1 BISS 5033 Deduction Method And Maqasid Shariah For Business

1.0 TA’WIDH AND GHARAMAH

In Islamic banking, the operation of a sale and purchase transaction is generated through
the relationship between the financier and the recipient. Both parties will produce a bond with
the financier having the obligation to distribute the funds to the beneficiary through the contract
being executed. The payee bond is by accepting a loan and is required to settle the amount of the
financing within the prescribed period and agreed upon by both parties. In the financing or
contract transaction, any transaction or contract may be affected in the financial activities of the
financier if payment is not paid by the debtor within the stipulated period and this will cause loss
to the party. Therefore, the recipient of the financier should be liable to a fine in compensation
for the delay in paying the amount that should be settled within the prescribed period.

2.0 DEFINITION OF TA’WIDH AND GHARAMAH

The debate on the use of the indemnity method in Islamic financial activity in Malaysia
covers aspects of financial settlement, judgment debt and initial debt settlement. The problem of
default on settlement of loan payments is dealt with through the imposition of interest or Riba on
customers. Since the application of interest or Riba is contrary to Shariah principles, therefore,
Islamic Banking should look at this aspect of damages or penalties in the context of Islam and
ensure that it does not violate Islamic law as long as the core principle of Islamic banking is the
elimination of interest (riba) in the banking system.

Therefore, in Islamic banking, the Bank Negara Malaysia (BNM) has introduced the
concept of ta'widh and gharamah to enable the activities of paying fine in a transaction. Based
on the 30th Meeting, BNM's Syariah Advisory Council has decided that the payment of ta`widh
imposed on outstanding payments and the failure to pay after the maturity date is allowed. This
ta`widh payment is for Islamic financing based on `uqud mu`awadhat (exchange contracts)
including sukuk issued on the basis of exchange contracts. The implementation of ta’widh and
gharamah in the Islamic banking system in Malaysia need to have time to mature in its
adaptation and adjustment like Bank Islam of Malaysia where they only managed to implement
ta’widh in February 2010 even though the imposition on ta’widh in Islamic finance was issued in
the 4th meeting of the SAC of Bank Negara Malaysia in 1998.

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In the context of financing, ta`widh is the damages imposed on the actual losses incurred
by the financier of the impairment of the payment of financing by the recipient. The word
ta’widh is derived from the word al-‘iwad which define as ‘instead,’ and the term ta‘widh or
syart jaza‘i is interpreted as a fine as agreed by the parties to the contract as compensation that
can be claimed by the financer when the receiver failed to pay or make late payment of debts.
The International Islamic Fiqh Academy of the Organisation of the Islamic Conference define
ta’widh as reward or financial compensation payment acquired as a result of initiating harm to
others. Meanwhile according to the Resolution of Shari’ah Advisory Council (SAC) of Bank
Negara Malaysia (2010), ta’widh refers to the actual losses gained which will be assessed and
determined by a third party that is the Bank Negara Malaysia which acts as the regulator.

Gharamah is defined as penalty imposed for delayed pay off debt, without the need to
prove actual loss. Arabic Language Academy of Cairo defines gharamah as a monetary penalty
which aim to introduce discipline as well as to enforce compensation among individual. Bank
Negara Malaysia had defined gharamah as a penalty or charge imposed to customers who had
delay in their financing or debt settlement over and above the amount of Ta’widh.

3.0 BASIS OF THE RULING IN TA’WIDH AND GHARAMAH

Delay recipients of payment in financing can be refuted to ghasb (confiscating) a

valuable item. This is because there is an 'illah' equality between the two which is to prevent the
use of the property and its benefits and to overcome its deterioration with injustice. In the
opinion of Imam Shafi'i and Hanbali in the case of ghasb, the benefit of the property seized is in
the guarantee and is indemnified. This is because delaying the payment that should need to
perform can cause the financier unable to utilize the fund for other business purposes. Therefore,
the customer or debtor should pay compensation to the financier to cover the losses suffered by
the financier.

The Muzakarah of the National Council on Islamic Religious Affairs for the 99th Islamic
Religious Affairs Meeting convened on 4-6 May 2012 discussed the Law on the Distribution of
Islamic Financial Institutions Giving to Baitulmal. The Muzakarah made a decision and asserted
that the obligation to impose gharamah on the recipient who had delayed the payment of the
payment as determined was based on the hadith of the Prophet (peace be upon him) who
described the delay in repayment of debt by a capable person as a tyranny and could be

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detrimental to Islamic financial institutions. Muzakarah also thinks that gharamah produced in
Islamic financial institutions should be channeled to institutions that are specifically related to
Muslims so that they are not abused.

The Muzakarah had agreed to decide that the result of the Islamic Financial Institution's
outcome on gharamah should be channeled to Baitulmal to ensure the use of the property
conforms to the maslahah ammah of Muslims. Among the arguments that necessarily impose the
gharamah on the customer can be refuted like the hadith of the Prophet (peace be upon him)
describing the delay in repayment of the debt by a capable person as a tyranny, From Abi
Hurairah that the Prophet (peace be upon him) said:

" Delay by rich person (in paying debts) is a tyranny."

(Hadith narrated by al-Bukhari).

There is also a fiqh maxim extracted from a hadith relating to this matter:

“Neither harming nor reciprocating harm (in Islam).”

Based on this maxim, the delay of payment that need to perform by the customer base on
the agreement between both parties will create harm to the Islamic financial institution as the
financier whereby the Islamic financial institution will suffer actual loss in terms of acquiring
additional disbursement, such as the costing for issuing notices and letters, legal fees and other
related costs that can make the financier getting losses. These issues should be avoided in order
to ensure that business transactions are directed according to the principle of market productivity
(istiqrar ta`amul).

The other fiqh maxim that had a related issue on this Ta’widh and Gharamah is based on
this word:

“Whatever harm should be removed.”

Based on the word of fiqh maxim above, imposition of ta`widh and gharamah on delayed
payment of debt is an appropriate approach to moderate the harm suffered by the financier, and

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at the same time it will introduced discipline on customer to make payment according to the
stipulated schedule and prevent people from stuck with debt.

4.0 THE RESOLUTION OF TA’WIDH AND GHARAMAH

4.1.1 The SAC Meeting: 4th Meeting (14th February 1998)

The Council in its 4th meeting held on 14th February 1998/16th Syawal 1418 resolved that
ta`widh may be obligatory on the defaulting customer who fails to meet his obligation to pay the
financing on agreed time or late of payment based on the condition of the amount of ta`widh
cannot more than the actual loss suffered by the financier and the default or delay of payment is
due to carelessness on the part of the customer or debtor.

4.1.2 The SAC Meeting: 50th Meeting (26th May 2005) and 61st Meeting (24th
august 2006)

The Council in its 50th meeting, held on 26th May 2005/17 Rabiul Akhir 1426 and 61st
meeting on 24th august 2006/30th Rejab 1427 resolved that the judge may impose a late
payment on a debt judgment decided by the court for Islamic banking and takaful
cases.Imposition of late payment penalty charge is based on the combination of gharamah
(penalty) and ta'widh mechanism.

The Shariah Advisory Council (SAC) also resolved that the mechanisms for implementing
late payment penalty charge must be follow certain condition which were the court may impose
penalty charges at the rate of 8% per annum. However, from this rate of 8% per annum, the
judgment creditor (bank) is only allowed to be compensated for the actual loss and cannot
exceed the amount of loss. Secondly, SAC agreed that the compensation rate of actual loss
(ta`widh) must be determine by adopt "annual average for overnight weighted rate" of Islamic
money market of the preceding year as a reference and lastly the total compensation based on
actual loss must not exceed the principal debt. If the rate of actual loss is less than 8% per
annum, the balance shall be channeled to charitable organization as be stated and choose by
Bank.

4.1.3 The SAC Meeting: 101th Meeting (20 Mei 2010)

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There are also several condition for Ta’widh and Gharamah process to be allowed which
were ta`widh may be charged on late payment of financial obligations resulted from exchange
contracts (such as sale and lease) and qard, ta`widh may only be charged after the due of
settlement date of the financing as been agreed on both parties, Islamic financial institution may
identify ta`widh as income on the basis that it is charged as compensation for genuine loss
suffered by the institution while gharamah cannot be recognized as income. Instead, it has to be
channeled to certain charitable bodies.

5.0 METHOD OF COMPUTATION PENALTY AND TA’WIDH

In conventional banking, penalty for late payment of a loan is about 2 percent up to 5

percent of total loan outstanding. The rates charged by conventional banks are based on
compounded and the penalty will be included in the loan amount. If there is further penalty, it
will be attached to the percentage of the original loan amount. Meanwhile in Islamic banks,
ta’widh rate is charged at 1 percent and it is non-compounding. Hence, it is lower than the
conventional banking charges and less harmful toward both parties. Table 1 below shows the
difference between the penalty that been practice by conventional banking and ta’widh and
gharamah that been practice by Islamic banking.

Figure 1.1

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6.0 BENCHMARK FOR CINEMA BUSINESS

The SAC at its 151st meeting on 26 September 2013 updated the resolution on the benchmark

for cinema business from five per cent benchmark to 20 per cent benchmark. The SAC resolved

that it is not suitable to equate cinema business with other activities which are clearly prohibited

by Syara` such as riba (interest-based companies such as conventional banks), gambling, liquor

and pork which are classified under the five per cent benchmark.

Before we discuss further the transition of the resolution, it is good for us to know what the

meaning of Shariah screening process is. Shariah Screening process is a guideline derived from

Islamic Resources to screen out the business activities of the company. This guideline will

determine the level of Shariah complains of the company. The screening process involves two

types of the assessment process which is quantitative and qualitative.

Quantitative assessment will focus on the contribution of non-permissible activities and compare

to the group turnover and group profit before tax. The benchmark for quantitative assessment is

5% and 20%. 5% benchmark is to assess the level of mixed contribution of activities that clearly

prohibited such as riba, liqueur and pork. 20% benchmark is to assess the level of contributions

of mixed rentals from Shariah non-compliance activities. Besides that, quantitative assessment

also concern about financial ratio where the benchmark is 33% which means the financial ratio

for debt and cash from non-permissible activities must not exceed 33% over total assets.

Next, the screening process also involves the qualitative assessment where the factors of the

image of the company, maslahah, umumbalwa and urf are brought for considerations. The SC

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will consider the mentioning factors as the basis to determine whether the company is Shariah

compliance or not as the complementary factor to the quantitative assessment.

As mentioned in the resolution, that cinema benchmark has changed from 5% benchmark

to 20% benchmark. There are a few indicators that lead to changes. Firstly, as mentioned in the

resolution that the cinema is not considered under 5% benchmark because cinema is not the

activities that clearly prohibited in Islam like gambling and others. The main business for cinema

is to provide entertainment in the form of movie watching and that it is the main core business

from them. It is admitted to say that some of the cinema may involve in the non-permissible

activities but it is in the small portion compare to the income of providing movie entertainment.

Next, the changes also might be from the consideration of urf for the existence of cinema

in Malaysia. As mention above that urf is one of the qualitative assessments. Urf means common

practices by the society whether it is from words or actions. There are several conditions need to

fulfil before the urf can be accepted as a part of permissible things in Islam (Zaidan, 2013). First,

the urf must not against the text of Shariah. Any actions or words that practice by the society

must not against the shariah laws. Second, the urf must be dominant in society and it is

happening widely practice by the peoples. Third, urf must become the main reasons for the

practices. Fourth, there must no contradiction whether in a form of word or actions toward the

meaning of urf.

In Malaysia, cinema is not considered as a bad place to visit. As far as this concern, we

can say that the existence of cinema in this country is something that well known by society and

it is not something that leads to the harmful or bad. In addition, watching a movie in the cinema

also not prohibited in Islam. Sheikh Dr Yusuf al-Qaradhawi was once asked about the law of

watching movies in the shadow of the movie, he replied:

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"There is no doubt that the cinema is a tool of directing and entertainment, so the affairs

(activities) of each of these tools are seen as being used for good or bad. So it is accepted, and it

is not a matter of fact. So the law of its activity is according to what it takes and do it (YADIM ,

2019).

There is fiqh maxim that stated that Customary practices as a basis of judgements. The custom of

Malaysian sees that cinema is not a bad place to visit whether it by practice or words. Besides,

there also no evidence that mentions that this kind of entertainment business is prohibited in

Islam.

There is a researcher mentions that the benchmarking for cinema is place under 5%

benchmark because there is a cinema in this country serve liquor to their customer. But, after

making an observation regarding this issue, we realize that the liquor only serves to the non-

Muslim customer (Azmi, Non, & Aziz, 2017). It is something that cannot be avoided

(umumbalwa) in this country where sometimes the entertainment company need to provide food

and beverages that not halal because of multi-races and religion and this country recognized their

right.

As a conclusion, cinema is the type of entertainment business that permissible in Islam.

Even sometimes the company provide non-halal food and beverage but the changes of

benchmark give wider space to the company to be listed as Shariah-compliant Company in the

capital market.

7.0 CINEMA BUSINESS IN MAQASID SHARIAH

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Maqasid Shari'ah means the purpose of Allah and His Messenger in formulating Islamic

laws. The purpose can be traced in the verses of the Qur'an and the Prophet's Sunnah as a logical

reason for the formulation of a law oriented to the benefit of mankind. As stated by Abu Ishaq al-

Syatibi that the ultimate goal of governing Islamic law is to benefit both the world and the

hereafter. According to Syatibi needed of human can divided in three category which is

Dharuriyyat, hajiyyat and Al-tahsiniyyat.

Dharuriyyat is the level of need that must exist or is called the primary need. If this level

of need is not met, it will endanger the safety of mankind. The necessity and protection of this al-

dharuriyyat in the ushul fiqh book, including as-Sythibi, divide into five, namely the fulfillment

of the need and the protection required for the salvation of the religion (obedience to worship of

Allah SWT), life safety (perindividu) and security of mind (including conscience).

The need for hajiyyat is the secondary needs, which are not realized this requirement

does not threaten its safety, but will have difficulty and difficulty may be prolonged, but not to

the extent of extinction or utterly helpless. So what distinguishes al-dharuriyyah dengn al-

hajiyyah is its influence on human existence. However, its existence is needed to provide ease

and eliminate the difficulties and difficulties in the life of mukallaf.

Al-tahsiniyyat is (tertiary) that is all the necessary and necessary protection for life to be

comfortable and more comfortable, easier and easier and more spacious. In other terms it is the

necessity people need to make their lives in ease, comfort, and spaciousness.

Therefor, cinema business is not main necessary to human in their life , the necessary

for cinema only need by human more to necessary of soul. If the cinema don’t exist in human

life, it not give big impact in their life. So , this necessary of cinema is categorized to Al-

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tahsiniyat. This necessary only make human life become more comfortable and more

spaciousness.

8.0 CONCLUSION

Islamic ruling does authorizations Islamic banks to impose penalty charges toward

customer payment defaults. However, the mechanism of ta’widh implementation is different

from penalty charged that been applied by conventional banks which is riba. The imposition of

ta’widh and gharamah by Bank Negara may help Islamic banks in Malaysia to moderate default

payment risk as well as enable Islamic banks to compete with conventional banks at the same

time prevent the riba which is prohibited in Islam. As a conclusion, cinema is the type of

entertainment business that permissible in Islam. Even sometimes the company provide non-

halal food and beverage but the changes of benchmark give wider space to the company to be

listed as Shariah-compliant Company in the capital market.

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REFERENCES

I, M. (1970, January 01). Ta'widh dan Gharamah. Retrieved from

http://faisolmuamalah.blogspot.com/2016/12/tawidh-dan-gharamah.html

Yaakub, E., Adli, M. A., Husin, A., Muhamad, M. D., Shahruddin, M. S., & Khalid, M. M.
(2014). A Revisit to the Practice of Late Payment Charges by Islamic Banks in Malaysia. Jurnal
Pengurusan, 42, 185-190. doi:10.17576/pengurusan-2014-42-15

Shahruddin, M. S., Yazid, N. H. M., TESL, U. T., & Alam, S. LATE PAYMENT CHARGE IN
ISLAMIC BANK.

Shariah resolutions in Islamic finance. (2007). Kuala Lumpur: Bank Negara Malaysia.

Azmi, A., Non, N., & Aziz, N. (2017). Challenges to Shariah Equity Screening, From shariah
Sholars' Perspective. International Journal of Islamic and Middle Eastern Finance and
Management.
YADIM . (2019, 3 22). Retrieved from Yayasan Dakwah Islamiah Malaysia:
http://www.yadim.com.my
Zaidan, A. K. (2013). Kaedah Usul Fiqh. Selangor: Pustaka Al-Ehsan

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