Asian Regional Public Debt Management Forum, 5th November 2009
Assoc. Prof. Dr. Asyraf Wajdi Dusuki Head, Research Affairs International Shari’ah Research Academy for Islamic Finance (ISRA)
Outline • •
• Islamic Finance Master Class
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Defining Shariah Compliant Shariah Parameter in Structuring Islamic Financial Products Underlying Principles of Islamic Finance Fundamental Characteristics of Shariah Compliant Finance Illustrations of various 2 Islamic Finance and Takaful Instruments
Dharurah!
Maslahah
Viability? Maqasid
Legal Structure
We need to finance our car, house, business…
How to structure financial products that comply with Shariah…?
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What is Shariah? • Literally means ‘path to watering place’ • Technical meaning – Path to tread for guidance in this world – Commands, prohibitions, values prescribed by Allah for His slaves either through Al-Quran or As-Sunnah (the teachings of the Prophet Muhammad s.a.w.) • Normally, the Sharī’ah is described as ‘Islamic Law’. But the boundaries of Sharī’ah extend beyond the limited horizons of law (Sardar 2003). • Sharī’ah is a set of norms, values and laws that go to make up the Islamic way of life (Ahmad 2003). According to one observer, the Sharī’ah is the “epitome of Islamic thought, the most typical manifestation of the Islamic way of life, the core and kernel of Islam itself” (See in Schact (1964)).
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ISLAM & Components of Shariah I`tiqadiyah (Belief)
`Amaliyah (Dealings)
Ibadah (Human with Creator)
Economics
Family Law
Akhlaqiah (Morality)
Muamalah (Human with human)
Criminal Law
Politics
Issues in Islamic banking and finance
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Approach in Deriving Hukm Syar’i (Islamic Legal Ruling) Ibadah • Fixed • Determined by God • Original Ruling is prohibited unless there is a valid justification that explains its permissibility • Otherwise, it is considered bidaah (innovation)
Muamalah • Combination of fixed and flexibility • Based on premise:
اﻷﺻﻞ ﻓﻲ اﻷﺷﻴﺎء اﻻﺑﺎﺣﺔ “The original ruling is permissible” • Unless there is a clear and valid justification that suggest otherwise • Understanding the ‘illat (rationale) and maslahah 7
What is Maqasid As-Syariah? • It outlines the objectives and wisdom (hikmah) as prescribed by Shariah (Allah & His Prophet s.a.w.) in all its rulings to protect and preserve the benefits and interests (maslahah) of society. • What is Maslahah? – is the benefits or interests which are deemed necessary from Syariah perspectives to protect and preserve the five darurah. (AlMansul, Fakhruddin Ar-Razi, p.24) 8
وﻣﺎ ارﺳﻠﻨﺎك إﻻ رﺣﻤﺔ ﻟﻠﻌﺎﻟﻤﻴﻦ
“And We have sent you (O Muhammad) not but a mercy to the whole universe”
Alleviate Hardship
(Al-Ambiya:107)
Eliminate Prejudice
Justice
Maqasid as-Shariah (The Objectives of Shariah)
Religion
Wealth
Intelect Life
Posterity
Preservation and Promotion
Preservation of Wealth ﺣﻔﻆ اﻟﻤﺎل Alleviate Hardship
Eliminate Prejudice Justice
Maqasid as-Shariah in Islamic Finance Macro Maqasid
Micro Maqasid
Assessment on the overall impact and contribution
Assessment on the transactional instrument and mechanism
Ar-Rawaj (Distribution of Wealth) آﻲ ﻻ ﻳﻜﻮن دوﻟﺔ ﺑﻴﻦ اﻷﻏﻨﻴﺎء ﻣﻨﻜﻢ
اﻟﻮﺳﺎ ﺋﻞ اﻟﻤﻘﺎﺻﺪ Approach in Realization of the Objectives of Shariah
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Any transfer of wealth or property has to be made through a valid contract or `aqad Theory of Contract in Islam
Divine Sources (Quran & Sunnah)
Mutual Consent (Redho)
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Shariah Parameter in the Theory of Contract ()اﺳﺒﺎب اﻟﺘﺤﺮﻳﻢ
SHARI’AH-COMPLIANCE PARAMETERS IBF Contract s
9 Lawful Objective/Purpose 9mutual consent No coercion, fraud, misrepresentation , influence, mistake etc.
No Prohibited elements Nonhalal
Riba Gharar
Maysi r
HOW TO MAKE MONEY IN ISLAM? ﺣ ﱠﺮ َم اﻟﺮﱢﺑﺎ َ ﷲ اﻟﺒﻴ َﻊ و ُ واﺣ ﱠﻞ ا
ﻗﺎﻟﻮُا ِا ﱠﻧﻤَﺎ اﻟ َﺒ ْﻴ ُﻊ ﻣِﺜ ُﻞ اﻟ ﱢﺮﺑَﺎ
“Allah permits trading but prohibits Riba” (2:275)
“They said that indeed trading is just like riba” (2:275)
RIBA NO COUNTER-VALUE
PROFITS What’s The Difference?
WITH COUNTER-VALUE (`IWAD)
15 Effort (Al-
Risk (Al-
Liability (Al-Dhaman)
General Classification of Contract in Islam
Profit-making Contracts
Charitable Contracts ()ﺗﺒﺮﻋﺎت
Exchange Contracts ()ﻣﻌﺎوﺿﺎت Cooperation Contracts ()ﻣﻌﺎوﻧﺎات
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Deposit-taking Contracts
Various forms of Islamic Contracts used in Banking
Sales-based Contracts
Lease-based Contracts
Equity-based Contracts
Fee-based Contracts
Promise/Undertaking Wa`ad
Hybrid Contracts
Wadi’ah Yad Amanah; Wadiah Yad Dhamanah, Mudarabah; al-Qard BBA – deferred sale; Murabahah – cost-plus sale; Bai al-Inah, Bai alTawarruq Ijarah Wa Iqtina; Ijarah Thumma Al-Bai’, Ijarah Muntahia Bitamleek
Mudarabah, Musyarakah
Kafalah/Dhaman (Guarantee); Wakalah (agency) Musyarakah Mutanaqisah (Dimishing Partnership), AITAB etc.
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Major Components of Islamic Financial Services ISLAMIC BANKING
ISLAMIC CAPITAL MARKET
Financing
Equity
Deposit Investment
Islamic Securities Funds & Unit Trust I-REITs Venture Capital/ Private Equity Derivatives
TAKAFUL/ ISLAMIC INSURANC E Takaful Retakaful
Promote Maslahah Freedom from Riba
Entitlement to Equal, Adequate, Accurate Info.
Promote Brotherhood
Freedom from Gharar
Freedom from Dharar
Freedom to Contract
Characteristics of Shariah-compliant Banking and Financial System Freedom from Price control & Manipulation
Freedom from Qimar & Maysir
A system grounded on moral and ethics Entitlement to Transaction at Fair Price
Some illustrations of Islamic Financial Products Available in the Market
BBA HOME FINANCING MODUS OPERANDI 5. Bank pay developer the 90% balance
Sales & Purchase Agreement (S&P)
Developer/Vendo r
1. 10% down payment
1. Beneficial ownership
Property Sale Agreement (PSA) 3. BBA price (deferred payment) 3. House
2. House 2. Cash price (90% balance)
BANK
Property Purchase Agreement (PPA)
Customer
Tawarruq Model of Home Financing 4.Property 4.RM200,000 Customer
Property Owner/Developer 3.RM200,000
cal i r t s lec 3.E liance App
1.RM200,000 1.Electrical Appliances worth RM200,000 Electrical Appliances Wholesaler
2.RM350,000 Deferred 2.Electrical Appliances
Musyarakah Mutanaqisah (Modus Operandi) Bank leases its 90% share of property to customer
90%
10%
0%
100%
Customer pays rent for usage of Bank’s 90% share of property Customer gradually buys share of property from Bank Customer’s monthly installment payments
ILLUSTRATION of Musharakah Mutanaqisah Customer’s Share
MM
Bank’s Share
100 The asset is now mine. Thanks to
Islamic Bank
90
90%
80
80%
70 Customer now owns 100% of the Assets
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60% 50%
50 40 30 20
10%
70%
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40% 30% 20% 10% Bank’s share = “0”
Commodity Murabahah Deposit Placement US$ 1 Million on spot Client US$ 1.1 Million deferred
Broker A Where is this proceed invested?
US$ 1 Million on spot Broker B
Islamic Bank
Istisna’ Arrangement (1) Lessor is the beneficial owner of the to Construct vessel and the lessee is the registered owner and operator of the vessel Vessel (2) Lessor will lease its beneficial interest in
Engage in construction
Ship Builder
the vessel
Forward Lease Agreement
Istisna’ Agreement Seller/Lessee
(1) Purchaser and the Seller agree that the Seller will build the Vessel (2) Purchaser agrees to pay the Istisna’ cost as the price for the Seller per forming the works (3) Seller agrees to sell by way of Istisna’ to Purchaser its beneficial interest in the constructed Vessel and Purchaser agrees to purchase the constructed vessel for the Istisna; cost.
ORPHAN SPV (Mudarib/Purchas er/ Lessor Mudarabah Agreement
Financier (Rabbul-Maal)
No Claim
Profit Premium
Insurance Company
BASIC MECHANISM OF INSURANCE
Policy holder Peace of mind
Compensation
Calamity
Why is conventional insurance not Shari’ahcompliant? •
Element of uncertainty (gharar) – There is uncertainty of what the insurance policy-holder is “buying” or paying for • If no loss occurs Ö Policy-holder receives nothing • If loss occurs Ö Policy-holder gets compensation in varying amounts Premium
Insurance Company
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•
Coverage
Insurance Policy-holder
Element of gambling (maysir) – The insurance company is gambling that total premiums collected will exceed total claims and thus producing underwriting surplus (profit) – Total claims is predominantly affected by chance (will of God) Element of riba – Insurance fund commonly invested in interest-bearing securities
ISLAMIC ALTERNATIVE TO INSURANCE
BASIC DESCRIPTION OF TAKAFUL INSDUSTRY Takaful Operator
Takaful Participants
Manages fund for a fee or share in profits on investment
Takaful Fund
• • •
•
Contribute via unilateral contract (tabarru’at)
Takaful participants contribute to a takaful fund based on the concept of mutual assistance The contribution is done via reciprocal/mutual donation (tabarru’at) and does not represent a commercial “sale of coverage” Takaful entails a unilateral, charitable contract (tabarru’at) in contrast with the conventional insurance contract which is a bilateral exchange contract (mu’awadat) Gharar is tolerated in a charitable unilateral contract
Models of Takaful
Between Participants and Takaful Operator
Among Participants
Tabarru` (mutual indemnity)
Wakalah (Agency)
Mudarabah (Partnership)
Hybrid
Waqf (Endowment)
MODUS OPERANDI (MUDARABAH MODEL) Takaful Participants Contribute 2nd
Tabarru`
Contract
Mudarabah
1st contract
1. 2.
Takaful Funds Manage
Invest
Takaful Operator
Profit, if any, is shared between the two based on certain ratio or percentage & loss, if any, will be borne by the capital provider alone
unilateral contract valid though no acceptance and consideration from the recipient
Pay Claims
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MODUS OPERANDI (WAKALAH MODEL) Takaful Participants Wakalah fee 2nd
Contribute
Tabarru`
Contract
Wakalah
1st contract
Risk Fund
-retakaful -reserves -claims -investment income -stabilization reserves
Manage Takaful Operator
Surplus 33
In a nutshell as a Muslim, a man needs to abide with Shariah!
Every Transactions Must Be Shari`ah Compliant!
What Does it Mean By Shari`ah Compliance? 34
SHARIAH-COMPLIANT IS NOT JUST ABOUT: • Satisfying the mechanics of financial operation; • Fulfilling the legal documentation requirement • Focusing on the legal form of a contract
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VALIDITY vs. PERMISSIBILITY
Validity (Sahih Qadaan) is based on the FORM of the Contract while Permissibility (Sahih Diyanatan) is A Valid Contract is not necessarily PERMISSABLE (HALAL) VALID(SAHIH) Based on the SUBSTANCE of the contract and Halal (Permissable) contract that is used contract that meets its to obtain Halal (Permissible) ends. requirements conditions theandINTENTION of the contractors. 36 Financial Contract MUST be BOTH HALAL (Permissable) & SAHIH (Valid)
Shariah-Compliant Requires • Financial Contract to be Shariah compliant both in terms of FORM and SUBSTANCE • Operation to be Shariah compliant • Islamic banking to be more ethical • Socially Responsible
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ISRA @ INCEIF 2nd Floor, Annexe Block Menara Tun Razak Jalan Raja Laut 50350 Kuala Lumpur MALAYSIA General Line : +603-2781 4000 Fax : +603-2691 1940 Email Website
:
[email protected] : www.isra.my
