2.1 INTRODUCTION – PROHIBITION OF RIBA
2.1.1 Riba In Holy Qur’an
Since the ages of legacy by Prophet Muhammad S.A.W., he has encourage and forbid public to never take riba (interest) in debt and also in doing business. The societies of Arab Jahiliyyah in the past were among the peoples in Arabic land before the birth of our Prophet was actively charged higher interest or riba in doing their business. Until Allah S.W.T sent the message to the Prophet in Holy Qur’an (Surah al- Baqarah, verses 278-81):
O believers, fear God, and give up the riba that remains outstanding if you are believers. (278) If you do not do so, then be sure of being at war with God and His Messenger. But, if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it. (279). If the debtor is in difficulty, let him have respite until it is easier, but if you forego out of charity, it is better for you if you realize. (280). And fear the Day when you shall be returned to the Lord and every soul shall be paid in full what it has earned and no one shall be wronged. (281).
2.1.2 Riba In Hadith
Moreover, Prophet Muhammad S.A.W. also encouraged his followers to not accepting riba in dealing business and loan. It is clearly stated in the hadith as from two examples below:
From Abu Hurayrah: The Prophet, peace be on him, said: “On the night of Ascension I came upon people whose stomachs were like houses with snakes visible from the outside. I asked Jibrail who they were. He replied that they were people who had received riba.” (Ibn Majah, Kitab al-Tijarat, Bab al-taghlizi fi al-riba; also in Musnad Ahmad).
From Abu Hurayrah: The Prophet, peace be on him, said: “God would be justified in not allowing four persons to enter paradise or to taste its blessings: he who drinks habitually, he who takes riba, he who usurps an orphan’s property without right and he who is undutiful to his parents.” (Mustadrak al Hakim, Kitab al-Buyu).
From the two examples above, we can conclude that any business conducted that consists riba in it will get sins and also do not get any blessing from Allah S.W.T…
2.1.3 Why Riba Was Prohibited?
Loan = 25000
To pay = 27500
Loan = 35000
To pay = 38500
To understand more about riba, suppose BANK ABC creates Ringgit Malaysia 100,000 and supplies it at an interest rate of 10% per annum and remember there is no money available in the economy from any other source. The bank has taken substantial collateral or guarantee as security of its money from each borrower.
Money creator & supplier
Loaned = 100000
Receivable = 110000
Loan = 40000
To pay = 44000
Diagram 2.1.3: The Borrowers Intake Loan and Repayment Liabilities at the end of the First Year.
From the diagram above we can see that at the end of the first year, a combined sum of Ringgit Malaysia (RM) 110,000 is due on all borrowers to repay to the loaning bank.
But the money available in the economy is only RM 100,000 as the bank is only supplier of money, so from where the rest 10,000 would come that is the difference in the borrower’s intake and total repayment amount…… from NOWHERE.
(HazaRiba.com; Qazi Irfan, 2002)
This is happening every where in this world from USA to the smallest country on this earth. This artificial scarcity of money is the main cause of people’s problems from hard struggle for their living and to the loss of happiness from their lives.
In a Riba (interest) based system, people are not aware of this foul play – borrowers think that they will manage to repay the principal plus Riba (interest) as they think it would be coming from some where else, but the fact is – every borrower would be in battle with others where some borrowers have to lose in order for others to win, some would fail to pay their loans in order for others to get the sum they need to pay off the Riba (Interest
(HazaRiba.com; Qazi Irfan, 2002)
Riba was prohibited just to prevent the creation of “extra liability/demand” because that is fake and “does not exist” physically, this artificial “extra liability/demand” creates scarcity of the produce in the society and unjustly accumulation of the produce in few hands. This is unfair and against the nature, so ALLAH prohibited Riba (interest, usury) very strictly to stop this criminal action.
(HazaRiba.com; Qazi Irfan, 2002)
2.1.4 The Definition Of Riba
A forced means demanded, requested, agreed etc.
Any of the above or similar words which are related with “forced” category that define and create a liability on other party.
Increase in value means the increase in terms of value which comprises the quantity and the quality, just increase no matter how small or large it is and how that increases is defined.
The medium of exchange means any thing that can serve the purpose of exchange of good(s) and/or service(s) in the society at any level i.e., international, national, or local.
(HazaRiba.com; Qazi Irfan, 2002)
Discounting is opposite of a Loan transaction, the following comparison may be helpful to emphasize on this difference:
Table 2.1.5: Table of differences for loan transaction and discounting transaction
When : Capital is in-hand
When : Capital is not in-hand
Scenario : I give you an amount of 100,
after one year, I receive 110
Scenario : I give you a Bill of 100, I receive
90 on spot, after one year, you receive 100
Analogy : I sold 100 for 110
Analogy : I sold 100 for 90
An increase of 10 is noticed
A decrease of 10 is noticed
This increase of 10 is an extra liability
created on the borrower
This decrease of 10 is basically sharing of
what is available
Nature: A loan is required when the wealth has to be created.
Nature: Discounting is required after the wealth is created.
Activity is dependent on loan
Activity is already done.
Moreover, what is important is the adherence to the principles of sharia. Easy principles to understand are the prohibition of financing or investing in activities that are banned (casinos,pork,alcohol,gharar speculation). Contracts need to be certain, which should be obeyed to the instructions by the lawyers- no gambling.
(HazaRiba.com; Qazi Irfan, 2002)
2.1.6 The Meaning of Bay’ al-‘Inah
Bay al-inah is generally known as sale based on the transaction of Nasi’ah (delay). The (prospective) debtor sells to the (prospective) creditor some object for cash which is payable immediately; the debtor immediately buys simultaneously the same object for a greater amount for a future date. Thus the transaction amounts to a loan. The difference between the two prices represents the interest. Such contract was evolved in the early period of Islam and it exists for the fundamental reason that a loan for interest is forbidden because it is equivalent to usury (riba). In this contract, there is an economic interest for both the borrower and the lender, which at the same time circumvents the prohibition of usury. (Saiful Azhar Rosly & Mahmood M. Sanusi (1997)).
2.1.7 The Shafi’I View
According to Shafi’i school such sales are to be allowed because, in the words of Imam Shafi’I, contracts are valid (Sahih) by the external evidence that they were properly concluded: the unlawful intention (niyya or qasd) of the parties is immaterial, it does not invalidate their act, unless expressed in that act. Al-Shafi’I illustrated his teachings with following example which concerns the marriage of a man who intends to keep his wife for only a short period of time. (Saiful Azhar Rosly & Mahmood M. Sanusi (1997)).
2.2 FACTOR OF CHOICE FOR ISLAMIC LOANS & FINANCING
Meanwhile, the existence of so many financial institutions and banking sector industry in Malaysia have given a lot of choices for customers to take which one that is suitable and fulfill their criteria. Is it due to the banking products itself? Or is it due to good customers’ services? Or is it because of the efficiency of the services?
According to Dar and Presley (2000), an Islamic bank is an intermediary and trustee of other people’s money with a key difference, in that it shares profit and loss with its depositors. Additionally, the Islamic banking operation must abide by Islamic law commonly known as Shariah. Therefore, a more concise meaning of an Islamic bank is as follows: it is initially a banking business with theories behind its products, as well as the ability to put such theories into practice as far as their products are concerned. The products and operations of the business must follow the permissible rules as proposed through Ijtihad, which is in line with the Shariah Islamiyyah. Islamic banks have to operate under a very strict religious guidelines, which are based on different principles than those of conventional banks (Haron, 2005; Ghani, 1999).
These principles are:
prohibition of interest in all forms of transactions – Islamic prohibits interest due to the fact to reduce the concentration of wealth in the hand of few. (Khir et al., 2007; Ahmad, 2000);
undertaking business and trade activities on the basis of fair and legitimate (halal) profits- Islamic allows trade activities but not to interest taking activities. (Khir et al., 2007; Mirakhor, 2000;Warde, 2000);
payment of the poor due (zakat) from their operations (Lewis and Algaoud, 2001), zakat is the most important instrument for the redistribution of wealth. This is a compulsory levy and it constitutes one of the five basic tenets of Islam;
prohibition of exploitative monopoly of resources or economy activities; and
cooperation in the development of society, by investing only in businesses and trades, which are not prohibited by Islam.
2.2.1 Factors Of Choice For Banking
The investigation of choice criteria for Islamic banking by Erol and El-Bdour (1989) discovered that the most important criteria considered by customers in patronizing Islamic banks are the provision of fast and efficient services, the bank’s reputation and image and confidentiality. Indeed, provision of fast and efficient services are always regarded as high-quality services by bank customers who value time and expect the transaction to be completed as quickly as possible. Therefore, it is argued here that in order to survive, Islamic banks should not rely on religious factor alone since other factors as stated earlier are also important.
Moreover, Haron (1994), Ahmad and Haron (2002), Dusuki and Abdullah (2007) identified three studies in Malaysia on banking selection. The recent work by Dusuki and Abdullah (2007) investigated the banking selection in Peninsular of Malaysia or West-Malaysia and concentrated its sample to Kelantan, Penang, Kuala Lumpur and Johore. In more detail, they found that financial reputation and quality service are the key factors affecting bank customers’ decision to select banks. Furthermore, they also found that other factors such as good social responsibility practices, convenience and product price are important factors in explaining why customers choose banks.
Furthermore, Devlin and Gerrard (2004) presented an analysis of trends in the relative importance of bank choice criteria. In particular, the researchers provided findings from 7,033 consumers and showed that the influence of recommendations is now the most important choice criterion. Other factors, which have also increased in importance, are the offering of incentives, the wide product range, the interest rate paid and the relevant fees and charges.
A study by Metawa and Almossawi (1998) pointed out that provision of Shariah compliant products and services were highly regarded by majority customers while selecting banks. Other factors were the reward given by banks, family influence, convenient location and customers’ education and knowledge.
Boyd et al. (1994) found the five most important factors affecting bank customers’ selection for bank are:
(1) Bank reputation.
(2) Interest on savings accounts.
(3) Interest charged on loans.
(4) Quick service.
(5) Location in the city.
Many of the banking patronage studies identify a number of factors, such as cost and benefits, good service delivery (fast and efficient), size and reputation of the bank, convenience (location and parking), and friendliness of bank personnel, as either equally if not more important criteria for the customers in selecting a particular Islamic bank. (Asyraf Wajdi Dusuki and Nurdianawati Irwani Abdullah, November 2006)
2.3 ISLAMIC FINANCE IN GLOBAL
2.3.1 Islamic Finance in France
In a global recession, Islamic finance looks an attractive business. Worldwide sharia-compliant assets grew by 29% over the past year to $822 billion, according to The Banker. French officials fret that Paris is missing out on its share, particularly to London, whose multicultural approach gives an open-arms welcome to Islamic investors. To catch up, the French have pushed through changes to their tax and legal codes.
For Christine Lagarde, the finance minister, who has pushed to open France up to Islamic finance, it is a matter of keeping Paris a competitive financial centre. The government is backed by French financiers who see a handy new source of income.
Yet for many politicians the idea of incorporating sharia, even if only technically, is a dangerous breach of France’s secular principles. Some Islamic scholars fear that a more open attitude could also make it easier for radical Islamists to gain a foothold in France.
(Adapted from: The Economist; Islamic finance in France Sharia calling, A political row about Muslim law; published on Nov 12th 2009)
2.3.2 Faith in Islamic Finance
Islamic finance rests on the application of Islamic law, or sharia, whose primary sources are the Koran and the sayings of the Prophet Muhammad. Sharia emphasises justice and partnership. In the world of finance that translates into a ban on speculation (or gharar) and on the charging of interest (riba). The idea of a lender levying a straight interest charge, regardless of how the underlying assets fare in an uncertain world, offends against these principles—though some Muslims dispute this, arguing that the literature in sharia covering business practices is small and that terms such as “usury” and “speculation” are open to interpretation.
There is no ultimate authority for sharia compliance. Some worry that this may hold the industry back. Malaysia has tackled this by creating a national sharia board. Some industry bodies, notably the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain, are working towards common standards. That a few scholars dominate the boards of the big international institutions also helps create consistency. But differences between national jurisdictions—between pious Saudi Arabia and more liberal Malaysia, say, are likely to remain.
Both of these countries feature in the top three markets for Islamic finance, measured by the quantity of sharia-compliant assets (see table).
Table 2.2.3: League of Nations
Top is Iran, although international sanctions keep its industry isolated. The Gulf states, awash with liquidity and with a roster of huge infrastructure projects to finance, are the most dynamic markets. Britain is the most developed Western centre, although France, with a much larger Muslim population, wants to close the gap.
(Adapted from: A short introduction Faith-based finance, the whys and wherefores of Islamic finance, published on Sep 4th 2008)
2.3.4 Islamic Banking and Finance in Western Countries
Islamic banking and finance activities are in an increasing stage in Australia. The Muslim Community Cooperative Australia (MCCA) has been offering Islamic saving and investment opportunities to Australian Muslims since 1989. MCCA currently manages assets worth AUS$28.536 million (US$ 23.09 million) and it has over 8000 members. It is actively involved in Islamic finance activities in the property and real estate sector. Another conventional-based financial institution – APV Sydney Finance – also provides Islamic finance services to Australian Muslims. It approves the Islamic property loans from AUS$50,000 (US$40,453) to AUS$200,000 (US$161,812). National Australia Bank is developing its own systems to introduce Islamic banking and finance products in Australia. With the improving and promoting Islamic products by local Australian banking sector, it creates good opportunity for Australian Muslims to invest and savings. (M. Mansoor Khan and M. Ishaq Bhatti, 2006).
188.8.131.52 United States of America & Canada
The demand for Islamic bank and finance in the US also increased from time to time. This increasing has surprised one of the banks in the United States since many borrowers is getting aware and demand for interest-free loan.
The bank started looking into options. As word got out, the demand exploded showing there really was a need, and we were in a good position to help. We had done non interest-based financing before for the observant Jews, but the strong Muslim demand for such products surprised us (Rushdi Siddiqui, 2011). Islamic banking and finance has older and stronger roots in the USA. First and foremost, American Finance House LARIBA, a locally established financial institution in California, has been engaged in financing of autos, home mortgages, medical clinics and small businesses based on Islamic joint venture or leasing model since 1987. (M. Mansoor Khan and M. Ishaq Bhatti, 2008).
University Bank of Michigan established the first Islamic banking subsidiary – University Islamic Financial – in 2005 which offers Shariah compliant products and services that include deposits, home finance and Mutual Funds to Muslims in the USA. (M. Mansoor Khan and M. Ishaq Bhatti, 2008).
Moreover, one of the famous bank in the United Stated of America also taking part in this Islamic financing industry. Devon Bank has transformed itself into a specialist in the kind of no-interest Islamic financing the customer was seeking. Islamic financing now accounts for more than 75% of the bank’s mortgage portfolio, and Devon has made mortgages compliant with Islam’s sharia law in 36 U.S. states, Loundy says. (Paul Wiseman, 2008).
2.3.5 Islamic Finance in South East Asia
184.108.40.206 Islamic Finance in Indonesia
In Indonesia, the government also takes part in promoting banking products based on Shariah principles. The increasing of borrower in applying Islamic loan has caused the government to develop two banks; Syariah Mandiri and Bank Syariah Mega Indonesia. (M. Mansoor Khan and M. Ishaq Bhatti, 2008).
Indonesia, the biggest Muslim populous country of the world, embarked upon the Islamic banking venture with the establishment of Islamic bank – Bank Muamalat Indonesia – in 1992. Bank Indonesia has devised a roadmap to ensure that the Islamic banking industry has a share up to 6 per cent of the total Indonesian banking market by 2011 (Hairsman, 2006).
There are growing opportunities to invest in Islamic stocks, bonds and money market instruments in Indonesia. The Indonesia Stock Exchange offers 242 Shariah-compliant stocks and Jakarta Islamic Index of 30 Islamic securities to Muslim and other investors. Jakarata Stock Exchange has observed a rapid growth in Sukuk trading over the years. (M. Mansoor Khan and M. Ishaq Bhatti, 2008).
2.4 ISLAMIC FINANCE IN MALAYSIA
2.4.1 Malaysia Rules in Islamic Finance
Indeed, Malaysian government also taking part in promoting and advancing its economy by empowering their banking products. Due to the recession impact, Malaysian government agreed to use and promoting shariah-based products in combating the higher interest that burden to the borrowers.
Islamic bonds, or sukuk, pay holders a share of the issuer’s profits rather than interest. For instance, a sukuk holder might have a claim to a portion of toll revenues from a highway project. This year, international borrowers have sold $9.8 billion of Islamic bonds, with 72 percent of that being issued in Malaysia, according to data compiled by Bloomberg. (Dana El Baltaji and Soraya Permatasari, 2010)
Worldwide, assets that comply with shariah (Islamic law), including deposits at Islamic financial institutions, were pegged at $950 billion by Moody’s and could grow to $1.6 trillion by 2012, according to the Kuala Lumpur-based Islamic Financial Services Board and Jeddah-based Islamic Development Bank. (Dana El Baltaji and Soraya Permatasari, 2010)
2.4.2 Southern Finance
The developments of Islamic finance industry also give the opportunity and road to local financial institutions in Malaysia. As we can see nowadays, Bank Islam, Bank Rakyat, CIMB Bank and many other banks also promoting a variety of shariah-based products. Same thing goes to the SOUTHERN Finance Bhd. The institution has forecast a 20 per cent loans growth in Islamic financing this year. Last year, Islamic financing constituted 12.5 per cent of its total loan base.
Chief executive officer Abdul Rahim Mohd Zin said with the opening of its Islamic banking centre as well as aggressive marketing and promotion, Southern Finance will be able to meet the target.
“Our Islamic financing products, especially for vehicles and housing, have achieved tremendous growth and I expect it will continue to contribute significantly to the loans growth,” he said. (New Straits Times, published on 14/01/2002)
220.127.116.11 Sabah Credit Corporation
Sabah Credit Corporation has launched a new product based on Syariah principles. The i-Executive is a personal loan which was offered on December 1, 2010 is based on Bai’ Inah (Borneo Post, 2010). Under the new product, it allows personal financing up to RM200, 000 with profit rate low as 3.25 per cent (recently up to 4.85%) for short term and up to 5.25 per cent.
“It is our expectation that the Syariah compliance product i-Executive will be widely accepted in the market and will offer to the public a much cheaper alternative to borrowing from the Alongs and the expensive credit cards,” said by Datuk Vincent Pung, SCC chief executive officer.
Moreover, AmBank Group partner with SCC were in the final stage of preparation to launch SCC’s RM1 billion Sukuk issuance programmed. It is about 70 per cent of the RM1 billion issuance will be used to replace their conventional financing portfolio and about 30 per cent for new business. Furthermore, Ambank Group chairman Tan Sri Azman Hashim said Sukuk issuance programme would further deepen and strengthen Malaysia’s growing Islamic capital market and also to possess Malaysia as a leading Islamic financial centre.
With the partnership between SCC and Ambank it is hopefully that public can get more benefits from the launched of the new I-Executive product which is based on Syariah principles.
(Adapted from: The Borneo Post; RM100 mln Islamic banking facilities signed, by Chok Sim Yee published on November 25, 2010)