ISLAMIC BANKING PRODUCTS

THIS ONE IS ONE OF MY ASSIGNMENT THAT I HAVE DONE ABOUT WHAT IS PROHIBITED IN ISLAMIC TRANSACTIONS AND ALSO ISLAMIC BANKING PRODUCTS

During on Hari Raya Aidilfitri, I and my family went back for holiday. We were really excited to go back at our hometown because can meet our relatives where we are long time no see. I am in the middle of taking fresh air outside the grandmother's house, suddenly Pak Su called me over sitting on the porch of Grandma's house.

Pak Su             : How are you Aimi?

Me                   : Alhamdulillah, I’m fine thank you. How about Pak Su?

Paksu              : Alhamdulillah, I’m fine. So how is your study back there Aimi? It is going    

   smoothly or not?

Me                   : Erm.. So so la Pak Su. There Islamic term that I need to understand well.

Pak Su             : Really? (With full of impression) Can you tell me a bit about what you have

   learned back there.

Me                   : Well as you know now I am taking Bachelor Islamic Banking and Finance

   which is difference course when I’m taking diploma before this. Do you

   know Islamic banking has actually been in Malaysia around 1963.

Pak Su             : Really? I never know that Islamic bank is already exist in Malaysia since

   1963. Then what is the first Islamic bank in Malaysia?

Me                   : The first Islamic bank in Malaysia is Perbadanan Wang Simpanan Bakal-

   Bakal Haji (PWSBH) was established. Then in 1969 PWSBH merged with

   Pejabat Urusan Haji to form Lembaga Urusan dan Tabung Haji and now

   known as Lembaga Tabung Haji.

Pak Su            :  Owh I see. After Lembaga Tabung Haji what is the second Islamic bank?

Me                  :  Then the second Islamic bank is Bank Islam Malaysia Berhad (BIBM) and

   was established on July 1, 1983. Followed by Bank Muamalat Malaysia

   Berhad, where established on October 1, 1999.

Pak Su            :  Wow, I am so impressed!

Me                  :  Me too Pak Su. In Islamic banking we are using two act which is Islamic

   Banking Act 1983 and Banking and Financial Institutions Act 1989. While

   for conventional, there are only using Banking and Financial Institutions Act

   1989.

Pak Su             :  But Aimi, what is the different between Islamic bank and conventional bank?

Me                   :  Islamic bank is according Syariah Law, where this law is based on what

   Allah has mentioned in Al-Quran and Hadith. While for conventional bank, it

   is man-made law.

Pak Su             : Ohhh…

Me                  : In Syariah Law we prohibit of Riba (interest), Gharar (uncertainty), Maysir

  (gambling) and etc.

Pak Su             : Riba? Gharar? Maysir? What is that?

Me                  : Pak Su in Islam we are prohibited to take or charge any interest in our

  business transaction. And Riba also known as interest.

Pak Su             : Why interest is prohibited in Islam?

Me                   : It is because interest is where we charge an additional amount and this interest

  will make us suffer to pay to pay the additional charges. While for Gharar is

  uncertainty where the bank is questioning where the money come from. In

  Islamic bank when the banker found out that deposit from depositor is come

  from illegal activities, the banker will asked the  depositor to withdraw the

  money.

Pak Su            : Aimi, what if the bank has used the money from depositor which have

  element of Gharar?

Me                  : If the bank have used the money for make an investment, the bank will use

  small portion of that money to give to charity.

Pak Su            : What is Maysir?

Me                  : Maysir is gambling, which is totally prohibited by Allah.

Pak Su             : Aimi, how the bank can identified Gharar and Maisir?

Me                  : For an example if one of depositor account is showing a huge amount to be

  deposit to the account, the banker will asked the depositor how they get the

  money. Or the banker itself may investigate the depositor. The banker should

  investigate that money because we doesn’t want that the money is not come

  from illegal activities and winning from gambling. Even though non-Muslim

  those deposit their money in Islamic banking, the banker has an authority to

  ask them to withdraw the money.

Pak Su            : Wow! That is amazing about Islamic banking. Then how about the product

  that Islamic banking has provided to public?

Me                  : There are a lot of Islamic banking products, for an example Mudharabah, Ar-

  Rahn, Murabahah, Ijarah, Bai’ As-Salam, Bai’ Bithaman Ajail (BBA), Ijarah

  and others.

Pak Su            : Mudharabah? Ar-Rahn? Murabahah? Ijarah? Bai’ As-Salam? Bai’ Bithaman

  Ajail? Ijarah?

Me                  : I know you might get confuse with the term that I just now mention.

Pak Su            : Yes of course.

Me                  : Ok Pak Su, take a deep breath because I will explain one by one the Islamic

  banking product.

Then Pak Su take a deep breath and excited to know about what I’m going to tell about Islamic product

Me                   : First I will explain about Mudharabah, it is a profit sharing concept. It is an

   agreement between a parties, who provides the capital (rabbul marib) and the

   other party; entrepreneur (mudarib), to enable the entrepreneur to carry out

   the business projects.

Pak Su            : How they share the profit?

Me                  : The profit is based on a profit sharing basis, which it is according to pre-

  determined ratios agreed upon earlier.

Pak Su            : What if they are facing losses?

Me                  : If the business is facing losses, the losses are borne by the provider of the  

  funds. The profit rates of the business will be declared in every 16^th of the

  month and it is based on month-to-month actual profit earned.

Pak Su            : Aimi, if let say I would like to take a loan using Mudharabah concept, what is

  the benefit?

Aimi                : The benefit of using Mudharabah concept is Muslims have the option to

  comply with Islamic teaching when engaging in the financial activities so that

  they are not exposed to the element of Riba (interest) while for non-Muslims,  

  will have benefits of alternative mode of savings.

Pak Su            : How are we going to know either they are follow Syariah law or not?

Me                  : Other than that the funds will be invested in activities governed by the

  Syariah Consultant to ensure all the investment and activities are in

  accordance to Syariah principle.

Pak Su            : Intersting! Now i get it. How aboout Murabahah?

Me                  : For Murabahah refers to the sale of goods at a price, which includes a profit

  margin as agreed to by both parties. Such sales contract is valid on the

  condition that the price, other costs and the profit margin of the seller are

  stated at the time of the agreement of sale.

Pak Su            : Murabahah concept it seem like mark-up price?

Me                  : Yes, it is like mark-up price.

Pak Su            : But Aimi, in Islam can we mark-up the price?

Me                  : Yes. We can mark-up the price if this is stated in agreement of sale. But if it is

   not stated in agreement the contract is invalid.

Pak Su            : Oh i see.

Aimi                : Now I will explain about the Ar-Rahn concept. It is indicates the alternatives

  documenting the debt in the absence of the scribe, e.e., via pawning. The

  application may take either the form of papers such as proper documents,

  vehicle papers, sukuk, shares, etc., objects like ornaments, jewelries and other

  valuables.

Pak Su            : Can you explain detailed about Ar-Rahnu concept? Because I really excited to

  know about Ar-Rahnu bank.

Aimi                : Yes of course. For an example bank will provides financing RM50,000 to

  customer. And customer will pawns his valueable item (e.g., jewelry or

  valueable asset) as collateral for the finances amount. Then, every month the

  customer needs to pay back the money that they lend form bank with

  additional charges to bank as a safe keeping of the asset that we pawn. During

  this transaction, the bank (creditor) cannot sell the asset without the consent of

  the debtor because he is owner of the pawned asset.

Pak Su            : What if we cannot pay the debt according to the contract?

Aimi                : If we cannot pay the debt according to the contract, we can go to bank and ask

  them the procedure to extend the time of paying the debt. And the reason for

  the customer want to extend the time of paying debt must be reasonable.

Pak Su            : Ok now i get it. How about Ijarah?

Me                  : Ijarah means a a contract to lease or rent or hire. It is a contract or sale

  involving the use of property owned by a different party. There are some rules

  apply in Ijarah.

Pak Su            : Really?

Me                  : Yes, first is khiyar al-ru’ya, which is the right to revoke the contract at the

  time the goods are seen by the buyer. Second Khiyar al-‘ayb, which is the

  right to revoke the contract due the goods being of an inferior quality. Third is

  khiyar al-shart, the right of revocation. Fourth is fasakh, which is revocation

  or nullification and the last is ikala, which is revocation or replacement.

Pak Su            : Wow! I didn’t know that in Islam, Allah has given a right to the buyer to

  revoke the deal if there are major defects on rented or leased goods.

Me                  : Yes Pa Su. Islam is such a wonderful, am I right?

Pak Su            : Yes, you were right.

Me                  : Now I will explain about Bai As-Salam concept. This principle involves a sale

  and purchase contract made between two parties, the seller and the buyer.

  Under this contract, the buyer agrees to make an advance payment but the

  asset is delivered at a late date.

Pak Su            : Bai As-Salam is more looks like we are buying online stuff. I never know that

  in Islam there are also have concept of make advance payment and delivered

  the good at a later date.

Me                  : Yes, we do have this concept in Islam. Like Allah said, Islam is a wonderful

  religion and law can be used all of us no matter where we stay.

Pak Su            : That’s true Aimi.

While we were talking suddenly my mom calls me.

Mom               : Aimi! Where have you been? Why you were not answering you hand phone?

  Grandfather and grandmother were looking for you?

Me                  : I am not going anywhere; I just have a conversation with Pak Su. We were

  discussing about what I have learned in Islamic banking. Did you call my

  hand phone? Sorry mom, Syukrey (little brother) is using my hand phone to

  play game.

Pak Su            : Yes Kak Long (sister) we were chit chat about Islamic banking. I am so

  excited to hear what have my niece have learned in Islamic banking.

Mom               : Later on, if you want to make an investment, loan or whatever about Islamic

  banking, you can ask Aimi.

I am just smiling when there we talk about me.

Mom               : Let’s come inside. Grandfather and grandmother were looking for you. They

  also want to know about your life in UUM (Universiti Utara Malaysia).

Me                  : Ok mom. Let’s go inside. Pak Su, are you coming with us?

Pak Su            : Yes I’m coming.