ISSUES IN BAY AL INAH AND BAY AL DAYN

ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAWTO BE EMPLOYED... Share Report Abuse Next Blog» Create Blog Sign In FreeWebSubmission.com ARZIM NAIM Chartered Islamic Finance Professional ALL ABOUT ISLAMIC BANKING AND FINANCE, ISLAMIC CAPITAL MARKETS, TAKAFUL, SHARIAH AUDIT AND ACCOUNTING FOR ISLAMIC FINANCIAL TRANSACTIONS Blog search directory SATURDAY, FEBRUARY 27, 2010 ABOUT ME ARZIM NAIM KUALA LUMPUR, WILAYAH PERSEKUTUAN, MALAYSIA Malaysia's Chartered Accountant (Chartered Accountant of the Malaysian Institute of Accountants), a member of the Association of Chartered Certified Accountants (ACCA) and a Practising Member of the Association of Chartered Islamic Finance Professionals (ACIFP). Founder of ARZIM ASSOCIATES, Chartered Accountants, Chartered Islamic Finance Professionals. Currently, a PhD in Islamic Finance candidate at the International Centre for Education in Islamic Finance (INCEIF). An auditing /accounting lecturer for the local universities. VIEW MY COMPLETE PROFILE ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED AS ALTERNATIVES IN CONTEMPORARY ISLAMIC FINANCE GO! FOLLOWERS Follow with Google Friend Connect Followers (16) ABSTRACT The application of bay’ al-‘inah (sale and repurchase back) and bay’ al-dayn(sale of debts) is making the Islamic financial industry lost its identity. The issues are serious to the Islamic financial market movement, as it is not about minor details of religious practices (furuq) but sadly dealing with the fundamental (usul) of religion. This time it is riba or READERS, usury. Its application in Islamic financial market is TO MY BLOG MY B LOG WELCOME TO partly caused by the lack of knowledge in riba that is This site is solely dedicated to both definite and decisive. For this reason, it is publishing my writing mostly on critical to put things straight and get to the basics the topics of Islamic finance, as again. This project paper endeavours to explore the and when I am able to pen my critical issues in regard to both instruments and thoughts. other concepts available in Islamic commercial law Some of the articles were written that can be employed as alternatives. 1.0 Introduction as partial fulfillment for completing the Chartered Islamic Finance Professional (CIFP) certifications and for the Ph.D in Islamic Finance that I am currently undertake. Interested parties, including ARZIM ASSOCIATES . CHARTERED ACCOUNTANTS . CHARTERED ISLAMIC FINANCE PROFESSIONALS One critical task of Islamic banking is to ensure that the behaviour of fund providers and users reporter/press or students, may reproduce or quote materials credit has to be given to my blog compliance with the Quranic spirit of justice (‘adl) published provided that the and cooperation (ta’awun). Driven by the profit (arzim.blogspot.com). http://arzim.blogspot.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn.html[30/01/2011 18:23:28] ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED... motive, Islamic banks today have rationalised the Comments must be accompanied application of murabahah[1] and bay’ bithaman Accounting . Islamic Finance . Shariah Audit . Halal Consultancy ISLAMIC FINANCE TOPICS by names or pseudonyms. ajil[2] (BBA) leading to a wholesale recognition of containing profanities and positive time preference. However, the worst Anonymous postings and those obscenities will be rejected. scenario would be the application of bay’ al-‘inah[3] DISCLAIMER and bay’ al-dayn[4] likes in Malaysia has further where credits have been driven Islamic banking and finance towards losing borrowed / discussed on its identity as a system. The Islamic financial rest of information, news, products introduced to satisfy the customers’ tastes presentations posted readings on Islamic resources and are articles, papers and slide inside this blog represent the "REFERENCE", the given to the ideas that i Apart from my writings Accounting and Auditing (5) Corporate Governance and Ethics (2) Economics (6) Islamic Banking and Finance (8) Islamic Jurisprudence (Usul al-Fiqh) (3) Islamic Law of Contracts (1) Islamic Rules on Transactions (Fiqh alMuamalat) (6) Others (5) Takaful (1) Wealth Planning and Management (1) and preferences and also the Islamic bank’s attitudes the compilation of my for being risk-adverse, the principle of ‘al-ghurm bil- finance from various ghunm (no pain, no gain) has been isolated from intended solely for purposes. Where financing. This point holds true for bay’ al-‘inah and and not for commercial bay’ al-dayn or combination of both products as they applicable, credits and are intended to satisfy the customer’s desire for fixed or attributed to the original authors or academic and research, copyright should be given income and risk-free investments. As lending has publishers of the said been the traditional approach in banking, Muslims Readers are invited to resources respectively. give comment so as to thought that only bai al-inah, murabahah and BBA expand the knowledge serve as the best alternative to lending. The same investment advice or and information herein. If other expert assistance is individualised services of should be sought. Thank you. DAILY CALENDAR Make Google Your Homepage Get Quickest Access To Google By Settin Your Homepage! Google co uk may apply in the design of salam[5] and istisna’[6] required, the financing, where Muslims may see them as a loan a competent professional instead of sale and purchase contract. January 2011 BLOG ARCHIVE Su M Tu W Th F Sa The same applies to the banking firms; for example, March (4) 1 in the practice of al-ijarah, al bay’ (financial leasing February (21) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 instead of true leasing) is usually applied. In this way January (13) 16 17 18 19 20 21 22 financiers do not bear the risks of ownership and YAHOO! MESSENGER other obligations attached to it. The banking firms for http://islamicfinancelaw. blogspot.com http://arzim.blogspot.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn.html[30/01/2011 18:23:28] resorts more into application of bai al-inah.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. USA) Blogging for Gearlog (Anywhere / USA) FREE ONLINE JOBWriter for new classical string music blog (New York or http://arzim. Thus. Technically.org http://www. the transaction amounts to a loan.co m http://www.co m application of mudarabah[7] and musyarakah[8] as risky ventures. being risk-adverse generally perceived the http://www.org.html[30/01/2011 18:23:28] . The bay’ al-‘inah and bay’ al-dayn issues are serious to the Islamic financial market movement.mia..blogspot.c om http://www. the debtor immediately buys simultaneously the same asset for a greater amount for a future date. the application of bay’ al-‘inah involves two set of transactions. murabahah and BBA.blogspot.inovastra.islamiclawoffi nance. (i) al-bay’ al-mutlaq[9] (cash sales). This means getting back to basics. The (prospective) debtor sell to the (prospective) creditor some asset for cash which is payable immediately. INCEIF holds a Students Day INCEIF devises 3 new Islamic instruments A global demand for Islamic Finance Professionals commercial law to be employed as alternatives. My BlogMap! Blogger Writer Position For Science & Technology Blog (Anywhere. For this reason.1 Bay’ al-inah Published a new blog post: QURANIC VERSES ON RIBA (USURY) II blogcatalog view all grab Bay’ al-‘inah is generally defined as sale-based on BLOGGERS CHOICE BUSINESSVARTHA the transaction of Nasi’ah (delay). it is critical to put things straight.inceif. as it is not about minor details of religious practices rouf 10 months ago Almiraz 11 months ago Powered By BlogCatalog (furuq) but sadly dealing with the fundamental (usul) of religion. to suit to Recent Viewers Noveriwita 5 days ago customers’ preferences. 2.. in turn. This project paper endeavours ISLAMIC FINANCE PROFESSIONAL to explore the critical issues in both concepts and to propose other concepts available in Islamic My News Feed Is celebrating their birthday today! Published a new blog post: QURANIC VERSES ON RIBA (USURY) I INCEIF and UK’s ICMA Centre jointly offers MSc in Investment Banking and Islamic Finance. This time it is riba or usury.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED.accaglobal.0 dayn Critical issues in bay’ al-‘inah and bay al- 2.my http://www.blogcatalog.com http://www. According to Shafi’i Mazhab. The same opinion is shared with Hanbali and Hanafi jurists. http://arzim.html[30/01/2011 18:23:28] . Anywhere/Telecommut e) UNLOCKING SECRETS OF FACEBOOK FRIEND REQUEST SYSTEM DELETE A FACEBOOK ACCOUNT PERMANENTLY and (ii) murabahah or BBA (deferred sale). the unlawful intention (niyyah or qasd) of the parties is immaterial.blogspot. contracts are valid (sahih) by the external evidence that they were properly concluded. However. ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS Bay’ al-‘inah trade is not found in any classic Follow this blog Islamic commercial law. and regard the grounds viable enough to suspect that the purpose is to exchange an amount of money with a higher amount that is deferred. It is worth noticing that the contract of murabahah and Blogs nearby : 100+ Powered by feedmap Find things to do at Center'd Followers (8) BBA is instrumental in making the bay’ al-‘inah transaction possible.. unless expressed in that Act. it does not invalidate their act. They consider the second transaction along with the first. such sales are to be allowed because in the words of Imam Shafi’i.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn.. which forms a prohibited riba. both of which are executed after one another. Imam Malik and other medinite jurists hold these transactions as invalid or void. in which it says the intention or niyyah is not a significant element in determining the validity of a contract.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. but in both ways each party gets what it intended to achieve. bay’ al-‘inah is a legal sale in the Shafi’i Mazhab. The process could take place in the reverse form too whereby the deferred sale is preceded by a cash sale and vice versa (known as reverse ‘inah). each party has made a prior guarantee that in every sale there will exist an automatic resale. Bay’ al-‘inah is just a legal device (hilah) that using Islamic commercial law (i.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. In the case of banking firms. It seems that both parties are pretentious and have no commitment to the sale contract.blogspot. the sale and resale contracts initiated by either the bank or the customer saw no event by which either party has assumed risk-taking and valueaddition in rationalising the profit taken. say defective goods sold. so that the process results in one of the parties invariably ending up obtaining immediate cash against a future obligation settling a higher amount.e. Impliedly. 2. through trade and commerce) to obtain cash without implicating riba. The fact that both parties have no intention of using the asset as any consumer does betrays one principle of contract in Islam..2 Bay’ al-dayn Dayn or debt is basically a liability of a person to http://arzim. Generally. those who oppose bay’ al-‘inah have does so primarily on the assumption that there exists an agreement between the parties to carry out the two sales in that order. if any. namely the objective of contract (maudu ‘ul aqdi).html[30/01/2011 18:23:28] .ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED.. In both transactions. The object of sale comes into play by virtue of a trick to get away with interest payments and receipts. neither is exposed to market risks and liability arising from. bay’ al-‘inah implicates back door for interests. As such. to make forbidden thing permissible. blogspot. debtor and the nature of the debt itself. debt is intangible asset in nature.html[30/01/2011 18:23:28] . Such opinions are based on the forbidden sale of bai’ al-kali bil kali[10] (a debt that is paid by debt) and a sale of gharar[11]. this is the source for dayn to arise. According to most of Hanafis. BBA. pay certain amount of money or in kind and the obligation will reside until it is completely discharged. Hanafis also disallowed bay’ aldayn to the third party regardless of the types of http://arzim. Therefore. the qard is only a type of dayn.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. bay’ al-dayn is not allowed to a non-debtor or a third party at all. in qard contract. Bay’ al-dayn (debt trading) in Islamic commercial law point of view is referring to the principle of selling the dayn which results from mu’awadhat maliyyah contracts (exchange contracts) such as murabahah. Zahiris maintained that the sale of debt is disallowed to third party or even to the debtor himself.. In Islamic commercial law. Hanafi Mazhab looked at bai’ al-dayn from the aspects of potential risks to the buyer.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn.. Thus. Dayn is more general than qard (loan) whereby. There is no room to profit from a debt trading. ijarah and others. dayn can be traded only at par under the purview of hiwalah (transfer of debt). creditor lends money or item to the debtor on a condition that the debtor will return the value of the money to the lender at a specific time. Hanbalis and Shafi’s jurists. which implicates the sale of a thing which the seller does not possess. Thus. com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. debts because the risks cannot be overcome in the context of debt selling. Ibn al-Qayyim.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. bay’ aldayn for deferred payment is not allowed. Contrary to that.. to avoid debt selling before qabadh and to avoid riba. Furthermore. The study shows that the ikhtilaf (differences of opinion) among past Islamic jurists centred on the ability to deliver the items sold.blogspot. As for Hanafi jurists. http://arzim.html[30/01/2011 18:23:28] . a Hanbali jurists confirmed that bai’ al-dayn is completely in agreement with Shariah and there was no general nas or ijmak (consensus on legal opinion) that prohibited it. Thus. The fifth condition set by Maliki Mazhab for bay’ aldayn relates to the exchange of ribawi items: the debts can only be sold at par value. the debt sold must be traded at par value.. What was stated was the prohibition of bay’ al-kali bil kali. The Malikis also shared the same view with Ibn alQayyim except that Malikis imposed eight conditions to be fulfilled in order to protect the rights of the debt buyer. Shafi’is maintain that the sale of a debt is allowed if it is confirmed debt (dayn mustaqir) and was sold in exchange for ‘ayn (goods) that must be delivered immediately. This is because the debt is in the form of mal hukmi (intangible assets) and the debt buyer takes on a great risk because he cannot own the item bought and the seller cannot deliver the item sold. This is especially true if there is an absence of supervision and control. the prohibition for the sale of dayn to third party for the fear that the buyer will have to bear great risks holds the truth in it. the creditor (i.e. In the Malaysian context. Therefore.000 . In this way. he may sell it immediately or hold the bond till maturity and redeem it at par.000 (par value) may be sold for RM920 to the third party. unless he can make some capital gain from it.ebtor d will buy debt at par value. A bond worth RM1. For example. a bond that matures at par value can be sold at a discount before maturity.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. In the case of Islamic bonds as practiced in Malaysia.html[30/01/2011 18:23:28] .RM920 = RM80). But in the capital market. investor) is forced to sell at a discount the Islamic bond for liquidity purposes.blogspot. practically no non. If he anticipates the interest rate will rise (this in turn will decrease the bond’s price). Likewise. the trading of Islamic debt securities instruments (or Islamic bonds) is regulated by the Central Bank of Malaysia and Securities Commission to safeguard the parties involved. he still making profit of RM80 (RM1. If he anticipates that the interest rate is falling (this in turn will increase the bond’s price).ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED.. What practically happened is that Malaysian jurists hold the view that the sale of securitised debts is similar to the sale of properties: the process of securitisation of the debts will glue the bonds or http://arzim. the conditions set by the Maliki Mazhab and the fears of risks by Hanafi Mazhab are overcome by the regulation and surveillance set by these regulators. the third party can sell the bond at a profit before maturity. he can sell it at the higher price than RM920.. the characteristics of debt securities are now different from currency or money (ribawi item).html[30/01/2011 18:23:28] . the bond or dayn is indeed money in nature. Money has no intrinsic utility.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. not property. the subject matter or object of sale must generate usufruct (manfa’ah) to the buyer.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. But the bond or dayn in this sense is not the commodity or property. Therefore the sale of dayn must only be made at par value. Since a property can be sold at any price. the question of riba arises if it was sold not at par value. people buy food for consumption or buy houses to protect them from the heat or cold. Even if the underlying debt was not the result of a moneylending transaction (qard). papers to some underlying assets and thus can automatically qualify itself as property (al-mal). the sale of dayn is similar to the unequal exchange of money for money. For example. right to future cash flow arising from loan repayments) represented by a piece of document in the form of papers or certificates.e. Islam does not recognise money as a subject-matter of trade. each unit of money is 100% equal to another unit of the same denomination. http://arzim. therefore. it is only a medium of exchange. The underlying of it is more of a future monetary claim. Hence.blogspot. but only a legal right to a loan (i. there is no room for making profit through the exchange of these units inter se.. Thus. In a contract of sale. thus. the Islamic bond as a property can be disposed at any price agreed upon by the contracting parties.. When the bonds are sold at a discount or premium. ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. Musyarakah financing can be utilised for purely commercial purposes which are usually of a short term nature. It is a form of partnership contract whereby the Islamic bank agrees to transfer gradually (by way of selling its shares in http://arzim. Hence. to finance import and export. or for participation in the equity of medium to long term projects. sharikat ‘inan fi almal [14] since it is this form which is seen to be the most appropriate for Islamic banking environment. motor vehicle or house). as working capital of a running business or to purchase assets (e. Another term for musyarakah mutanaqisah is musyarakah muntahiyah bittamlik. we are concerned with one type of musyarakah.. that which is known in fiqh as ‘inan (unequal-shares) partnership i. the concept of musyarakah is used in much wider sense.e. Application of musyarakah will let more involvement of Islamic banks in the sense of a real business venture.blogspot. Musyarakah can be used as for project financing. (a) commercial musyarakah.html[30/01/2011 18:23:28] . 3. and (c) permanent participation. (b) decreasing participation or known as musyarakah mutanaqisah. However.g. Musyarakah mutanaqisah or diminishing musyarakah is a new instrument for musyarakah products and was introduced in Egypt. any profit created from the sale of dayn is unlawful. it implicates riba al-fadl[12]. In fiqh[13].0 Other concepts available in muamalat to be employed as alternatives 3.1 Musyarakah mutanakisah or diminishing musyarakah Musyarakah is applicable in different modes of financing for Islamic banks.. The type of musyarakah available are. in the context of Islamic banking operations.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. html[30/01/2011 18:23:28] . or in a joint commercial enterprise. the bank and its clients can participate either in a joint ownership of a property or an equipment. These features are as follows: ‘inan company (form of partnership. ‘B’ agrees to participate because ‘B’ believed the business is viable. After analyzing the business plan and track record of ‘A’.. in which each partner contributes both capital and work). The share of the bank is further divided into number of units and it is understood that the client will purchase the units of the share of the bank one by one periodically. For example. say ‘B’ and ask if the bank agrees to participate in the business venture.. thus increasing his own share until all the units of the bank are purchased by him so as to make him the sole owner of the property or commercial enterprise. promise from the financial institution to sell its share of the company to its partner.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. say ‘A’ wants to participate into one business venture.000 : 80% will be financed by ‘B’ whilst ‘A’ has to come out with another 20%. each unit http://arzim. and the institution sells all of its partner fully or partially. At the same time.blogspot. one payment or in instalments based on terms agreed by both parties) to the other partner its (the Islamic bank’s) share in musyarakah. Total working capital of the business is RM100. so that the Islamic bank’s share declines and other partner’s share increases until the latter becomes sole proprietor of the venture. but he is short of fund. Therefore. say restaurant. Diminishing musyarakah has taken different forms in different transactions. The majority of the current Islamic jurists are unanimous in accepting it as one of the halal (permissible) instruments. He approaches one of the Islamic banks. the share of ‘B’ is further divided into eight units. This is because it has features that do not contradict the nas and general principles of the Shariah.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. 000 is earned by ‘B’ and RM1.html[30/01/2011 18:23:28] .500 being 70% from the RM5. he approaches one of the financiers who agree to participate in joint arrangement to buy the house with him. Islamic financial institutions (IFIs) in Europe have been using diminishing musyarakah as the mode for house financing. the client wants to purchase a house but need additional funds.000 by ‘A’ on a daily basis. representing 10% ownership of the restaurant. the client purchases one unit from the share of financier. At the same time.000 daily net profit earned.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. Consequently. The agreement states that every 1 month. the client must purchase one unit of the share by paying 1/10th from the price of the house. The condition is the financier will finance 80% from the price whilst 20% will be borne by the client. Therefore.. ‘A’ will purchase one unit of the share of ‘B’. Since ‘B’ has 80% share in the restaurant. The agreement states that every 3 months. For example. the share of the financier is further divided in eight equal units. the share of financier http://arzim.000 daily net profit earned whilst ‘B’ will be entitled RM3.000 on a daily basis.. ‘A’ purchases one unit from the share of ‘B’.blogspot. This means that RM4. the client uses the house for his residential requirement and pays to the joint owner for using their ownership in the property. from the date of purchased. Consequently. the share of ‘B’ is reduced to 70% and the share of ‘A’ is increased to 30%. whereby the whole restaurant will be owned by ‘A’ and ‘B’ will take back its original investment on top of profit distributed as aforesaid. After 1 month. ‘A’ will be entitled to RM1. it generated net profit of RM5. Thus. each unit representing 10% ownership of the house. After 1 month. This process will go on until after the expiry of eight months.500 being 30% from the RM5. When the restaurant is operated. it is agreed that 80% of the net profit earned will be given to ‘B’ and the remaining 20% will be retained by ‘A’ who has 20% share in the restaurant. After purchasing the property jointly.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. . say 10%) in musyarakah mutanaqisah for the purchase of the property (which costs RM125 million). ABC Holdings buy a property worth RM125 million and sells it to XYZ Holdings for RM150 million based on the principle of BBA within 120 months.blogspot. Consequently. the client purchases the whole share of the financier reducing the share of financier to ‘zero’ and increasing his own share to 100%.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn.html[30/01/2011 18:23:28] . The mudarib contributes his labour and time and manages the venture according to the terms of the contract. This will end at the point when ABC Holdings owns all the shares back. the portion of rent paid to the financier is also reduced by that portion. ABC Holdings puts in its share (the smaller part.e. This process goes on in the same fashion until after the end of two years (i. For the next 3 months. For example. called mudarib for the purpose of conducting the trade. the client will purchase another unit of the share. this will reduce the financier share to 60% whilst increasing his share in the property to 40%.2 Mudarabah contract Mudarabah is a contract between two parties whereby one party called rab al-mal (investors) entrusts money to second party.120 months. The financier will get back his investment along with rental income distributed to him as aforesaid. 3. As ABC Holdings requires liquidity.e. http://arzim. The investors hold the majority part (90%).. the rent payable to the financier is also reduced to that extent. Hence. Application of diminishing musyarakah can also be used in the capital market. 24 months). is reduced to 70% and the share of client is increased to 30%. it can get the project investors involved by issuing sukuk [15] based on musyarakah mutanaqisah. ABC Holdings will then buy back all the shares from the investors every month according to the amount and duration agreed upon i.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. For that purpose. the funds of the restricted IAHs are invested in asset pools that are separately designated and distinct from shareholders’ funds. should be borne by the investor alone. but the day-to-day control of the business is the sole right of the mudarib. On the contrary.. Another essential characteristic is that the capital provider or investor is not allowed to interfere in the management of the business. if any. The arrangement is normally be used in IFIs to set-up the investment accounts.html[30/01/2011 18:23:28] . The funds under mudarabah contract for investment accounts holders (IAHs) include both unrestricted and restricted IAH funds.. its progress. normally in the same asset pool as that in which shareholders’ funds of IFIs and those from current accounts are placed.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. IFIs can also participate in venture capital with entrepreneurs by using mudarabah contract for project financing. Mudarabah contract can be applied in various ways in conducting banking.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. http://arzim. if any. It is worth noticing that the arrangement in mudarabah contract fits well with the structure of venture capital. Mudarabah can also be used to finance import and export. One of the essential characteristics of this contract is that the profit. The IFIs do not interfere in the day-to-day functioning of the project. For unrestricted IAHs. but the losses will be completely borne by the IFIs. its prospects and others. trade and finance.blogspot. will be shared between the investor and the mudarib on a pre-agreed proportional basis. monitor and supervise the way the business is run. He may have the right to oversee. The loss. The profit is to be shared between the parties according to an agreed ratio determined ex-ante. IFIs provide financing to the projects and the entrepreneurs as the mudarib act as the mangers of the project. the funds will be invested at IFIs discretion. does not recognise money as a subject-matter of trade. there is no room for making profit through the exchange of these units inter se. For example. Islam. Money has no intrinsic utility. 4. the current issue on sale of dayn has arisen. therefore.blogspot. For these reasons. he will appoint the bank as the mudarib.. it is critical for us to get to the basics again. it is only a medium of exchange. the client is about to import/ purchase stocks from oversea suppliers.. For example. The conventional / capitalist concept of financing is that the banks and financial institutions deal in money and monetary papers only.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. so that there’ll be no more hilah is used to legitimize what is forbidden in Islam. mudarabah structure can be used in the issuance of Letter of Credit (LC) which is normally used in the import and export transactions by the bank.0 Conclusion One of the most important characteristics of Islamic financing is that it is an asset-backed financing. The bank. The application of bay’ al-‘inah and bay’ al-dayn is making the Islamic http://arzim. we also need to know are the basic components of Islamic legitimacy in Islamic commercial contracts. acting as the mudarib.html[30/01/2011 18:23:28] . After disposing the goods. He can informs the bank of his LC requirements and negotiates terms and conditions of the mudarabah financing for this LC. Because of lack of understanding in money. As such. We are not only need to know what leads to riba. each unit of money is 100% equal to another unit of the same denomination. The client will then places a deposit with the bank under wadiah [16] principles and the full amount of the cost of the goods to be imported/ purchased as per mudarabah agreement. the bank will share with the client the profit from the venture according to the terms and agreement of the venture. establishes the LC and pays the proceeds to the negotiating bank utilizing the client’s deposit.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. on the other hand. the main purpose of bay’ al-‘inah is to legitimize riba which is forbidden in Islam. Dr. Zainal Azam Abdul Rahman. However. The selling of bonds at premium or discount is equivalent to the unequal exchange of money with money. In Islamic commercial law. “Islamic Securities Play A Key Role”.. implicates riba al-fadl to arise. Pp 21-38. It is only when we get to the basics. Tuesday 3 June 2003. “Currency Fluctuation And Its Effects On Debts And Obligations In Islamic Law”. Zainal Azam Abdul Rahman.e.html[30/01/2011 18:23:28] .com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. Jurnal UndangUndang.blogspot. The object of sale comes into play by virtue of a trick to get away with interest payments and receipts.. what is happening in the capital market like in Malaysia. Now. financial industry lost its identity. The Star.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. There is no room to profit from a debt trading. However. is sadly discouraging and directly contradicts to the principle of Shariah. Pp 22. thus. The bay’ al-‘inah and bay’ al-dayn issues are serious because it is dealing with the fundamental (usul) of religion which is riba or usury. http://arzim. 2003. References : Dr. it is the time to seek other alternatives for bay’ al-‘inah and bay’ al-dayn such as musyarakah and mudarabah contracts. sale of dayn at par value is permissible since this is equal to the exchange of equivalence for equivalence (mithlun bi mithlin) and the debt must be confirmed debt. through trade and commerce) to obtain cash without implicating riba. maqasid al-Shariah or the objectives of Shariah can be achieved. Bay’ al-‘inah is just a legal device (hilah) that using Islamic commercial law (i. Takaful and Financial Planning. the payment being settled either in instalments or in lump sum. the term is now used to refer to a sale agreement whereby the seller purchases the goods desired by the buyer and sells them at an agreed marked-up price. However. [2] Bai’ bithaman ajil : Trading at cost plus specified markup. [5] Salam : 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 on the spot. via installments). [3] Bai’ al-‘inah : Sales and repurchase back. Refers to trading whereby the seller sells his assets to the buyer at agreed selling price (with a specified mark-up) to be paid by the buyer at a later date. Resolutions of The Securities Commission Shariah Advisory Council. Critical Issues on Islamic Banking and Financial Markets: Islamic Economics. loss is borne by the financier. According to large majority of fuqaha (jurists who give opinion on various juristic issues in the light of Quran and the Sunnah).ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. 2nd Edition. Edward Elgar Publishing. [8] Musyarakah : Similar to mudarabah contract.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. While profit is shared. Dr. Saiful Azhar. 2005. After that. Banking and Finance. Mingguan Malaysia.Llewellyn.g. [6] Istisna’ : A contract whereby a manufacturer (contractor) agrees to purchase (build) a deliver a welldescribed good at a given price on a given date in the future.html[30/01/2011 18:23:28] .blogspot. 2002. Munawar Iqbal and David T. the buyer sells back the assets to the seller at a cash price. lower than the agreed selling price. “Krisis Mata Wang Dari Perspektif Islam”. [4] Bai’ al-dayn : Sale of debt or liability. Rosly. Kuala Lumpur: Dinamas Publishing. United Kingdom. [1] Murabahah : Sale at specified margin.. Zainal Azam Abdul Rahman. http://arzim. Islamic Banking and Finance: New Perspectives On Profit-Sharing and Risk. debt cannot be sold except at its face value. with the difference that both partners participate in the management and the provision of capital and share in profit or loss.. A variation form of murabahah (sale at specified margin) with purchase payments is deferred and payable at a certain particular time in the future (e. [7] Mudarabah : A profit and loss sharing contract in which one party provides the financial capital and the other manages the enterprise. risk and uncertainty.ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED. The creditor then sells the debt again to the debtor for another period and increases the price.blogspot. [10] Bai’ al-kali bil kali : A debt sale that is paid by debt. date of delivery. danger.. quantity of the counter-value. [15] Sukuk : Refers to a financial paper showing entitlement of the holder to the amount of money shown on it.. means exposing oneself to excessive risk and danger in a business transaction as a result of uncertainty about the price. quality. POSTED BY ARZIM NAIM AT 4:49 AM LABELS: ISLAMIC RULES ON TRANSACTIONS (FIQH AL MUAMALAT) 0 COMMENTS: Post a Comment POST A COMMENT Comment as: Select profile. the meaning resorts to the cash sales. the debtor did not receive anything in exchange when being charged for extending the period of payment. eventhough in Islamic culture it is encouraged to provide this service froo of charge or to recover only the costs of safekeeping without any profit. The keeper can charge a fee. Islamic jurisprudence covering all aspects of life including economic. It refers to an exchange of different quantities (but different qualities) of the same commodity. http://arzim. In this case. [14] Sharikat ‘inan fi al-mal : A form of partnership which is termed as limited investment partnership.. Select profile. [13] Fiqh : The science of understanding of divinelyrevealed law. the debtor seeks extension with the promise to pay something in addition.. [12] Riba al-fadl : Riba pertaining to trade contracts. the ability of either the buyer or the seller to fulfill his commitment or ambiguity in the terms of deal. It is a type of credit sale in which on the date of the discharge of the debt.. [9] Al-bay’ al-mutlaq : A general sales. Technically. [11] Gharar : Literally means deception. [16] Wadiah : A contract whereby a person leaves a valuables with someone for safekeeping. It is a form of financial note. Normally.html[30/01/2011 18:23:28] ..com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. .ISSUES IN BAY’ AL-‘INAH AND BAY’ AL-DAYN AND PROPOSAL FOR OTHER CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED.html[30/01/2011 18:23:28] .blogspot.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn. Post Comment Preview Newer Post Older Post Home Subscribe to: Post Comments (Atom) ARZIM ASSOCIATES .. CHARTERED ACCOUNTANTS . CHARTERED ISLAMIC FINANCE PROFESSIONALS http://arzim. 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