FACULTY OF BUSINESS AND MANAGEMENT

BACHELOR OF BUSINESS ADMINISTRATION (HONS.) ISLAMIC BANKING

ADVANCE FIQH MUAMALAT

(ISB548)

GROUP PROJECT
SHARI’AH CONTRACT AND ISSUES

PREPARED FOR : DR. HUSNIYATI BTE ALI

PREPARED BY :

NO. NAME MATRIC NO.

1 NURNADIAH ADAWIYAH BINTI KAMAL 2019218966

2 NURIN HANNANI BINTI MOHD SALLEH 2019295056

GROUP : BA2494A
DATE OF SUBMISSION : 7 JUNE 2021
 Table of Content

NO CONTENT PAGE NUMBER

1.0 Introduction 1

2.0 Contracts of Security (Uqud Al-tawthiqat) 2–5

3.0 Contracts of Partnership 6 – 10

4.0 Contracts of Exchange (Uqud Al-mu’awadhat) 10 – 16

5.0 Contracts of Safe Custody 16 – 22

6.0 Conclusion 23

7.0 Reference 24 – 27
1.0 INTRODUCTION

With the rise of banking, it has become an integral part of modern society. Its role is to provide
access to various financial products and services to individuals and households. It is also used
by governments to finance their various activities. Conventional banking is founded on "man-
made" ideas designed to maximize profit (generally without any limitation). Islamic finance also
has grown in popularity in both the Islamic and non-Islamic worlds. Many people believe that the
conventional banking approach lacks a lot to be gained. Shariah rules drawn from the Quran,
Hadiths, and Sunnah which is to regulate Islamic finance. Certain components of social, moral,
and economic ideals are compiled to. The proclaimed goal of Islamic banking or finance is to
generate genuine wealth in society. The larger the bank's profit, the greater the depositors' income
is set. Islamic banking is actually based on profit and loss combination on the deposits side, profit
and loss sharing on the assets side, or profit on the assets side.

1
2.0 CONTRACTS OF SECURITY (UQUD AL-TAWTHIQAT)

2.1 Kafalah

2.1.1 Nature of Contract

Basically, Kafalah is a contractual obligation or surety that refers to the joint liability of a
person and a firm when it comes to demanding compensation. Some scholars believe that it is
also applicable to the joint liability of a guarantor and a guarantee. A Kafalah is a contract that
enables the parties to agree on the terms of the guarantee, which include the obligation to perform
and or honor the agreed actions and obligations. In this instance, the bank may ask the customer
to furnish a security contract or a primary contract. The latter can be used as a secondary contract
or a primary contract. A Kafalah contract is allowed based on the evidence presented from the
Quran. “They said, "We are missing the measure of the king. And for he who produces it is [the
reward of] a camel's load, and I am za’im for it". (Quran 12:72). According to Ibn Abbas, za’im or
responsible as stated in the verse can be defined as guarantor. Besides, according to the Islamic
jurists, Kafalah is a legitimate contract that allows creditors to safeguard their rights and avert
danger from a debtor (Muneeza & Mustapha, 2020).

A Kafalah arrangement needs to be built on the following requirements which are a

guarantee contract, a beneficiary, and the contract language. For instance, if the parties agree to
accept the terms of the guarantee contract, the Kafalah contract is built on offer alone (Muneeza
& Mustapha, 2020). The terms and conditions of a guarantee may include time, date, or other
conditions that are acceptable by Shariah. If the guarantor is unable to settle the liability, the
beneficiary can only claim from the guaranteed party. The Kafalah contract remains valid unless
otherwise specified. In any event, the extension period is only applicable to the guarantor if the
liability becomes claimable before the contract's maturity (Hasnat & Alom, 2017, 769)

Kafalah is divided into two categories which are Kafalah bi al-Nafs or it is called Physical
Guarantee and Kafalah bi al mal or it is called Financial Guarantee. Definition for Kafalah bi al
mal is in suretyship for a person, the guarantor is responsible for making sure that the principal
shows up in a lawsuit. This type of guarantee is not applicable if the principal dies. Kafalah bi al
mal can be defined as Kafalah for the property which is a type of contract that guarantees the
return of a specific thing or debt. In this case, the guarantor is not responsible for the thing even
though the owner or creditor dies. Kafalah bi al-ma' is a type of guarantee that can be divided into

2
three categories, namely, Kafalah bi al-dayna which is a loan obligation that is secured by another
party, Kafalah bi al-ta's which is guarantee of payment or delivery in a transaction, and Kafalah bi
al-daraks which is a guarantee that prevents an asset from being encumbrances (Muneeza &
Mustapha, 2020).

2.1.2 Shariah issue relating to the application of Kafalah

The main issue that Shariah scholars have is whether or not charging a fee is allowed.
One of the most important factors that Shariah courts consider is the protection and guarantee of
deposits. This is because the fees paid by members are considered compensations against the
guarantee. The Shariah Advisory Council of Bank Negara Malaysia has decided that the operation
of an Islamic guarantee mechanism by charging a fee is permitted to financial institutions as long
as they provide Islamic financial products to their customers. The operation of Malaysia Deposit
Insurance Corporation (PIDM) in the insurance industry is also governed by the principle of
Kafalah bi-ajr. Most of the Islamic jurists have always ruled that it is not permissible to charge a
fee to provide a guarantee. They also hold that it is not permitted to take any rewards from the
agreement. The condition that a fee is required for a guarantee is unlawful. In this case, the
guarantor will ask the secured person to pay more than the sum he owed. According to Ibn
Qudamah, "the guarantor is bound to fulfill the payment of debt; if he pays it, it becomes the
responsibility of the guaranteed person, and so it becomes a debt." As a result, if the guarantee
accepts a fee, the loan becomes a loan that creates profit for the creditor (Hasnat & Alom, 2017,
774).

However, Shariah scholars keep questioning this practice. Some scholars like Hanafi and
Shafie schools did not allow a fee for a guarantee. This is because the relationship between the
customer and the guarantor will change once the customer defaults. Owing to the fact that, the
demand of a fee will result in riba. Some contemporary scholars like Sheikh Ahmad Ali Abdullah
of the Organization of Islamic Cooperation (OIC) International Islamic Fiqh are of the opinion that
a fee should not be charged for availing a guarantee. Furthermore, there is no conflict with riba
because the guarantor's pledge is seen as a counter value according to the fiqh principle that
involves al kharaj bi daman which is a profit that comes with liability. Based on this, the Shariah
Advisory Council of Bank Negara Malaysia has permitted charging a charge for a letter of
assurance (Hasnat & Alom, 2017, 770)

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2.1.3 Example Banks Of Kafalah Contract With Its Product

a) RHB Islamic Bank

The product offered by RHB Islamic bank of Kafalah concept is Bank Guarantee-i. Upon
reaching an agreement with the beneficiary, the customer requests RHB Islamic Bank to issue
Islamic Bank Guarantee (IBG). In return, the bank will issue IBG to the customer as a surety in
case the customer defaults. The guarantor (RHB Islamic Bank) asks the customers to pay a fee
in bank guarantee-i. In addition, RHB Islamic Bank offers rapid payment on first demand if the
claim fits all of the guarantee's terms. Furthermore, if there is no breach, the beneficiary will refund
the IBG to the client, supported by the termination of RHB Islamic Bank at maturity. RHB Islamic
Bank charged fees on bank guarantee-I depending on the actual cost and this method is allowed
by the AAOIFI (Hasnat & Alom, 2017, 770).

b) UOBM Islamic Banking

The product offered by UOBM Islamic Banking of Kafalah concept is Bank Guarantee-i.
This is at the initiative of the client, UOB provides a contractual undertaking on behalf of a third
party (the beneficiary) guaranteeing payment or providing assurances of the applicant's capacity
to comply under the contractual obligation between the beneficiary (United Overseas Bank
Malaysia Bhd., 2021). Customers will get a guarantee on specific liability required by the contract
awarder or third party in fulfilling the contract (UOB Malaysia, 2019)

Specific Bank Guarantee-i based on Kafalah to is actually to meet client’s requirements

such as in tender or bid bond, advance payment guarantee, performance guarantee and warranty
maintenance guarantee. Examples of fees and charges by this bank are commission, stamp
duties as per the Stamp Duty Act 1949 which was revised 1989, Rentas and other charges.
However, If the fees and charges relevant to the financing facility change, the Bank will notify the
customer at least 21 calendar days before the actual date of the agreement. Nonetheless, if a
customer failed to make a payment owing to the Bank's fault, the bank may levy Ta'widh
(compensation) which are for any failure to pay any amount due under the BG-i, the Bank may
impose a compensation rate per annum, which is equal to the total outstanding balance excluding
interest. Other than that, the sum of such compensation must not be compounded or calculated
in any other manner allowed by the Shariah Advisory Council of BNM (UOB Malaysia, 2019).

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 (c) Agrobank

The product offered by Agrobank of Kafalah concept is Bank Guarantee-i. The benefits
from the bank offered is it allows consumers to acquire bank guarantees in their best interests for
job performance, settlement, and so on. Kafalah is specially customized to fulfill criteria such as
Advance Money Guarantee, Guarantee on Deposit/Supply Guarantee securities, Duty or
Customs Tax Exemption Guarantee, Customs Bonds, Prudent Cheque Guarantee, Guarantee
To Coordinate Ledger Accounts, and Tender Guarantee. However, according to the Agrobank
website, usury or penalties are not included in the guarantees offered. Aside from that, Agrobank
also has a Kafalah product that is Shipping Guarantee-i. The guarantee issued by the Bank to the
Consignee or Importer to enable them to acquire goods without presenting the original Bill of
Lading. The advantages of this facility are that it allows the importers to obtain goods immediately
before the shipment of their original documents and importers might escape demurrage and other
port expenses (Agrobank Malaysia Bhd, 2015).

(d) Ambank

The product offered by Ambank of Kafalah concept is Bank Guarantee-i. The product is
about an assurance given by AmBank Islamic (the “Bank”) to pay an amount of money to the
beneficiary in exchange for the production of a written demand and any other documentation
provided in the guarantee. The bank has mentioned in the product disclosure sheet that the
charges and fees are exclusive of any taxes that may be applicable in Malaysia. If the customer
does not maintain sufficient funds in their current account to settle the claim, they will be given a
time to settle the amount. Otherwise, the claimed Bank Guarantee-i shall be resolved by
Complementary Term Financing-i. In such a case, they must submit the required documents.
(Ambank Islamic Berhad, 2021)

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3.0 CONTRACTS OF PARTNERSHIP

3.1 Mudharabah

3.1.1 Nature of Contract

The word refers to a type of business agreement in which one side contributes finance
and the other contributes human labor. The banker is referred to as ‘rab al-maal’, whereas the
entrepreneur is referred to as ‘mudarib’. As a financing mechanism used by Islamic banks, it is a
deal in which the Islamic bank provides all of the money while the firm is managed. Profit is shared
in during the agreed ratios, while loss, whether caused by carelessness or breach of contract by
the mudarib is covered by the Islamic bank. This loss is passed on to depositors by the bank
(Institute of Islamic Banking and Insurance, 2018). In addition, the term ‘Mudharabah’ originates
from the phrase ‘al-dharb fi al-ardh’, which means to travel. This lexical meaning is connected to
business cooperation since doing business generally necessitates travel, particularly in the past
(ISRA,2012).

There are two types of a Rab Al Mal may invest in two kinds of Mudharabah contracts
which are restricted Mudharabah or it is called as Mudharabah Al Muqayyadah and unrestricted
Mudharabah or it is called as Mudharabah Al Mutlaqh. Restricted Mudharabah can be defined as
the investor identifies a specific business or project for which the institutional investors are to be
utilized and the working partner is not permitted to utilize the funds for either business or project.
Besides, unrestricted Mudharabah in this mudharabah agreement is when the investor authorizes
the working partner to invest the capital in whatever form of business or project that helps achieve
both partners' financial objectives.The unrestricted Mudharabah is most commonly utilized when
a Mudharabah contract is implemented as a source of bank funds which is when the customers
puts money in the bank. The limited mudaraba is most typically in action when the contract serves
a bank's equity financial product which is when the bank delivers funds to a working partner
(Jamaldeen, 2021).

In specific, Mudharabah contains three key parts that contribute to the fulfillment of its
contract agreement. First, there is a guarantee; second, there is justice; and finally, there are
advantages. From the perspective of the Islamic mujtahid who advocated for the application of
Mudharabah, these three aspects seemed to be ideal. Mudharabah can be implemented with
certain pillars and conditions. Additionally, the pillars of Mudharabah are capital, types of

6
business, profit, sighah which is agreement and lastly is the two parties that are required in the
agreement, who are the one who are called as Sahibul Mal and Mudharib. These factors need to
be considered in sighah conditions which are the offer and acceptance must state precisely why
the contract is being made. Next, the offer and acceptance must be completed during the
agreement signing ceremony. Lastly, contracts are executed in writing, either physically or via the
use of various forms of communication and contemporary technology (Che Tahrim et al., 2019).

3.1.2 Issue Related to Mudharabah Contract

Although the concept of Islamic banking is very close to the objective of many countries,
many Islamic banks are still reluctant to offer equity-based financing. In Malaysia, for instance,
the total amount of financing provided by Islamic banks is only six percent of the total financing
provided by other banks (Abdul Rahman & Mohd Nor, 2016). According to three parties, Islamic
banks, regulators, and entrepreneurs, there are various concerns or obstacles in applying the
Mudharabah contract in Islamic bank financing products and most of them remain to choose to
provide contracts based on exchanges such as Ijarah. Other than that, from an Islamic bank
perspective, they preferred a low-risk product. This is because they are depending on the lower
the risk, the better for its financing contract (Yustiardhi et al., 2020)

Due to the characteristics of Mudharabah, Islamic banks do not have access to or the right
to control the Mudarib's decisions and management, particularly if there is a charge of loss. It will
have a direct impact on the bank's liquidity because the financing supplied by Islamic banks is
mostly derived from depositors' funds. Furthermore, financial risk will subsequently affect
business risk. When there is inadequate funding to insist on continuing the project's functioning,
business risk is revealed. Last but not least, the rate of return risk occurs when the bank's return
is unspecified because they only know the actual amount at the closure of the time. As a result,
implementing both financing products is extremely complicated and problematic for an Islamic
bank (Yustiardhi et al., 2020)

Anyhow, the selection procedure presents a significant barrier to Islamic banks in terms
of financing. The Islamic bank has to find the right partner that can help it generate profitability.
This is because the bank is not a charity organization and it needs to remain competitive in the
market. Along with that, the election is tough since it necessitates an analysis of many risk
factors.If they do not help the entire society, such as funding small businesses, Islamic banking

7
will be no different than conventional banking, with the wealthy growing wealthy and the poor
getting poorer. Above all, Islamic banks must be fairer and more equitable to everybody in order
to preserve the long-term viability of Islamic banking (Abdul Rahman & Mohd Nor, 2016)

3.1.3 Example Banks of Mudharabah Contract with Its Product

(a) Affin Islamic Bank

The product offered by Affin Islamic bank of mudharabah concept is Affin Islamic Bank
Ria-i. This category of Mudharabah concept that has been used for this product is restricted
mudharabah which is Mudharabah Muqayyadah. This also refers to a type of specific investment
account where the customer agrees to invest in specific Shariah-compliant projects in line with its
role as the Mudarib. Product suitability for consumers is made up of several categories such as
the type of investor, return objectives, holding period of investment, principal investment and
investment limit. The type of investor that suits this product offered by the bank are individual
investor and corporate investor including Small and Medium Enterprises (SMEs) and Institutions.
In addition, the minimum investment limit is RM5,000 and the maximum amount of investment
limit is RM7,500,000 (Affin Islamic Bank Berhad, 2020).

Although Investment Account Holder (IAH) may gain higher profit from the performance
of the specific asset, it is not guaranteed that the investment will perform as expected. As an
extra, the bank also mentioned about the key risks that are correlated with this product. The risk
may exist, resulting in investment losses and it includes regulatory non-compliance risk and
shariah non-compliance risk. The performance of the underlying assets may affect the amount of
your return and the investment is not secured by Perbadanan Insurans Deposit Malaysia (PIDM)
(Affin Islamic Bank Berhad, 2020).

(b) AmBank Islamic Berhad

The product offered by AmBank Islamic Berhad of mudharabah concept is Mudarabah

Term Investment Account-i. The Mudarabah term investment account-i allows customers to place
their money under the Mudarabah contract to be invested in the bank's mortgage financing
portfolio. Returns will be distributed according to the pre-agreed profit-sharing ratio. Other than
that, the customer can make their own evaluation by choosing the best loan product for his needs,
the past performance of the portfolio will be made available through the Product Disclosure Sheet

8
that includes Fund Performance Report via the Bank’s website. The product features that are
offered by this bank including minimum investment limit is RM10,000, investment tenure which
are one month, three months or six months. Apart from that, there are also profit distribution at
maturity, automatic reinvestment, early redemption is allowed partial or in full according to the
standardization given by the bank and lastly Investment Account Holder is eligible to withdraw a
portion of their placement payment (AmBank (M) Berhad, 2021)

(c) Hong Leong Islamic Bank

The product offered by Hong Leong Islamic Bank of mudharabah concept is Hong Leong
Term Investment Account-i (HLTIA-i). HLTIA-i is a type of investment account that is based on a
profit-sharing contract or it is called mudharabah contract. The product is sorted under
Unrestricted Investment Account (UA). It is typically used for investing in stocks, bonds,
commodities, or other financial instruments. The profit that the customer gets from the
investments is shared equally between the IAH and the Bank. This product is suitable for
individual or sole proprietorship. Aside from that, the objective of this product return investment is
using low to medium risk investing activities, the goal is to achieve predictable and consistent
returns throughout a consented investment period. A minimum investment limit is RM500 and the
tenure of investment is three and six months. According to the product disclosure sheet of HLTIA-
i, they highlighted many types of key risk that may occur and one of them is about Shariah non-
compliance risk. It is mentioning the problem that occurs as a result of the bank's inability to follow
Shariah norms and principles as specified by the Shariah Committee or regulatory bodies. The
Bank will supervise the investment in accordance with Shariah laws and principles, with direction
from the Shariah Committee of the bank (Hong Leong Islamic Bank Bhd, 2018).

(d) Maybank Islamic

There are three products offered by Maybank Islamic of mudharabah concept namely
Private Banking Account-i (PBA-i), Premier Mudharabah Account-i (PMA-i) and Golden Savvy
Account-i (GSA-i). This contract is between a rabbul mal, who acts as capital provider and a
mudarib,who acts as entrepreneur, whereby the rabbul mal will provide money to a mudarib to
invest in a Mudharabah venture. In addition, the rabbul mal is required to share its profits with the
mudarib. Moreover, the type of this product is an unrestricted investment account and this product
is only suitable for individuals. However, the eligibility for this product is for individuals or joints
that are suitable for all Malaysian Citizens and foreigners. Along with that, those three products

9
offered have different minimum initial placement amounts which are RM1,000 for Golden Savvy
Account-i and Premier Mudharabah Account-i and RM10,000 for Private Banking Account-i.
According to the product disclosure sheet of these products, the bank has made a figure table
about possible future gains and losses and this will help the Investment Account Holder (IAH)
make a decision wisely. For instance, in July 2020, the rate of return to investors for PMA-i and
GSA-i is 0.33% while the rate of return to investors for PBA-i is 0.65% (Malayan Banking Bhd,
2021).

4.0 CONTRACTS OF EXCHANGE (UQUD AL-MU’AWADHAT)

4.1 Bay Al-Murabahah (Mark-up sale)

4.1.1 Nature of contract

Murabahah literally means from the word which means profit to be detailed, is increase in
capital or profit in transaction and technically, Murabahah means the sale of an asset where the
attainment cost and the mark-up are revealed to the buyer which means in buying and selling
transaction in Murabahah must explain the benefits or advantage. In Islamic banking, all the
products organized based on al-Bay’ are planned based on mode of pricing as per Murabahah
rules because of translucent financing margin and profit. Meanwhile, Al Zuhaili (1984) said that
according to the term Murabahah is buying and selling at the basic price with additional benefits.
One of the most popular schemes of fiqh used by Islamic banking is a scheme buying and selling
transaction in Murabaha. Financing transactions Murabaha is commonly done by the Prophet
SAW and his companions. To be simplified, Murabahah means a sale of goods the price of the
item plus agreed margin (Karim, 2007).

Murabahah is one form of buying and selling of the mandate known in Islamic law,
because the seller required to make a contract first by stating the price of the goods to be
purchased (Hulwati, 2006). In financing Murabaha bank determines the selling price of goods,
namely the cost of goods acquired plus a certain amount of the bank's profit margin. The selling
price that has been agreed at the beginning of the contract cannot change over a period of time
financing. Because in its definition it is stated there is an agreed advantage, the characteristic of
murabahah is the seller must inform the buyer in advance about the cost of goods purchased and
include the amount of profit that added to the cost. In technical existing in sharia banking,

10
Murabaha is a sale and purchase agreement that occurs between the Islamic bank as the provider
goods that sell to customers who order in order to purchase goods that. Profits obtained from
parties’ Islamic banks in this transaction are agreed sale and purchase profit together (Huda,
2010).

It is also stated by Imam Malik that Murabahah is conducted and completed by exchanging
goods and price including a mutually agreed profit margin. Buy and sell with this form of
murabahah is in the form of order, which is termed by Imam Syafi'I as al-amir bi al-shira. It is also
can be equated with Bay' bi Tsaman Ajil or Bay' Mu'ajal where it is buying and selling the goods
are delivered immediately and payment is deferred or done incrementally. Therefore, Murabaha
is a form of selling buy which is legal (Iska, 2012).

One of the legal bases for Murabahah in Al-Qur'an:

‫اَّلل اَك ان ِب ُ ُْك ار ِحميًا‬

‫نُك ۚ او اَل تا ْقتُلُوا َأن ُف اس ُ ُْك ۚ ا ذن ذ ا‬ ‫اَي َأُّيه اا ذ ِاَّل اين أ امنُوا اَل تاأْ ُ ُُكوا َأ ْم اوالا ُُك بايْنا ُُك ِِبلْ ابا ِطلِ ا ذَل َأن تا ُك ا‬
ْ ُ ‫ون ِِت ااار ًة اعن تا ار ٍاض ِم‬
ِ ِ
﴾﴿٢٩

O you who have believed, do not consume one another's wealth unjustly but only [in lawful]
business by mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you
ever Merciful. (4:29)

Thus, by definition, is the basis for a valid Murabahah that the buyer must know the original,
additional price expenses if any and the amount of profit. Murabahah is a contract of trust.

Rukun of Murabaha financing:

a) Ba’i or seller, a person who has merchandise or a person who offers an item.

b) Musytari or buyer, is a person who makes a request for an item offered by the seller.

c) Mabi' or goods, are commodities, objects, objects that are traded

d) Tsaman or selling price, is as measuring tool to determine value an item

e) Ijab and Qabul as outlined in contract

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Murabahah Terms of Financing

a. Contracting parties (seller and buyer)

1) The contractual parties must be of legal age to enter into the Murabahah agreement.
From a Sharia perspective, a person's legal capacity is described as the ability to assume
rights and duties, as well as the ability to give legal effect to his actions. A sound intellect
and the ability to discriminate between what is detrimental and what is good to one's
interests are also required. A Murabahah contract can be entered into by an agent on
behalf of a party.

2) Both parties must be volunteered or pleased ant in not deep circumstances or down
pressure by other parties that are not related.

b. Objects that are traded (Asset)

The Shariah considers the asset to be valuable, recognizable, and deliverable. The asset
must already exist and be in the seller's possession. Gold, silver, currencies, building
assets, and debt assets are not permitted to be exchanged in Murabahah.

c. Offer and Acceptance (Ijab and Qabul)

In the Murabahah, every sale and buy transaction must be based on an offer and
acceptance between the contracting parties. The offer and acceptance may be made
orally, in writing, or by any other means that may be supported by adequate paperwork or
records.

1) Must be clear and clearly stated specifications with whom to contract

2) No time limit for the buyer to possess the asset. For example, “I sell it to you for a long
time 10 months and after that will be mine again”

d. Price

At the time of engaging into the Murabahah contract, the price and currency must be
specified and mutually exclusive. When entering into a contract, the price must also be
based on the specified acquisition cost plus the extras. Direct costs of acquisition, such
as shipping and storage, may be included in the total cost of acquisition. All direct

12
 expenses incurred upon entering the Murabahah contract cannot be included in the
purchase cost. The cost of acquisition does not include indirect expenses for various
Murabahah transactions, such as premises rent, utility bills, staff salaries, and employee
payments.

4.1.2 Issues that related to Bay’ Al-Murabahah

Murabahah is a complex operation that consists of a series of transactions that describe

the relationships between the parties participating in the funding. Financial institutions sell goods
needed by consumers on the basis of deferred payment through a properly signed Murabahah
sale contract in this sort of financing. This necessitates the financial institution's past ownership
of the required commodity, as well as the presence of things at risk at the moment of sale.
However, because most financial institutions do not keep stock, consumers must acquire items
from other sources, usually from sources suggested by the customer. As a result, several
additional difficulties in the Murabahah method are introduced. While the idea is true, the bank
appointing the client who has sought the Murabahah facility as his agent to purchase the
appropriate assets on his behalf invariably results in increased transaction complexity. Two sale
transactions in which the bank purchases commodities from the market first and then sells them
to a second customer at a higher value-added cost, both of which must meet the necessary sharia
conditions for sale (Sadique, 2018).

As a result, rather than extending loan facilities to customers to purchase commodities,

Islamic banks purchase commodities from suppliers first and then sell them to customers on the
basis of deferred payment, with an agreed-upon fixed price that covers the bank's costs as well
as additional profit margins. Murabahah is a complex method that encompasses a lot of
transactions and outlines a variety of relationships between the parties involved when it comes to
finance. Regardless of the mode of sale, all regulations and conditions governing sale
transactions apply in Murabahah, even if they are utilized for financing. Murabahah provides a
valid way to qualify a person's instant financing with a premium, without having to borrow interest,
if it is done correctly and all the prerequisites are met.

13
4.1.3 Example banks of Bay Al-Murabahah with its products

There two types of Murabahah which is ordinary Murabahah and Murabahah to the Purchase
Orderer (MPO). Murabahah to the Purchase Orderer (MPO) is an arrangement under the contract
of Murabahah. It is a sale contract with a disclosure of an asset, cost price and profit margin to
the purchaser. Under this contract, there is an order and promise to purchase by the customer
prior to the seller’s acquisition of the asset. The payment of Murabahah price is payable within a
fixed future date by lump sum or fixed installment.

(a) Bank Islam

The product offered by Bank Islam of Murabahah financing is Vehicle Financing-i. Vehicle
Financing-i facility is a term financing which is calculated based on a fixed rate. Vehicle Financing-
i allows you to own your dream vehicle under the contract of Murabahah to the Purchase Orderer
(MPO). The main Shariah contract applied in the product is MPO for example a sale contract with
a disclosure of the asset cost price and profit margin to the purchaser. Under this contract, there
is an order and promise to purchase by the customer prior to the seller which is in this case is
Bank Islam’s acquisition of the asset.

How the MPO is functioning for financing product in Bank Islam is Bank appoints the
customer as its purchasing agent to purchase the vehicle from the dealer. Customer irreversibly
and unconditionally promises which is Wa’d contract and undertakes to purchase the vehicle from
the Bank. Secondly, the customer purchases the vehicle from the dealer on behalf of the Bank
Islam. Bank Islam sells the vehicle to the customer on Murabahah basis. Customer pays the
selling price to the Bank Islam on deferred payment basis. The Customer pledges the vehicle to
the Bank Islam as security or collateral.

Bank Islam also offers Letter of Credit-I (LC-i). Letter of Credit-i facility is a written
undertaking by the Bank Islam at your request as a buyer to pay the seller a certain sum of money
as specified in the Letter of Credit-i provided that the seller or beneficiary complies with the terms
and conditions of the LC-i. LC-i can be offered under Wakalah with Ujrah as well as under
Murabahah. LC-i of Murabahah is where Bank Islam will purchase the goods before it is sold to
customer at a marked-up price for a deferred payment.

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 (b) Maybank Islamic Banking

The product offered by Maybank Islamic Banking of Murabahah financing is Commodity

Murabahah Home Financing-i. Commodity Murabahah Home Financing-i is based on the principle
of Murabahah where it is cost plus profit, the Bank provides home financing to customer via
trading of identified Shariah-compliant commodities such as Crude Palm Oil and RBD Palm Olein.

Customers have the option of an affordable fixed, tiered or variable profit rate, with no profit
aggregation and other charges and no early settlement charges or lockout period penalties. There
is ceiling rate protection upon fluctuations in Islamic Base Rate (IBR) over the period, 20% stamp
duty reduction for new financing & waiver of conversion from conventional Facilities and rebate
provision for early settlement. And easy for third party financing, plus minimal documentation
compared to other home financing plans.

Maybank Islamic Banking also offers the product of Cash Line-i Facility. It is based on the
Shariah contract of Murabahah (cost plus profit sale) via Tawarruq arrangement. It's a method of
sale with a mark-up price where customers pay a price over an agreed period of time. The
underlying asset for the sale transaction will be a specific tradable Shariah compliant commodity.

(c) OCBC Al-Amin Islamic Banking

OCBC Al-Amin offers the Commodity Murabahah Revolving Credit Facility-i as the Islamic
financing product for their bank. It is a revolving short-term working capital financing facility based
on the Shariah concept of Commodity Murabahah by using Tawarruq arrangement that refers to
the trading of commodities acting as the underlying assets for a transaction. Commodity
Murabahah Revolving Credit Facility-i is an ideal way to fund your business to bring customer
more benefits, whether it is for expansion, asset acquisition or working capital.

(d) RHB Islamic Bank

RHB Islamic Bank offers the Murabahah Term Financing-i. The Islamic financing product
is a type of medium to long term financing. Generally, Murabahah Term Financing-i is used to
finance the acquisition of assets or properties or any acceptable Mal (asset) that can be identified.

15
It is also to finance the construction or manufacture of assets. Then, it is to finance eligible asset
to be financed are halal goods, raw material, stocks and inventories and acceptable collaterals
are term deposit, landed property and another fixed asset as well.

5.0 CONTRACTS OF SAFE CUSTODY

5.1 Al-Wadi’ah

5.1.1 Nature of contract

Etymologically Wadiah means pure deposit which means trust. The term wadiah is derived from
the verb wada’a, which means to leave, lodge or deposit (Al-Farabi, 1987). Wadiah is said to
mean trust because Allah calls wadiah with the word amanah in several verses of the Qur'an,
while in terms of terminology there are several opinions from scholars, including:

i. Hanafiah: al-wadi'ah is a trust left to be preserved for others

ii. Malikiah: al-wadi'ah is a property that is delegated to others to be maintained

iii. Syafi'iyah: al-wadi'ah is something that is stored in someone else's place to be

preserved

iv. Hanabilah: a property that is handed over to someone to look after it without compensation

v. Contemporary Fiqh Scholars: al-Wadi'ah is a pure deposit from one party to another,
both individuals and legal entities that must be guarded and returned whenever the custodian
wants it.

Wadiah can be interpreted as a deposit from one party to another, both individuals and
legal entities that must be guarded and returned whenever the depositor wants it. The purpose of
the agreement is to maintain the safety of the goods from loss, destruction, theft, and so on. As
the recipient of the deposit, there is no obligation for the bank to provide compensation and Islamic
banks can charge a deposit for the goods. It is known as sale at loss. It is also categorized under
trust sale (bay’ amanah) since the seller discloses the actual cost (Widayatsari, 2013).

16
One of the Sharia foundations in Wadiah practice:

۞ ‫اَّلل اَك ان‬ ‫اَّلل ياأْ ُم ُرُ ُْك َأن تُ اؤ هدوا ْ َاْل اماَنا ِت ا ا َٰل َأ ْه ِلهاا اوا اذا اح ا َْك ُُت ب ا ْ اْي النذ ِاس َأن ا َْت ُ َُكوا ِِبلْ اعدْ لِ ۚ ا ذن ذ ا‬
‫اَّلل ِن ِع ذما ي ا ِع ُظ ُُك ِب ِه ۗ ا ذن ذ ا‬ ‫ا ذن ذ ا‬
ِ ِ ِ ِ ِ
‫﴾ ا َِسي ًعا ب ا ِص ًريا‬٥٨﴿

Indeed, Allah commands you to render trusts to whom they are due and when you judge between
people to judge with justice. Excellent is that which Allah instructs you. Indeed, Allah is ever
Hearing and Seeing. (4:58)

Rukun of Wadi’ah

According to Hanafiah: According to him, there is only one pillar of wadi'ah, namely the existence
of a statement of will is offer (ijab) which is an expression of the will to entrust goods from the
owner and acceptance (qabul) which is an expression of readiness to accept the deposit by the
entrusted party (Widayatsari, 2013). Based on Jumhur the fiqh ulama’ there are three of rukun of
wadi;ah:

(1) there are contract actors

(2) the goods are deposited

(3) the statement of will (sighat ijab and qabul) is either carried out in words or just acts.

Essential Elements of Bay’ Waḍī’ah

1. Contracting Parties

The contracting parties shall have the legal capacity

2. Offer and Acceptance

Each sale and buy contract in the Al-Wadi’ah is formed by the contractual parties making
an offer and accepting it. The offer and acceptance may be made orally, in writing, or in
any other manner that may be supported by suitable paperwork or records.

17
3. Asset

Sharia-compliant assets must be valuable, recognisable, and deliverable. The asset is

already present and in the seller's possession. Before entering into a contract, the seller
must have possession of the items.

4. Price

The sale price must be lower than the cost price

There are two types of wadi’ah which is:

1. Wadi'ah Yad Amanah (trust)

Wadi’ah Yad Amanah is where the recipient of the deposit is not allowed to use the deposited
item until it is taken back by the depositor (Widayatsari, 2013).

The characteristics of Wadi'ah Yad Amanah, namely:

(1) The recipient of the deposit (custodian) is to gain trust (trustee)

(2) Assets/capital/goods that are in safekeeping must be separated

(3) Assets in safekeeping cannot be used

(4) The recipient of the deposit does not have the right to use the deposit;

(5) The recipient of the deposit is not required to replace any risk of loss or damage to the
property being deposited except if the loss or damage is due to the negligence of the
recipient of the deposit or if the status of the deposit has changed to Wadi’ah Yad
Dhamanah.

2. Wadi'ah Yad Dhamanah (guaranteed deposits)

Wadi'ah Yad Dhamanah is where the deposit which has not been returned to the depositor can
be utilized by the recipient of the deposit. If a profit is obtained from the utilization, then all of it
becomes the right of the recipient of the deposit. Usually, Islamic banks use the wadi'ah yad
dhamanah principle for savings and checking products (Widayatsari, 2013).

18
Characteristics of Wadi'ah Yad Dhamanah, namely:

(1) The recipient of the deposit is trusted and the guarantor of the goods being deposited;

(2) Assets in safekeeping do not have to be separated;

(3) Assets or capital or goods in safekeeping can be used for trading;

(4) The recipient of the deposit is entitled to income derived from the use of the treasured
property in trading; and

(5) The owner of the property or capital or goods may withdraw the deposit at any time.

Changes in Status from Wadiah Yad Amanah to Wadiah Yad Dhamanah is occur when

(1) the assets in the deposit have been mixed;

(2) The recipient of the deposit shall use the deposited property;

(3) The recipient of the deposit charges the service fee to the depositor (Widayatsari,
2013)

5.1.2 Issues related to Wadi’ah

Hibah in Wadi’ah contract

The idea of wadiah yad dhamanah is one of the strategies used by Islamic financial
institutions in Malaysia to accept deposits. Some Islamic banking institutions offer hibah to wadiah
depositors as a gesture of their gratitude for their trust in the institutions. One concern is that
offering hibah to wadiah depositors may become an urf, or Shariah-prohibited behavior. The SAC
was consulted in this regard to determine if the practice of Islamic banking institutions providing
hibah to wadiah depositors is legal. The SAC decided at its 35th meeting on May 22, 2003, that
Islamic financial institutions may give hibah to wadiah depositors. To avoid this practise becoming
an urf that resembles a condition in a deposit contract based on wadiah, such a practice must not
become the standard.

19
 Lembaga Tabung Haji (TH) has replaced the Al-Wadiah Yad Dhamanah savings contract
with the concept of Wakalah which is more effective, systematic and structured than Al-Wadiah
Yad Dhamanah. The Deputy Chairman of the Shariah Advisory Council, Bank Negara Malaysia
explained that, in general, the two contracts are the same, that is, the depositors' principal money
is guaranteed by the government and they are eligible for a profit or return (Sinar Harian, 2019).

Specifically, through the Al-Wadiah Yad Dhamanah account or guaranteed savings, when
a depositor comes to TH and gives money to TH, in terms of its syariah, it is counted as part of
the debt that the depositor gives to TH. Therefore, TH as the person who receives the debt, he
has to guarantee the principal money. So, if they give TH a debt of RM100, TH as the recipient of
the debt has to repay RM100. There is no choice and therefore, TH cannot promise to give a
return of RM105 to the person who gave the debt earlier because it is usury. This is the root of
the problem. The same goes for deposits where depositors come for debts to TH, but suddenly
they ask TH to pay more on a contractual basis. That cannot be because TH gives the Al-Wadiah
Yad Dhamanah contract to the customer at TH's discretion. It is not in the contract for TH to pay
more because if it is in the contract, it is considered usury (Sinar Harian, 2019).

As for Wakalah, in particular, it involves a depositor who comes to TH and gives his money
as a principal to delegate TH to do something, such as investing the money and so on. So, as a
representative, it is TH's responsibility to give a return to the depositor if there is a surplus of return
after deducting the management costs and some costs involved mentioned earlier. It must be
given and not on a discretionary basis like the contract of Al-Wadiah Yad Dhamanah.

5.1.3 Example banks of Al-Wadi’ah with its products

a) Affin Islamic Bank

Products offered by Affin Islamic Bank using Wadi’ah concept to customers is:

i. Current Account-i

ii. Savings Account-i

iii. Affin Plus-i

iv. Junior Saver-i

20
 v. Wealth Saver-i

vi. Affin Gold-i

RM10 will be charged on every June and December if the average balance
over last 6 months is less than RM1,000 for Affin Gold-i current account.

vii. Affin Barakah Charity-i

Eligible customers will authorize the Bank as an agent (Wakeel) with written
instructions to deduct the whole or any part of the Hibah realized and
obtained for distribution to charity; and subsequently distribute and manage
charitable funds in accordance with the Bank's charitable fund policy

viii. Affin eSaver-i

ix. Foreign Currency Account-i

All deposit and withdrawals into or from the Customer’s Foreign Currency
Account-i must be made through a fund transfer process. No ATM card and
cheque book will be issued for the Foreign Currency Account-i account
holder.

Under Wadi’ah concept, the customer places the fund on trust basis with the Bank for
safekeeping purposes. The Bank acts as the trustee and depository, therefore guarantee payment
of the whole amount of deposit, or any part thereof, outstanding in the account of depositor, when
demanded. Income generated from utilization of deposits belong solely to the Bank. The Bank
may at its sole discretion distribute Hibah to the Customer and if so, it will be credited to the
Customer’s account. All the products above are eligible for protection by Perbadanan Insurans
Deposit Malaysia (PIDM) (Affin Islamic Bank).

b) Hong Leong Islamic Banking

HLISB Current Account-i is an Islamic product offered by Hong Leong Islamic Banking
(HLISB). Using the Wadi'ah Yad Dhamanah idea, HLISB will receive the cash deposited and the
amount to be withdrawn later credited to HLISB Current Account-i. HLISB reserves the right to
employ alternative concepts at any time or without prior warning. The Customer authorizes HLISB

21
to deal with all or any portion of any money perceived to be credit to the Account in any manner
HLISB deems appropriate (Hong Leong Bank Berhad, 2014).

Customers can also open an HLISB Savings Account– I with HLISB. Individuals,
communities, and groups can open HLISB savings accounts-i. HLISB savings account-i cannot
be opened by sole proprietorships, partnerships, corporations, organisations, or statutory bodies.
For HLISB's savings account-i, the Wadi'ah Yad Dhamanah or Mudharabah Concept is used.
HLISB reserves the right to invest or utilise the cash in any way it sees fit. The road will be
constructed in compliance with Shariah regulations. The Customer must provide his authorization
to HLISB to deal with all or any portion of the money that remains in appreciation from their
Account in a way judged appropriate by HLISB under the Wadi'ah Yad Dhamanah Savings
Concept. HLISB promises that principal payment, in whole or in part, will be credited to the
Customer's account upon request, and may pay the Hibah as a gift in its exclusive discretion. The
grant is voluntarily decided, and if declared, it will be declared at the rate declared at HLISB and
computed using the daily balance or other calculating methods established by HLISB at its sole
discretion from time to time with prior notice (Hong Leong Bank Berhad, 2014).

c) Bank Muamalat

Savings Account-i is a product offered by Bank Muamalat (SA-i). Savings Account-i (SA-
i) is an Islamic savings account based on the Wadi'ah Yad Dhamanah contract. A contract in
which an asset is entrusted to another party for safekeeping is known as al-Wadi'ah. The
depositor gives the Bank permission to use the funds for any purpose authorised by Syariah. In
exchange, the bank guarantees the deposit's value, resulting in a Wadiah Yad Dhamanah
contract (Bank Muamalat Malaysia).

d) OCBC Al-Amin Islamic Bank

Wafi Current Account-I is a streamlined Islamic Current Account offered by OCBC Al-Amin
Islamic Bank to meet the needs of today's customers using the Wadi'ah Yad Dhamanah concept.
This refers to guaranteed safe custody, in which the account holder deposits cash with an Islamic
financial institution that serves as custodian. The account holder gives permission for the cash
deposit to be used by the Islamic banking organization. When the deposit amount, or any portion
thereof, outstanding in the Account is demanded, the Islamic banking institution guarantees to
pay back the deposit amount, or any portion thereof, outstanding in the Account, and may grant
hadiyyah to the Customer as a sign of appreciation (OCBC Al-Amin Islamic Banking, 2020).

22
6.0 CONCLUSION

In summary, aside from multiple frameworks for banking activities, there is also Shariah, or
Islamic commercial law. It is a structure unique to Islamic finance and cannot be classified as
conventional. Aside from that, its goods and services are intended to lead to a condition of
economic well-being. However, Islamic business companies must conduct genuine and lawful
business and meet all contractual obligations and duties. Lastly, choosing an Islamic bank can
prevent Muslim from involving themselves with non-compliant to Shariah law such as usury and
as well as give benefits to them because the interest may not higher compare to conventional
banking.

23
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