CIFPPart2

ShariahissuesinIslamicfinance

ShariahissuesinIslamicfinancing
(BAI``INAH `INAH,TAWARRUQ, TAWARRUQ BAI`MA`DUM)

Dr.AhceneLahsasna INCEIF,KualaLumpur hasan@inceif.org

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BAI``INAH

BAI``INAH
The SAC, at its 5th meeting on 29 January 1997, passed a resolution that bai` `inah is a principle that is permissible in the Islamic capital market in Malaysia. Bai `inah Bai` inah refers to trading whereby the seller sells his assets to the buyer at an agreed selling price to be paid by the buyer at a later a a e da date. e After that, the buyer immediately sells back the assets to the seller at a cash price, lower than the agreed selling price. The majority of Islamic jurists state that there are three forms of trading categorised as bai` `inah, whereby it can be concluded that all the assets sold come from the financier.

Cont.
The financier will sell a product to the buyer at an agreed price to be paid later later. The financier then immediately y buys y back the asset at a cash price lower than the deferred selling price

Inah transaction

Sale

1
RM 100,000.00 100 000 00
Received RM 85,000.00

2
d f deferred d payment t

Buyer Seller
RM 85,000.00 Cash

Seller buyer

RM 100,000.00

Buying & selling back the same item

Discount RM 15,000.00

Formsofbai``inah
Forms of bai` `inah are as follows: The seller sells a product to the buyer at a higher price on a deferred payment basis. After delivery to the buyer, the seller buys back the product in cash at a much lower price price. party y is involved, , the seller sells a p product that is A third p delivered later on for, say RM200. After delivering it to the buyer, the buyer then sells it to a third party for a lower price, say RM100. The third party then resells it to the first party (original owner) for RM100. RM100 This means the original owner obtained RM100 from the trade.

Cont.
A man wants to borrow, say RM100. The creditor refuses to lend using the qardh principle. Instead he says: I am not giving you qardh (loan) but I will sell you this shirt by deferred payment for RM100 although the market price is RM70. RM70 This is to enable the buyer to sell it for RM70 at the market. When the buyer agrees, the trade is transacted. What happens is the shirt owner makes a profit of RM30 from the transaction because the buyer will pay him a deferred payment of RM100.

ARGUMENTSONTHEPERMISSIBILITYOFBAI`INAH Opinions of Past Islamic Jurists Past Islamic jurists had differing views on determining the h k on bai` hukm b i` `i `inah h. The following were their views: The majority were of the opinion that bai` `inah was not permissible because it was the zariah ( p (way) y) or hilah ( (legal g excuse) to legitimise riba (usury). The Hanafi Th H fi Mazhab M h b was of f the th opinion i i th that t bai` b i` `i `inah h was permissible only if it involves a third party, which acts as an intermediary between the seller (creditor) and buyer (debtor) (debtor).

Cont.
The Maliki and Hanbali Mazhab, on the other hand, rejected bai` `inah and considered it invalid. Their opinion was based on the principle of sadd zariah that aims to prevent practices that can lead to forbidden acts such as, in this case, riba. The basis for the opinion of the majority of the Islamic jurists was the hadith dialogue between Aishah and Zaid bin alA Arqam which hi h showed h d th the prohibition hibiti of f bai` b i` `i `inah h. They also held to the hadith of the Prophet s.a.w s a w in which he warned that those who practised bai` `inah would suffer scorn

Cont. The Syafi`i and Zahiri Mazhab viewed bai` `inah as permissible. A contract was valued by what is disclosed and ones niyyah (intention) was up to Allah s.w.t. to judge. They criticised the hadith used by the majority of the Islamic jurists as the basis for their argument, saying that it (the hadith) was weak and therefore could not be used as the basis for the hukm. From the study done on the opinions of past Islamic jurists on the issue of bai` `inah, the SAC decided to accept the opinions of the Syafi Syafi`i i and Zahiri Mazhab in permitting bai bai` `inah inah.

Cont. Therefore, it can be developed into a product for the Islamic capital p market in Malaysia. y When institutions or individuals are in need of capital for a specific f purpose they can utilise this method of f payment, using their assets as mortgage. As they still need the assets, this method allows them to liquidate q without losing g the asset.

Cont.
Background Bai` `Inah concept is used in Malaysia Islamic banking system and capital market to facilitate the needs of market players when Islamic financial industry was first pioneered in the country. Even though the majority of Shariah scholars disallow this concept some of them are of the opinion that it is acceptable concept, as long as all the pillars and conditions of the contract are complied with. Based on this opinion, bai` `inah concept is accepted to be practiced in Malaysia to ensure that Islamic finance is as competitives as its conventional counterpart. Among others, this concept is applied in money market transaction transaction, bond issuance, debt securitization and credit card facility.

Cont.
Issue Bai`InahTransactionintheMoneyMarket Bai``inahtransactionisperceivedasasuitablecontracttobe introducedinIslamicInterbankmoneymarket. market Inthistransaction, transaction Shariahcompliantasset(forexampleGovernmentInvestment Issues)willbesoldbyafinancier(forexamplecentralbank)tothe recipient i i tbank b kat tXprice i ondeffered d ff dterms. t Then,recipientbankwillsellbacktheassettothefinancieron cashbasisatYprice. Th Thed deffered ff dprice i of fXis i higher hi h than h the h cash hprice i of fY, Y h hencehe h differenceisregeardedasprofittothefinancier. p y Bothsalecontractsareexecutedseparately. Thequestioniswhethertheapplicationofbai``inahasexplained above b is i complies li with ithth theconcept tof fbai` b i``inah `i hwhich hi his i acceptableinShariah.

Cont.
Resolution TheCouncilinits8thmeetingheldon12thDecember1998/23 Syaaban1419resolvedthatbai``inahtransactionintheIslamic InterBankMoneyMarketispermissiblebasedthefollowing conditions: (i)Bai``Inahtransactionmustfollowthemechanismwhichis acceptedbySyafiischool;and (ii)Thetransactedgoodisnotaribawiitem.

Cont.
IslamicCreditCardBasedonBai Bai``Inah Inah IslamicbankinginstitutionproposedtoofferIslamiccreditcard basedonthecombinationofbai``inahandwadiahconcepts. Theproposedmechanismisasfollows: (i)Thecustomerpurchasesanassetfromthebankondeferred terms(thepurchasepricecomprisecostplusprofit); forexample,RM11,800(RM10,000+RM1,800)tobepaidwithin oneyearbythecustomer; (ii)Thecustomerthereafterwillsellbacktheassettothebankon cashbasis(atcostvalue); forexample,RM10,000. Thesellingpriceoftheassetislowerthanthepurchaseprice. Thisistheamountwhichwillbecreditedintoamarginalwadiah accountofthebankforcustomers customer suse. use

Cont.
TheabovemechanismofIslamiccreditcardwasproposedtothe Councilfordeliberationtodeterminewhetheritisincompliance withShariah. Resolution TheCouncilinits18thmeetingheldon12thApril2001/22 Muharram1422resolvedthatthemechanismofIslamiccredit cardwhichappliesbai``inahconcepttogeneratefundsforcredit purposesbyacustomerwhorequestsfortheIslamiccreditcardis permissible.

Cont.
RevisitingtheRulingsonBai Bai``Inah Inah TheRegionalShariahDialoguewhichwasheldon28thand29th June2006aimsatharmonisingandpromotingunderstanding amongstthe h Shariah Sh i hscholars h l who h arei involved l d i inIslamic l i fi finance. Thedialoguehadspecificallyfocusedonfindingthebestsolution toresolvetheissueoftheuseofbai``inahandtawarruqinIslamic financialsystem. TheCouncilandtheparticipatingShariahscholarhadtakena comprehensive p approach pp withregard g tobai``inahandtawarruq q transactions.

Cont.
Resolution TheCouncilintheRegionalShariahScholarsDialogueon29th June2006or3 Jamadil dilAkhir khi 1427resolved l dthat: h (i)Thepermissibilityofbai bai``inah inahandtawarruqisstillamatterof juristicdisagreementamongtheShariahscholarsbackedbytheir ownbasisofjustifications; (ii)Thebasisreliedupontojustifythepermissibilityoftawarruqis justify ythep permissibility yofbai``inah. similarwiththebasistoj Therefore,bothconceptsshallberuledsimilarly; ( (iii) )Bai` ``inah ` hconceptisstill llnecessaryinthe h contextl local lIslamic l financedevelopment. However,themarketplayersarerequiredtostrengthenand enhancetheoperationalprocessanddocumentationtocomply withthefeaturesofbai``inahaspermitted;and

Cont.
(iv)Sinceba ba``inah inahconceptisstillregardedasamatterofjuristic disagreementamongtheShariahscholars,itismoredesirablethat Islamicfinancialinstitutionstolimititsuseinproductswhichface difficultyinstructuringthembasedonotherconsensually acceptedcontracts.

TAWARRUQ

Tawarruq
The Islamic Fiqh Academy of Jeddah has described tawarruq as the purchase of a commodity that is in the ownership and possession of the seller against a deferred price, and its subsequent sale by the purchaser to a party other than the seller on cash, for the purpose of obtaining cash, that is, wariq. The Encyclopedia of Islamic Law published by the Ministry of Awqaf of Kuwait defines tawarruq as purchasing a commodity on credit and selling it to a person other than the initial seller for a lower price on cash.

DifferencebetweenTawarruq andInah
Tawarruq Tawarruq q: indicates an instance where a person who needs liquidity q yp purchases an asset from someone on credit. thereafter sells it, usually for a lower price, to a person other than the original seller, that is, to a third party. the structure does not give a ready d i indication di i of f a hilah hil h adopted solely for circumventing riba. Si Since th the asset t in i this thi case does not return to the original vendor and it is sold to a third party party. Inah Hinah: in inah one who requires liquidity purchases an asset from a seller on credit. Thereafter, he sells it on cash basis at a price lower than the purchase p p price to the seller himself. this transaction has been termed inah because the particular asset purchased (ayn in Arabic) had found its way back to the original seller. this fact strongly indicates that the asset had been utilised merely as a hilah for earning riba, on the basis of which they ruled the transaction prohibited. hibit d

Inah transaction

Sale

1
RM 100,000.00 100 000 00
Received RM 85,000.00

2
d f deferred d payment t

Buyer Seller
RM 85,000.00 Cash

Seller buyer

RM 100,000.00

Buying & selling back the same item

Discount RM 15,000.00

Tawarruq transaction

3
N New b buyer
Buyer takes Possession

RM 85,000.00 Cash transaction

Supplier of the commodity to the bank

1st Sale

Process of tawarruq q
Bank
1st Sale to the bank

The commodity (not of gold or silver)

Bank sales the commodity to the client on the basis of murabahah. (deferred payment)

+
2nd Sales to the client

Possession The client takes a possession of the commodity

2nd Sale

+
Possession

+
Agency Agency g y

+
3nd Sale cash

The client will appoint the bank as his agent (intermediate) to sell the commodity to a new purchaser on a cash basis for a lower price.

=
Getting cash and be in debt

3rd Sale The second transaction is done the bank will hand over the cash to the client.

Tawarruq Fiqhi Process

RM 15,000.00 Discount

C Commodity dit sold ld at t RM 85,000.00 85 000 00 cash h The cash is credited to buyers account

The sales is s base on ca ash

1 Client

Buy a commodity from the supplier on the murabahah. (deferred payment)

RM 85,000.00

The commodity (not of gold or silver)

3
Buyer takes Possession Buyer appoint the supplier as agent to sale the goods
Or other party, or he do it him self

New buyer
Agency agreement is an option

deferred payment

RM 100,000.00 100 000 00

2
Debt RM 100,000.00

Supplier

Regulated Tawarruq Process

The cash is credit to account of the client Buy a commodity from the bank on the basis of murabahah. b h h (deferred payment)

RM 85,000.00 85 000 00 4

1 Client

New buyer

The commodity (not of gold or silver) RM 85,000.00 Buyer takes Possession Buyer appoint the bank as g to sale the goods g agent The sales is base on cash Cash

Or other party, or he do it him self

deferred payment

RM 100,000.00 RM 100,000.00 Bank Discount 15,000.00

Bank sale the goods to the third party

RM 15,000.00 Discount Commodity cash Supplier 3

REGULATEDTAWARRUQ,FIQHITAWARRUQ
REGULATEDTAWARRUQ FIQHITAWARRUQ Fourpartyarrangement(normally) Tripartitearrangement InvolvesunilateralpromisetopurchaseInvolvesnopromisetoPurchase InvolvesnopromisetopurchaseInvolvesonlytwobasicsales bytheclient(mutawarriq) Involvessigningofanoverallagreement/Nosigningofsuchanagreement memorandumofunderstandingof theproceduretobefollowed InvolvestheclientappointingthebankasTheclientwillsellthe hisagenttocarryoutthesecondbasiccommodityonhisown tawarruq sale Transferofp possessionisonly ylimitedtoSeemstohaveenvisaged g signingofthecontractsofsalethatgivingrisetocomplete includeclausesontransferofrightsandtransferofpossession liabilitiesp pertaining gtotheitems.p physically y yaftereachcontract Thus,transferofpossessionthroughout theprocedureisonlyheldtomaterialise constructively

Why contemporary scholars condemn tawarruq q munazzam

The client is found to do little other than expressing the amount of cash required by him.

Regulated tawarruq offered and carried out by some Islamic banks strongly g y indicates a willing g cooperation p aimed at supplying cash against a higher credit obligation.

the strong resemblance borne by tawarruq to a hilah for attainment of riba appears prominent.

The objective only happens to be obtaining cash from the bank against undertaking a debt to be settled in instalments.

Fiqhi tawarruq comprises the genuine purchase of a commodity at a credit price resulting in the ownership of the purchaser to the asset and this is demonstrated by al-qabd (taking possession) that has taken place properly. As such, the whole liability of the ownership rests totally with him. The possibility of a subsequent sale to fulfil his needs for cash is also not assured. all these aspects do not happen properly in a regulated tawarruq.

IjarahSukukandShariahCompliantSecuritiesas UnderlyingAssetinTawarruqTransaction
ThereisaproposaltouseijarahsukukandShariahcompliant securitiesasunderlyingassetintawarruqtransactionor murabahahtomanageliquidityinIslamicfinancialsystem. Theproposedcharacteristicsofijarahsukukincludeijarahsukuk whichisbackedbytangibleasset,financialassetandaombination ofbothtangibleassetandfinancialasset. ForShariahcompliantsecurities,theproposedcharacteristicis thatthesecuritiesmustbeendorsedasShariahcompliant. Theissuehereiswhethertheuseoffinancialassetlikesukukand securitiesinsteadofcommodityintawarruqtransactionis permissibleinShariah.

Cont.
Resolution gheldon27thApril p 2006/ /28th TheCouncilinits58thmeeting RabiulAwal1427resolvedthattheuseofijarahsukukand Shariahcompliantsecuritiesasunderlyingassetintawarruqor murabahah b h htomanageliquidity l d inIslamic l financial f lsystemis permissible. However,suchijarahsukukmustbebackedbytangibleassetand notfinancialasset asset.

BAI`MA`DUM

BAI`MA`DUM
TheSACdiscussedthebai`ma`dumissueinaseriesofmeetingsin 1995and1997inrelationtowarrantsandfuturescontractson crudepalmoil,andconcludedthatbai`ma`dumispermissible. INTRODUCTION AccordingtothetheoryofcontractsintheIslamicjurisprudence, oneoftheconditionsisthatthemahalal`aqdorma`qudalaih (objectsintrade)tobetradedmustexistwhenthecontractis beingmade. made Purchaseofanobjectthatdoesnotexistwhenthecontractis beingmadeisconsideredbai`ma`dum.

ARGUMENTSONBAI`MA`DUM Thebai`ma`dumissuewasdiscussedbypastIslamicjuristswhen theyweredebatingontheconditionofanobjectinacontractof sale. Itisnecessarytolookforthe`illah(reason)fortheprohibitionof bai`ma`duminavastmajorityofpastIslamicjurisprudence lit t t literature toensurethat th tnoerrori ismade d when h applying l i the th prohibitionruleinmanymodernbusinesstransactions

OpinionsofPastIslamicJurists TheHanafiandSyafi`i Syafi iMazhabpronouncedthattheobjectofsale mustbeinexistenceatthetimethecontractismade.Otherwise, thecontractwillbedeemedinvalidbecauseanythingthatis ma`dumcannotbeowned. This h wasbased b donthe h prohibition hb by b the h Prophet h s.a.w.onthe h sale l ofanunbornbabycamelandasaleofanonexistingobject. However,exemptionwasmadetothesalam,ijarah,musaqahand istisna`contractsbasedontheistihsanprinciple. p p TheMalikiMazhabechoedtheopinionoftheHanafiandSyafi`i Mazhabregardingmu`awadhatmaliyah(exchangecontract), whileforthetabarru`at(ownershipcontractonvoluntarybasis) suchashibah,theydidnotimposeanyconditionforanexisting object.Whatwasimportantwasthatitwasexpectedtoexistin thefuture.

Cont. TheHanbaliMazhab,ontheotherhand,didnotstipulatethis condition. Whatwasimportantwasthatacontractdidnotcontainelements ofgharar,whichisforbiddenbyShariah Shariah. bai` IbnuTaimiyahandIbnuAlQayyimanalysedthequestionofbai ma`dumandconcludedasalewasforbiddennotbecauseof ma`dumduringthecontractmaking,butratherbecauseofthe existence it of fgharar h ,which hi his i aforbidden f bidd element. l t Thiswasbasedontwoarguments

Cont. NeithertheQuran,theSunnahnortheProphetscompanions statedthatbai`ma`dumwasnotpermissible. Therewas,however,ahadithprohibitingthesaleofcertaingoods withfeaturesthatdidnotexist. Theprohibitionwasalsoforgoodsthatareavailablebutsimply didnotexistatthepointoftrade. trade Thisshowedthatthep prohibitionwasduetotheexistenceofthe ghararelementinthetrade. Ghararmeanstheinabilitytodeliverthegoodssoldregardlessof whethertheyexistornot.

Cont. Anexampleisthesaleofarunawayslaveorananimalthatran loose. Althoughthegoodsexist,thesellerisnotabletodeliverthemto thebuyer buyer,despitethefactthatitishisobligationtodosooncethe saleandpurchaseagreementiscompleted. Thisfailuretofulfilhisobligationimpliesthepresenceofthe forbiddenelementofgharar;and

Cont. Therearespecificsituationswherebai bai`ma ma`dum dumispermissibleby Syaraandconsideredvalid. Anexampleisthesaleoffruitsandgrains,whichareaboutto mature. Thisisconsideredbai`ma`dumbecausethebuyercannottake deliveryofthegoodsandhastowaituntilthefruitsorgrains mature. Thesalam,istisna`,andijarahcontractsareotherexamplesofbai` ma`dumwhicharepermissiblebasedontheprincipleofistihsan. Alltheseexamplesshowthatsellingsomethingthathasnotyet existedorisnotyetinthesellers seller spossessionatthepointofthe saleisnotforbiddenmerelybecauseofitsma`dumnature.

Thankyou
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