Islamic Finance Instruments gif


The commodity is purchased by the custom- er on a deferred payment, and then sold for less than the agreed price to the bank. Thus the bank hands over cash finance to the customer. Figure 2 illustrates the steps of a Tawarruq transaction.Although the buyer enters into the contract knowing he will suf- fer financial loss, he considers the access to ready cash to be worth the mark-down. The bank makes a profit due to the mark-up on the price of the commodity it sells to the cus- tomer. Osman admits the controversy over the validity of such a transaction and says that “In Tawarruq […] one needs to exercise extra care and subject the product to an ad- ditional dose of investigation before accept- ing it as Shari’ah compatible”, but this is not going nearly as far as the OIC Fiqh Academy were to, two years later.


In the Academy’s statement ruling against organised tawarruq, it’s stated in black and white that this type of trans- action is “not permissible”. Organised tawarruq is the term used to describe a tawarruq transaction whereby both sales transactions take place simultaneously. The Academy says this is impermissible because the practice of simultaneous transactions in exchange for a financial obligation is considered a deception, “i.e. in order to get the additional quick cash from the contract. Hence the transaction is considered as containing the element of riba” (OIC Fiqh Academy Ruling, Reso- lution 179 (19/5)). Therefore, turning from Bay’ al-Inah to tawarruq could be considered as an example of ‘jumping out of the frying pan, into the fire’.


The Prospects for Bay’ al-Inah


Bay’ al-Inah continues to exist in the public consciousness, but it is losing the battle to be accepted theoretically as sharia’a, mean- ing that any practical use of it in the context of Islamic finance is effectively declared null


References and Further Reading:


• Hasan, Zulkifli. 2009. ‘My Thought: BBA Issue in Malaysia’. Blog of Knowledge. • Hasan, Zulkifli. 2009. Case Report: Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party). Available at http://zulkiflihasan.files.wordpress.com/2008/11/arab-malaysian-fimance-bhd-2008-5-mlj.pdf • Rosly, Saiful Azhar and Sanusi, Mahmood M. 1999. ‘The Application of Bai-al-Inah and Bai-al-Dayn in Malaysian Islamic Bonds: An Islamic Analysis’. International Journal of Islamic Financial Services. Volume 1, Number 2. • ‘Islam & Finance from my Perspective’ Blog. ‘Bay Al-Inah’. Available at http://myviewpoint2u.blogspot.com/2009/04/bay-al-inah.html • Naim, Arzim. 2010. ‘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’. Available at http://arzim.blogspot.com/2010/02/issues-in-bay-al-inah-and-bay-al-dayn.html • Osman, Mohd Farihal. 2007. ‘Bai Al-Inah and Tawaruq as a Solution to Interest-based Personal Financing Facility’. Universiti Utara Malaysia. • ISRA Portal. 2009. ‘OIC Fiqh Academy Ruled Organised Tawarruq Impermissible in 2009’. Available at http://www.isra.my/index.php?option=com_ content&view=article&id=355:oic-fiqh-academy-ruled-tawarruq-impermissible&catid=11:tawarruq&Itemid=15 • ISRA Portal. 2006. ‘Revisiting the Rulings on Bai’ ‘Inah’. Available at http://www.isra.my/fatwas/commercial-banking/financing/tawarruq/139-revis- iting-the-rulings-on-bai-inah.html


2011 February Global Islamic Finance 39


which led to a fatwa that all but admitted that limited use of Bay’ al-Inah is still allowed in Malaysia out of necessity (Revisiting The Rulings on Bai’ ‘Inah). Point 3 of the reso- lution states “Bai’ ‘Inah is still necessary in the context of local Islamic finance”, leading


and void. Bay’ al-Inah meets the require- ments of neither Malaysia’s Islamic Banking Act 1983 (IBA) nor the country’s Banking & Financial Institutions Act (BAFIA) 1989 (Has- an). Whilst the IBA is relevant to full-fledged banks, the BAFIA, particularly Section 124, is concerned with Islamic banking windows in conventional banks. In theory then, all Is- lamic banks adhere to the IBA and all Islamic banking windows adhere to the BAFIA.


Theoretically, there is legislation prohibiting Malaysian Islamic banks and Islamic bank- ing windows alike from using Bay’ al-Inah. In practice, however, the common structure of Malaysian sukuk, as discussed above, shows that this legislation has not exactly been enforced. In June 2006, Bank Nega- ra’s Shariah Advisory Council participated in The Regional Shari’ah Scholars Dialogue,


to Point 4, which does not prohibit the use of Bay’ al-Inah but merely says “Since bai’ ‘inah is still regarded as a matter of juristic disagreement among the Shari’ah scholars, it is more desirable that Islamic financial in- stitutions limit its use in products which face difficulty in structuring them, based on other consensually accepted contracts”. If the legislation ruling against Bay’ al-Inah in Ma- laysia were ever to be enforced, it would be because Bay’ al-Inah no longer had a market in that country.


As it is already avoided in the Middle East by investors, it is difficult to see how Bay’ al-Inah could continue to be used in any Is- lamic finance strongholds if Malaysia were to abandon it. Whilst Bay’ al-Inah could be rendered extinct in Malaysia from the top (the regulators) down, the Middle East could extinguish it from the international Islam- ic finance industry altogether, from the bottom (investors and consumers) up.


Customer needs £1000


Bank buys a computer for £1000


Customer


eventually pays the bank back for first sale


Bank sells computer to customer for £1500, on a deferred basis


Customer sells computer back to bank for £1000 cash


After all, the use of Bay’ al-Inah comes from consumer demand for personal fi- nancing or investor demand for securities. As we have seen there are alternatives to Bay’-al Inah, sharia’a-compliant methods for both financing and investment. If con- sumers and investors worldwide, and not just in the Middle East, begin to refute the validity of Bay’ al-Inah and turn to these alternatives instead, Bay’ al-Inah could soon lose the empathy of bodies such as Bank Negara. Were this ever to happen, Bay’ al-Inah would not only be theoreti- cally null and void, but also obsolete.


In reality, market forces continue to drive the level of availability of a structure, as


is only realistic in any free market financial philosophy. Until the time when demand for instruments that can only realistically be structured with Bay’ al-Inah subsides, there will always be someone, somewhere, turning a blind eye to it.


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