Shariah concepts in Islamic banks
In this chapter, researcher will review and analyze the Shariah concepts that been applied by Maybank Islamic Berhad in their products , in this case the researcher will look further into the concept of Musharakah Mutanaqisah and also reviewed the application of Musharakah Mutanaqisah in home financing offered by Maybank Islamic Berhad which also being called as Home equity financing –i
4.2 SHARIAH CONCEPTS IN MAYBANK ISLAMIC BERHAD
Mudharabah is derived from the word dharaba which means travelling for trade. It is a type of contract where one of the parties provides capital and the other expertise, labour, and entrepreneurial skill to conduct a particular business where both parties would share profit. There are people who have capital but do not know how to use it or where to invest it. There are others who have the entrepreneurial skills and business acumen but have no capital. Mudharabah enables both parties to make profit. The owner of the capital benefits from the experience and skills of the mudharib and the mudharib benefits from the capital which he invests in a profitable way. Both parties share the profit. The practice was common among pre-Islamic Arabs. The prophet p.b.u.h. himself before his prophet hood entered into such a contract with Khadijah r .a. After the coming of Islam mudharabah was not disallowed but was approved and continued to be practised. Caliph Umar r.a. and other companions used to invest the properties of the orphans in business to avoid zakat consuming them. They traded these properties in the form of mudharabah transactions.
Mudharabah has three rukn (pillars). First, there are two or more parties; they are investor, and care taker/ organizer. Second, object of the cooperation, this included fund/ capital, business and profit. Third, saying the agreement orally (sighah).
The first pillar, two or more parties should involve in the cooperation, they are the investor and the care taker or organizer. All parties should have competencies required (jaiz al tasharruf), meaning that all parties are mature enough (baligh), have normal sense (not idiot), rasyid (normal) and are allowed to make transaction to their wealth.
The second pillar, object of cooperation included a) fund/ capital, b) type of business and c) profit.
a. Fund/ Capital .The requirements of capital are as follows:
1. Fund/ Capital should be in the form of monetary exchange (al naqd). The base is Ijma, or goods in which the value is determined before the transaction.
2. Fund/ Capital which is given should be known clearly.
3. Fund/ Capital which is given should be determined before the transaction.
4. Fund/ Capital which is given should be received by the care taker/ organizer directly, and he can make transaction with it.
So in Mudharabah, capital should be known, and given to care taker (mudharib), also it should be in monetary value like gold, silver or a common monetary exchange. It should not be in form of goods, unless the value of the goods is calculated based on value of money at the time the transaction taken place, so the value of the goods become the capital of mudharabah. It is important to have clarity of total value of the capital to determine the profit sharing. If the capital are in form of goods and are not clear at the time of transaction, the value of the goods may changes as the time goes by and it may lead to dispute at the time of profit sharing.
b. Type of business. The requirements for type of business are as follows:
1. It is in trading sector.
2. It is not putting the care taker/ organizer in difficult position, example the capital should be used to trade on very expensive jewellery or diamond which is very rare and difficult to trade.
3. It is not prohibited by Shariah like alcoholic beverage or pork.
4. There is a time limit or time frame of the investment.
The purpose of any work is to get profit. In mudharabah the requirement of profit are as follows:
1. Profit is only for the parties who joined the cooperation. It is not allowed to share the profit with the party who are not involving in the cooperation.
2. Profit sharing is for both parties, it is not allowed to give the profit only for one party.
3. It is required to have the clarity of the profit.
4. It is required to define the percentage of profit sharing for the investor and the care taker/ organizer.
While at the time of sharing the profit, we need to see the following:
1. Profit sharing is done based on the agreement by both parties, but the investor need to bear all the loss.
2. The care taker/ organizer should define his part from the profit sharing. If both parties are not defining it, then the care taker/ organizer should receive salary, and the profit will become the right of the investor.
3. The care taker/ organizer should not receive his part from the profit sharing before he hand over the whole fund/ capital to the investor. If there is any profit and loss at the same time, the loss should be covered from the profit. It’s mean that the profit is defined from the excess of the initial fund/ capital.
4. Profit can be shared at the middle of the cooperation as long as it is agreed by both parties.
5. Profit sharing should be done after final calculation has been done for the cooperation.
There are two applications for final calculation. First, to do the final calculation at the end of the cooperation, so the investor can withdraw the fund/ capital and ends the cooperation. Secondly is to finish cleansing toward the profit calculation. This is done by cashing all the assets and calculates the value. At this time the investor is allowed to withdraw the capital. He is also allowed to re-invest the capital with the new contract/ agreement. The contract cannot be rolled over without making new contract.
The third pillar, saying the agreement orally (sighah).
Sighah is saying the transaction by both parties who join the cooperation. It shows the expression and desire of doing the cooperation. The mudharabah transaction is considered valid by saying the desire of doing the cooperation and by doing the transaction.
‘Musharakah’ is a word of Arabic origin which literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture. Musharakah is an agreement whereby the customer and the bank agree to contribute an agreed proportion of financial resources to construct any type of business venture and manage the business according to the terms of the agreement. Losses are shared in proportion to the respective capital contributions. This applies also to profits unless mentioned otherwise in the agreement (Abu Dhabi Islamic Bank; 2007). According to Taqi Usmani (2006), every partner in musharakah normally has a right to take part in business management. However, the partners may agree upon a condition that the management shall be carried out by one of them and no other partner shall work for the join venture. But in this case the ‘sleeping’ partner should be entitled to the profit only to the extent of his investment, and the ratio of the profit allocated to him should not exceed the ratio of his investment as discussed earlier. Furthermore, if all the other parties agree to work for the joint venture, each of them shall be treated as the agent of the other in all the matters of the business and any work done by one of them in the normal course of business shall be deemed to be authorized by all the partners.
Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabahah is not a loan given on interest; it is a sale of a commodity for cash/deferred price.
The Bai' Murabahah involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client. In other words rather than advancing money to a borrower, which is how the system would work in a conventional banking agreement, the bank will buy the goods from a third party and sell those goods on to the customer for a pre-agreed price.
Murabahah is a mode of financing as old as Musharakah. Today in Islamic banks world-over 66% of all investment transactions are through Murabahah
Basic rules for Murabahah,
Following are the rules governing a Murabahah transaction:
1. The subject of sale must exist at the time of the sale. Thus anything that may not exist at the time of sale cannot be sold and its non-existence makes the contract void.
2. The subject matter should be in the ownership of the seller at the time of sale. If he sells something that he has not acquired himself then the sale becomes void.
3. The subject of sale must be in physical or constructive possession of the seller when he sells it to another person. Constructive possession means a situation where the possessor has not taken physical delivery of the commodity yet it has come into his control and all rights and liabilities of the commodity are passed on to him including the risk of its destruction.
4. The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. For example, 'A' tells 'B' on 1st January that he will sell his car on 1st February to 'B', the sale is void because it is attributed to a future date.
5. The subject matter should be a property having value. Thus a good having no value cannot be sold or purchased.
6. The subject of sale should not be a thing used for an un-Islamic purpose.
7. The subject of sale must be specifically known and identified to the buyer. For Example, 'A' owner of an apartment building says to 'B' that he will sell an apartment to 'B'. Now the sale is void because the apartment to be sold is not specifically mentioned or pointed to the buyer.
8. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance.
4.2.4 Bai Bithaman Ajil
Bai Bithaman Ajil means sale of goods with deferred payments, i.e.bai (sale), bithaman (price), Ajil (deferment).BBA is a sale with “deferred payments" and is not a spot sale. It is a mode of Islamic financing used for property, vehicle as well as financing of other consumer goods. Technically, this financing facility is based on the activities of buying and selling. The asset that the customer wishes to purchase for example is bought by the bank and sold to the customer at an agreed price after the bank and customer determines the tenure and the manner of the instalments.
1) SELLER / BUYER
A). Capable of accepting responsibility
- Sound mind
B). Not restricted from dealing in
- Business transaction
- Not bankrupt
- Not safih
C). Not being forced into contract
B). Halal (lawful)
C). of some use/value
D). Seller – real owner
E). Seller – able to deliver
F). Known to seller & buyer
A). Must be known
B). Currency specified
A). In definite/decisive language
B) Acceptance consistent with offer
C). done in a contract meeting
4.2.5 Bai Al – Dayn
Bay al-dayn is an Arabic term for “sale of debt" as originated from two words; bay’ which means sale, while dayn means debt. As far as bay al-dayn is concerned, it simply means a sale and purchase transaction of a quality debt.
The selling of debts is to avoid the occurrence of riba between two debts and also to avoid any kinds of gharar and makhatara which may arise at the level of inability of a buyer from possessing what he has bought as it is not permitted that the buyer sold before actual receipt of the purchased item.
On 21st August 1996, The Malaysian Securities Commission Shariah Advisory Council passed a resolution unanimously agreed to accept the principle of bay al-dayn as one of the concepts for developing Islamic capital market instruments. This was based on the views of some of the Islamic jurists who allowed this concept subject to certain conditions for instance there is a transparent regulatory system in the capital market to safeguard the maslahah (public interest) of the market participants.
Opinion of the past Islamic jurists:-
1) Hanafi Mazhab
The Hanafis are unanimous in not permitting bay al-dayn with reason that the debt is in the form of mal hukmi (intangible property) and the buyer takes great risk because he cannot own the item bought and the seller cannot deliver the item sold.
2) Maliki Mazhab
The Malikis allow bay al-dayn subject to certain conditions as follows:
a) Expediting the payment;
b) Debtor present at the place of sale;
c) Debtor confirms the debt;
d) Debtor belongs to the group that is bound by law so that he is able to redeem his debt;
e) Payment is not the same type as dayn, and it fit so, and the rate should be the same to avoid riba;
f) The debt cannot be created from the sale of currency (gold and silver) to be delivered in future date;
g) The dayn should be goods that are saleable even before they are received. This is to ensure that the dayn is not of the food type which cannot be traded before qabadh occur; and
h) There should be no enmity between the buyer and seller, which can create difficulties to the debtor.
3) Shafi’i Mazhab
The Shafi’i allows the selling of debt to a third party if the dayn was mustaqir (guaranteed) and was sold in exchange for goods that must be delivered immediately. The debt is sold; it must be paid in cash or tangible assets as agreed.
The Securities Commission Shariah Advisory Council held that in the context of the sales of securitized debt, the characteristic of securities differentiates it from currency. It is not a legal tender and therefore, it is not bound by the conditions for exchanging of goods. It is not a ribawi item as the fifth condition set by Maliki mazhab.
4.2.6 Al – Wakalah
Literally wakalah means protection or delegation. Legally wakalah refers to a contract where a person authorizes another to do a certain well-defined legal action on his behalf. An agent is someone who establishes contractual and commercial relations between a principal and a third party. Agency is necessitated by the fact that an agent has to perform certain tasks which the principal has neither the time, knowledge nor the expertise to perform himself. The need for agency arises where a person has no ability or expertise to perform a certain action. For example, a lawyer can be employed to represent a client or a broker can be authorized to sell or purchase a certain commodity. In some cases distance may prevent a person from personally concluding a commercial transaction. He may appoint an agent to enter into the contract on his behalf. Agency is also necessitated in some other cases by the presence of many customers in one or different locations. For instance, insurance or travel agents could be appointed to deal with many customers in various locations. In organizations such as companies, managers and directors are needed to act on behalf of the companies.
4.2.7 Al – Wadiah
The term wadi ‘ah is derived from the verb “wada‘a" which means to leave, lodge or deposit. Accordingly, wadi‘ah in the literal sense means leaving something to somebody’s custody. In the legal sense, however, Muslim scholars have defined the term wadi‘ah as follows:
1. Empowerment to someone for keeping the owners wealth explicitly or implicitly. This definition is suggested by the Hanafis.
2. Representation in keeping possession or respectable private good in specific way. This is the view of the Shafi‘is and Malikis.
In the light of the above definitions, it is possible to say that wadi‘ah in the legal sense signifies a thing entrusted to the care of another. The proprietor of the thing is known as mudi‘(depositor), the person entrusted with it is known as muda‘or wadi‘(trustee) and the property deposited is wadi‘ah. In modern Islamic banking system it has been defined as the consent of the depositor to depositee a certain amount of money with the bank with different terms according to the type of deposit, either deposit base on withdrawal upon demand or deferred to a specific later date as agreed between the two parties and create from this deposite responsibility on the bank to refund a certain amount of money upon demand or upon the fulfilment of the specified period which ever come first (Mawsu‘ah al-‘Imiyah wa al-Maliyyah li al-Bunuk alIslamiyyah, 1982). Originally, a wadi‘ah as stated in the Islamic law and practiced in the Islamic golden period is a contract of trust (amanah) and as such the trustee is not subject to liability. Therefore, its keeping is a meritorious act for a person who discharges the right of a trust, and without a violation of the limits. The limit, as it were, is that the trustee has no right to use the money in trade or investment. In return, the depositor has no right to claim any loss or damages on the trusted property in as much as the trustee did not violate the fundamental rule of trusteeship in Islam. However, as it evident, in the contemporary practices of wadi‘ah by the Islamic banks specifically in Malaysia as the trustee i.e. the banks, are empowered by the banking laws to authoritatively received the deposits and use it as its own money, invest it in any form and at any period, makes profits from it etc. The terms and conditions of these deposites are assumed to be established between the bank and the clients but the case is in the opposite direction. The bank is the sole maker of the rules and regulations that govern the period of deposits and present it to the customers in the form of accept it or leave it (ibid). Thus, Islamic banks contract of trust is not based on meritorious act as it was practiced during early Islamic period, rather is profit oriented trustee and is subject to liability for any loss or damage to trusted wealth.
The Conditions of Wadi‘ah
For a proper understanding of the conditions to wadi‘ah, it is crucial to mention the pillars of this transaction in the first place. This is because every single contract in Islamic law has its own pillars which stipulate certain conditions to be complied in order to be valid.
According to the majority of jurists, wadi‘ah have three pillars, namely:
1. The declaration (offer and acceptance)
2. The both parties involved (depositor and depositories).
3. The deposit itself.
The Hanafis, however, argued that the pillar of wadi‘ah is only the declaration, while the other two pillars as suggested by the majority of jurists are merely conditions which must be met in order to complete the declaration. In any case, the discussion on the conditions to wadi‘ah within the scope of the three above elements is inevitable (Al-Kasani, 587H/1166).
1. Offer and Acceptance (Declaration)
The jurists unanimously agreed upon the mutual consent as a original rule for every single contract. Thus, wadi‘ah is not valid until there is a mutual consent between the involved parties.This mutual consent is expressed by offer and acceptance.Offer is an indication of willingness to leave his property to somebody’s custody for safekeeping. (E.g. if one person says to another: “I leave this item with you for safekeeping") (ibid). With regard to acceptance, it simply means an act whereby the trustee agrees to undertake a trust.Thus, the acceptance may be verbal (e.g. “I agree to keep your item safely"), or it may be implied through physical receipt and silence. Acceptance of a deposit, according to the majority of jurists is not obligatory at all, but there are jurists who hold that it is obligatory when the depositor cannot find anyone else with whom he can deposit his property.
2. Trustee and Depositor
The wadi‘ah contract must have at least two parties involved i.e. the depositor and the trustee. In this regard, the jurists are unanimous that the depositor and the trustee must be the persons who have legal capacity. According to the Hanafis, what is intended by attaining legal capacity here is one who is sane and reaching the stage of discretion (mumayyiz) even though he does not reach the age of puberty, whereas according to the majority of jurists such as al-Shafi‘i and others, he must be sane and reaching the stage of discretion and the age of puberty as well (ibid). Based on the confirmation of contractual capacity in the Qur’an “And do not give the immature ones their money which Allah has entrusted to you, then if you find they (the minor/immatured) have sound judgement, hand over their property to them." (Surah al-Nisa’: 5-6). Thus, one should not accept the deposit on the part of a minor or an insane, though one incurs all the obligations of a true depository if one does so. On the other hand, a minor who has accepted a deposit is not responsible for it in case of loss, unless that loss is caused by his own personal fault.
3. Subject Matter of Contract (Deposit Itself)
The item of deposit must be a valuable property in Islamic law. What is meant by this is the deposit property is valuable for a Muslim and subject to transactions. This is because some property is valuable to nonMuslims but not Muslims, for example dead animal, unslaughtered cattle, wine, pork and other forbidden things. The item of deposit also must be a form of property that can be possessed physically (ibid).
4.2.8 Musharakah Mutanaqisah
Musharakah Mutanaqisah is a form of partnership in which one of the partners’ promises to buy the equity share of the other partner gradually until the title to the equity is completely transferred to him. The transaction starts with the formation of partnership, after which buying and selling of the equity take place between the two partners. It is therefore necessary that this buying and selling should not be stipulated in the partnership contract. In addition, the buying and selling agreement must be independent of the partnership contract. It is not permitted that one contract be entered into as a condition for concluding the other.67
In order to perform the Musharakah Mutanaqisah financing, the parties that involved in this contract should follow the pillars.
1. Contracting parties
3. Sighah (offer and acceptance)
4. Project and work
18.104.22.168 Al ijarah
1. Lessor and lessee
2. Benifit of use
3. Rental payments
4. Sighah (offer and acceptance)
22.214.171.124 Al – bay
1. Buyer and seller
2. Contracted goods
3. Sighah (offer and acceptance)
4.3 INSTRUMENT BASED ON MUSHARAKAH MUTANAQISAH OFFERED BY MAYBANK ISLAMIC BERHAD.
4.3.1 Personal Financing
1) Home financing (home equity i)
2) Shop house financing (shop house equity i)
4.3.2 Banking business
1) Asset and wealth financing (MMTF i)
4.4 PROVISIONS OF LAWS AND REGULATION
1) AL quran and As sunnah
2) Banking and financial institution act (BAFIA)
3) Bank Negara Guidelines
4.5 HOME EQUITY – I FINANCING OPERATION
Musharakah Mutanaqisah process in home financing home equity offered by Maybank Islamic Berhad involving three parties, which are:
1) Maybank Islamic Berhad as a financier and partners.
3) Property developer of a house.
Under this home financing which applied the Musharakah Mutanaqisah concept it shows that this facilities been used in certain property ownership. To finance the home financing, the first step is to get the written consent of the bank and the possibility whether it’s been accepted or not is in the hand of the bank, if the bank approved it the customer needs to follow the rules and condition that have been set by Maybank Islamic Berhad. Maybank Islamic Berhad will be appoints as a manager and as a trustee during the financing period. Ownership of the property will have to be bear by both sides whereby both parties have the privilege in getting the benefit. Maybank Islamic Berhad is a major contributor towards the asset.
Financing procedures are as follows:
1) Maybank Islamic Berhad and the customer agreed to share in owning the house and both parties sign a contract. Total capital contributions by both parties have been agreed among them earlier. For example, Maybank Islamic Berhad contribute 90 % of the capital and the remaining percentage been paid by the customer.
2) Usually, customer needs to pay a deposit to the seller or the developer, this means that the customers have to sign a property purchase agreement with the developer and the total deposit will be include as a total value of the partnership contract that need to be paid by both parties.
3) Because of the customer wants to have the full right of the commodity, thus the customer have to pay gradual payments to Maybank Islamic Berhad, the payments is for the purchases of ownership shares and monthly rental.
4) The customer needs to sign an agreement to enable them to buy all the shares of Maybank Islamic berhad have in the asset, and Maybank Islamic Berhad also have to sell the shares to the customer. This agreement will cause the ownership percentage of Maybank Islamic Berhad decreases and the customer ownership percentage increases.
5) In addition, the customer will have to pay the monthly rental payment to Maybank Islamic Berhad, in order for the customer to use the house or commodity.
6) If the customer late in paying the rental payment that should’ve been paid in the time that supposed to be, the customer will not have to endure the charge for the late paying instead the basic rate of Base financing rate will increase ,in the case if the customer late in paying the payment in more than three month.
7) When the total gradual payment have been settle, the right of the ownership will shift to the customer and Maybank Islamic Berhad will officially release the letter that stated the transfer of the ownership have been finalised and the house is 100 % belong to customer.
4.6 FEATURES OF HOME EQUITY FINANCING
4.6.1 Conditions to apply 
Open for capable individual
Applicant age are from 21 to 60 years old
Open for Malaysia citizen only
Capable to pay back the amount of the financing with their own sources of income
Completed all the documents that Maybank Islamic Berhad need to support the financing for example payment slips Bank statements and ETC.
Individuals between 21 and 60 years of age
4.6.2 Margin of financing
Maybank Islamic Berhad offer a high margin of financing to the customer which is 90 % and the remaining balance will be pay by the customer, it is because this financing use a partnership concept. This means that both parties will have to contribute their own capital.
As Maybank Islamic Berhad finance around 90 % from the actual price from the house, customer will have to contribute 10 % of the actual price of the house,
4.6.4 Stamp duty
Customer will be charge stamp duty on their document and depends with the amount of financing.
Maybank Islamic Berhad will provide Takaful services to protect the house during the period of the tenure and they also provide 100 % financing amount from mortgage takaful premium
4.6.6 Financing calculation
The calculation of an amount of financing will be make by using calculator that have been prepared by Maybank Islamic Berhad in order to calculate the repayment of financing
4.6.7 Rental payment
In Musharakah Mutanaqisah there is an element of rental whereby the customer will pay gradual payments to Maybank Islamic Berhad in a period that has been set in the beginning of the contract.
4.6.8 Purchase of share
Share purchases from Maybank Islamic Berhad are part of gradual payment that need to be settle by the customer to ensure the customer shares in the property increases and Maybank Islamic Berhad will decreasing from time to time.
4.6.9 Surrender of possession
When the total of periodic payments had been settled by the customer, the surrender of the house ownership will takes place .This indicates that the customer will own a complete ownership of the house and Maybank Islamic Berhad will confirm it by issuing a confirmation letter that stated the partnership between them have finish and the transfer of ownership will takes place
4.7 DOCUMENTS IN HOME EQUITY- I FINANCING
For salary earners: Monthly salary statements (last 3 months) and J Form (last 3 years)
For businessmen: Financial statements (last 3 years), J Form (last 3 years), photocopies of last 6 months' bank statements
A photocopy of title deed, Sale and Purchase Agreement
A copy of valuation report (where required). The valuers must be approved by the bank
Photocopy of applicant's NRIC
4.8 ADVANTAGES IN HOME EQUITY FINANCING-I FINANCING
Based on the principle of Musyarakah Mutanaqisah (diminishing partnership)
No capitalisation of profit (compounding of monthly profits)
Competitive financing rates and margin of financing
Easy payment of your instalment via Maybank branches, ATMs, Kawanku Phone Banking, and online via Maybank2u.com
Up to 100% financing of Mortgage Takaful (MT) premium
Little documentation compared to other home financing plans
4.8.1 Scope of financing
Finance the purchases of residential property whether it is under construction and fully construct.
Refinance/Property redemption/Additional financing
Construction of bungalow
Change of financing status from Conventional financing to Islamic financing
Refinance or acquisition of property or asset from other financial institution.
From this chapter, I can conclude that the concept of Musharakah Mutanaqisah that have being applied in home financing offered by Maybank Islamic through Home Equity is suitable with the concept in Muamalah principle and also in line with the shariah.