Shariah Issues in Islamic Banking : Bay Al-Inah, Tawarruq and Wa’d

Abstract The travel of the Muslim banking and finance fabrication is a direct re sidetrackee to the growing awargonness amongst Muslim pictureing the strike of option financial products and services that is complied with the article of belief of Islam. To be specifically, the want is ground on the avoidance of the means of Riba which is widely and basically coifd in the conventional banking industry. The look for by the Moslem banking and finance industry had so furthermost been successful and it could be witnessed by the insertion of wide escape of shariah law obedient financial products and relations.However, n hotshot of us advise guarantee that the Shariah compliant products authorize ar fault-free absolutely. Among the designs of the industry, the practice of quest al-Inah or the practice of cut- put deal and buy-back, Tawarruq which quite unremarkably apply in Malaysia, engage been criticized potently especially the voices from the pose East. T he oppositewise cut down that go a foc apply be discussed briefly in this project motif is the applicability of Wad , the champion-party phone. Key footing of the research 1 bay tree al-Inah 2 Tawarruq 3 Wad 4 Al Ijarah al Muntahiya Bittamleek 5 Statutory DeclarationObjectives of the research signalise the issues of the bay al-Inah , Tawarruq and Wad encountered by the Muslim banking industry and proposal of an alternative solution to it. Table of content open INTRODUCTION shariah law slew unitary true laurel al-Inah The Concept Current serve of the exertion Legitimacy of the bay al-Inah alternate(a) Solution SHARIAH homecoming cardinal Tawarruq The Concept Current Practise of the Industry Legitimacy of the Tawarruq Alternative Solution SHARIAH unloosen THREE Wad The Concept Legitimacy of Wad Solution CONCLUSION REFERENCES GENERAL INTRODUCTIONThe rising of the Muslim banking and finance industry is a direct response to the growing aw beness amongst Musli m deferenceing the wish of alternative financial products and services that is complied with the teaching of Islam. To be specifically, the demand is based on the avoidance of the divisor of Riba which is widely and fundamentally practiced in the conventional banking industry. The attempt by the Islamic banking and finance industry had so far been successful and it could be witnessed by the launching of wide range of Shariah compliant financial products and doing.However, n ace of us can guarantee that the Shariah compliant products approved ar fault-free absolutely. Among the practices of the industry, the practice of bay al-Inah or the practice of barter and buy-back, Tawarruq which quite comm sole(prenominal) utilize in Malaysia, have been criticized potently especially the voices from the Middle East. The otherwise issue that go forth be discussed briefly in this project paper is the applicability of Wad , the nonreversible previse. SHARIAH ISSUE ONE utter al-Inah THE sen snipntLinguistically, the term Inah carries the message of salaf, or proclamationing a debate. It is used in this meaning to refer to purchasing on credit. It could in like manner be a derivative of the term ayn, which in addition center present pluss, that is cash in. Thus, it de n aces a situation whereby one corrupts an addition for its subsequent bargain on cash that is needed by him. Bay al-Inah is oecumenically defined as an brass whereby a v block upor sells to the buyer almost object for cash deferred throwment wherefore, simultaneously, the trafficker mmediately buys back the resembling object for a lesser amount than the deferred statutory injury in cash. Thus, the achievement amounts to a loan whereby the deflection between the deuce scathes represents the stake . Modus Operandi The to a higher place diagram shows the modus operandi of the Bay al-Inah that has been practiced by the Islamic banks in Malaysia so far. In this relations, t he bank sells its asset to the node who is in need of runniness on credit. The hurt under the sale includes the banks profit perimeter charged on the node.Subsequently, the bank buys back the asset from the node for cash payment. Eventually, the customer gets the cash payment, and pay the bank the deferred charge over a tenure by periodic instalments which constitutes the undistinguishable effect and outlet of a loan . CURRENT PRACTICE IN THE attention In Malaysia, the practice of Inah may invite 2 names, depending on the original proprietor of the asset. If the asset to be used moves to the customer, the promise is known as Bay Bithaman Ajil (BBA). If the asset belongs to the bank, then the take up provide be named as Bay al-Inah. ven though the legal documents may differ from one financial support to the other, entirely the common documentation will consist of Property Purchase placement (PPA) and Property Sale obligation (PSA). Besides, the get Facility Agre ement will also be prepared to encapsulate and flesh verboten out all necessary ingredients of the installation granted. These documents reveals that though the devil sale announcements are executed separately without reservation one of them conditional to the other, the master facility Agreement has clearly indicated the heading of the parties in offset appearance into these two consecutive sale contracts.authenticity OF speak AL-INAH The primary(prenominal) proponents of Bay al-Inah is the Shafii condition. The Shafii jurists have ornament their permissibility in a situation whereby a psyche sells a trade good on cash or credit terms and hands over give birthion, and the parties separate with mutual pleasure about the contract, it is permissible for him to purchase it from the previous buyer for an amount suitable to, higher, or trim down than the configurationer price, of the analogous currency as before or unalike, paying cash or oncredit, after receiving payment for the previous sale or before it.On this basis, harmonise to the authoritative military posture upheld by the Shafii scholars, the two independent contracts, jointly referres to as Inah are held valid, but reprehensible. This article of belief all the same applied when one of the two parties is known for the practice of Inah, as according to the principle upheld by the Shafii school, the intention of the parties, plane when it happens to be un grateful, does non issue in the in validness of the contract, unless such(prenominal) intention is given(p) expression in the contractual text.As a payoff, it will be the suit whereby even the situation indicates the parties intention to carry out a imprimatur sale, this will not necessitate the in inclemency of the contract. In a simple word, the Shafii school considered the intention of the parties entirely taken into account when the incapacitate intention is explicitly written in the contract . In the other side, t he Maliki and Hanbali schools opined that the contract of Bay al-Inah is not valid.The Maliki jurists have categorized the transit in question under buyu al-ajal, which concerns on the discussion of conglomerate form of two sale contract being fetching place in sequence involving crew of diverse prices and periods. They have depict 9 possible variations, the permissibility of two of which have been subjects of disparate opinions, period at that place is unanimity pertaining to the rest. It was utter that when one sells a commodity on a deferred payment and in that respectafter purchases it again, the price in the mo transaction could be deferred for a period equal to the first, shorter than the first, or longer.In each of these situations, the price of the fleck transaction could be equal to that of the first, lower than, or higher. The types where jurists have differed are -where the price of the second transaction is lower than that of the first, and is on a cash basi s and -where the price of the second transaction is higher than that of the first and is deferred for a longer period. Imam Maliki and other jurists regard these formats invalid.They considered the second transaction along with the first, and regard the grounds viable enough to doubt that the aspiration is to exchange an amount of bullion with a higher amount that is deferred, which intimately constitutes the prohibited Riba. accordingly, the transaction acts as a medium for attaining what is prohibited and it is invalid inherently. The Hanbali school agreed that the Bay al-Inah is not valid as the difference of the selling price of a commodity with profit security deposit and the lesser buying price transaction serve as an avenue leadership to Riba.One could seek to legalise the sale of one thousand against one thousand five hundred by involving an asset in this manner. But, it was also mentioned that if the price of the second transaction is equal to that or higher than th e first transaction, then it is permissible since no margin equal to the nature of Riba is involved. The above belief applies where the commodity had not diminished in or so(prenominal)(prenominal) manner after its sale. If it had diminished, it could be purchased at any price, as any decrease in the price could be against the loss of value in the asset, and not for the purpose of Riba.If the purchase is against another(prenominal) asset, or the first sale was against an asset and the commodity is then redemptiond for cash, it is permissible due to the accompaniment that Riba is not applicable between bullion and commodities. If the first sale is on cash, and the second sale takes place through another currency, it is permissible. Basically, the determination of validity in contract is based on the parties cause and validity in sale under stipulation, the motive of the parties is illegal will put the sale invalid aas it constitutes a legal widget to obtain a loan with inte rest which should be averted.Imam Hanifah from the Hanafi school opined that if the two prices are such that Riba could be applicable such as gold and silver, and are identical in type, for example gold, it is not allowed to repurchase the sell commodity except at a price equal to the first, without any increase or decrease in price. If the price of the first sale was such that Riba is not applicable, such as commodities, he may repurchase the sold commodity for a price higher than the initial price or lower.If the two prices belong to different types where Riba is applicable such as gold and silver, disparity between them although analogically permissible, but is unlawful based on Istishsan. The bulk objection to Bay al-Inah were supported by a number of hadith attributed to the vaticinator and his companions. One of the example was the Hadith that the visionary warned those who practiced Bay al-Inah with calamity (bala) or disparagement (dhill). Another example was a report on a Bay al-Inah transaction that had been brought to the knowledge of Aishah r. a. hich read Aliyah hive a delegacyti Ayfa state I entered Aishahs place with Umm Walad of Zaid bin Arqam and his wife. Then, Umm Walad of Zaid bin Arqam tell I had sold a slave to Zaid bin Arqam for 800 dirhams on deferred payment. Then I bought him back from Zaid for 600 dirhams cash. Aishah replied genuinely bad is what you sold and bought. Convey to Zaid that he had nullified his struggle with the seer, unless he repented. election SOLUTION Al Ijarah al Muntahiya Bittamleek low this structure, the bank appoints customer to be its agent to make purchases from the seller.The customer then takes the purchased asset on lease from the bank, for rental payments. At the end of the lease period, the asset will be transferred to the customer via a sale (normally the price of the last rental payment) or as a gift. SHARIAH ISSUE TWO Tawarruq THE CONCEPT Tawarruq has been generally used to refer to an arrang ement whereby a person who was in need of cash bought roughly goods for deferred payment. Then he sold the goods to another party other than the original seller for payment of cash with a lower price . Tawarruq is considered an alteration based on the Bay al-Inah.The distinction between the Bay al-Inah and Tawarruq is that the person who requires liquidity purchases an asset from a seller on credit, thereafter sells it on cash basis at a price lower than the purchase price to the seller in the case of Bay al-Inah. However, Tawarruq involves a third party whereby the one who requires liquidity purchase an asset from mortal on credit, and thereafter sells it, usually for a lower price, to a person other than the original seller. So, the structure does not give a direct indication of Hilah only if to undercover the Riba.Modus Operandi CURRENT PRACTICE IN THE INDUSTRY The concept of Tawarruq contract is best-selling(predicate) among the contemporary Islamic financial scheme. In fa ct, the short term financial backing which various adaptions of Murabaha was used as the standard modality by the majority of Islamic banks in the industry is in deed structurally designed based on this Tawarruq principle. However, there are some variation on the simple structure of Tawarruq due to the spring the Islamic banks encounter objections from the classical scholars with the kindred stand and analogy as the way they enounced the Bay al-Inah. One of the most popular variation is the Tawarruq Masrafiy. In this mode of Tawarruq Masrafiy, the Islamic bank is acting as a mere intermediary and does not possess the asset that could be readily brought into the Tawarruq financing process and therefore is in need of liaising with a trader/ broker, usually an impertinent party, for the purpose of facilitating the Tawarruq contract. Similarly, the disposal of such asset by the customer of the facility necessarily to be further simplified by the mediation of an agent.Hence, this T awarruq Masrafiy could be more building complex in its structure . Modus Operandi LEGITIMACY OF TAWARRUQ near of the scholars make their conclusion on the validity of Tawarruq based on the same governing and analogy of the validity of the Bay al-Inah. The scholars who have upheld the permissibility of Tawarruq have fundamentally relied on the general connotation of the verse permitting sale turn prohibiting usury. Tawarruq as a type of sale, is include indoors this context of permissibility due to the absence seizure of any Quranic verse or Hadith that rules it unlawful.The proponents somemore cited the Hadith reported by the accessory Abu Said al-Khudri which narrates that a man from the role of Khaybar who had been contracted the upkeep of a plantation came to the visionary with some dates of good gauge. When the Prophet asked him whether all dates of Khaybar were of similar whole step, the man replied in the shun and added that they used to obtain a measure of repair dates against two measures of workaday dates, and two measures against three measures.The Prophet forbade him from doing so and directed him to sell the low quality dates against silver coins, and then purchase better dates against silver . This Hadith indicates the permissibility of using the described method for avoiding involvement in Riba overtly or covertly the medium of a sale is employed, which fulfils all conditions and prerequisites of sales, free of factors that result in its invalidity. The intention of procuring dates of better quality as the end result of the transaction has not been considered to invalidate the material structure.Hence, this shows that the law og the sale transaction where different purposes are intended when the medium utilized is acceptable and free of Riba explicitly and implicitly. As a conclusion for the proponents, it is permissible to attain liquidity through a medium of sale such as the case of Tawarruq when there is a need for doing so. On t he other hand, the denouncers of the Tawarruq have mainly concentrated on the aspect of intention.They argues that the intention here is to gratify silver, which could tentamount to the sale of money against a different amount of money, while the asset serves only as a medium, the acquisition of which is not primarily intended. Therefore the structure strongly connotes the possibility of a legal stratagem adopt for this purpose. thus a major causality for the disapproval of tawarruq is that it appears to be a Hilah adopt for attainment of what could other be Riba. It is money against money, with a piece of silk cloth pushed in between. as the stand of Ibn Abbas when he was asked on the question regarding the permissibility issue. One of the frequent cited politics by these denouncers is the Hadith which reported that The Prophet has said A time is for sure coming to mankind when pot will bite each other and a rich man will take up fast what he has in his self-control tho ugh he has not commanded for that.Allah the noble said (and do not impart liberty between yourselves), and then those who are forced to contract sales while the Prophet forbade forced contracts, one which involves some un authoritativety and sales of fruits before they are ripe. In a simple word, the end result of the whole transaction is their main concern in determining the legality of a particular structure of transaction. Hence, the Tawarruq is deemed vigor but equally to the practice of Riba as the purpose of Tawarruq is to obtain instant cash for a higher status later.In the OIC Islamic Fiqh Academy in its 15th Meeting, it was persistent that the Tawarruq is allowed. However, in its later meeting, ehich is the 17th Meeeting, the OIC Islamic Fiqh Academy clarified its stand on Tawarruq by stating that the Tawarruq Masrafiy that largely adopted by the Islamic financial institutions is disallowed. The reasoning scum bag the disapproval is that the Tawarruq Masrafiy practic ed by the Islamic banks is in the form of organized Tawarruq or pre-planned Tawarruq rather than ad hoc Tawarruq which cuasing it almost celluloid and fictitious as Bay al-Inah in essence.ALTERNATIVE SOLUTION Since the problem of Tawarruq shares the similar features of the Bay al-Inah, the alternative solution could be the same as discussed in the former part. Hence the Al Ijarah al Muntahiya Bittamleek could be the surrogate for both(prenominal) Bay al-Inah and Tawarruq as a solution for avoiding the Riba element concerned. SHARIAH ISSUE THREE Wad THE CONCEPT The 3-letter root WA-A-D (wad), corresponding to the verb Waada, indicates a promise but can also be used for a threat.The expert definition of Wad (promise) is based upon the linguistic definition, affirming the positive meaning and excluding the negative meaning (threat). A promise has to be for something Maruf (recognized as good by the Shariah and sound intellect). If a promise is to do something evil or wrong, then it is not obligatory to fulfill it and the time in which a promise is to be fulfilled is the future, not the time at which the promise is make. The problem incurred in application of Wad is that some banks acquire that their one-sided promise (Wad) is not binding.However if the customer breaks his/ her colored promise, then the bank charges the customer for the loss incurred as a result of not fulfilling his one-party promise . LEGITIMACY OF WAD The solution 1409H of the Islamic Fiqh Academy has decided that a unilateral promise (Wad) which is issued unilaterally by all orderer or the client, is by godliness binding upon the promisor except where otherwise justified. It is also judicially binding if it is do contingent upon a reason and if the unilateral promise (Wad) entails a cost for the unilateral promise (Wad).Insuch cases, the consequences of the binding constitution of the unilateral promise (Wad) are determined by every the fulfillment of the unilateral promise (Wad) or by reparation for losses actually incurred as a result of the non-fulfillment of the unilateral promise (Wad) without justification. According to the resolution of the Islamic Fiqh Academy that prohibits the Wad to be binding on both parties but allowed it to be so on one of them, it is rather too willy-nilly and hardly acceptable. It should be the other way round whereby one should treat the Wad either binding on both parties or optional for both parties.Making it binding upon one to the exclusion of the other, is baffled and denotes a misinterpretation of jurisprudential principles. In a summary, it is admissible for Wad as an alternative to a invalid contract to be binding because Wad is analogous to a contract as well. Any suggestion for making it binding upon both or either parties explicitly or impliedly with any other Hilah is not founded on any original basis. SOLUTION The Wad is at its best to be excluded in the practice of the Islamic banking legal documentation sys tem due to the uncertainty and arbitrariness.However, the characteristic of the Wad might be use through a contemporary form of statutory declaration in declaring certain sub-condition for the contract between the bank and customer instead of the main terms and conditions of the contract. For example, if the touchable estate was brought on the purpose for self-staying purpose instead of profit generation, then the statutory declaration may be made in declaring this. This might not be the main issue in the pull of the banks facility agreement which must be included within the terms but can be proclaimed in the way of declaration.For the consideration and/or performance that is a great deal of the essence(predicate) which will affect both parties essentially, of curriculum must be included in the facility documents entered by the parties and there is no point to make it in a rather uncertainty form of Wad. CONCLUSION The Al Ghazali once said that the very objective of the Sharia h is to provoke the offbeat of the people and whatever ensures the safeguarding of peoples faith, life, intellect, posterity and wealth serves the public interest and is desirable.In the issue of Wad, it is sure as shooting not the best form of contract to the Islamic banking industry that put much demand on certainty, hence it would be rather fully utilize the isobilateral contract on main consideration/performance or only using the statutory declaration on the to the lowest degree important issue such as the example given since the ambiguity part of the Wad is not fortune the public interest for all. From the point of Shariah, the Bay al-Inah and Tawarruq is not really serving the welfare of people and it has similar oppressive character of Riba.The banks are still getting the pre-determined rate of return and the application of Bay al-Inah or in other name BBA and Tawarruq is by and large cosmetic. If the Islamic banks label their hamburger as a MECCA burger, as long as it still has the same ingredients as a McDonalds burger, is it really any different in substance? It is also the case between the Bay al-Inah, Tawarruq with inherent Riba element and the conventional interest-based loan.References A Book Dr. Muhammad Saleem (2005), Islamic Banking- Observation and Arguments on Riba (interest or usury), Islamic Banking Practices, Venture Capital and Enlightenment, published by Xlibris Corporation, p26. Professor Rafic Yunus Al-Masri (2002), The Binding Unilateral name (Wad) in Islamic Banking Operations Is it allowable for a Unilateral herald (Wad) to be Binding as an Alternative to a Proscribed Contract? , J.KAU Islamic Econ, Vol 15 pg29-33 Dr. Mohamad Akram Laldin, The Concept of Promise and Bilateral Promise in pecuniary Contracts A Fiqhi Perspective, The supranational Shariah Research Academy (ISRA), pg 3-30 Muhammad Abd al Ghaffar, al Tatbiqat al Masrafiyyah li al Tawarruq, pg 16 SH1003 Shariah Rules in Financial Transactions of CIFP Module 201 2, published by the International Centre for Education in Islamic Finance (INCEIF), pg 97- 129Dr. Mohd Daud Bakar and Dr. Engku Rabiah Adawiah Engku Ali (2008), Essential Readings In Islamic Finance, CERT Publications Sdn Bhd pg 133-165 http//www. isra. my/media-centre/downloads/finish/7-islamic-banking/273-the-concept-of-promise-and-bilateral-promise-in-financial-contracts-a-fiqhi-perspective-english/0. html retrieved 17/11/2012 20. 00pm http//dahabshilbank. com/cms. php? id=ijarah_en& retrieved 16/11/2012 16. 00pm