GROUP MEMBERS

1) ALAN PHANG KIAN YUNG

2) DIONYSIA GINSOS
3) LEONG KAT FUN
4) LOW AIVY
5) MICELLY HULO LEWAT

It is important to understand the basic contracts in
Islamic banking in terms of the characteristics based on
the terms and conditions.
In the profit and loss sharing agreements, there are two
main types of contracts which are Musharakah (joint
venture profit sharing) and Mudharabah (trustee profit
sharing).
For the contract of sales, exchange goods for money such
as bay al muajjal (example bai al murabahah, bai
bithaman ajil, bai al istina, bai al salam,bai as-sarf),
and exchange of services for money such as qard-hassan
(al-ijarah and al-jualah).

Shariah aspects of Islamic banking contracts meet the
Shariah requirements that referring to avoidance of
prohibitions, and ensuring that the contracts have all
their essential elements with their necessary
conditions.

The word riba has been used in the Holy Quran on several
occasions.
Riba has been extracted from Raba. (increase).
In the Shariah, riba technically refers to the premium that must
be paid by the borrower to the lender along with the principal
amount as a condition for the loan or for an extension in its
maturity.
In this sense riba has the same meaning as interest in accordance
with the consensus of all jurists without any exception.
So the Holy Quran and the Hadith do not make any such difference
between usury and interest.

Riba al-nasiah,
Riba al-fadl.

Islam, however, wishes to eliminate not merely the exploitation
that is intrinsic in the institution of interest, but also that which is
inherent in all forms of unjust exchange in business transactions.

Riba al-fadl is the excess over and above the loan paid in kind. It
lies in the payment of an addition by the debtor to the creditor in
exchange of commodities of the same kind. The following tradition
of the Prophet Muhammad (saw) is cited as evidence. It is related
that Abu Said al-Khurdi said: the Prophet Muhammad (saw) has
said that gold in return for gold, silver for silver, wheat for wheat,
barley for barley, dates for dates and salt for salt, can be traded if
and only if they are in the same quantity and that is should be hand
to hand. If someone gives more or takes, then he is engaged in riba
and accordingly has committed a sin.

Riba is prohibited in Islam as it appears explicitly in the Holy Quran.
There is complete unanimity among all Islamic schools of thought
regarding the prohibition of riba. Since the Quran is the undisputed
source of guidance in Islam for all Muslims, there is unanimous
agreement on the fact that Islam has forbidden the practice of riba.
The debate on whether interest is riba or not has been settled. The
ulama have made crystal clear that interest is riba. The modern
banking system is organized on the basis of a fixed payment called
interest. That is why the practices of the modern banking system are
in conflict with the principles of Islam which strictly prohibit riba.
Islam is opposed to exploitation in every form and stands for fair and
equitable dealings among all men. To charge interest from someone
who is constrained to borrow to meet his essential consumption
requirement is considered an exploitative practice in Islam. Charging
of interest on loans taken for productive purposes is also prohibited
because it is not an equitable form of transaction. Now lets have a
look on the prohibition of interest in the light of the Quran and the
Sunnah (tradition of Prophet Muhammad (saw).

That which ye lay out for increase through the property of
(other) people, will have no increase with Allah: But that which
ye lay out for charity, seeking the countenance of Allah (will
increase): it is these who will get a recompense multiplied.
(30:39)

That they took riba (usury), through they were forbidden and
that they devoured mens substance wrongfully We have
prepared for those among men who reject faith a grievous
punishment. (4:161)
O ye who believe! Devour not usury doubled and multiplied;
but fear Allah, that ye may (really) prosper. 3:140)

Jabir reported: The Prophet (saw) cursed the
receiver and the payer of interest, the one who
records it (the contract) and the two witnesses
to the transaction and said, They are all alike (in
guilt).
Jabir ibn Abdullah, giving a report on the
Prophets farewell pilgrimage, said: The Prophet
(saw), addressed the people and said, All the
riba al-jahiliyyah is annulled, the first riba that I
annulled is our riba, accruing to al-Abbas ibn
Abdul Mutalib (the Prophets uncle).

Despite the fact that interest occupies a central position in modern
economic system and that it became the very life blood of the existing
financial institutions, Islam considers that the principle of charging interest
is quite opposite of that of business in the spirit of sharing and cooperation
and that lending on interest is not as a business in the real sense.

In legalizing trade and condemning interest, Islam considers that there are
fundamental differences between the nature of profit resulting from
interest charges and that earned by trade. In interest-based transactions,
there may be no equitable division of profit between the buyer who makes a
profit on the sale of good purchased, and the seller who derives a profit in
consideration of the labour and time spent in procuring the goods.
Moreover, there could be no end for an interest-based transaction, since
there could always be interests of unpaid interests as long as the principle
amount loaned is not fully returned. This could, in extreme cases, create
un-repayable debt for generations.

a) Profit-and-loss sharing contracts (mudarabah)
The Islamic bank pools investors' money and
assumes a share of the profits and losses

agreed upon with the depositors

filter parses company balance sheets

determine whether any sources of income to the
corporation are prohibited



i. Declining-Balance Shared Equity:
Commonly used to finance a home purchase
the investor to purchase the home jointly

ii. Lease-to-Own
similar to the declining balance one described above
except that the financial institution puts up most

iii. Installment (Cost-Plus) Sale (murabaha):
This is an action where an intermediary buys the home
with free and clear title to it
This credit sale is an acceptable form of finance and is
not to be confused with an interest-bearing loan.


b) Partnership and joint stock ownership
(musharakah)
c) Leasing ('ijarah/'ijar)

The sale of the right to use an object (usufruct) for a
specific time period

the lessor must own the leased object for the
duration of the lease

'ijarah wa 'iqtina provides for a lease to be written

These are rare forms of financing, used for
certain types of business

exception to gharar

The price for the item is prepaid

the item is delivered at a definite point in the
future
is a partnership contract between
rabbul mal and mudarib in which the
rabbul mal provides capital to the
mudarib for investing it in a business
enterprise by applying his skill and
labour.
The financer is known as rabbul mal
or shahibul mal, while the
entrepreneur is known as mudarib.
Mudarabah
is a contract between the partners to
contribute capital to an enterprise or a
venture, whether existing or new, or to
owner of a real estate or moveable asset,
either on a temporary or permanent basis.
Musharakah
The proportionate share in profit is determined
by mutual agreement.
Profit is shared between the rabbul mal and
mudarib according to a pre-determined profit
sharing ratio.
In principal, any financial loss under
mudharabah financing must be borne by
Islamic banking institution.
However, if the loss is caused by negligence,
management or breach of contracted terms by
the customer, then the customer is liable for
loss.
It is an agreement between the
bank and the depositors, who
agree to put their money into
the banks investment account
and to share profits with it.
First tier
It is an agreement between the
bank and the entrepreneurs
who seek finance from the
bank on the condition that
profits accruing from their
business will be shared
between them and the bank in
a previously mutually agreed
proportion, but that loss shall
be borne by the financier only.
Second
tier
a. Contracting parties
Mudarabah gives the right to the contracting parties to
share the profit, while liability for losses is borne by
the participants.

b. Offer and Acceptance
Mudarabah has two pillars of offer and acceptance.
Mudarabah is concluded when the parties use words
that clearly indicate the contract of mudarabah in their
offer and acceptance.

c. Capital
The capital in this partnership must be in absolute
currency, it should be ready cash and not form in the
debt.

d. Profit
Any profit made will be share between the
rabb-ul-maal and the mudarib according to
an agreed ratio while losses are borne solely
by the rabb-ul-maal.

e. Work/Labour
The rabb-ul-maal has no right to participate
in the management which is carried out by
the mudarib only.

Restricted Mudarabah (al-
mudarabah al muqayyadah)
The rabbul mal may specify a
particular type of business or to
a particular location or specified
period for the mudarib, in which
case he shall invest the money
in that particular business only.
Restricted mudarabah divided
into 3 parts:
i. Restriction in respect of
specified time or period.
ii. Restriction in respect of
specified place or location.
iii. Restriction with respect of
specific business.
Unrestricted Mudarabah ( al-
mudarabah al-mutlaqah)
It is a contract in which the
rabbul mal permits the mudarib
to admister the mudarabah fund
without any restriction.
In this case, the mudarib has a
wide range of business options
on the basis of trust and the
business expertise he has
acquired.
Mudarabah interbank
investments (MII) refers to a
mechanism whereby a deficit
Islamic banking institution
investee bank can obtain
investment from a surplus
Islamic banking institution
investor bank based on
mudarabah.
The literal meaning of Musharakah is sharing.

The root of the word Musharakah in Arabic is
Shirkah, which means engagement of two or more
parties who have a common interest to form a
partnership.

It is a contract of partnership between two or more
parties in which all the partners contribute capital,
participate in the management, share the profit in
proportion to their capital or as per pre-agreed
ratio and bear the losses (if any) in proportion to
their capital ratio.
a. Capital
The contract of musharakah can be based
only on money and not on commodities. The
share capital of a joint venture must be in
monetary form. No part of it can be
contributed in kind.
b. Contracting Parties
Parties involved in a partnership
arrangement contribute funds to and have
the right to exercise executive powers in
that project in accordance with an agreed
formula.

c. Work
The partners must belong to the same trade and
they should work in one place. Besides, all the
partners should participate in actual work and
should get profit according to their work.
d. Risk
The musharakah financing entails lower risks,
since it involves risk sharing through partnership.
The number of individuals who are in a position
to provide musharakah financing is limited ,
although modern musharakah funding through
equity market participation may have much
smaller risks because of the ease of divestment.

Musharakah

Shirkah al-milk (non-
contractual partnership)

Shirkah al-uqood
(contractual
partnership)
Shirkah al-milk (non-contractual) implies co-
ownership and comes into existence when
two or more persons happen to get joint-
ownership of some asset without having
entered into a formal partnership agreement
for example, two persons receiving an
inheritance or a gift of land or property
which may or may not be divisible.
The partners have to share the gift, or
inherited property or its income, in
accordance with their share in it until they
decide to divide it.
Shirkah al-uqood (contractual partnership)
however can be considered a proper partnership
because the parties concerned have willingly
entered into a contractual agreement for joint
investment and the sharing of profits and risks.

Shirkah al-uqood has been divided in the fiqh
books into four kinds:
i. al-mufawadah (full authority and obligation)
ii. al-inan (restricted authority and obligation)
iii. al-abdan (labour, skill and management)
iv. al-wujuh (goodwill, credit-worthiness and
contracts)

-An legal exchange of a useful and desirable thing for
a similar thing by mutual consent for the alienation of
property.

A form of an exchange value or
consideration, return, wages, or rent of
services of an asset

Contract between two parties, the lessor and
lessee, where the lessee enjoys or reaps a
specific service or benefit against a specified
consideration or rent from the asset owned
by the lessor.
BANK
(Lessor)
PROPERTY
(1) Bank buys property
(3) Customer pays rental
(2) Bank leases property
Ijarah (cont)
PEOPLE
(Lessee)
A party undertakes to pay another party a
specified amount of money as a fee for
rendering a specific service in accordance
to the terms of the contract stipulated
between the two parties.

-For example, Ahmad (Jail) declares that if
anyone(Amil) recovers his lost property, he
will give him RM10.
Contract between a buyer and a seller which
the seller sells specific goods allowed under
Shariah principles to the buyer at a cost plus
agreed profits payable in cash on any fixed
future date in a lump sum or by instalments.

Bai al-Murabahah (cont..)
Bank
Customer
Supplier of
commodity
1.Customer identifies
commodity
2.Customer
approaches bank,
promises to buy
commodity from
bank
3.Bank buys
commodity on
cash basis
4. Customer buys
commodity via
murabahah on
deferred payment
terms
Contract of a sale and purchase transaction for
the financing of an asset on a deferred payment
basis with a pre-agreed payment period.

Buyer and Seller are not restricted from dealing in
business transactions. In addition, they are not
bankrupt and safih (an extraordinarily extravagant
person/spendthrift) and are not being forced to
enter into contract. The seller must be the real
owner of the merchandise and able to deliver the
merchandise to buyer and the asset is free from
any circumstance.

The asset has the following characteristic, such
as in the form of Mal (valuable asset) halal/
lawful, valuable (has trade value). Besides that,
the asset should not be an unusable material
according to shariah.
A contract in which advance payment is
made and the goods will be delivered later
on. The seller supply specific goods to the
buyer at a future date while an advance
price is fully paid at the time of contract.
Salam (cont)

Contract for the acquisition of goods by
specification or order.

The sale of goods by way of ordering where
the price is paid in advance or
progressively but the assets are
manufactured and delivered at a later
specified/defined date.
Customer identifies
commodity and the
design

Customer approaches bank, promises to
buy commodity from bank through
Istisnaa contract
The bank then enters
into a back-to-back
Istisna'a contract with
a third party to have
the subject commodity
manufactured, built or
assembled.
Bank sell the commodity by
cost+profit to customer once
bank own the commodity
A sale in order to get cash, not property or a sale
in which a commodity is sold for a deferred
payment (thaman mu ajjal) and then resold to
the seller on cash basis (which is cheaper than
deferred payment price).

Such an organised same-item sale-repurchase
between the same parties is not allowed in many
jurisdictions.
Islamic contract and transaction need to
confirm to the principle of Shariah without
involving any prohibited elements such as riba
and gharar.
Islamic banks contract performance provides
signal to the banks management whether to
improve its deposit services or financing
services or both in order to improve banks
earnings.
Every contract exposed to various types of
risks so it requires proper, adequate and sound
risk management infrastructure and internal
controls to manage the risks.