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
• Defining Shariah Compliant
• Shariah Parameter in
Structuring Islamic
Financial Products
• Underlying Principles of
Islamic Finance
Islamic
Finance • Fundamental
Master
Class
Characteristics of Shariah
Compliant Finance
• Illustrations of various
2
Islamic Finance and
Takaful Instruments
 Dharurah!
Maslahah
Viability? How to
Maqasid structure
financial
products that
Legal Structure
comply with
Shariah…?

We need to
finance our
car, house,
business…
4
 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 5
Schact (1964)).
 ISLAM
& Components of Shariah

I`tiqadiyah `Amaliyah Akhlaqiah

(Belief) (Dealings) (Morality)

Ibadah Muamalah
(Human with Creator) (Human with human)

Economics Family Law Criminal Law Politics

Issues in Islamic banking and finance 6

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. (Al-
Mansul, 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”
(Al-Ambiya:107)
Alleviate Hardship 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 Micro
Maqasid Maqasid

Assessment on the
Assessment on the overall transactional instrument and
impact and contribution mechanism

Ar-Rawaj (Distribution of ‫اﻟﻮﺳﺎ ﺋﻞ اﻟﻤﻘﺎﺻﺪ‬

Wealth) Approach in Realization of the
‫آﻲ ﻻ ﻳﻜﻮن دوﻟﺔ ﺑﻴﻦ اﻷﻏﻨﻴﺎء ﻣﻨﻜﻢ‬ Objectives of Shariah
11
 Any transfer of wealth or
property has to be made
through a valid contract or
`aqad
Theory of Contract
in Islam

Divine Sources Mutual

(Quran & Consent
Sunnah) (Redho) 12
 Shariah
Parameter in the
Theory of
Contract
(‫)اﺳﺒﺎب اﻟﺘﺤﺮﻳﻢ‬
 SHARI’AH-COMPLIANCE
PARAMETERS
IBF
Contract
s

9 Lawful Objective/Purpose
9mutual consent No Prohibited elements
No coercion,
fraud, Non-
misrepresentation Riba halal
, influence,
mistake etc. Maysi
Gharar
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 “They said that indeed
prohibits Riba” (2:275) trading is just like riba”
(2:275)

RIBA PROFITS
What’s WITH
NO
COUNTER-VALUE The COUNTER-VALUE
Difference? (`IWAD)

15

Effort Risk Liability

(Al- (Al- (Al-Dhaman)
 General Classification of Contract in
Islam

Profit-making Contracts

Exchange Contracts
Charitable Contracts (‫)ﻣﻌﺎوﺿﺎت‬
(‫)ﺗﺒﺮﻋﺎت‬
Cooperation Contracts
(‫)ﻣﻌﺎوﻧﺎات‬ 16
 Wadi’ah Yad Amanah;
Deposit-taking Contracts Wadiah Yad Dhamanah,
Mudarabah; al-Qard
Various forms of
Islamic BBA – deferred sale;
Contracts used Sales-based Contracts Murabahah – cost-plus
sale; Bai al-Inah, Bai al-
in Banking Tawarruq
Ijarah Wa Iqtina; Ijarah
Lease-based Contracts Thumma Al-Bai’, Ijarah
Muntahia Bitamleek

Equity-based Contracts Mudarabah, Musyarakah

Kafalah/Dhaman
Fee-based Contracts (Guarantee); Wakalah
(agency)

Musyarakah Mutanaqisah
Promise/Undertaking Hybrid Contracts (Dimishing Partnership),
AITAB etc.
Wa`ad
17
Major Components of Islamic Financial
Services
TAKAFUL/
ISLAMIC
ISLAMIC ISLAMIC
CAPITAL
BANKING INSURANC
MARKET
E
Financing Equity Takaful
Islamic
Deposit Retakaful
Securities
Funds & Unit
Investment
Trust
I-REITs
Venture Capital/
Private Equity
Derivatives
 Promote Maslahah
Entitlement to
Equal, Adequate,
Freedom from Accurate Info.
Riba

Promote
Freedom from Brotherhood
Gharar

A system grounded
Freedom from on moral and
Dharar ethics
Characteristics of
Shariah-compliant Entitlement to
Freedom to Banking and Financial Transaction at
Contract Fair Price
System
Freedom from
Freedom from
Price control &
Manipulation Qimar & Maysir
 Some
illustrations of
Islamic
Financial
Products
Available in
the Market
 Developer/Vendo
BBA HOME r
FINANCING MODUS
OPERANDI

5. Bank pay
developer
the 90% Sales & Purchase
balance Agreement (S&P)
1. 10% 1.
down Beneficial
payment 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

t r ical 2.RM350,000
lec s Deferred
3.RM200,000 3.E liance
App
2.Electrical
Appliances

1.RM200,000

1.Electrical
Appliances worth
RM200,000
Electrical Appliances
Wholesaler
 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
90 90%
mine. Thanks to
Islamic Bank
80 80%

70 70%

Customer now 60 60%

owns 100%
of the Assets 50%
50
40%
40
30%
30
20%
20
10% 10%
10 Bank’s share
= “0”
Commodity Murabahah Deposit Placement

US$ 1 Million on spot

Client

Broker A US$ 1.1

Where is this Million
proceed deferred
invested?

US$ 1 Million on
spot
Broker B Islamic Bank
 Engage in Istisna’
construction
Arrangement
(1) Lessor is the beneficial owner of the
vessel and the lessee is the registered to Construct
owner and operator of the vessel
Ship Builder
(2) Lessor will lease its beneficial interest in Vessel
the vessel
Forward Lease Agreement
ORPHAN SPV
(Mudarib/Purchas
er/ Lessor
Istisna’ Agreement
Seller/Lessee (1) Purchaser and the Seller agree that the
Seller will build the Vessel Mudarabah
(2) Purchaser agrees to pay the Istisna’ cost as Agreement
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. Financier
(Rabbul-Maal)
 BASIC
No Claim
MECHANISM
Profit OF
Premium INSURANCE

Insurance Policy holder

Company
Peace of mind

Compensation

Calamity
 Why is conventional insurance not Shari’ah-
compliant?
• 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 Insurance
Company Policy-holder
Coverage

• 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

Manages fund for a fee or share in Takaful Participants

profits on investment

Contribute via
Takaful Fund 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
Among Participants
Participants and
Takaful Operator

Tabarru` Wakalah Mudarabah Waqf

(mutual (Agency) (Partnership) (Endowment)
indemnity)

Hybrid
 MODUS OPERANDI
(MUDARABAH MODEL)
Takaful
Participants

1st
Contribute
contract
Tabarru`
2nd Contract
1. unilateral contract
Mudarabah Takaful Funds 2. valid though no
acceptance and
consideration from
the recipient
Manage

Invest Takaful Operator Pay Claims

Profit, if any, is shared between the two

based on certain ratio or percentage & loss,
if any, will be borne by the capital provider
32
alone
 MODUS OPERANDI (WAKALAH
MODEL)

Takaful
Participants

Wakalah 1st -retakaful

Contribute -reserves
fee contract -claims
Tabarru` -investment income
2nd Contract -stabilization reserves
Wakalah Risk Fund

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

35
 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)
Based on the SUBSTANCE
VALID(SAHIH) of
Halal (Permissable) the contract
contract that is used
and
contract that meets its
theandINTENTION
requirements conditions of the contractors.
to obtain Halal (Permissible) ends.

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

37
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 : info@isra.my
Website : www.isra.my