GLUE2073 LAW OF ISLAMIC TRANSCATION

GROUP ASSIGNMENT

QUESTION NO.3: APPLICATION OF SHARIAH PRINCIPLE IN

ISLAMIC FINANCE

PREPARED BY:
MUHAMMAD AIMAN ARIFF BIN MUHAMAD KAMIL (264613)
MUHAMMAD AMIN KAMAL BIN AHMAD KAMAL (261429)
MUHAMMAD KAHIRUL IZZAN BIN SAJALI (264198)
NIVISYAA TAMIL A/P TAMILCHELVAM (255528)
MADRURI KAUR A/P GANASAN (264284)
SATHIYERUBINI A/P MUNISPERAN (264964)
MUHAMMAD AL-HAZIM BIN IDRIS (264662)

PREPARED FOR: DR. ALIAS BIN AZHAR

SUBMISSION DATE: 31ST OCTOBER 2019

TABLE OF CONTENT

INTRODUCTION
SUKUK
DEFINITION OF SUKUK
APPLICATION AND BENEFITS OF SUKUK
COMPARISON BETWEEN SUKUK AND CONVENTIONAL BONDS
ISSUE RELATING TO SUKUK – DISCLOSURE
QARD AL-HASAN
DEFINITION OF QARD AL-HASAN
APPLICATION OF QARD AL-HASAN IN FINACIAL INSTITUTION
BENEFITS OF QARD AL-HASAN
CASE LAW RELATING TO QARDAL-HASAN
THE APPLICATION OF QARD AL-HASAN IN ISLAMIC FINANCIAL INSTITUTION
TAWARRUQ
DEFINITION OF TAWARRUQ
APPLICATION OF TAWARRUQ
COMPARISON BETWEEN APPLICATION OF TAWARRUQ BY BURSA SUQ AL-
SILA’ MALAYSIA AND JFX SYARIAH INDONESIA
ISSUE RELATING TO TAWARRUQ – PREARRANGEMENT
CONCLUSION
Introduction

The modern Islamic finance and banking system is relatively new as it only been

introduced and enforced through the Islamic Banking Act in 1983 due to the increase demand

of the Muslim community for shariah-compliance financial products and services in

Malaysia. Even though, the form and technicalities of Islamic finance is relatively new, yet

the substance and principles that guides the implementation of various products and service

to be Syariah compliance had long been established through the commandment in the Quran

and the Prophet’s teaching and had been continuously developed by the Muslim scholar and

jurist to cope with the changing needs of the Muslim community in their respective time

period.

Among those principles are the prohibition of ‘riba’ and excessive ‘gharar’ in any

transaction. Riba can be defined as increase in one of two exchanged items of the same genus

and kind without compensation while gharar encompasses some forms of incomplete

information and/or deception, as well as risk and uncertainty intrinsic to the objects of

contract (El-Gamal)1. These two fundamental principles had profoundly determined the

manners financial products and services shall be implement towards the consumers.

Thus, the purpose of this report is comprehend and appreciate the application

of Syariah principle in Islamic finance by analysing in detail, specifically some of the

products and services offered in the current Islamic financial industry which are Sukuk

(Islamic Bond), Qard al-Hasan (Good Loan), and Tawarruq (Commodity Murabaha).

1
El-Gamal, M., A. (2006). Islamic Finance: Law, Economics and Practices. New York: Cambridge University
Press.
Definition of Sukuk

Sukuk is can be defined as a tool which represent proportionate beneficial ownership

(risks and rewards) in an asset, usually for a defined period of time, similar to asset-backed

bonds. It is frequently referred to as an Islamic bond, but a more accurate translation of the

Arabic word would be an Islamic investment certificate. Modern sukuk are better described

as Islamic investment certificates. This distinction is as crucial as it is important, and it is

stressed throughout this pioneering work that sukuk should not simply be regarded as a

substitute for conventional interest-based securities. The aim is not simply to engineer

financial products that mimic fixed-rate bills and bonds and floating-rate notes as understood

in the West, but rather to develop innovative types of assets that comply with Shari’a Islamic

law2.

Application and Benefit of Sukuk

The issuance of Sukuk on the basis of the rules of the Shining Shariah of Islam is

among the objectives of Islamic banking and is also one of the greatest means of establishing

Islamic economies in society. However, it is on condition that the tools used to develop and

structure Sukuk are in consistence with the fundamental principles which distinguish Islamic

economic systems from others. The interest-based system prevalent in the world today

regularly issues bonds that includes interest from capital enterprises that bring great profits

and regular revenues3. The use of Sukuk issued by the governments of Bahrain and Malaysia

were asset specific. In February 2004, Bahrain announced the launch of its first US$250

million five-year Sukuk al-Ijara issue to fund the extension of the airport. The underlying

asset was the airport land sold to the Special Purpose Vehicle (SPV). The arranger of this

Sukuk issue was Citi Islamic Investment Bank. In 2002, the Government of Malaysia issued a

2
Usmani, M., T. (2007). Sukuk and their Contemporary Applications.
3
Allen, F., and D. Gale. (2000). Comparing Financial Systems (MIT Press, Cambridge, MA).
US$ 600 million Sukuk al-Ijara Trust Certificates (TCs), due for maturity in 2007. Under this

arrangement, the beneficiary right of land parcels have been sold by the government of

Malaysia to an SPV, which was then re-sold to investors for five years. The SPV kept the

beneficiary rights of the properties in trust and issued floating rate Sukuk to investors4.

Among the benefits of Sukuk are as follow:

1. Sukuk are among the best ways of financing large enterprises that are beyond the

ability of a single party to finance.

2. Sukuk provide an ideal means for investors seeking to deploy streams of capital and

who require, at the same time, the ability to liquidate their positions with ease

whenever the need should arise. This is because it is envisioned that a secondary

market for the trading of Sukuk will develop. Thus, whenever investors require cash

from their investments, or from a part of the same, it will be possible for them to sell

their Sukuk holdings, or a part thereof, and receive their value from their original

investment plus earnings, if the enterprise is profitable, in cash5.

3. Sukuk represent an excellent way of managing liquidity for banks and Islamic

financial institutions. When these are in need of disposing of excess liquidity, they

may purchase Sukuk; and when they are in need of liquidity, they may sell their

Sukuk into the secondary market6.

Comparison Between Sukuk and Conventional Bonds

“Sukuk” is one of the methods of financing uses in Islamic transaction. Sukuk in

Islamic finance can be considered as bonds in conventional finance. Sukuk is like an

investment certificates in the Islamic transaction. The application of sukuk usually used by

4
Dar, H. (2006). Sukuk, An Introduction to the Underlying Principles and Structure (Dar Al Istithmar Ltd).
5
Usmani, M., T. (2007). Sukuk and their Contemporary Applications.
6
Berle, A. and G. Means. (1932). The Modern Corporation and Private Property (Commerce
Clearing House, New York).
company or institution that running an Islamic finance. However, sukuk and bonds has a

separate entity and differences of their own perspective.

Firstly, and foremost, sukuk is indicates as asset ownership while bonds indicate as

the debt obligation. Sukuk has two type which are asset-based and asset-backed. Asset-

backed Sukuk are such where a true sale has taken place and the special purpose vehicle

(SPV) controls the underlying asset while assets-based Sukuk are securitization of the asset

which are closer in form to conventional bonds. 7 Even if sukuk looks similar to bonds, it is

actually a two different thing. Sukuk are financial instrument and certificates of equal value

representing undivided shares or tangible assets and the holder of sukuk entitled to receive

periodical payments based on the proceeds generated by the underlying assets. 8 Meanwhile,

bonds are interest-bearing or discounted securities that pay the holder a specified amount of

money (the interest), usually at certain intervals, in addition to its face value (principal) at

maturity.9 What make them different is that sukuk must be base or backed by an assets or

project or any economic activities and conventional bonds is based on debt.

At its roots, the relationship between the issuer of bonds and its buyer is different

between the relationship of the issuer of sukuk and its buyer. On account of a bond, the buyer

is going about as the loaner and the bond issuer as the credit beneficiary. For this situation,

the advance has a fixed intrigue, in this manner being “Riba”. However, in sukuk, the buyer

is purchasing an asset that has value rather than participating in an implicit loan agreement. 10

By looking in Islamic perspective, conventional bonds are not with the sharia

compliance as the mechanism of conventional bonds clearly violate the legal rule of Islamic

7
Koch M. Sukuk vs Conventional Bond: A study into the performance of Islamic Bonds
8
Bakir, M., & Bakir, M. M. (n.d.). investment&finance. Retrieved from
https://www.financialencyclopedia.net/islamic-finance/tutorials/difference-between-sukuk-and-bonds.html.
9
Ibid
10
Five Important Differences Between Sukuk and Traditional Bonds - Sukuk: Home of the Global Sukuk
Industry. (n.d.). Retrieved from https://www.sukuk.com/education/important-differences-sukuk-traditional-
bonds-2207/.
regulations where in Islam, the application of interest or which called as “Riba” is prohibited.

But the application of sukuk are in compliance by the sharia as they grant the ownership of

the underlying assets. This rulings of sukuk make the investors of sukuk has right to receive a

share of profits from the underlying assets. Besides that, in sukuk, all of the asset involved in

sukuk certificates comply with the law of Islam differ from conventional bonds whereas there

the bonds might be backed by assets that are not compliant with Shariah, which may be

bundled together with other types of assets without the consumer’s knowledge. The purchaser

of sukuk is guaranteed that the value of the endorsement corresponds to assets that are in the

public good and not identified with activities or items or products that are against Islam.

Moreover, the comparison between sukuk and conventional bonds can be seen in the

pricing of the products. Sukuk are priced according to the value of the assets backing them

while bond pricing is based on credit rating. 11 What it mean is that for sukuk, the face value is

based on the market value of the underlying assets and for conventional bonds is the face

value of bond is based on the issuer’s credit worthiness including its rating. This is important

on account of securities since if the purchaser of bond sell it on the auxiliary market, that

mean the purchaser are actually selling the debt obligation in the underlying loan relationship.

Different with sukuk as if the purchaser of sukuk sell his sukuk certificates on the secondary

market, it simply means a sale of ownership in the assets.

Furthermore, in term of investment rewards, the bondholders receive regular interest

payments (fixed or floating) over the life of the bond, and the principal (original sum) is

guaranteed to be returned on the bond’s maturity dates. 12 In sukuk, the holder of sukuk

receive a share of profit generated by its underlying assets but, the face value of sukuk is not
11
Five Important Differences Between Sukuk and Traditional Bonds - Sukuk: Home of the Global Sukuk
Industry. (n.d.). Retrieved from https://www.sukuk.com/education/important-differences-sukuk-traditional-
bonds-2207/.
12
Jamaldeen, F. (n.d.). How Sukuk (Islamic Bonds) Differ from Conventional Bonds. Retrieved from
https://www.dummies.com/personal-finance/islamic-finance/how-sukuk-islamic-bonds-differ-from-
conventional-bonds/.
guaranteed. However, in sukuk, their value can increase in relationship to the assets backing

the sukuk certificate. If the asset raises in value, then the value of the ownership of that asset,

backed by the sukuk, increases.13 This is one of what conventional bonds lacking as it is

impossible to increase the debt in bond and increase in revenue from a bond cause of the

fixed interest in the conventional bond. Simply put, in bonds, the performance of the

underlying does not affect bondholders, while in sukuk, raise of value in underlying asset

affect sukuk holders.

Issue Relating to Sukuk - Disclosure

Disclosure of information and material is one of the issues raised by the company that

apply the method of Sukuk in their financing. AAOIFI FAS 17 which are the financial

accounting standard made by Accounting and Auditing Organization for Islamic Financing

Institution (AAOIFI) has made a requirement of disclosure in the case of speculation in

Sukuk. Among the requirements are that disclosure shall be made by the issuer of Sukuk, if

material, the face value of Sukuk, the percentage of Sukuk acquired from each party issuing

the Sukuk and each type of Sukuk. 14 There is additionally a requirement to disclose the party

ensuring the Sukuk and the nature of the assurance. Moreover, there also requirement of

disclosure of the contractual relationship between the issuer and/or manager of Sukuk and the

holders of such Sukuk and to disclose the classification of Sukuk according to their

maturities.

All the disclosure requirement in Sukuk literally indicates that the Islamic institution

or any other institution applying Sukuk must be transparent in disclosing financial

information pertaining investment in securities. Most of the financial institution if it possible,

13
Five Important Differences Between Sukuk and Traditional Bonds - Sukuk: Home of the Global Sukuk
Industry. (n.d.). Retrieved from https://www.sukuk.com/education/important-differences-sukuk-traditional-
bonds-2207/.
14
Hanefah M. M., Noguchi A., Muda M., (2013), SUKUK: GLOBAL ISSUES AND CHALLENGES;Journal of Legal,
Ethical and Regulatory Issues, Volume 16
want to hide some of the financial statement as it to protect their company privacy and policy

thus, making the disclosure of the material involving become an issue for them. However, all

the requirement listed in Sukuk actually did not contradict with International Financial

Reporting Standards 7 (IFRS 7) except on the part of disclosure of fair value. As for the

significance of financial instruments, IFRS 7 requires the company to disclose the

significance of the financial instruments according to different categories. 15 Financial assets

and liabilities are to be measured at fair value through profit and loss, showing separately

those held for trading and those designated at initial recognition. 16 All this disclosure are

needed as it to ensure the securities of the holder of Sukuk and it is what made Sukuk is a

Syariah compliance.

15
Ibid
16
Ibid
DEFINITION OF QARD AL-HASAN

In Islam, the principle of Qard al-Hasan is a system for welfare and not for reason of

business transactions. It is a loan that is free from usury and given to beneficent purpose. The

borrower is just required to reimburse the sum acquired. 17 Al-Qard in Arabic or al-Qat'u

implies the deduction. Ihsan means loving others. Qard al-Hasan is a loan which is returned

toward the end of the concurred period with no interest or share in profit or loss. Qard al-

Hasan is a respectable act on account of non-benefit material returns. As indicated by Farooq,

in financing Qard al-Hasan, an extra sum that is required is prohibited. In any case, the

borrower can pay more if not determined in the agreement. While there are a few contrasts of

opinion on certain issues with respect to the implementation of this principle, for example,

the issue of the management costs, early repayment as indicated by request of lenders, the

need for guarantors and others.18

APPLICATION OF QARD AL-HASAN IN FINACIAL INSTITUTION

The core principles of Islam place incredible emphasis on social justice, inclusion, and

sharing of resources between the haves and the have-nots. Islamic finance addresses the issue

of financial and social incorporation from two directions: one by advancing risk-sharing

contracts that provide a viable alternative to conventional debt-based financing; and the other

through voluntary and involuntary instruments of redistribution of wealth in society. Both

risk-sharing financing instruments and redistributive instruments complement each other to

offer a comprehensive approach to enhance financial and social inclusion, eradicate poverty,

and build a healthy and vibrant economy.19 One of the essential tenets of Islamic finance is

unconditional prohibition of interest in lending transactions. This prohibition suggests

17
Kuwait Ministry of Waqf and Islamic Affairs, Al-Mawsu`ah al-Fiqhiyyah al-Kuwaitiyyah, 1993, v. 33, p. 111.
18
Iqbal, Z./ Shafiq, B. 2015. Islamic Finance and The Role of Qard-Al-Hassan (Benevolent Loans) in Enhancing
Inclusion
19
Al-Syawkani, Fath al-Qadir, Dar al-Ma`rifah, 2007, p. 168
prohibition of any debt or loan which conveys a monetary reward tied to the time of lending.

Thus, due to the prohibition of interest, the instrument of debt is prohibited. However, two

kinds of loan are admissible and one of these is highly suggested. This is a typical no-cost

loan for consumer and commercial purposes. However, the other kind of loan known as

Qard-al-hassan, known as a loan for community members who are under financial distress

and therefore, has special purpose in the Islamic economic system. Qard-al-hassan is a loan

mentioned in the Qur’an as «beautiful», probably because in all the verses in which this loan

is mentioned, it is stipulated that it is made directly to Allah and not to the recipient. It is a

voluntary loan, without any expectation by the creditor of any return on the principal.

BENEFITS OF QARD AL-HASAN

It is a non-rewarding loan, but the borrower is under moral obligation to repay the

principal depending on the borrower’s financial capacity to do so. The creditor would forego

the demand for payment of principal if despite best efforts and good intentions by the

borrower; he/she cannot repay the principal due to economic hardships. The incentives for

lenders to extend credit based on Qard-al-hassan are clearly benevolent and spiritual as they

are abiding by Allah’s Command to supply such loans for benevolent purposes. Sadr and

Torabi make an interesting observation arguing that rational lenders optimize the return to

their portfolios by constructing a diverse portfolio of Qard-al-hassan lending and investments

in risky assets—thus optimizing return on their portfolio through combining monetary and

non-monetary returns.20 The primary objective of Qard-al-hassan is to help poor get on their

feet to become part of economic activities in a dignified and cost-effective manner. Since

poor do not have any material collateral, social capital is the only collateral for extending

such credit. The institution of Qard-al-hassan can be effectively used to eradicate extreme

20
Sadr, S.K and Omid T. (2015), Qard-Ul-Hasan and Micro Financing in Zamir Iqbal and Zurina Shafii, (Eds.) State
of Islamic Finance: A Retrospective Assessment and Looking Forward, University Sans Islam Malaysia (USIM),
Nilai, Malaysia.
poverty through opportunities to poor to create new jobs market and business ventures by

using their merits, skills and expertise. Finally, Qard-al-hassan can serve as tool to enhance

financial and social inclusion in the society. By extending credit to poor, they can be brought

into the formal financial sector and as they come out of poverty, they are better integrated and

included in the society.

The experience with microcredit or microfinance has been mixed, as there is growing

consensus that the expectations were overestimated. There are serious challenges in achieving

sustainable impact on poverty alleviation. One of the key criticisms of commercial and

conventional approaches to microfinance is the existence of high cost of borrowing as a result

of high interest rate. These high rates are justified because of high transaction costs and high-

risk premium. Whatever the justification and/or the reasons these are for high interest rates—

and there are economically justifiable reasons— from an Islamic point of view high and at

times exorbitant, interest rates are exploitative, unjust, and repressive especially for the poor

and therefore are considered an abomination. The alternative of Qard al-hassan provides a

viable option for the poor.

Qard-al-hassan works on the basic axiom of Islamic development according to which,

the poverty is an outcome of israf, itlaf, and the non-payment to lower segment of society.

The unique structure of Qard-al-hassan makes use of the distinguished feature of property

rights as prescribed by Islamic economic system which offers rights in resources to all even

to those who don’t own them through the principle of distribution and redistribution.

However, formal use of Qard-al-hassan as a tool for microfinance and financial inclusion is

relatively recent.
CASE RELATING TO QARD AL-HASAN

In case of Bank Islam Malaysia Berhad v Lim Kok Hoe & Anor 21 and other Appeals,

the principle of Islamic contract BBA was upheld. The court took the approach to uphold

BBA, by stating that BBA is shariah compliant, should not be equated with conventional

loans, hence the calculations of profit of BBA should not be compared to the calculations of

interest under conventional loan, and the conventional loan should not at all be brought into

the picture following the different laws governing the two. Earlier judgments have held that

BBA is valid, lower courts are bound by it. In Islamic financing there is nothing that prohibits

the giving of a loan. It is only the riba element in the loan that is prohibited. Hence, loans

without riba ie benevolent loans or qard al-Hasan are allowed.

The Application of Qard Al-Hasan in Islamic Financial Institution

As time passes by, more individuals and companies (bank) have realized the

advantages of Islamic finance that the banks nowadays offer products that are in accordance

with Shariah principles. Indeed, there is no much difference between conventional and

Islamic finance because the latter merely gets rid of any haram aspects such as gharar or

uncertainty and riba or interest in the transaction or products offered. Due to belief among

Muslims, the tendency of these customers choosing the latter is therefore commendable. As

discussed above, Qard’ al-Hasan is one of the contracts in Islamic finance that customers may

opt to utilize shariah-compliant products in their daily financial transaction. The main

objectives of Qard’ al-Hassan include helping the underprivileged individuals who are in

financial difficulty, lowering the gap between poor and rich people, distributing wealth

among all deserving people in the community and performing a good deed that is highly

encouraged by the Allah Almighty and His messenger to build, strengthen and sustain

21
Bank Islam Malaysia Berhad v Lim Kok Hoe & Anor and other Appeals [2009] 6 CLJ 22 / [2009] 6 MLJ 839
national economy.22 In short, it is a form of contract in Islamic finance that is helpful for

Muslim customers who are in need of financial help or money.

There are several pillars of Qard’ al-Hassan which are Muqridh, Muqtaridh, Maal and

Sighah. Muqridh is defined as the creditor or the one who gives the credit, Muqtaridh is the

one who receives the credit, Maal or Muqradh is the exchanged item or money and Sighah or

Ijab and Qabul means offer and acceptance.23 Like other Islamic transactions, Qard’ al-

Hassan contract entered into by the contracting parties requires the same principles which are

firstly, both parties should be legally capable to enter into a contract. The parties who want to

enter into the contract must be baligh, aqil and rashid or as in the conventional transaction,

the parties must attain the age of majority and be sound of mind at the time they enter into it.

Secondly, Ijab and Qabul that it must be made clear before entering into the loan contract.

The agreement must be made clear to both contracting parties in order to avoid future legal

dispute. Thirdly, the date of payment must be specified. A transaction may lead to ambiguity

and dispute among lender and the borrower if the date fails to be specified. Last but not least,

the contract must be in writing. Unlike conventional transaction, the obligation to have a

written contract is expressly mentioned in the Quran.24

Several countries across the world have adopted Qard’ al-Hassan as one of the

shariah-compliant products offered in the Islamic finance. This includes Bosnia Herzegovina,

Islamic Republic of Iran, Indonesia, Pakistan, and UK where Qard’ al-Hassan is utilized in

microfinance.25 Malaysia does not also miss the opportunity to create and offer products
22
Wan Yussof, W. N., Ismail, A. G., Ahmad , S., & Ahmad, S. (2015). The Originality of Qard and its Implication
on the Loan Theory: Does Intention Matter? Retrieved October 28, 2019, from
http://jams92.org/pdf/MSJ04/msj04(013)_wannoraisyah.pdf.
23
A Brief Study on Qardh Hasan, Hiba and Wadiah in the Light of Islamic Jurisprudence. (2017, June). Retrieved
October 30, 2019, from http://www.ijetsr.com/images/short_pdf/1503310117_870-873-
saeed_ijetsr_june2017.pdf.
24
Barbarawi, K. A. (n.d.). Understanding in Qard Hassan. Retrieved October 30, 2019, from
https://www.academia.edu/25047611/Understanding_Qard_Al-Hassan.
25
Iqbal, Z., & Shafiq, B. (2015, October). Islamic Finance and The Role of Qard al-Hassan (Benevolent Loans) In
Enhancing Inclusion: A Case Study of Akhuwat. Retrieved October 30, 2019, from http://www.acrn-
journals.eu/resources/jfrp0404b.pdf.
which are lending-based but with no profit. It is still in a small percentage. 26 There was an

essential issue that arose as to the use of term ‘Qard’’ or ‘Qard al-Hassan’ in a service or

product that is not profit-oriented because the word ‘Hassan’ implies that the benefits in

return are only for God to grant. However, a resolution by Bank Negara Malaysia in 2005 had

come to consensus that the word ‘Hassan’ should be removed after the word Qardh implies

that Qard is an obligation for borrowers to pay back their financing to lenders. 27 In effect, the

customers who use Qard’ products are now obliged to make repayment as agreed in the

contract.

The application of Qard’ in Malaysia has expanded to other products such as al-

Rahnu loans, credit cards, charge cards and others. One of the products using Qard’ principle

is the Qard’ al-Hassan credit card. Some local banks have provided Islamic credit card such

as Bank Islam Malaysia Berhad whereby the customers use the card to buy a piece of land on

credit from the bank. The bank deposits cash in the account of the client, who can draw the

money to meet their needs.28 Conventional credit cards according to Shariah principles are

haram because of its features that have element of riba or gharar. The prohibition of riba in

Islam is a clear-cut case that the profit made on money is illegal. It same goes to gharar

whereby the terms and conditions of the contract entered by the contracting parties must be

certain. In this case, Islamic banks or financial institutions that provide any product or service

such as in Murabahah contract must declare the mark-up price to the customers. Otherwise,

the contract is illegal and void. Islam permits the use of credit card as long as there is no

usury. If the holders are only required to pay the principle amount and the service charge, the

26
Wan Yussof, W. N., Ismail, A. G., Ahmad , S., & Ahmad, S. (2015). The Originality of Qard and its Implication
on the Loan Theory: Does Intention Matter? Retrieved October 28, 2019, from
http://jams92.org/pdf/MSJ04/msj04(013)_wannoraisyah.pdf.
27
32. Qard Principles in Islamic Finance. (2018). Retrieved October 30, 2019, from http://www.sacbnm.org/wp-
content/uploads/2018/03/32.E.pdf.
28
Farooq, M. O., & Ghattis, N. E. (2015). Qard Hasan, Credit Cards and Islamic Financial Product Structuring:
Some Quranic and Practical Considerations. Retrieved October 30, 2019, from
http://research.usc.edu.au/vital/access/manager/Repository/usc:21832.
transaction is permitted.29 This is therefore connected to the issue of the term Qard’ al-Hassan

since the term itself means a non-profit based product because it aims to help poor that the

reward is for Allah the Almighty to return. In consistent with the same Qur’anic principle,

Qard al-Hasan cannot therefore be part of any profit-oriented, commercial transaction, either

by itself or as part of a commercial product or service which uses Qard al-Hasan as one of the

component contracts. The result of using the term while the product is a profit-oriented one

will tarnish the image of Islam and the financial institutions itself.30

29
Mohd Dali, N. R. S., & Mohd Rais, N. A. (2006). Factors Influencing Islamic Credit Cards Holders. An Online
Study. Retrieved October 30, 2019, from http://ddms.usim.edu.my/bitstream/123456789/1569/3/4th
International Islamic Banking and Finance Conference 2006.17-31.pdf.
30
Wan Yussof, W. N., Ismail, A. G., Ahmad , S., & Ahmad, S. (2015). The Originality of Qard and its Implication
on the Loan Theory: Does Intention Matter? Retrieved October 28, 2019, from
http://jams92.org/pdf/MSJ04/msj04(013)_wannoraisyah.pdf.
DEFINITION OF TAWARRUQ

A tawarruq which is otherwise called 'commodity murabaha’ starts with

indistinguishable strides from a true murabaha and includes a further advance whereby the

venture organization exchanges the advantages acquired by method for the murabaha

transaction. This is on the grounds that in a tawarruq the undertaking organization does not

require the obtained resource for its own utilization and is just keen on the money esteem it

can get by quickly exchanging it. These exchange are called commodity murabaha as the

goods usually used for this purpose are commodities such as aluminium, copper, and lead

which can be exchanged with low transaction costs are have promptly accessible sport

markets. For occasion the London Metals Exchange. Gold and silver can't be utilized for

tawarruq transactions, as they are administered by another set of Sharia principles.

APPLICATION OF TAWARRUQ

The utilization of tawarruq can be found in the Bursa Suq al-Sila. Banks will offer on

the cost while on the other hand suppliers for commodities will line up as from supplier A, B

and C when the market is open. The request will be coordinated by Trading and Clearing

Engine. Once the bidding has finished, CPO will be sold to Islamic Bank A by means of

Broker A. During this period, the delivery of commodities and trade affirmation will be sent

to all parties is done by Trading and Clearing Engine. However, the additional charge

imposed for delivery is not included in the selling price in the very beginning which implies

that there are two separate prices which are for delivery and non-delivery. Islamic Bank A

will sell the commodities to the Islamic Bank B on deferred basis. Then, Islamic Bank B will

sell the commodities to Trading and Clearing Engine through broker B. During this

procedure, the proprietorship is transferred. This asset ownership will be fully recognized and
verify ownership through electronic certificates. The Trading and Clearing Engine will sell

the commodities to the buyer based on the bidding price.

Apart from that, Islamic banks utilizes transaction of tawarruq. The Islamic Bank purchases

the item from seller A in cash cost and during this specific time, the product is under the

ownership of Islamic Bank. Later on, Islamic Bank offers the items to customers or another

Islamic Bank based on the fetched cost also profit margin. The product will be possessed by

the counterpart at that point. Counterpart would then offer the product to another party which

is merchant B based on cash. The commodity’s possession will be exchanged to merchant B.

Comparison Between Application of Tawarruq by Bursa Suq al-Sila’ Malaysia and JFX

Shariah Indonesia

Two stages, in particular BSAS and JFX Shariah Indonesia, have been acquainted in the

market with address the Sharêñah worries over the act of organized tawarruq. BSAS is an

Islamic commodity exchanging platform for the Islamic financial industry and capital market,

introduced by Bursa Malaysia in 2009. It is intentionally structured as a trade of various items

utilizing tawarruq transactions. It began by exchanging local crude palm oil (CPO) and

plastic resin (PE) yet plans to proceed onward to other Sharêñah-endorsed commodities,

including cars, oil, copper and aluminium. In April 2012, BSAS included refined, bleached

and deodorised (RBD) palm olein as another commodity to fulfil more prominent need from

neighbourhood and worldwide players for ware based Islamic financing.

Compliant with the introduction of BSAS, JFX Indonesia propelled JFX Shariah

Indonesia in late 2011. Started by the National Sharêñah Board-Indonesian Council of Ulama

(DSN-MUI), JFX Shariah Indonesia is just permitted to be utilized for banks' liquidity the

executive purposes. The study found that a large portion of the Sharêñah issues in organized

tawarruq have been all around dealt with by both BSAS and JFX Shariah Indonesia. The

accompanying discourse reveals insight into how the two stages address the Sharêñah issues

in the act of tawarruq.

ISSUE RELATING TO TAWARRUQ - PREARRANGEMENT

A significant concern raised by researchers is that the commodity must not be offered to

the parties from whom it was acquired, nor should it come back to the seller by method of

netting arrangement, because of earlier understanding or agreement between the two parties

or customary practice. To tackle this issue, BSAS has masterminded that the deal to the

commodity provider be done on an arbitrary premise. The providers place their offers which
repeat the genuine market. When proprietorship returns to a provider, every unhampered

commodity might be re-offered into the BSAS advertise for other trades.

Meanwhile, to address the issue of intrigue and market control in JFX Shariah, Circular

III of Bank Indonesia doesn't permit a commodity merchant part to lead transactions with a

party that goes about as both commercial member and the commodity trader. The exchange is

likewise done on an irregular premise to guarantee that a similar commodity doesn't return to

a similar individual by means of a netting plan.

CONCLUSION

The three aforementioned products and service currently offered by various Islamic

financial institutions which are Sukuk (Islamic Bond), Qard al-Hasan (Loan of welfare

purpose), and Tawarruq (Commodity Murabaha) had been analysed in details to

demonstrated the application of Syariah principle such as the prohibition of riba and

excessive gharar in Islamic Finance and how those principles had influence the architecture

and development of modern Islamic finance industry in Malaysia.

This report has critically discussed the definition of each product or service and their

respective framework and procedure in which they operate in. It is essential to discussed such

matter in order to fully comprehend and appreciate the distinction of between Islamic finance

with conventional finance, and the underlying benefits of the former that substantially

outweigh those of the latter. This can be observed in discussion of Qard al-Hasan whereby

the main purpose of Qard al-Hasan is welfare-oriented - to provide a lenient financial

assistance to those of lesser and in need, in contrast from making profit on monetary lending

as practice in conventional finance. This report also deliberated extensively on issue or

problem concerning the mentioned product or service in its application along with the

solution or initiative taken in tackling such issue. This is to provide insight of the ongoing

development of such product or service and how it is affecting the Islamic finance industry.

For instance, the issue of disclosure relating to speculation in sukuk. Such disclosure may

detriment the company’s privacy and policy, however such disclosure is also a prerequisite to

constitute Sukuk as Syariah-compliant, hence arose an existential dilemma between the

Syariah principle and the company’s interest.

 In conclusion, we hope that this report may enlighten and imbue the readers regarding

Sukuk, Qard al-Hasan, and Tawarruq on its application framework in Malaysia along with its

difference and benefits compare to conventional finance.