ISLAMIC FINANCIAL SYSTEM

Regulations and Operations

Islamic Banking and Finance (MFS 608)

Assoc. Prof. Dr. Mohd Fuad Mohd Salleh Dr.

fuadsalleh@yahoo.com 21st.. December 2012
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SOURCES OF ISLAMIC INJUNCTIONS

The Qur`an The Sunnah Ijma (Consensus of Muslim jurists) Qiyas (Analogical Reasoning) Istihsan (Juristic Preference) Istishab (Presumption of Continuity) Istislah / Maslahah (Public Interest) Maqasid al-Shari`ah (The Objectives of Shari`ah) Sadd al-Dhari`ah (Blocking the Means) `Urf (Custom) Qawa`id Fiqhiyyah (Legal Maxims)
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INTRODUCTION
Malaysia has a unique legislative framework consisting

of mixed jurisdictions and mixed legal systems namely the common law and shari`ah The growth and development of Islamic banking industry are supported through goods governance and its comprehensive legal frameworks. Since Malaysia is a common law country, it is very essential to have standard law of practice, which harmonizes both shari`ah and civil law. The integration between two traditions is really necessary in the context of Islamic banking in Malaysia.

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Regulations in Islamic Financing

Islamic Banking Act 1983 (Amended 17 times)
This Act which came into force on 7th April 1983 was

enacted to provide for the licensing and regulation of Islamic banking business in Malaysia which is banking business whose aims and operation do not involve any elements which is not approved by the religion of Islam. The Islamic Banking Act 1983 is governed by the Central Bank of Malaysia.

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Regulations in Islamic Financing

Capital Market and Service Act (CMSA 2007)
The practice of Capital Market and Islamic capital market

is Governed by the Securities Commission Malaysia. The Act incorporates three key legislation on the capital market: o Securities Industry Act 1983, o Futures Industry Act 1993, and o Part IV of the Securities Commission Act 1993. \ These Acts are to regulate and to provide for matters relating to the activities, markets and intermediaries in the capital markets, and for matters consequential and incidental thereto.
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Regulations in Islamic Financing

Shari`ah Guidelines
Guidelines on the Governance of Shariah Committee for

the Islamic Banks, known as BNM/GPS1 Shariah Governance Framework for IFIs 2011 Guidelines on the Disclosure of Reports and Financial Statements of Islamic Banks known as BNM/GPS8i Shariah Parameter Reference 1 - Murabahah Concept Paper on Shariah Parameter Reference 4: Musharakah Contract Concept Paper on Shariah Parameter Reference 5: Istisna' Contract

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ISLAMIC INVESTMENT
Islamic Worldview of Investment Islam is the ad-din Wealth accumulation is enjoined in Islam Balance between spiritual and worldly obligation Allah is the ultimate owner of wealth and man is only the trustee Man is vicegerent of Allah (khalifatullah) Islam encourages working, smart consumption and investment for future

All investment MUST be in accordance with

Islamic teaching

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Basic Islamic Contracts

Contract in Islam Known as `aqd Derived from the root verb `aqada which means to bind or tie. To denote a reciprocal or bilateral transaction which concluded by an offer (ijab) and acceptance (qabul) The term is also used by the jurists to denote dispositions of property by will which are concluded by the offer of one party only such as in hibah, waqf, ibra (unilateral contract) Marriage and divorce which do not necessarily involve the concept of consideration also fall under

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Essential Elements of a Valid Contract

Offeror and Offeree (`Aqidan) o Both must be competent, measured by two aspects i.e prudence and puberty Offer and Acceptance (Sighah) o Verbal, Written, Electronic, Conduct. Subject matter o Lawfulness, existence, deliverability, precise determination

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Essential Elements of a Valid Contract

Types of Islamic Contracts Sale Contract Bay Lease Contract Ijarah Custody Contract Wadiah Gratuity Contract Hibah, Ibra Agency Contract Wakalah Patnership Contract Mudarabah, Musyarakah

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Basic Islamic Contracts

Sale Contract Bay
The exchange of one commodity for another, one of which is

called the object, and the other the price. The transfer of ownership of property for another. The transfer of ownership of some lawful (mutaqawwim), specific, known property for a fixed price (which may be money or other known property), both counter values are present and can be delivered immediately.

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Basic Islamic Contracts

Sale Contract Bay a. Categories according to price b. Categories according to object c. Categories according to manner of payment

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Basic Islamic Contracts

Sale Contract Bay Categories according to price
Tawliyya : Resale at cost price Murabaha : Cost plus profit sale (the cost price is disclosed by

the seller) Musawamah : Cost plus profit sale (actual cost price and margin of the profit is unknown to the buyer) Wadhiah : Resale at below cost price

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Basic Islamic Contracts

Sale Contract Bay Categories according to object Muqayada : Exchange of object for object (Object barter) o Sarf : Exchange of price for price (money barter) o Salam : Sale with immediate payment and deferred delivery o Mutlaq : Absolute sale of object for money, whether immediately or deferred.

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Basic Islamic Contracts

Lease Contract Ijarah
Literally means the sale of usufruct ( bay al-manfa`ah) Hanafis definition: A contract intended to give ownership of a

determined and legitimate use (manfa`ah) of a rented corporeal object (`ayn) against a consideration. Shafie defined al-ijarah as a contract where the subject matter is the determined, legitimate, assignable and lawful use of an object against a fixed consideration. The contract to use the usufruct of a permissible thing for a known counter value. A bilateral contract where the use of corporeal object is exchanged for a price.

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Basic Islamic Contracts

Types of Ijarah:
Ijarah al-Manfa`ah Ijarah for usufruct The modern term of tenancy or leasing Ijarah al-Amal Contract of employment or work

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Basic Islamic Contracts

Custody Contract Wadiah :
The term derived from root word wadaa which literally means leave. Wadiah: Goods or deposits which have bee deposited with another person (the custodian), who is not the owner, for safekeeping. Surely Allah commands you to make over trusts to their owners and that when you judge between people you judge with justice; surely Allah admonishes you with what is excellent; surely Allah is Seeing, Hearing. (An-Nisa: 58 )

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Basic Islamic Contracts

Custody Contract Wadiah : Types of Al-Wadiah a) Wadiah Yad Amanah b) Wadiah Yad Dhamanah

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Basic Islamic Contracts

Gratuity Contract Hibah, Ibra Al-Hibah A token given voluntarily in return for loan given or benefit obtained It is a unilateral benevolent contract in which a party transfers the ownership of an asset to a person without any consideration during the lifetime of the giver.

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Basic Islamic Contracts

Gratuity Contract : Hibah, Ibra Al-Ibra
Surrendering ones claims and rights on certain thing. This is other peoples obligation to him which needs to be fulfilled. In Islamic banking, the concept resembles the rebate payment. In Islamic financial system, contractually customer has to settle total outstanding selling price in the case of early settlement However, Islamic bank normally gives rebate to its customer who made early settlement.

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Basic Islamic Contracts

Agency Contract : Wakalah A contract of agency in which one person appoints someone else to perform a certain task on his behalf, usually against a certain fee. Wakalah enables a person without ability or expertise to appoint an agent to represent himself to perform a certain task. An agent is someone who establishes contractual and commercial relations between a principal and a third party.

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Basic Islamic Contracts

Agency Contract : Wakalah The principal should have the power and competence to deal and own the property. The agent should also be a competent person. The thing or act should be known. This is to avoid uncertainty or gharar. That the action is a lawful action.

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Basic Islamic Contracts

Patnership Contract Mudarabah, Musharakah Musharakah
o Also known as shirkah

A form of partnership when two or more persons combine their capital or entrepreneurship togetherto share the profits and enjoy similar Types of Musyarakah 1. Shirkah Al-Milk (non-contractual partnership) 2. Shirkah Al-Aqd (contractual partnership)

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Thank You Wassalam

Mohd Fuad May 2010