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INTRODUCTION

ISLAMIC FINANCIAL SYSTEM

ISLAMIC FINANCIAL MARKET

DIRECT FINANCIAL MARKET INDIRECT FINANCIAL MARKET

ISLAMIC MONEY MARKET TAKAFUL

ISLAMIC CAPITAL MARKET UNIT TRUST

ISLAMIC EQUITY MARKET MERCHANT BANKS

ISLAMIC BOND MARKET COMMERCIAL BANKS

FINANCE COMPANIES

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ISLAMIC MONEY MARKET
PRINCIPLES OF BANKING AND FINANCE
• Universal (tabi’e principles):
1. Profitability
2. Safety
3. Liquidity
• Shariah principles:
1. Application of al-bay’ (i.e. exchange with ‘Iwad or equal
countervalue)
2. Prohibition of riba
3. Avoidance of gharar (uncertainties/ambiguities) in
contractual agreements.
4. Prohibition of maisir (gambling)
5. Prohibition to engage in the production of non-halal
goods and services (prohibited commodities).

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PRINCIPLES OF BANKING AND
FINANCE
• Universal (tabi’e principles) + Shariah
principles
= ISLAMIC BANKING AND FINANCE
• Two types of RISK:
1. Gharar (negative) = risk and uncertainty }
unlawful/haram
2. Ghurmi (positive) = good types of risk and
uncertainy (that can claim profit) } lawful/halal

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 PRINCIPLES OF CONTRACT (‘AQAD)
1. Agents of Contract
 Sound mind, rational
2. Objective of Contract
 Equivalence for equivalence, transfer of right
3. Object of Contract
 Possession, delivery, price, permissible object, non-
defective, goods etc.
4. Offer and Acceptance (Ijab & Qabul)
 Mutual exchange, non-duress, under conscious situation

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TRADE (AL-BAY’)

TRADE
(AL-BAY’)

CONTRACT OF EXCHANGE CONTRACT OF PROFIT/LOSS SHARING

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 TRADE
(AL-BAY’)

CONTRACT CONTRACT OF
OF EXCHANGE PROFIT/LOSS SHARING

AL-QIRAD
SERVICES SHIRKAH
GOODS & MONEY (CAPITAL PROVIDER
AND MONEY (PARTNERSHIP)
& CAPITAL USER)

SPOT/CASH SALE WAKALAH

DEFERRED SALE KAFALAH

DELIVER NOW/
WADIAH
PAY LATER

DELIVER LATER/
RAHN
PAY NOW

OTHERS 7
CONTRACT OF QARD / DEBT / LOAN

CONTRACT
OF DEBT

CAPITAL + CAPITAL +
CONTRACTUAL NON-CONTRACTUAL
PROFIT PROFIT
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CONTRACT OF QARD / DEBT / LOAN
• Capital + Contractual Profit
 Pre-determined or fixed gains/interest
 Transferring the risk which is uncertain
 Nature : 1000 xΔ >1000
 Bring injustice, unfair contract i.e. no equivalence
counter value
 Treat money as a commodity.
 The concept of borrowing is violated.
 Contract: NULL/VOID

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CONTRACT OF QARD / DEBT / LOAN
• Capital + Non-Contractual Profit
 None Pre-determined or fixed gains
 Get back the principal + rewards
 Nature : 1000 xΔ =1000
 May pay extra (optional). In this situation, the payer will
get more rewards from God.
 Qard-al-Hassan = charitable loan
 Loan is not a commodity. The basic principle is to help
those who are in need.
 Contract: VALID/ACCEPTABLE

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 E.G. BORROWING MONEY
THE PRINCIPLES CAPITAL + CAPITAL + NON-
CONTRACTUAL CONTRACTUAL
PROFIT PROFIT

AGENTS Creditor and Debtor

Creditor and Debtor
OBJECTIVE X Equivalence with  Equivalence for
Equivalence (extra is
non-equivalence optional)
X some impermissible
OBJECT object permissible object
(debt in currency with (debt in currency with
higher price) price = 0)

IJAB & QABUL X under duress voluntary

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 ARGUMENTS AGAINST
CAPITAL + CONTRACTUAL PROFIT

LEGAL MORAL/ETHICAL
PERSPECTIVE PERSPECTIVE
Fixed increment / pre-determined
sum of increase over principal i.e. 1. Unjust
similar to riba, violation of the 2. Oppressive
Principles of contract. Thus, action 3. Exploitation
becomes void and invalid and this 4. Unfair income distribution
is haram. God does not recognize 5. Big gap between the rich and the poor
the deed!

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EXAMPLES
• Loan = RM1000 in xΔ of RM1100
 RM100 is haram (10% is pre-determined)
• Loan = RM1000 in xΔ of RM1000 and extra of
RM200 as gratitude
 RM200 is halal (optional and not pre-fixed)
• Sale = RM1000 in xΔ of goods/services (that cost
only RM600)
 RM400 is halal because of ‘iwad or equivalence
counter value (effort / risk / liability)

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EXAMPLES
• When bank gives loan and charges you with an
interest of 10%,
 The interest is to cover
1. Cost of funds
2. Overhead / resource cost
3. Inflation premium
4. Default of risk
• Meaning, the bank is transferring all uncertainties to
the creditors and the bank is guaranteed of the
payment. (for NPL, that is the irresponsibility of the
creditor)

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DEPOSIT IN ISLAM: SAVINGS

SAVINGS PRODUCTS
- AL-WADIAH

AL-WADIAH AL-WADIAH
YAD AMANAH YAD DHAMANAH

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 AL-WADIAH
• AL-WADIAH YAD AMANAH
 Safe-keeping function – Bank looks after valuables such as gold and jewelry,
documents etc.
 The bank/keeper will not use them for business purposes or other commercial
activities that can gain profit.
 The bank/keeper will charge some fees such as service fees, rent fees and other
charges.
 The exchange: money vs. services
• AL-WADIAH YAD DHAMANAH
 Safe-keeping function involving only money.
 With information and notification to customers, these money will be invested
with a guarantee (Dhaman) given on savings alone (capital) but not returns
(Hibah). The hukm of giving hibah is mubah (since the bank has no contractual
obligation to reward savers).
 The customers have rights to the capital i.e. his/her all savings.

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 TRADITIONAL AL-WADIAH
• E.g. I am traveling, so I am leaving some cash or cows to
my neighbor to be kept.
 Charitable contract
 Return to the owner on demand
 Keeper can use the object (to earn profit/gain)
 Keeper has right to the profit of wadiah
 Hibah is a gift arising from wadiah and Qard.
 Not contractual
 Promised benefit but not binding

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 TRADITIONAL VS. MODERN AL-
WADIAH
• Previously, the property owner is giving out the hibah due to the gratitude to the
keeper as the keeper is taking care his/her property.
• Nowadays, the keeper is giving out the hibah due to the gratitude to the property
owner to let him/her in using the property kept.
• Either way, with God’s will, both kindness will be rewarded.

• Today all Islamic banks and Islamic windows will giving out the hibah (literally
means gift) due to the competitiveness in attracting the depositors. This is permissible
as banks shall feel the gratitude towards the depositors. However, the hibah rate is
not pre-determined and it depends on the profit/loss margin of the institutions.

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AL-WADIAH: CALCULATION
• E.g. You deposit RM2000 on 03.05.1996 in Bank
Islam. What will be the hibah on 31.05.1996?
And what will be your savings on that day?
(Rate of the month is 5.15%)

• Formula of hibah

Cumulative balance x rate of the month (%) X 1

Number of days in the month x 100 12

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AL-WADIAH: CALCULATION
• E.g. You deposit RM2000 on 03.05.1996 in Bank
Islam. What will be the hibah on 31.05.1996?
And what will be your total savings on that day?
(Rate of the month is 5.15%)
• According to the formula,

(2000 x 29) x 5.15 x 1 = 298700 = 8.03

31 x 100 x 12 37200
Your hibah = RM8.03
Thus, your total savings = Deposit + hibah
= RM2000 + RM8.03
= RM2008.03

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AL-WADIAH: CALCULATION
• E.g. You deposit RM2000 on 03.03.1996 in
Bank Islam. What will be the hibah on
07.05.1996?
 (Rate of the month is according to the
following)
 Mac: 4.9%
 April: 5.5%
 Mei: 5.15%

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AL-WADIAH: CALCULATION
• E.g. You deposit RM2000 on 03.03.1996 in Bank Islam. What will be
the hibah on 07.05.1996?(Rate of the month is according to the
following)
 Mac: 4.9%
 April: 5.5%
 Mei: 5.15%
• ANSWER:
• Mac
(2000 x 29) x 4.90 x 1 = 284200 = 7.64
31 x 100 x 12 37200
• April
(2000 x 30) x 5.50 x 1 = 330000 = 9.17
30 x 100 x 12 36000
• Mei
(2000 x 7) x 5.15 x 1 = 72100 = 1.94
31 x 100 x 12 37200

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Total Hibah = 7.64 + 9.17 + 1.94 = 18.75
AL-WADIAH: CALCULATION
• You open a wadiah account with a deposit of RM8000 on
02.01.2011. You deposit another RM2500 on 10.06.2011 but
withdraw RM1800 on 21.06.2011. On 07.08.2011, you withdraw
another RM1300 from the account. What will be your total
hibah on 31.08.2011?
Notes: There are 28 days on month of February. Assume that hibah is withdrawn every month.

Month Rate Month Rate Month Rate Month Rate

(%) (%) (%) (%)
Jan 5.0 Mar 5.1 May 5.2 July 5.0

Feb 5.1 Apr 5.3 June 5.2 Aug 5.3

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 AL-WADIAH: CALCULATION
ANSWER: Total Hibah?
Mei (31 days)
Jan (30 days only) Jul (31 days)
8000 X 31 X 5.2 X 1 = 34.67
8000 X 30 X 5.0 X 1 = 32.26 8700 X 31 X 5.0 X 1 = 36.25
31 X 100 12
31 X 100 12 31 X 100 12

Jun (9 days)
Feb (28 days) August (6 days)
8000 X 9 X 5.2 X 1 = 10.40
8000 X 28 X 5.1 X 1 = 34.00 8700 X 6 X 5.3 X 1 = 7.44
30 X 100 12
28 X 100 12 31 X 100 12

Jun (11 days)

Mac (31) August (25 days)
10500 X 11 X 5.2 X 1 = 16.68
8000 X 31 X 5.1 X 1 = 34.00 7400 X 25 X 5.3 X 1 = 26.36
30 X 100 12
31 X 100 12 31 X 100 12

Jun (10 days)

Apr (30 days)
8000 X 30 X 5.3 X 1 = 35.33
8700 X10 X 5.2 X 1 = 12.57 Total Hibah= RM279.96
30 X 100 12
30 X 100 12

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END OF CHAPTER 6

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