

Bai` `inah refers to trading whereby the seller sells his assets to the buyer at
an agreed selling price to be paid by the buyer at a later date. After that, the
buyer immediately sells back the assets to the seller at a cash price, lower
than the agreed selling price.
The majority of Islamic jurists state that there are three forms of trading40
categorised as bai` `inah, whereby it can be concluded that all the assets sold
40 Forms of bai` `inah are as follows:
The seller sells a product to the buyer at a higher price on a deferred payment basis. After delivery
to the buyer, the seller buys back the product in cash at a much lower price.
A third party is involved, the seller sells a product that is delivered later on for, say RM200. After delivering
it to the buyer, the buyer then sells it to a third party for a lower price, say RM100. The third party then
resells it to the first party (original owner) for RM100. This means the original owner obtained RM100
from the trade.
A man wants to borrow, say RM100. The creditor refuses to lend using the qardh principle. Instead he
says: “I am not giving you qardh (loan) but I will sell you this shirt by deferred payment for RM100
although the market price is RM70.” This is to enable the buyer to sell it for RM70 at the market. When
the buyer agrees, the trade is transacted. What happens is the shirt owner makes a profit of RM30 from
the transaction because the buyer will pay him a deferred payment of RM100.21
come from the financier. The financier will sell a product to the buyer at an
agreed price to be paid later. The financier then immediately buys back the
asset at a cash price lower than the deferred selling price.41

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF
BAI` INAH

Opinions of Past Islamic Jurists
Past Islamic jurists had differing views on determining the hukm on bai` `inah.
The following were their views:
The majority42 were of the opinion that bai` `inah was not permissible because
it was the zari’ah (way) or hilah (legal excuse) to legitimise riba (usury).
The Hanafi Mazhab was of the opinion that bai` `inah was permissible only if
it involves a third party, which acts as an intermediary between the seller
(creditor) and buyer (debtor).
The Maliki and Hanbali Mazhab, on the other hand, rejected bai` `inah and
considered it invalid. Their opinion was based on the principle of sadd zari’ah
that aims to prevent practices that can lead to forbidden acts such as, in this
case, riba.
The basis for the opinion of the majority of the Islamic jurists was the hadith
dialogue between Aishah and the slave Zaid bin al-Arqam which showed
the prohibition of bai` `inah.
43 They also held to the hadith of the Prophet
s.a.w in which he warned that those who practised bai` `inah would suffer
scorn.4422
Resolutions of the Securities Commission Shariah Advisory Council
The Syafi`i and Zahiri Mazhab viewed bai` `inah as permissible. A contract
was valued by what is disclosed and one’s niyyah (intention) was up to Allah
s.w.t. to judge. They criticised the hadith used by the majority of the Islamic
jurists as the basis for their argument, saying that it (the hadith) was weak
and therefore could not be used as the basis for the hukm.
45
From the study done on the opinions of past Islamic jurists on the issue of
bai` `inah, the SAC decided to accept the opinions of the Syafi`i and Zahiri
Mazhab in permitting bai` `inah. Therefore, it can be developed into a product
for the Islamic capital market in Malaysia.
When institutions or individuals are in need of capital for a specific purpose
they can utilise this method of payment, using their assets as mortgage. As
they still need the assets, this method allows them to liquidate without losing
the asset.

BAI` DAYN

RESOLUTION

At its 2nd meeting on 21 August 1996, the Shariah Advisory Council

(SAC) unanimously agreed to accept the principle of bai` dayn i.e. debt

trading as one of the concepts for developing Islamic capital market

instruments. This was based on the views of some of the Islamic jurists

who allowed this concept subject to certain conditions. In the context of the

capital market, these conditions are met when there is a transparent regulatory

system which can safeguard the maslahah (interest) of the market participants.

INTRODUCTION

From the Islamic jurisprudence point of view, dayn encompasses a wide

scope, including payment for product, qardh (loan) payment, mahr (dowry)

payment before or after cohabitation, that is mahr which has not been

given after the marriage `aqd (contract), rental, compensation for crime

committed (arsy), compensation for damages, money to be paid for divorce

(khulu`) and for purchase orders which have not yet arrived (muslam fih).31

In the context of the Islamic capital market, bai` dayn is the principle of

selling the dayn which results from mu`awadhat maliyyah contracts (exchange

contracts), such as murabahah, bai` bithaman ajil (BBA), ijarah, ijarah

munthiyah bi tamlik, istisna` and others.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF

BAI` DAYN

The bai` dayn principle has always been a point of contention among past

and present Islamic jurists. However, there is no general nas or consensus

(ijmak) among those who forbid it.32

In general, the majority of Islamic jurists are unanimous in allowing the

activity of selling debts to the debtor.33 They only differ in opinion about

selling the debt to a third party for the reason that the seller will not be able

to deliver the sold item to the buyer.

At its 8th meeting on 25 January 1996, the IISG identified the `illah (reason)

for why some Islamic jurists do not allow bai` dayn. The `illah generally touches

on the risks to the buyer, gharar,

34 absence of qabadh 35 and riba.

Opinions of Past Islamic Jurists

The Hanafi Mazhab looked at bai` dayn from the aspects of potential risks

to the buyer, debtor, and the nature of the debt itself. They were unanimous

in not permitting this instrument because the risks cannot be overcome in

the context of debt selling. The debt is in the form of mal hukmi (intangible

assets) and the debt buyer takes on a great risk because he cannot own the

item bought and the seller cannot deliver the item sold.36

The Maliki Mazhab allowed debt selling to a third party subject to certain

conditions to facilitate the use of this principle in the market. The conditions

are as follows:

(a) Expediting the payment of the purchase;

(b) The debtor is present at the point of sale;

(c) The debtor confirms the debt;

32 Ibnu Qayyim al-Jauziyyah, I`lam al-Muwaqqi`in, Dar al-Fikr, Beirut, vol. 1, p. 388.

33 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 433.

34 See SAC resolution on gharar for further explanation.

35 Qabadh means the control and ownership of the item bought. It depends a lot on `urf or the normal

recognition of the local community. See SAC resolution on qabadh for further explanation.

36 Al-Kasani, Badai’i` al-Sana’i`, Dar al- Fikr, Beirut, vol. 5, p. 148.18

Resolutions of the Securities Commission Shariah Advisory Council

(d) The debtor belongs to the group that is bound by law so that he is

able to redeem his debt;

(e) Payment is not of the same type as dayn, and if it is so, the rate should

be the same to avoid riba;

(f) The debt cannot be created from the sale of currency (gold and silver)

to be delivered in the future;

(g) The dayn should be goods that are saleable, even before they are

received. This is to ensure that the dayn is not of the food type which

cannot be traded before the occurrence of qabadh; and

(h) There should be no enmity between buyer and seller, which can create

difficulties to the madin (debtor).

The conditions set by the Maliki Mazhab can be divided into three categories:37

(a) To protect the rights of the debt buyer;

(b) To avoid debt selling before qabadh; and

(c) To avoid riba.

The Syafi`i Mazhab was of the opinion that selling the debt to a third party

was allowed if the dayn was mustaqir (guaranteed)38 and was sold in exchange

for `ayn (goods) that must be delivered immediately. When the debt was

sold, it should be paid in cash or tangible assets as agreed.

Ibnu al-Qayyim was of the opinion that bai` dayn was permissible because

there was no general nas or ijmak that prohibited it. What was stated was

the prohibition of bai` kali’ bi kali’.

i kali’ is bai` nasi’ah bi nasi’ah which means

a debt sale that is paid by debt. For example, one buys food on credit for two months. When the time

comes, he should redeem his debt. However, he says to the seller: “I still have no food to pay my debt,

so sell it to me for another period.” The seller then sells it to him for another period and increases the

price. In this case, the buyer did not receive anything in exchange when being charged for extending the

period of payment.19

Principles of Muamalat in the Capital Market

Results of the study showed that the main reason for the clash of opinions

on bai` dayn among the past Islamic jurists centred on the ability of the seller

to deliver the items sold. This was stated by Ibnu Taimiyyah himself and was

also based on statements made in the great books of the four mazhab.

The argument of the Islamic jurists that prohibited bai` dayn to a third

party for fear that the buyer will have to bear great risks (Hanafi Mazhab)

has some truth in it. This is especially true if there is an absence of supervision

and control. In this context, the buyer’s maslahah should be safeguarded

because he is the party that has to bear the risks of acquiring the debt

sale while making the sale contract. In the Malaysian context, the debt

securities instruments based on the principle of bai` dayn are regulated by

Bank Negara Malaysia and the Commission to safeguard the rights of the

parties involved in the contract. Therefore, the conditions set by the Maliki

Mazhab and the fears of risks by the Hanafi Mazhab can be overcome by

regulation and surveillance.

Thus, it can thus be concluded that although there are differences in opinions

on bai` dayn among the Hanafi and Maliki Mazhab, there is a convergence

point which states that bai` dayn can be used if there is a regulatory system

that protects the buyer’s maslahah in an economic system.

The fifth condition set by Maliki Mazhab relates to the exchange of ribawi

goods. In the context of the sale of securitised debt, the characteristics of

securities differentiate it from currency, and hence, it is not bound by the

conditions for exchanging goods.

MUSYARAKAH MUTANAQISAH

RESOLUTION

At its 7th meeting on 1 December 1995, the Islamic Instrument Study Group

(IISG) passed a resolution to accept musyarakah mutanaqisah as a concept

that can be used to develop instruments for an Islamic capital market.

INTRODUCTION

Another term for musyarakah mutanaqisah is musyarakah muntahiyah bi

tamlik.

25 It is a form of partnership contract whereby the financier allows his

partner to buy assets in one payment or in instalments based on terms agreed

by both parties.26

An illustration of musyarakah mutanaqisah in the capital market is: ABC

company buys a building worth RM80 million and sells it to its customers for

RM100 million based on the principle of bai` bithaman ajil (BBA) within 120

months. As ABC company requires liquidity, it can get the project investors

involved by issuing sukuk27 based on musyarakah mutanaqisah. For that

purpose, ABC company puts in its share (the smaller part, say 10%) in

musyarakah mutanaqisah for the purchase of the building (which costs

RM80 million). The investors hold the majority part (90%). ABC company

will then buy back all the shares from the investors every month according

to the amount and duration agreed upon i.e. 120 months. This will end at

the point when ABC company owns all the shares.

ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF

MUSYARAKAH MUTANAQISAH

Musyarakah mutanaqisah is a new instrument for musyarakah products and

was introduced in Egypt.28 The majority of the current Islamic jurists are

unanimous in accepting it as one of the instruments in the capital market.29

This is because it has features that do not contradict the nas and general

principles of the Shariah. These features are as follows:

(a) `Inan company (form of partnership, in which each partner contributes

both capital and work);

(b) Promise from the financial institution to sell its share of the company

to its partners; and

(c) The institution sells all of its shares to its partner fully or partially

Muamalat

Muamalat is set of rules (fiqh) related to worldly matters such as business/trading/commerce transactions, lending and borrowing contracts. Muamalat also involves the rules regarding the social interactions between human such as marriage, inheritance (waqaf, faraidh) and other human activities.

Muamalat nowadays, is always associated to economics and finance since these elements are the key for happiness in this world and hereafter.

As a Muslim, we are believed that all the wealth on this world are belonged to Allah. Humans are only the appointed trustees to manage and distribute the wealth among them. Humans are encouraged to seek wealth through knowledge and skills given by Allah.
The rules and practices of fiqh muamalat are derived from 2 (two) primary sources: the Holy Quran and Hadith of Prophet Muhammad S.A.W.

There are other secondary sources of Islamic law which are collective opinions agreed among Shariah scholars (Ijma’) i.e the 4 (four) school of Fiqh – Hanbali, Maliki, Hanafi and Shafie, Analogy (Qiyas), Personal Reasoning by Ulama’ (Ijtihad) and Traditions/Customs (Urf) – as long as it is not in conflict with Shari’ah.

Among the requirement of Shari’ah laws in practicing businesses transacrions:

·         Not producing and trading of illicit materials (swine, liquor, stolen goods)

·         Not producing and trading of materials which are of no use

·         Not producing and trading of materials which are of no use

·         Gharar (Uncertain)

·         Contains Elemnet of Riba and

·         Involvement of gambling elements

What is Islamic Banking

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings) and its practical application through the development of Islamic economics. The principles which emphasise moral and ethical values in all dealings have wide universal appeal. Shari'ah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money, as well as carrying out trade and other activities that provide goods or services considered contrary to its principles. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims.

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shari’ah, known as Fiqh al-Muamalat(Islamic rules on transactions). Islamic banking activities must be practiced consistent with the Shari’ah and its practical application through the development of Islamic economics. Many of these principles upon which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades. These principles are not new but arguably, their original state has been altered over the centuries.

The principle source of the Shari’ah is The Qur’an followed by the recorded sayings and actions of Prophet Muhammad (pbuh) – the Hadith. Where solutions to problems cannot be found in these two sources, rulings are made based on the consensus of a community leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings to not deviate from the fundamental teachings in The Qur’an.

It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.

The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalisation of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and principles of Islam.

Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.

Origin

The origin of the modern Islamic bank can be traced back to the very birth of Islam when the Prophet himself acted as an agent for his wife's trading operations. Islamic partnerships (mudarabah) dominated the business world for centuries and the concept of interest found very little application in day-to-day transactions.

Such partnerships performed an important economic function. They combined the three most important factors of production, namely: capital, labour and entrepreneurship, the latter two functions usually combined in one person. The capital-owner contributed the money and the partner managed the business. Each shared in a pre-determined share of the profits. If there was a loss, the capital-provider lost his money and the manager lost his time and labour.

Commercial Banks in Muslim Lands

Western commercial banks date from about two and a quarter centuries ago, when the western world was dispensing with moral and ethical considerations in economics. When the Muslim world came into contact with the west, Muslims had two choices:

a) To accept commercial banking, arguing that the interest charged by them did not contain the element of riba prohibited in the Qur'an; or,

b) To accept that interest charged was riba and try to develop an alternative system of banking.

But ancient Muslim institutions, such as the Shari'ah courts, had been made ineffective by the colonial powers. Muslims had no alternative but to work with the colonial institutions, including commercial banking.

Nevertheless, during the 19th century, several religious scholars argued that the term riba referred to loans for consumption, which people found it difficult to repay, and not to commercial banking loans, where the debtor can repay from the profits.

But the Qur'an makes no distinction between loans for consumption and loans for productive purposes. So their views were rejected. As a consequence, modern commercial banking did not make much headway in Muslim countries and to this day the presents of the conventional framework still dominates the national financial system.

Early Western PLS Proposals

Equity-participation systems had been proposed at various times of economic crises in the United States and Latin America. The most ardent proponent of these was American Economist, Henry Simons (1899 – 1946), who, in the 1930s, argued that the traditional fractional reserve banking system was inherently unstable and should be replaced by two separate financial institutions:

1. Deposit banks, which would maintain 100% reserves. They could not fail the depositors and could not create or destroy effective money. They would simply accept deposits.
2. Investment trusts, which would perform the lending functions of existing banks. Such companies would obtain funds for lending by selling their own stock.

Simons' call for a distinction between the payments and portfolio functions of banks, and for 100% reserve requirement in the former, was rejected at the time, but interest in Simons' ideas has remained.

Many reasons have been advanced for the possible instability of the traditional banking system. Simons suggested that the basic flaw was that as a crisis develops and earnings fall, banks make loans to increase reserves. However, each bank can do so only at the expense of other banks and thus some banks become insolvent.

The bank failures in the U.S. during the 1980s revived interest in equity-based proposals and the separation of the payment of deposits from the portfolio activities of banks. The proposals made were strikingly similar to the Islamic systems now being implemented, at least on the deposit side. But the Islamic system goes further, requiring that loans made by banks should also be equity-based.

Islamic Banks in the 20th Century

When, in the1960s, Muslim thinkers began to explore ways and means of organising commercial banking on an interest-free basis, economists dismissed their work as wishful thinking.

But, in 1963, in Mit Ghamr, in Egypt, the first Islamic interest-free bank came into being. Mt Ghamr was a rural area and the people were religious. They did not place their savings in any bank, knowing that interest was forbidden in Islam. In these circumstances, the task was not only to respect Islamic values concerning interest, but also to educate the people about the use of banking.

The following types of accounts were accepted:

a) Savings accounts

b) Investment accounts

c) Zakat accounts

No interest was paid on savings accounts, but withdrawals could be made on demand. Small, short-term, interest-free loans for productive purposes could be made. Funds in investment accounts were subject to restricted withdrawals and invested on the basis of profit- sharing. The zakat account attracted the official amount of zakat.

The Mit Ghamr project was successful, as deposits increased from 1963 to 1966. The bank was cautious, rejecting about 60% of loan applications and the default ratio was zero in economically good times. But project was eventually abandoned for political reasons. Nevertheless, it had shown that commercial banking could be organised on a non-interest basis.