gif Islamic Finance Instruments


set; the bank simply does it. If you do not state an intention, there is no proof that you even have that intention and therefore there can be no proof as to whether or not you’re going against it. The Shafi’i school of Fiqh declares the second type to be sharia’a- compliant, though to be avoided (makruh). However, other schools consider it as invalid as the first type. These schools include (Blog of Knowledge):


• Maliki • Hanbali • Hanafi • Ibnu Taymiyah • Ibnu Qayyim


Contemporary Fuqaha such as Yusuf Al- Qaradawi and Wahbah Al-Zuhailiy are of the same viewpoint.


The Case Against


Opinion against the validity of Bay’ al- Inah argues that the contract is a sales transaction with the purpose of riba. It is this purpose, this intention behind the contract that makes it Un-Islamic. The processes of the transaction are valid in themselves but the objective is to do with something prohibited. The actual proc- esses of the contract are just a means to a haram end. Islamic finance experts re- fer to ‘fatwa wrapping’ when referring to an Un-Islamic financial product that has been ‘wrapped up’ in Islamic labels and terminology. Bay’ al-Inah’s critics would argue that it is a riba-based transaction wrapped up in the terms of a halal sales contract. Not only, say the critics, is Bay’ al-Inah disguising something haram, it is haram itself as it constitutes outright deception.


Customer needs financing


Bank sells car to customer


ring to the hadith that says (Hasan), “A time is certainly coming to mankind when they legalise the Riba under the name of Bay’”. We have also mentioned the contemporary Jurist Yusuf Al-Qaradawi’s opposition to Bay’ al-Inah. His argument is that the structure is an example of usury, disguising as it does the practice of riba.


The Case For


How is it that Malaysian sharia’a scholars have allowed the use of Bay’ al-Inah in their country when so many schools are against it? It so happens that the school that Ma- laysian scholars follows is the Shafi’i-the school, as we have seen above, that be- lieves the second type of Bay al-Inah to be valid. What is the case for this argument of validity? We have seen how those opposed


• Project financing • Financing of imports and exports • Business financing • Personal financing for assets such as a house or motor vehicle.


Customer pays back surplus £1000


Customer owes bank £5000


In the case of diminishing musharakah, a relatively recent subtype of the instrument, a partnership contract is formed whereby the Islamic bank agrees to transfer its share in the musharakah to the other party. The Islamic bank effects this transfer by selling its share to the other partner in one payment or in instalments, based on terms agreed by both parties. The bank’s share is divided into units that the other partner buys one by one, peri- odically. Therefore, the proportion of the bank’s share declines as the other par- ty’s increases until the latter becomes the sole proprietor of the musharakah. With this structure, the bank and its customer can participate in either joint ownership of an asset or in a joint com- mercial enterprise.


Customer has financing


Bank gives customer £4000


Bank buys back car immediately


Zulkifli Hasan additionally points towards the case of Arab Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd in his argument against Bay’ al-Inah. This 2008 Malaysian High Court case discusses in length the Al- bai bithaman ajil (BBA) facility, which is wide- ly used in Islamic banking in Malaysia. BBA facility is not the same as Bay’ al-Inah but it is a mode of payment structured under the Bay’ al-Inah concept, making this court case relevant to our discussion of Bay’ al-Inah.


In this case, the court “considers deferred payment of the selling price is a credit or a loan and any profit claimed or charged by the bank as an additional to the facility amount is interest” (Hasan, 2009). In our example illustrated in Figure 1, the surplus £1000 would be the “profit claimed or charged by the bank”-the riba. We have mentioned the Ibnu Qayyim school as one that is against Bay’ al-Inah and the Jurist himself based his argument against the transaction by refer-


38 Global Islamic Finance February 2011


to Bay’ al-Inah have based their argument on matters of Niyya. It is therefore hardly surprising that those who say the structure is valid downplay the importance of Niyya to the debate. According to the Shafi’i, intention is not a significant element in determining the validity of a structure (Naim, 2010). Bay’ al-Inah is a valid sales contract because, in the words of Imam Shafi’i himself, contracts are valid by the external evidence that they were properly concluded; the motives of the parties are immaterial.


No intention can invalidate their contract, unless it is expressed in that contract. This fits in with what we previously said about in- tention being unable to be proved unless it is explicitly expressed. Disregarding the issue of intention in this way led Imam Shafi’i to take Bay’ al-Inah on face value as two sepa- rate contracts that are each compliant with all the essential principles of a sharia’a com- patible sales contract.


Another alternative, for the purpose of commercial financing, is mudaraba, which can be used in a number of ways in terms of banking, trade and finance. Here, the two parties agree upon a con- tract whereby one party, known as the rab al-mal (investor) entrusts funds to the other party, the mudarib, for the pur- pose of conducting trade.


Whilst the investor contributes the financ- ing, the mudarib contributes his expertise and time, managing the venture in accord- ance with the terms of the contract. One es- sential feature of this structure, proving its basis in sharia’a, is that the profit, if any, will be shared between investor and Mudarib according to a pre-agreed proportional ratio. The loss, if any, will be borne by the inves- tor alone as the Mudarib will already have wasted a lot of time and effort on nothing and does not need the burden of financial loss as well. This principle of profit and loss sharing is crucial to sharia’a.


Tawarruq is cited by Osman (2007) as a “bet- ter” alternative to Bay’ al-Inah, although this was of course before the OIC Fiqh Academy ruled against organised tawarruq in 2009. Tawarruq, like Bay’ al-Inah, musharakah, and mudaraba, is a way of generating finance.


Alternatives to Bay’ al-Inah


If we work on the assumption that Bay’ al- Inah is not sharia’a-compliant, what then are the truly sharia’a-compliant alternatives for the sharia’a-sensitive party in need of finance? Musharakah can be used as the structure for various types of Islamic financ- ing, such as (Naim):


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84  |  Page 85  |  Page 86  |  Page 87  |  Page 88