Islamic financial planning
BY DR ZURINA SHAFII
Rebate for early settlement
The Syariah does provide for early settlement in the form of ibra’ but the
method of calculation needs to be more transparent
R
etail Islamic financing for
home and vehicle purchases
based on Bay’ Bithaman
Ajil (BBA) does not provide for
early settlement. The price is fixed,
as once the sale transaction takes
place, the customer has to pay the
whole profit amount accruing to
the bank. Thus, Islamic financing is
labelled as expensive compared with
conventional financing, which can
be terminated at any time since the
income of the bank is based on the
interest rate charged during the term
of financing. The shorter the time of
financing, the less interest is accrued
to that financing body.
However, Islamic banks do give
rebates (ibra’) to customers upon
early settlement of financing, based
on the concept of dho` wa ta`ajjal.
This practice was approved by the
Shariah Advisory Council, at its
24th meeting on April 24, 2002/11th
Safar 1423 although it is a departure
from the general principle of sale
prescribed in fiqh muamalat that once
a price is agreed upon, both sellers
and buyers have to honour it. The
bases for this decision are to protect
the public interest (maslahah) and to
keep the Islamic financing products
competitive against their conventional
counterparts. There is also no
uncertainty (gharar) in price as the
clause that promises ibra’ is stated
clearly in the financing agreement.
With the clause, which is stipulated
in the “method of payment” section,
the bank is bound to honour that
promise.
PM_43_0210.indd 43
.
However, the granting of a rebate
should entirely be at the discretion
of the seller and the rate of discount
cannot be specified in the contract.
The contract per se cannot contain a
stipulation for subsequent increases
or decreases in price.
The practice in the industry is that
ibra’ as an early settlement can only
be made available to customers a year
after the contract has been signed.
The discount is calculated using the
declining profit method. As a result, the
customer will benefit from not paying
the profit for the remaining period.
Here is a case study of how ibra’ is
treated by an Islamic bank. A friend
invested in real property and arranged
for Islamic financing for the amount
of RM184,883.
Other information on the
financing is as follows:
Bank’s purchase price RM184,883
Bank’s finance rate (BFR) at
date of transaction 6.75%
Effective profit rate
((EPR): BFR - 1.95%) 4%
BFR as at Feb 2, 2009 5.95%
Ceiling profit rate (CPR) 10.75%
Selling price at EPR 317,757.50
Sale price at CPR
• Disbursed Jan 12, 2009
• Period of financing = 30 years 621,306.00
Redemption sum for early
settlement on Nov 30, 2009
(upon sale of house) 213,507 at EPR
The term of the financing was
concluded at EPR of 4% (or BFR
– 1.95%) subject to CPR. The bank
may at its discretion charge the
price at CPR if it needs to, due to
the fluctuation of the market rate.
At first sight, it may indicate that
Islamic finance allows several prices
to be applicable to a contract, but
it is not the case since the Syariah
resolutions allows Islamic financial
institutions to grant ibra’ where there
are fluctuations in the original price
of EPR.
After 11 months, my friend
sold the house and the amount she
had to redeem was RM213,507.
This means that the profit taken
by the Islamic bank for taking the
risks of financing for nine months
before the settlement of the account
on Nov 30, 2009 was RM28,624
(the difference between the bank’s
purchase of the house from the
vendor of RM184,883 and the
redemption amount she paid back
to the bank of RM213,507), not
including the payments made during
the financing period. The bank
charged an exorbitant amount of
profit and kept my friend in the dark
on how it calculated the amount of
rebate or ibra’. The exorbitant profit
charged might be due to the fact
that she settled the sale price after
a period of less than a year, but she
was never told what the optimal
period to settle the sale price was.
If my friend were to take a
conventional 30-year loan of
RM184,883 at an interest rate of
10.75% , the amount of settlement
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 personal finance

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Q I work as a part-time freelancer. I do not find many guidelines on what

is taxable and what is not. I do not contribute to the EPF [Employees
provident Fund]. Can the following expenses be deducted from my personal
after 11 months would have been
RM184,082, much less than the
settlement she paid. Of course, she
income? also has to take into consideration the
1. Monthly handphone charges 6. Books penalty for early settlement.
2. Dental treatment or medical fees 7. Seminars As the financier decides whether
3. Sports equipment 8. Entertainment or not to give ibra’, it also has the
4. Monthly food 9. Any others? right to determine the method of
5. Monthly petrol calculation and amount. But the lack
of information on how the amount
What items are tax-deductible? is calculated reduces transparency,
Expenditure Tax Comments reducing customers’ trust in the Islamic
deductible? financial system. Several Islamic banks
1. Monthly phone Yes Provided you can show that they are incurred from such as Hong Leong Islamic and CIMB
charges business-related calls Islamic define ibra’ as the difference
2. Dental or medical
between the CPR and EPR but gave no
treatment No These are private expenses. explanation on how the calculation is
done.
3. Sports equipment Yes Your may claim capital allowance for these business
assets if your business is instructing/coaching sports.
Mohd Nasir Mohd Yatim in an
Yes Otherwise, up to RM300 per annum is deductible as article entitled “A Review on Conflicting
a personal relief in arriving at the chargeable income. Issues in a Deferred Payment Sale
Product of a Shari’ah-Compliant
4. Monthly food No This is a private expense. Banking Business” published in the
Yes Deductible if your activity is catering or baking. International Journal of Economics and
5. Monthly petrol Yes Tax-deductible subject to the exclusion of a Finance states that “in exploring the
reasonable portion for private use. practices of ibra’ or rebate, this study
6. Books Yes You may claim up to RM1,000 pa as a personal noted that there was an element of
relief for purchase of publications for personal incompleteness in the documentation
enhancement. of the financing. There was a lack of
Yes You may claim in full if the books are to keep you clarity in the documentation for partial
updated in your business — for example, fashion redemption”. The author added that this
magazines for a self-employed tailor. is contravenes Islam, which encourages
You may claim capital allowance if the books are one to make decisions and act wisely,
reference texts for your business — for example, law objectively, efficiently, effectively,
reports for a freelance lawyer. fairly and justly and not oppressive
7. Seminars Yes If you attend seminars to keep abreast of the latest unnecessarily.
development in your area of expertise. In conclusion, Islamic banks have to
No If the seminar is for personal/private interest — for resolve the issue on how they calculate
example, a seminar on tai chi as you are into staying
ibra’ upon early settlement so that
healthy.
there is fairness and transparency.
8. Entertainment Yes If you entertain your clients and such entertainment
(Note: is related to your business, 50% or 100% of the
Dr Zurina Shafii is an Islamic financial planner
Entertainment entertainment expense is allowable. If you are a
(IFP) and director of the Islamic Finance &
is a complicated freelance writer and have drinks with your sources,
subject tax-wise. 50% of the expense is allowable. If you are a Wealth Management Institute of Universiti
Expert tax advice freelance hairdresser and offer refreshments to your Sains Islam Malaysia (USIM). She holds a
is recommended customers, 100% of the expenses is allowable as the Bachelor’s in Accounting from UiTM and a
if you incur expense “is directly related to sales”. Master’s and a PhD in Islamic Finance from
substantial amounts No If it is social and private in nature. Durham University, UK.
in entertainment.) Comments: pmcontributor@bizedge.com: attn:
Zurina Shafii

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