Shari`ah Shari`ah Shari`ah Shari`ah Shari`ah Shari`ah Shari`ah Shari`ah Principles Principles Principles Principles Principles Principles Principles Principles in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing in Islamic Financing Dr. Dr. Mohd Mohd Fuad Fuad Mohd Mohd Salleh Salleh 2010 2010
Principles of Islamic Finance is important in safeguarding the implementation and development of instruments and services in Islamic Finance and Banking industry.
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Dr. Dr. MohdMohd FuadFuad MohdMohd SallehSalleh20102010
General Principles in Islamic Mu`amalah
• All exchange should be with consent of the parties concerned
• Full ownership and eligibility of the contractual parties –voluntary, no misstatements and no mistakes
• The contract object must be clearly mentioned: the types, the amount, can be surrended, useful and clean (pure) according to Islamic syari`ahamount, can be surrended, useful and clean (pure) according to Islamic syari`ah
• Free from riba’, gambling (al-maisir), preventable ambiguity or uncertainty (al-gharar) and other prohibited action
• Free from oppression: excessive profit (Ghabn al-Fahsy), hoard (Ihtikar), blockade from the market (Talaqqi al-Rukban).
Mohd Fuad May 2010
Why Islamic Finance
• The Islamic Ruling (Syari`ah) specifies rules that relate to:
� the allocation of resources
�property rights
�production and consumption
�the workings of markets
�the distribution of income and wealth
Mohd Fuad May 2010
The Rules Relate to:
� The allocation of resources
� Islam looks at wealth as life sustaining, to be used efficiently
“Give not unto the foolish your wealth which Allah has made a means of support for you”. (Quran, 4:4).
� Property rights
� Private ownership is affirmed but viewed as a trust� Private ownership is affirmed but viewed as a trust
“Believe in Allah and His messenger, and spend of that whereof He hath made you trustees.” (Quran, 57:7).
� Muslims are obligated to fulfill contracts and keep their promises:
“O you who believe fulfill your undertakings”. (Quran, 5:1)
Mohd Fuad May 2010
The Rules Relate to:
• Production and consumption
� Use of wealth and exercise of freedom of enterprise is
constrained by the obligation not to harm others. The Prophet ruled:
“No injury, and no inflicting of injury”. (Ibn Maja, Sunan: chapter “No injury, and no inflicting of injury”. (Ibn Maja, Sunan: chapter on Ahkam)
Mohd Fuad May 2010
The Rules Relate to:
• The workings of markets
� Islam encourages enterprise, efforts to create wealth, which
has been characterized as God’s bounty:
“And when prayer is ended, then disperse in the land and seek Allah’s Bounty”. (Quran, 62:10)Allah’s Bounty”. (Quran, 62:10)
� All exchange should be with willing consent of the parties
concerned:
“O you who believe squander not your wealth among yourself in vanity except it be a trade by mutual consent”. (Quran, 4:29)
Mohd Fuad May 2010
The Rules Relate to:
• The distribution of income and wealth
� Obligation to care for others and share with them
“O you who believe squander not your wealth among yourself in vanity except it be a trade by mutual consent”. (Quran, 4:29)
� This is symbolized by the well-known duty of paying Zakat or � This is symbolized by the well-known duty of paying Zakat or
poor tax
� This is a spirit of a cooperative and helpful behavior .
“Who hath created life and death that He may try you, which of
you is best in conduct”. (Quran, 67:2).
Mohd Fuad May 2010
TWO TYPES OF FINANCING
�Equity Financing (Sharing of capital)
�Al-Sharikah
�Al-Mudharabah�Al-Mudharabah
�Debt Financing (Loan)
�Al-Murabahah
�Al-Qard al-Hassan
Mohd Fuad May 2010
EQUITY FINANCING
Al-SharikahAl-Sharikah
(Partnership Contract)
Mohd Fuad May 2010
Definition: A contract between two or more parties, entrepreneur and investor, who share their capital, reputation, or expertise to share profit and loss.
Two Catagories:i. Sharikah al-Aqd or al-`Uqudi. Sharikah al-Aqd or al-`Uqud
– contract between two parties to share capital or assets
ii. Sharikah al-Milk or al-Amlak– ownership on an assets by two parties without using as-Sharikah contract.
Mohd Fuad May 2010
Three Types of Sharikah al-Aqd :
i. Assets Partnership (Sharikah al-Amwal) capital sharing in terms of assets.
ii. Labor Partnership (Sharikah al-Amal or al-Abdan) capital sharing in terms of expertise Abdan) capital sharing in terms of expertise or skills.
iii. Reputation Partnership (Sharikah al-Wujuh)capital sharing in terms of reputation or goodwill.
Mohd Fuad May 2010
Methods of Al-Sharikah :
Hanafi�Sharikah al-Mufawadah
Equal share or contribution, profit sharing and management. Each shareholder become a gurantor to each other.
Maliki�Sharikah al-Inan
Sharing of assets or capital to run a business and profit will be shared amongst themselves.
• A contract of profit sharing between the capital owner or the investor (Ra’s al-mal) to give the assets to the entrepreneur (al-‘Mudharrib) to be used in business with the ‘Mudharrib) to be used in business with the condition that profit will be shared justfully.
Mohd Fuad May 2010
Two Types of Mudharabah
1) Complete (al-Mutlaqah)where the assets or capital are given tobe used in business without anyrestriction or condition.
2) Conditional (al-Muqayyadah)the assets or capital are given with somerestrictions or conditions.
Flexibility of Islamic finance• It is not dogmatic rule-making.
• Attitude is: “how can we make this happen?”, “Lets do business.”
• Exceptions are permitted (but not encouraged) • Exceptions are permitted (but not encouraged) when no alternatives exist.
– Example: Investing in the common stock of leveraged firms is permitted, but the amount of leverage permitted is limited and that portion of investor return must be “purified.”
Mohd Fuad May 2010
The Islamic Market
• 20% of the world population.
• Not just “furriners” – domestically, between 6 million and 8 million people.
• 2.3 million households.• 2.3 million households.
• Rapid growth – 6% annual.
• Young, highly educated, professional.
• Affluent - above average income.
Mohd Fuad May 2010
Google search on
‘Islamic Banking’
yields this on the first
page.
Mohd Fuad May 2010
Mohd Fuad May 2010
Equity Investment
• Acceptable if the firm does not engage in prohibited practices mentioned above.
• Some leeway is possible – previous mention of riba.riba.
• Dow Jones Islamic Indexes.
• Listing of firms providing Islamic investments in bibliography.