[official presentation] mubari & co
TRANSCRIPT
The Basis of Islamic Banking
(Riba’, Gharar, Maysir, Khatar & Ethics)
and Comparison With Conventional Banking
SystemPresented by:
Hanis Syahirah binti Zulkefli (1120453)Nur Syakirah binti Maimun Aqsha (1120456)Salmah binti Rabun (1122019)Rafidah binti Arifin (1122022)Nabilah binti Mat Som (1122024)
Riba is an Arabic word, derived from the verb raba that literally means ‘to grow’ or ‘expand’ or ‘increase’ or ‘inflate’ or ‘excess’
In fiqh terminology, riba means an increase in one of two homogeneous equivalents being exchanged without this increase being accompanied by a return.
Riba’
The Prohibition Of Riba’ In Quran “Those who devour riba will not stand except as one whom Satan has driven to madness by his touch will stand. That is because they say: ‘Trading is like riba’, and Allah has allowed trading and forbidden riba. So to whoever takes the admonition from his Lord, then he desists, he shall be pardoned for the past, and his affair is committed to Allah, but whoever reverts, those are the inhabitants of the Fire, to dwell therein forever…..” [2:275-281]
The Prohibition Of Riba’ In Sunnah Another hadith is one narrated by Abu
Sa`id al-Khudri from the Prophet who said:
“Do not sell gold for gold, except when it is like for like, and do not increase one over the other; and do not sell silver for silver except when it is like for like, and do not increase one over the other; and do not sell what is away (from among these) for what is ready”
RIBA AL- NASI’AH
The term nasi’ah means to postpone or to wait and it refers to the time period that is allowed for the borrower to repay the loan in return for the addition of the premium. Hence it refers to the interest on loans. The prohibition of riba al nasi’ah essentially implies that the fixing in advance of a positive return on a loan as a reward for waiting is not permitted by the Shari’ah .
RIBA AL-FADL
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.”
To sum up, riba al-nasi’ah and riba al-fadl are both covered by the verse, “Allah has allowed trade and prohibited riba” (2:275), while riba-al nasi’ah relates to loans and riba al-fadl relates to trade
Although trade is allowed in principle it does not mean that everything in trade is allowed
The Distinguishing Features of The
Conventional Banking & Islamic Banking
(in term of Riba’)
CONVENTIONAL BANKING ISLAMIC BANKING The functions and operating modes of conventional banks are based on man-made principles.
The functions and operating modes of Islamic banks are based pn the principles of Islamic Sharia’h.
The investor is assured of predetermined rate of interest.
In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepeneur)
It aims at maximising profit without any restriction
It also aims at maximising profit but subject to Shari’ah restrictions.
Lending money and getting it back with interest is the fundamental function of the conventional banks.
Participation in partnership business is the fundamental function of the Islamic banks.
It can charge additional money (compund rate of interest) in case of defaulters.
The Islamic banks have no provision to charge any extra money from the defaulters
For interest based commercial banks, borrowing from the money market is relatively easier.
For islamic banks, it is comparatively difficult to borrow money from the money market.
The status of conventional bank has to guarantee all its deposits.
The status of Islamic Banks in relation to its clients is that of partners, investors and trader.
Since Islamic banks do not rent money, and therefore do not charge interest, they have developed some investment techniques such as bai` murabahah, musharakah and mudarabah in order to invest money and make profit
In any of these techniques, profitability and installment of repayment are identified beforehand
Gharar
Ibn Taymiyyah from the Hanbali school defines gharar as “that whose outcomes are unknown”
“Gharar is trading in risk” (El-Gamal, 2000)
“Gharar is a broad concept in that it comprises uncertainty and risk-taking as well as excessive speculation, gambling and ignorance of the material aspects of contract” (Kamali, 2000:96)
Various clarification of gharar (uncertainty) include pure speculation where the outcome depends on chance or gambling, uncertain outcome where the counter-value is uncertain or not realized, inexactitude of object, and unknown future of object.
For example, the Prophet (pbuh) has forbidden the purchase of the unborn animal in the mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver
The Rationale Behind the Prohibition To ensure full consent and satisfaction of
the parties in a contract Full consent can only be achieved in full
disclosure and transparency and through perfect knowledge from contracting parties of the counter values intended to be exchanged
Protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information
Contract of Investment vs. Contract of Exchange Whether a gain is made by one of the
partners at the expense of the other? So long as each partner's contribution
commands a freely negotiated percentage share of the final profit or loss, then neither can be said to have devoured the wealth of the other unjustly
There is certainly a lack of knowledge, but not of the type that benefits one party at the expense of another
Whatever profit or loss arises will be shared fairly between the partners – contract of investment e.g. musharakah investment
Each counter-value must be precisely known at the time of contracting – contract of exchange
Insurance vs. Takaful
An insurance contract contains gharar because when a claim is not made one party (insurance company) may acquire all the profits (premium) gained whereas the other party (participant) may not obtain any profit whatsoever
The concept of insurance where resources are pooled to help the needy does not necessarily contradict Islamic principles
Takaful Islamic Insurance Conventional Insurance Based on mutual assistance agreement and a combination of donation (Tabarru), agency (Wakala) and or profit sharing (Mudaraba) contract between the operator and participants
Based on sale and purchase contract between the insurer and the insured
A contract based on mutual contribution by the participants
Sale or purchase contract between policyholders and insurers
Takaful operators make use of participants contribution only for the intended purpose of “joint guarantee”
The operator use the premium paid by policyholders in investments in order to suit his shareholders needs
Takaful participants have a share in the surplus and profits of the risk and investment funds respectively based on a pre agreed ratio between the operator and the participants
Policyholders have no share in the business of the company
Takaful Islamic Insurance Conventional InsuranceTakaful participants contribute to the scheme as part of fulfilling or adhering to the injunctions drawn from the Qur’an that says “Help one another in goodness and piety but help not in sin and transgression” (Holy Quran 5:2)
The insurer is driven by the desire to make profit for his company without any moral restrictions
Takaful operator is strictly guided to invest his funds in accordance with the provisions of Shariah and that of prudential requirements
The conventional insurance operator is guided by prudential requirements only
Maysir
Also known as qimarDefinition : making an easy gain in
a competitive game at the expense of other participant/s without any effort
Win/lose by mere chance The gain is an unwarranted reward
and so is the loss Maysir (yasara) – the gambler seeks
to amass wealth easily without effort
The Prohibition Of Maysir In Quran
In Holy Quran,
Surah al-Ma’idah,verse 90 – sows the seeds of enmity and rancour among people.
Surah al-Baqarah, verse 219 – in both is greaty sin, and utility for men, but the sin in them is greater than their usefulness.
Gambling is also subsumed under the broader Quranic prohibition of wrongful devouring of the property of others
The risk in gambling is a staged event which is created by the parties and would not exist otherwise
Examples: horse racing, lottery
All agreements and contracts which involve elements of chance that violate the principle of equivalence in commercial transactions and seek unwarranted gain partake in maysir and therefore prohibited
Shariah scholars usually brought up the gambling issue as one of the underlying prohibitions of Islamic finance
Financial transactions implicated are: Insurance Commodity forward trading Financial futures and options
There has been arguments and legal opinions (fatwas) that all these transactions are gambling
Khatar(Risk)
Definition A type of gharar (uncertainty) that arises if
liability of any of the parties to a commutative contract (‘aqd muawadhah) is, or becomes, uncertain or contingent on unforeseen/uncontrollable events. Khatar may also arise if delivery of one of the counter values (in an exchange-based contract/commutative contract) is uncontrollable by any party, or if the object of sale or the amount of payment (thaman/badal) is undetermined.
Khatar خطر) ) is an Arabic term for harmful or dangerous risk.
Ibn Taymiyyah (728H-1328G) defined risk (khatar) asfollows: “Risk falls into two categories: commercial risk,where one would buy a commodity in order to sell it forprofit, and rely on Allah for that. This risk is necessary
forMerchants, and although one might lose sometimesthis is the nature of trade. The other type of risk is that of gambling, which implies eating people’s wealth fornothing. This is the type that Allah and His Messengerpbuh) have prohibited.”
Types of risk
Commercial
Gambling
Risks in islamic banking
Financial Credit Market Business Treasury Governance
Risks in conventional banking Market risk Credit risk Liquidity risk Operational risk Other types of banking risks
Conclusion
Risk in any transaction may exist due to many reasons
It can be due to natural causes (e.g. good weather conditions or not), time allocation outcome, and market outcome
The existence of all these risks is inevitable to everyday transaction
As such, the existence of risk alone does not render a contract invalid
Risk is something that is beyond our control.
Ethics in Conventional Bank &Islamic Bank
Introduction
What is Ethical Banking?
Ethical banking is the term that encompasses any banking system that embraces environmentally and socially conscious practices. While the banks still try to earn profits, they try to do it in the way that's consistent with their practices.
The key to ethical banking is deciding on the common set of principles and sticking to them no matter what.
Differences
Risk vs. CapitalISLAMIC BANK CONVENTIONAL BANK
Islamic bank will mediate the relationship between its aggregate depositors and its aggregate borrowers
Conventional bank will take ownership of the depositors' funds and become theborrower's partner
If the Islamic bank is profitable, the depositors are entitled to a share of those profits
conventional banking format, the ownersof a bank are more at risk than the depositors
Islamic banks located in the developing world do not offer such guarantees. Even if such systems were available, it is doubtful that they could offer similar levels of security
the support provided by central banks to depositors in case of bank failure.
work well in systems where the entire economy is based on Islamic principles and all the banks are Islamic (Pakistan & Iran)
dissuades poor judgment by forcing owners to bear the financial burden of those poor decisions while generally shielding depositors from the same level of loss
PricingISLAMIC BANK CONVENTIONAL BANK
computes its pricing as profit sharing ona given instrument or transaction
price its services according to what the market can bear
This minimum is computedas follows:• It must cover the cost of
running the bank. • It must permit the build up of a
reserve for bad loans. • The bank must then estimate
its profit and thus the return to its shareholders.
• The cost of regulatory processes, if any, must be included.
• It must estimate the amount of profits it will have to pay to its depositors to keep them as depositors.
Pricing must: • cover the expense of running the
bank, including staff salaries, rent, depreciation of equipment, communication expenses, etc.;
• allow the bank to build a reserve for bad loans;
• provide shareholders with a minimum return on their investments that matches alternative investment potential;
• account for regulatory and FDIC insurance processes; and
• cover the cost of funds of the bank: interest payments to private and corporate depositors and payment for borrowings from other banks, including the central bank.