ISLAMIC FINANCIAL SYSTEM

Trade and Consumer Financing

Islamic Banking and Finance (MFS 608) Assoc. Prof. Dr. Mohd Fuad Mohd Salleh
fuadsalleh@yahoo.com 3rd. August 2013
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What is Riba
Growth or addition Al-Quran uses this word to show the growth of land and trees. The word al-riba was used by the people of Arab jahiliah in their business. The word riba was translated into two areas:
sale and purchase activities debt activities

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Mazhab Hanafi
Riba means inequitable addition based on the rate that has been agreed by shara (Islamic Regulations) with some condition demanded from one of the people who involved in the contract of exchange.

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Mazhab Shafie
Riba means contract on certain trades with unknown exchange on the rate agreed by shara during the contract or postponement on one or both of the exchange items.

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Mazhab Hambali
Riba means addition. According to this definition, not all addition on contracts are riba. It will only become riba when the addition is set in the agreement or the addition is easily understood even though it is not explicitly mentioned.
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Mazhab Maliki
Riba means addition in number or the real weight of an item and deferment of handing over.

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Based on the difinition of riba there are 3 basic elements of which the existence of any of these elements show that riba exist:
Excess amount over the principal Determination of surplus in relation to time Stipulation of the excess in the agreement

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3 Categories of Contract Which Leads to Riba: A guaranteed return on ownership basis. Contract between 2 people with fixed interest without considering the benefit of the contract. The contract consists of uncertainty and ambiguity.

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CLASIFICATION OF RIBA ACCORDING TO ISLAMIC SCHOLARS

Riba Al-nasiah and Riba Al-fadhl Riba on Debt Riba on Sale and Purchase

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Reasons why riba is prohibited:

Making the rich richer and the poor poorer Creating an imbalance in the various sectors of the economy Causing dysfnctions in the mechanisms of distribution and ownership; Inflation;

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Trade Financing
One of the most important service offered by Islamic banking ..Address the needs of the business involving cross-border transactions ..Can be categorized into: 1.Domestic involves buying and selling of commodities in the country which includes retail trade and wholesale trade 2.International trade is the external trade of the country, and it encompasses the exchange of comodities between the country and other countries including the import and export trade

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Islamic Letter of Credit (ILC)

ILC is a written undertaking given by the Islamic bank to the seller (the beneficiary) at the request and the instructions of the buyer (the applicant), to pay at sight or at a determinable future date, a stated sum of money within a prescribed time limit and against stipulated documents which must comply with terms and conditions ..Can be offered based on a few contracts: ..Wakalah(agency) ..Murabahah(cost-plus profit) ..Musharakah(partnership)

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Islamic Letter of Credit (ILC)

Wakalah: -the customer must pay in advance the full value of the item prior to the issuance of the ILC. The IFI will receive a commission or service fee upon the service rendered to customer. Murabahah: -the IFI would import or purchase the goods and subsequently sell to the customer at a mark-up price agreeable to both parties. The title of the goods will be transferred to the customer only on the arrival of the import documents. If the customer does not have deferred payment facilities, he or she must settle in full to the IFI, prior to receiving the import documents

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Islamic Letter of Credit (ILC)

Musharakah: the principle of musharakah is used in addition to wakalah or murabahah in certain jurisdiction. IFI will require the customer to deposit a certain percentage of money prior to the importation of goods. The IFI will then, issue the ILC and make the payment using both customers and own fund. The customer is responsible for the selling of goods and returning the IFIs portion of capital together with the portion of profit agreed earlier

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Islamic Trust Receipts (ITR)

..ITR is a facility to finance domestic and international trade documents drawn against ILC ..Islamic banks issue ITR facility to the customer based on the Murabahah principle for financing the purchase of goods ..It is a document of trust signed by the customer (importer), the strength on which the IFI allows the customer to obtain release the merchandise but make a lump sum payment at a later date

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Islamic Accepted Bills (IAB)

- IAB is a result of the securitization of a murabahahI TR - IAB is drawn to finance the trading of tangible halal goods and formulated based on the murabahah (costplus sales) principle and bay al dayn ( sale of debt) - The result of securitizing the murabahah ITR, creates a debt owed to the IFI. E.g. A customer approaches an IFI for trade financing. The IFI will appoint the customer as an agent to purchase the asset from the supplier. The IFI will pay the supplier cash. The asset then will be sold to the customer at a price comprising the profit and to be paid by installment or a later date.

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Islamic Shipping Guarantee (ISG)

- ISG primarily a letter of indemnity to the owners and/or

agents or master of the vessel for delivery of goods without presentation of the document of the title of goods or the original bill of lading - It is a contract where IFI agrees to discharge the liability of a third party in case of default by the third party. - FI normally uses the kafalah principle to issue the instrument

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Consumer Financing
- Defined as financing activities where the main emphasis in on service for individuals rather than corporate and business entities - Delivered through a network of outlets and service points - Very narrow and specific to basic individual necessities that can be divided into three broad categories: Home financing Automobile financing Personal financing

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Home Financing
Most common types: - Bay bithaman ajil (deferred payment sale) - Musyarakah mutanaqisah (diminishing partnership) - Ijarah(leasing) - Parallel istisna (construction-required sale) Home Financing-Bay Bithaman Ajil (BBA) - Based on shariahconcept of defereedpayment sale - Defined as a sale contract which the payment of the price is deferred and payable at a particular time in the future - The term BBA is commonly used in Malaysia and Brunei - In other jurisdiction, the terms that are used to connote the same meaning are bay muajjal (South Asian Region) and baymurabahah (Middle Eastern countries)

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Home Financing
Home Financing-Musharakah Mutanaqisah (MM)
- A hybrid contract which was recently developed by contemporary scholars - Defined as a form of partnership in which one of the partners promise to buy the equity share of the other partner gradually untill the title of the equity is completely transferred to him. - The transaction generally consists of three steps: 1. A bank and a customer form a partnership based on the contract of shirkah al-milk 2. The customer agrees to rent the banks undivided share of the property through the contract of ijarah 3. Throughout the financing period, the customer will gradually buy the banks share through the contract of bay -the customer usually sign the purchase of undertaking (waad) for this purpose

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Home Financing
Home Financing-Parallel Istisna
- Usually offered for property under construction - Istisna means a request, invitation or inducement to construct or manufacture something - Defined as a contract whereby a buyer will place an order to purchase the asset which will be delivered in the future - The buyer will require the seller to construct or manufacture the asset according to the specifications given in the sale and purchase agreement - Both parties will decide on the price upfront and the settlement will be arranged based on the schedule of the work completed

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An-Nahl : 43 ...So ask of those who know (the learned) if you know not.

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Thank You Wassalam

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