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CTU351 ISLAMIC INSTRUMENTS: CONCEPT AND ITS APPLICATION IN BANKING AND FINANCE

No. NAME 1 NADZIRAH BINTI JOHAR 2 NUR ATIRA JULIANA BINTI NAZRI SITI NORSUHADAH BINTI MOHD 3 YUNUS NURULHUDA IZZATI BINTI ABD 4 WAHAB 5 AINAA NURHANIS BINTI ABU BAKAR

MATRIC NO. 2019274342 2019274466 2019270754 2019275296 2019418298

JBA1194D

ITEMS

MARKS

Introduction

2

Point and Explanation

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Recommendations and Conclusion

2

Bibliography

4

Ethics and Professionalism

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Total

20 %

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CHECK LIST FOR WORKING PAPER / ARTICLE REVIEW NO PARTICULARS

NOTES ( )

1.

Using the front page template provided by the lecturer.

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2.

Contain table of content, introduction, content, description, lesson and conclusion.

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Type using font 11 (Arial).

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Line spacing 1.5 and Justify.

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Citation of content reference according APA system.

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The position of page number must be at the bottom center.

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Number of pages between 10 – 15 excluding list of bibliography.

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Working paper / article review in form of softcopy.

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Minimum of 5 authoritative references.

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10. This check list sheet must be placed after the front page template.

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CONTENT NO

TITLE

PAGES

1.0

Introduction

4

2.0

Al-Wadiah

5

3.0

Al-Mudharabah

10

4.0

Al-Musharakah

16

4.0

Al-Murabahah

21

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Bay’ Bithaman Ajil (BBA)

27

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Conclusion

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Bibliography

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INTRODUCTION Islamic finance is known as a type of a financing activities that need comply with the Islamic Law. Islamic finance is important to us because it based on the Islamic principles and also conditions in Sharia Law. in Islam, we are considered the lending activities with the interest payment but if the interest was big and can burden the borrower it can be haram.

It is because the payment and the receipt of the interest

especially riba is illegal under the Islamic perspective. Some contracts are involved with the speculation and uncertainty are considerate as void in Islamic finance and have being practise in all Islamic banking in Malaysia. In the Islamic Financial, fixed claims instrument also being provide which also include Mudharabah, Ijarah, Salam and also Istisna. Besides that, in Islamic Finance there are Sukuk which is known as an asset-backed trust certificate who is representing an ownership of an assets or the earn based on the principle in Islamic Finance. In addition, the equity instrument also included the Mudharabah and Musharakah. This two type equity instrument have a different between the agreement before the both side make some affairs. Mudharbah is known as a profit-and- loss sharing partnership meanwhile for Musharakah is a profit-and-loss sharing joint venture. Furthermore, the Islamic Financial also have some risk such as credit, benchmark, liquidity, operational, legal and fiduciary risk. Because of that, some Islamic Financial will make insurance to make sure the risk can being handle with carefully to make sure the both side can feel safe. In addition, the insurance also one of the conditions in Sharia Law because before we make some agreement or investment, we need to make sure that the progress was guarantee by make sure all in insurance’ protection. Last, as we know Islamic finance is a centuries-old tradition that is gaining popularity worldwide. Islamic finance's ethical and economic values are attracting attention from outside the Muslim world. Expect this area to evolve much faster in the future, given the growing growth of Muslim countries. Because of that, we need to make sure all the bank in Malaysia are practise this method to make sure we are follow the Sharia Law which is suitable to our countries as one of the Muslim countries in the world.

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AL-WADIAH

1) DEFINITION Wadiah or savings is an Islamic banking concept that is very similar to the concept of savings account in conventional banking . Wadi'ah (ankin) means deposit (trust).The word "wadi'ah" comes from the verb " wada’a" (wada'a-yada'u-wad'aan) . It means to keep, lodge, store, entrust, leave, or deposit in its literal sense. In simple terms, it means “something held under the control of someone who is not the owner.” It may also mean to abandon or forsake something. (Bello, N. (2014, January 7). In

several

of

the

deals,

the

bank

charges

a fee for the secure custody of the depositor's assets. Usually the Islamic banks use the concept of asking for permission to utilize the customer’s funds for investment purposes to accept deposits from customers. There are two types of Al-Wadiah which are Wadiah Yad Amanah and Wadiah Yad Dhamanah. [Tariq, M. (2020, March 29). ]

2) LEGAL EVIDENCE The legality of a contract in Islamic law is extremely significant. The primary sources of Islamic law and secondary sources of Islamic law are usually referred to as sources of legality. The Quran and Sunnah are the primary sources of Islamic law, followed by secondary sources such as qiyas, istihsan, masalih mursalah, and others. From Al-Quran:

ϭ 豀 䗥   豀 䙠 nk䔤豀 豀䗥 䔧䙠䗥 䙠 α Ύin 䙠Ύ䙠 豀䗥䔤 䗥䙠 䔧䙠 n䙠 k 䙠 䙠   䙠  䙠i   䙠䔤䙠 䙠 n nkn 䙠 䔤䗥豀  䇅Ύ豀 䙠  Ύ  抰 n䙠i   “Surely, Allah commands you to return the trusts of the spirit, the physical body, the mind, and the free will to His Owner (Allah), and to judge between people with fairness.” (Al Quran, Al Nisa, 4:58) [Wadiah. (2018, July 25).]

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From hadith narrated by al-Tirmidhi :

䙠抰䙠䙠l

 䔤䙠  l豀 䙠 䗥 䙠匐 䙠 k 䙠䙠 䔤䙠 䙠 䗥ϣn  䔤䙠 䙠i 䙠䙠䔤䙠 䙠 n抰n   䙠

The Prophet said: “Give trust to those who have trusted you and do not betray those who betrayed you.” Narrated by al-Tirmidhi, 1264 [Jami` at-Tirmidhi 1264 - The Book on Business - Sunnah.com ]

3) PILLARS AND CONDITION Pillars: In Islamic law, the foundation of business contracts is extremely significant. To ensure that the contract is binding and acceptable, all parties must adhere to its terms. [Shuib, M. S., Bakar, A. A., Osman, A. F., Hashim, H., & Fadzil, A. B. (2016). ] According to the scholars of fiqh, Imam Abu Hanafi said that the pillars of wadi'ah are only ijab and qobul . However, according to the majority of scholars, there are three pillars of wadi'ah, namely: a. Contracting parties: sane depositors and custodians are needed. The depositor has the right to take possession of the property at any time. b. Offer (ijab) and acceptance (qabul): the majority of jurists believe that in this wadiah contract, there must be a legitimate offer and acceptance. c. Property for safekeeping : must be owned and deliverable. The object must be a piece of physical property that belongs to you. [Depositor known as Muwaddi’ and custodian known as Wadii’ (S.(2021, April 13). ]

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Conditions: a. For contracting parties, depositor and custodian have the same requirements, which is to be puberty(This condition was put forward by Jumhur ulama. However, Hanafiah does not make puberty a condition for the person who is kept, unless it is enough that it is mumayyiz), intelligent and mature. While wadi'ah is required to be in the form of a property that is in his real power/hand. b. Sighah is ijab and qabul. The condition of shigat is that consent must be expressed by speech or deed. Speech is sometimes firm (sharih) and sometimes with satire (kinayah). Malikiyah states that pronunciation with kinayah must be accompanied by intention. Example: sharih pronunciation: "I leave this item to you". While the sarcastic pronunciation "give me this car". The car owner replied: "I give this car to you". The word "give" means grant and wadiah (deposit). c. Items that are deposited are required to be objects that can be stored. If the object cannot be stored, such as a bird in the air or an object that falls into the water, then the wadi'ah is not valid if it is lost, so it is not obligatory to replace it.Syafi'iyah and Hanabilah require that things that are entrusted must be things that have value or qimah and are seen as maal, or najis. Like a dog that can be used for hunting or security. If the object has no value, such as a dog that has no use, then the wadi'ah is not valid. 4) ISSUES The problem is ,

that the depositor is the lender and the bank is the borrower .

Wadi'ah contracts on current and savings accounts are executed by a number of financial institutions in the region, including Islamic Bank, Muammalat Bank, and Maybank.The asset owner (customer) and the custodian (bank) sign a contract to secure the asset on behalf of the customer, and the bank will invest in the asset. As a result, jurists conclude that misguided instruments, such as current account loans and mudharabah tools, are more suitable than savings and fixed investment accounts. It makes sense that savers who keep money in banks realize that banks can mix their money with other funds and use it and spend it. The depositor will agree to the use of funds from the bank. This requires the use of hack code instead of wadi'ah .[Sourab, N. (2014, December 30). ]

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5) MODUS OPERANDI, CALCULATION AND COMPARISON

Modus operandi A depositor will deposit funds into the bank and the bank will guarantee repayment of all the deposit amount in question, or part of the outstanding amount when the depositor requests it. Depositors may be given a 'hibah' (gift), at the bank's discretion, as a form of appreciation for allowing the use of depositors' funds by the bank. For example, Party A owns an asset and entrusts it to Party B for safekeeping. Without charging a fee, Party B acknowledges the asset and the responsibility for its safekeeping. Party A has the right to request the asset's return at any time and without conditions. The asset that is kept for safekeeping is known as wadiah. [Hayat, M. ]

Calculation Based on the principle of Al-WADIAH, the bank is not obliged to provide returns to depositors. However, the bank at its absolute discretion, is able to provide a certain amount of return to its customers Cumulative daily : =Balance for the month / No.of days in the month X rate X 1/12 =Profit For example, the rate from June 16 to July 15 is 2.0 percent. The average daily balance is RM5000, and the deposit is kept for one month (June 2012, 30 days), resulting in a profit of RM5000: RM5000 X (30/365) X 0.02 = RM8.22 In effect, after the rate and benefit calculation are completed, the balance of RM8.22 will be credited directly to the account holder.

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Comparison THE DIFFERENT BETWEEN ALWADIAH ISLAMIC BANKING AD CONVENTIONAL BANKING Comparison wadiah for islamic banking is the principal is absolutely assured. and for conventional banking is unable to guarantee interest and savings benefits. According to the arrangements, the local Islamic Bank will give a Hibah or gift as a token of appreciation while for conventional banking , interest has been set at a pre -determined rate . There is no profit sharing in Islamic banking and conventional banking had to pay interest on all deposits . Islamic banking also cannot provide incentives in the form of gifts to attract new depositors meanwhile conventional banking can offer promotional items to attract new depositors .

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AL-MUDHARABAH

1) DEFINITION Mudharabah is a well-known Islamic contract that is a profit-sharing contract. This benefit sharing is legal when the partners have the same goal and must adhere to the syariah rules. The name Mudharabah is derived from the term "dharabah fi al-ard." This phrase means to travel, and it is named after the agent, who is an entrepreneur. Mudharabah is a type of business contract in which one party is required to provide resources while the other is required to provide personal efforts. When one party provides the money, for example, the other party must make a clear trade to ensure that the deal is legal and follows Islamic banking laws. This contract is also legal when the share holders are determined by making an agreement to ensure that both parties must adhere to the rules. According to Islamic banking theory, there is no loss sharing in the Mudharabah contract because the terms of profit and loss are more appropriate in the Musharaka contract. (Prof. Iraj Toutounchian)

2) LEGAL EVIDENCE FROM AL-QURAN: While these verses do not explicitly discuss the Mudharabah's legality, they have been interpreted to include all who travel for the purpose of trading and finding lawful income. 

al-Quran (Al-Muzammil :20)

(73:20) (O Prophet),18 your Lord knows that you sometimes stand up in Prayer nearly two-thirds of the night, and sometimes half or one-third of it, 19 and so does a party of

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those with you;20 Allah measures the night and the day. He knows that you cannot keep an accurate count of it, so He has shown mercy to you. So now recite as much of the Qur'an as you can.21 He knows that there are among you those who are sick and others who are journeying in the land in quest of Allah's bounty,22 and still others who are fighting in the cause of Allah.23 So recite as much of the Qur'an as you easily can, and establish Prayer, and pay Zakah,24 and give Allah a goodly loan.25 Whatever good you send forth for yourselves, you shall find it with Allah. That is better and its reward is greater.26 And ask for Allah's forgiveness; surely He is Most Forgiving, Most Compassionate.  al- Quran (Al-Jumuah :10)

(62:10) But when the Prayer is ended, disperse in the land and seek Allah's Bounty,16 and remember Allah much17 so that you may prosper.  al-Quran ( AL-Baqarah : 198)

198. And it is no sin on you if you (also) seek your Lord’s bounty (through trade during the Hajj days). Then when you return from ‘Arafat, celebrate the remembrance of Allah near Mash‘ar al-Haram (Muzdalifa). And remember Him as He has guided you. And you were certainly wandering disorientated before. FROM HADITH :

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According to Hakim Bin Hizam, he told a man that if he gave him certain assets to be used for Muqaradah (which is Mudharabah and Qiradh), he must not use them to buy livestock or carry them (travel) through the sea or drop by the oasis. If the man commits any of the aforementioned offences, he is considered the guarantee of my property.

3) PILLARS AND CONDITIONS

Pillars -

Sahibul Mal ( owner of the capital or fund provider )

-

Mudharib (entrepreneur )

-

Rasul Mal ( capital )

-

Al-Amal or Mashru ( business venture or project )

-

Ribh

-

Sighah (ijab- offers) ( Qabul- Acceptance)

(predeterminded share or profit )

Before entering into any agreement, we must first understand the six pillars of Mudharabah: Sahibul Mal, Mudharib, Rasul Mal, Al-Amal or Mashru, Ribh, and Sighah. This pillars must be completed and if one is missing from the list, the contract will be automatically cancelled. Sahibul Mal is the first. It refers to the capital owner or the fund provider. It's crucial because if there aren't any Sahibs, there will be no Sahibs. The Mudharib is the second. Mudharib is a Persian word that means "entrepreneur." The Mudharabah, as we all know, is a contract between two or more parties. Mudharabah has been used by entrepreneurs because they need to make a lot of contracts in order to keep their company running smoothly and prevent misunderstandings. Rasul Mal is the third. It's a term for money. Capital is also necessary because if there is no capital, the contract cannot be completed because capital is one of the Mudharabah's requirements. Before entering into a contract in Mudharabah, the first party must ensure that they have sufficient money. Then there's Al-Amal, also known as Mashru. This pillar refers to the initiative or business plan. Both parties must ensure that their project is legitimate and does not violate syariah law. Furthermore, the Ribh, which denotes a fixed benefit or share. All parties must adhere and the established values to ensure that there are no misunderstandings when the contract is signed. Last but not least, the Sighah.

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Sighah is important because it encompasses both the Ijab and Qabul. This is significant because all parties must make Ijab and Qabul after the contract has been signed, and they must ensure that there are no misunderstandings until the procedure can be completed. Conditions Of work/subject matters (the mudharabah work must be carried out exclusively by the entrepreneur known as ( Mudharib). If the capital provider was still expected to run the regular service, it would be illegal. The project must also be legal and have a permit that complies with syarak law. Aside from that, all expenses would be deducted from the capital if the total is less than the venture's necessary and justified expenses Next, for capital conditions, it must be in the form of money rather than goods, as commodities fluctuate in price and therefore trigger uncertainty and ignorance. Furthermore, the capital must be clearly defined, calculated, and known at the time of contracting. During the contract's end, both parties must ensure that the money is available cash-on-hand. Finally, the benefit conditions. The benefit allocation, which must be calculated proportionally between the capital provider and the entrepreneur, is governed by these conditions. The pre-determined benefit may also be expressed as a ration or a percentage rather than a fixed sum. Mudharabah also requires the benefit to be in various percentages depending on the case.

(Mahyuddin Khalid ,

April 05, 2011) 4) ISSUES

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Riskiness

-

Stiff competition

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Longer financing period

-

Not technically achievable

1. There cannot be a benefit distribution until the debts have been written off and the rab al-mas' equity has been completely recovered. 2. Any benefit distribution made prior to the contract's end would be considered an advance. 3. All expenses suffered in the ordinary course of business must be deducted from earnings before being deducted from Rab al-Mal's equity.

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4. If it has been decided that the mudarib will keep the entire benefit. The mudarib will be paid in accordance with tradition (ujr al-mithly) 5. If it has been decided that the mudarib will keep the entire benefit. For instance, the creditor is rab al-mal, and the debtor is mudarib. 6. The mudarib is not entitled to a regular salary or tax, as well as compensation for the work he does for the mudharabah. 5) MODUS OPERANDI , CALCULATION AND COMPARISON

Modus Operandi Mudharabah is a contract which is refers to a contract that made by two or more parties to a financial business venture. The parties is known as Rabb Al-Mal which is a investor have provide the capital meanwhile the second parties, Mudharib who known as entrepreneur will manage the project. Next, the p...