Riba

Definition:
The literal meaning of Riba is increase. Legally, Hanbalis defined it as an increase in specific item. But, the Hanafis define it as “an increase in one good for another in an exchange, without a compensation for the increase”. Hanafis’ definition of Riba, includes Riba Al-Nasiah and defective sales.

Prohibition of Riba
From the Holy Quran:
•“That which you give as Riba to increase the people’s wealth increases not with God; but that which you give in charity, seeking the goodwill of God, multiplies manifold.” (Surah al-Rum, 39)
•“And for their taking Riba although it was forbidden for them, and their wrongful appropriation of other people’s property. We have prepared for those among them who reject faith a grievous punishment.” (Surah al-Nisa’, 161)
•“O believers, take not doubled and redoubled Riba, and fear Allah so that you may prosper. Fear the fire which has been prepared for those who reject faith, and obey Allah and the Prophet so that you may get mercy.” (Surah Al-e-Imran, 130)
From the Holy prophet (pbuh) tradition:
•From Anas ibn Malik (Gbpwh): “The Prophet said: ‘When one of you grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower offers a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favours mutually’.”
•Zaid B. Aslam reported that interest in pagan times was of this nature: “When a person owed money to another man for a certain period and the period expired, the creditor would ask: ‘you pay me the amount or pay the extra’. If he paid the amount, it was well and good; otherwise the creditor increased the loan amount and extended the period for payment again.”

Types of Riba
Riba is divided into two main kinds namely:
i.Riba duyun: Riba in lending and borrowing; and
ii.Riba buyu’u: Riba in trading transaction

Riba Duyun (Riba in lending and borrowing) are:
Riba Duyun is the increase in the amount of money loaned. This increase is either:
•Imposed by the lender on the borrower in the loan contract.
•Promised by the borrower to the lender in the loan contract.
•Charged because of borrower default in payment.

Riba Duyun has two types:
iii.Riba Qardh: Riba that is imposed from the beginning.
iv.Riba Jahiliyah: Riba that is only imposed after default.

Riba Buyu’u (Trading transactions)
This kind of Riba may occur out of an exchange between two Ribawi materials in the same kind where the necessary rules are not observed.

Riba Fadhl It is the trading of one set of goods that are eligible for Riba for another set of the same goods, with an increase of one compensation over the other

Riba Nasiah or Riba Yad the addition of the premium which is paid to the lender in return for his waiting as a condition for the loan and is technically the same as interest.
Thus, trading goods of some genus for goods of the same or another genus with an increase in the measure (by volume or weight) in compensation for deferment fall under this de.nition. Examples include trading one volume of wheat for one and a half volumes to be paid in two months, trading one volume of wheat for two volumes of barley to be paid in three months.

Bai Salam

Bai Salam
Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot.
Here the price is cash, but the supply of the purchased goods is deferred. The buyer is called “rabb-us-salam”, the seller is “muslam ilaih”, the cash price is “ra’s-ul-mal” and the purchased commodity is termed as “muslam fih”, but for the purpose of simplicity.

Tawarruq

Tawarruq
Tawarruq is a sale of an asset to a purchaser with deferred payment. The purchaser then sells the asset to the third party on cash with a price lesser than the deferred price, for the purpose of getting cash. This transaction is called Tawarruq because when the purchaser bought the asset with deferred payment, he has no intention of using or getting benefit from it, but merely to facilitate him to obtain cash.

Istisna'

Istisna'
‘Istisna’ is a kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacturer undertakes to manufacture the goods for him with material from the manufacturer, the transaction of istisna’ comes into existence. But it is necessary for the validity of istisna’ that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully settled between them.
Murabahah Financing
Murabaha is derived from Ribh, which means gain, profit or addition. In Murabaha, a seller has to reveal his cost and the contract takes place at an agreed margin of profit. This contract was practised in pre-Islamic times.

Bai Inah

Bai Inah
A contract that involves selling and buying of an asset, where a seller will sell the asset to a buyer on a cash basis and subsequently will buy the same asset on a deferred payment basis at mark up price. It can also be applied when a seller sells the asset to a buyer on a deferred basis and will later buy back the same asset on a cash basis with a price which is lower than the deferred price.
Bai Inah has 2 agreements. In the first agreement, the bank sells an identified asset to the customer at an agreed price. The customer can complete the purchase of bank's asset via fixed monthly installments on agreed tenure. While for the second agreement, the bank re-purchases the same asset from the customer at a lower price. Upon completion of the 2nd transaction, the bank will pay the lump sum amount as per agreed by both parties in the agreement. The difference between the selling price and the purchase price is the bank profit.

Bai Bithaman Ajil (BBA)

Bai Bithaman Ajil (BBA)
Bai Bithaman Ajil means deferred payment sale. It is a sale based Islamic financing, usually used for financing house purchases by costumers. Technically, this financing facility is based on the activities of trade. “The property that you wish to purchase for example, are bought by the bank and sold to you at an agreed to price, once the bank and you determine the tenure and the manner of the instalments. The price at which the bank sells you the property will include the actual cost of the property, and will also incorporate the bank's profit margin.” As this is an Islamic way of financing, therefore there is no interest charged and any extra charges as compensations for the bank in all cases. The selling price in BBA is fixed which means no adjustment will be made if interest rates fluctuate.

Hawalah

Introduction:
Literal: Change, transfer or removal ( Ha wa la, Tahwil)
Technical: Transfer of debt (liability) by way of security and corroboration, from the original debtor (transferor) to another person to whom it is transferred (transferee)

Majelle:”to make a transfer from one debtor account to the debtor account of another” (same)

Nature: A has a debt owing to him from B and A himself owes a debt to C. All three agree that C, instead of realising his due from A, and A his due from B, C shall realise his duties from B.

Guarantee= Adjoining liabilities/ Hawalah: Transfer/ Removal
It must be absolute transfer, not subject to future and not conditional
It may subjected to the debt incurred in the future
Hawalah benefits the creditor and relieves the debtor difficulty

Essential Elements:
1: Muhal (creditor, transferred party)
2: Muhil (transferor, debtor)
3: Muhal `alayhi (transferee)
4: Al Muhal Bih (the transferred debt )
5: The debt owned by the transferee to the principal debtor
6: Contract Expression ( offer by a debtor) and acceptance by the transferee and the creditor)

Conditions:
1. Sighah: 1) Must be clear to show consent (words, express, writings, signs and gestures)
2) Must be in correspondence to one another (muwafaqah)

2. Transferor:
1) Must possess legal capacity , eligible(legally competent, sane, major and prudent, Hawalah Nafez) x interdicted persons (ok with guardian, Hawalah Mau`qufah)
2) Consent of the principal debtor (analogy to transfer of ownership)
Jurist- Legal age: Condition of enforceable, x condition of conclusion

3. Principal Creditor (Muhal): 1) Legal capacity (legally competent) 2) Consent 3)Acceptance to the contract (clear words)

4. Acceptance:
• Abu hanifa, Muhammad & Kasani- It must be made during the contract session (condition of conclusion)
• Abu Yusof- It is a condition of enforceability not conclusion (depends on his agreement)

5. Transferee: Same conditions as the conditions of the creditor/ Ability to repay the debt (if not contract can be terminated)
Transferee can be individual or group

6. Transferred Item:
1) It must be a debt
2) The debt must be binding or real debt (x binding such as debt of a young boy or incompetent person, debt for the price in a sale with an option)
3) It must be legal debt (debt of unlawful reason not under subject of Hiwalah)
• Validity of the new obligation will be effective only when it flows from a valid obligation (When the original has failed, the brance fails too)
4) The both debt must be known to the contracting parties
5) It must be transferable
• Muslim jurist also agree that the transferor may transfer a lesser amount of a debt owed to the transferee to settled from a larger amount of the debt owed by the transferor on condition that the transferee is entitled only to the equivalent amount of his debt

Debt:
1. Hanafi – Not a condition that the transferee must be indebted to the transferor prior, or whether transfer is restricted or unrestricted)
2. Malikis & Shafiis: 1) The transferee owes the transferor 2)The debt must be equal in kind and amount 3) The two debts must not be foodstuff that are objective of a salam sale ( because otherwise the contracts falls under the contract of selling foodstuffs prior to receiving them which is forbidden)
• Transfer a debt from sale with a debt from loan is permissible
• The two debt must be essentially similar (amount and due date)
• If Muhal `Alayhi debt to Muhil is higher is allowed, not lower

Consent of the contract parties (IMPO):
1. Hanafi- Consent of the principal creditor (bcoz debt is his due) and the transferee (bcoz new obligation) are required/ Consent of debtor is not a requirement because he bears no harm.
2. Hanbali & Zahiri- Only the consent of the principal debtor is required (hadith above)/ Sufficient to inform transferee & creditor
3. Maliki & Shafii- Consent of the principal debtor and creditor. Because the debtor is free to decide modes for settlement and due to creditworthiness of payment may be different from first (creditor).

• Third group say that Hadith above is mere recommendation to express his acceptance, not wajib
• Second group argue that the consent of the transferee is not necessary since the debtor has the right to collect what the transferee owes him and to avoid problems to the transferee later in the event of defects of the subject matter
• Hawalah is valid even without consent of the transferor. The consent of the transferee and creditor is sufficient to conclude a valid and enforceable Hawalah. (Consideration)
4. Practical application need the consent of the transferor (debtor) to affect a valid, enforceable and smooth functioning.

Wadiah

Introduction

Wadiah is a contract (akad) between the owner of goods and custodian of the goods. To protect the goods from being stolen, destroyed etc. In other word the custodian is to ensure the safe custody of the goods.

The two types of Wadiah are Wadiah Yad Amanah (safe custody - trust) and Wadiah Yad Dhamanah (guaranteed custody).

If the funds are pooled together, being utilized and being charged for the service, the Shariah contract of Wadiah Yad Dhamanah is applied.

Essential elements of Wadiah

The essential elements of Wadiah are:

1. The goods
2. Owner of goods
3. Custodian of goods
4. Contract – Offer and Acceptance

Bank is not allowed to promise and the customer is not allowed to request for any return when accepting or depositing the funds. Any promise or request is equivalent to ‘riba’ which is strictly prohibited in Islam. However, the bank at its sole discretion may award the customer with a certain amount of returns as a token of appreciation for depositing with the bank.

Kafalah

Introduction:
• Kafalah: Conjoining Guarantor’s liability to the liability of the debtor resulting in both of them being liable to the same liability. (It is a unilateral conract “tabruaat”=No Commercial Gain like Iaarah, Qard and Wadiaah. Therefore, both creditor and guarantor can cancel the Kafalah)
• Za’amah: Guaranteeing substantial financial amount.
• Himalah : Guaranteeing the blood money
Hiwalah: Transfer of debt.
In Kafalah : The original debtor is still liable for the debt, unlike Hiwalah . The original debtor is not released from the debt.

• Kafalah Hukum:
Wajib
Sunnah (fardu Kefayah)
Makrooh
Haram

• Kafalah Conditions:
1. Kafeel
2. Makfool Lahu
3. Makfool Alihe
4. Makfool Bihi(the debt must be true and certain debt on the debtor to be paid to the creditor, but Kafalaf can be on Yad Damanah and not Yad Amanah...examples of the makool bihi are: Debt, work to be performed and surrender...etc)
5. Sighah:
a. Majority: Only the Kafeel must express his clear intention to guarantee the debtor, at unilateral action. Therefore, there is no need for Creditor or Debtor agreement because Kafalah benefit both and it is Tabarru from the guarantor.
b. Abu Hanifah and Al-Shybani said the creditor must agree, because it involve his right, and by not having the agreement fraud can occur.
c. The third opinion said that as long as the creditor and debtor did not reject, then the Kafalah is valid.

Modes of creating Kafalah :
• Munjazah (Immediate)
• To be effective Future
• Made conditional to Future Event
• Made condition on certain preconditions

After the creation of Kafalah:
The debt is now a liability on the debtor and the guarantor, they share the liability. The creditor can recover from the debtor or creditor. But Maliki said creditor must ask from the debtor first and if he can’t recover his debt from the debtor then he can ask from the guarantor.

Qard and Kafalah : Tabarru Ibtidaa wa muaawadah intihaa
(If the debtor request, but if it is done by the gauarantor request then it is Tabarru until the end)

Fee can’t be charged on kafalah
Classical view: becaoz it involve Qarar, Kafalah is Tabarru, It can be Riba, It is like Qard and No subject matter is exchanged)
Modern view: Can if the debtor is the one who requested for the kafalah, becoz it can serve beneficial objectives, if people are not ready to do kafalah, the concept of al-jah and tabrru can be turned into exchange contract) The way out in this case is to invoke wakalah in the process so that the fee is not paid for the mere guarantee.

Multiparty kafalah:
If there are more than one guarantor, guaranteeing one debtor, then there will be 3 cases to be considered:
1. If the guarantors guaranteed the debtor at different times, then each guarantor will have to bear the whole liability.
2. If the guarantors guaranteed the debt at the same time then each of them bear his share of the liability.
3. If the guarantors guaranteed the debtor at the same time but they decided also to guarantee each other , then each one of them bear the whole debt.

Discharge of the Makfool Alihi by the creditor (Hibah or Ibra) : will discharge the Kafeel
Discharge of the Kafeel by the creditor (Hibah or Ibra) : doesn’t mean the discharge of Makfool alihi

Recourse after payment: (Only possible if the debtor requested for the Kafalah)
1. Hanafi: The Kafeel can only recourse the amount guaranteed not the actual amount paid.
2. Majority: The Kafeel should recourse the amount paid to the creditor by the debtor
3. Hanbali: The lesser of the 2 amounts
• If the gauarabtor is indebted to the debtor previously then Muqassah can take place (netting)

Application:
Mudarabah: Kafalah against breach of contract by Mudarib
Murabahah: Daman Al-durr (Buyer Benefit)
Daman Al-uhdah (Seller benefit)

Termination of Kafalh:
• Paying the deb
• Hibah
• Hiwalah
• Ibra
• Sulh
• Debtor acquire right of the debt

• If the creditor gives discount to the Kafeel and the Kafeel paid the debt discounted, then he can claim the full debt from the original debtor because the discount given by creditor is for the kafeel only.

Introduction

Islamic banking and finance is rapidly growing to carter for approximately $700 billion in Muslims fund. This fund is looking to be mobilized and managed by Islamic financial institutions. Currently there are more than 520 Islamic financial institutions operating worldwide and the number is increasing fast. The annual growth of the IFI has been estimated at 15% and it is expected to accelerate in the future. With this rapid growth in the number of IFIs, the industry of Islamic finance needs human capital who are knowledgable in Islamic finance to ensure the compliance of these IFI with the Islamic rules and principals. Therefore, it is important to develope Shariah supervisory executives to carry out this important duty in Islamic finance.
This blog is a humble contribution toward enhancing public awareness of Islamic finance and banking. Terms, concepts, issues, ....etc will be explained and discussed here.
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