ANALYSIS FROM PERSPECTIVE OF MAQASID

ACHIEVEMENT: CASE STUDY TO HOME

FINANCING

BY

WAHIDAH BINTI SHARI

A dissertation submitted in fulfilment of the requirements

for the degree of Master of Islamic Banking and Finance

Institute of Islamic Banking and Finance

International Islamic University Malaysia

SEPTEMBER 2013

ii

ABSTRACT

Islamic banks offer various banking products and services with different nature to

meet the different needs of the customers. Yet, the Islamic banking product offered by

the Islamic banks must be in line with the Sharīʿah objectives (maqāṣid al-Sharīʿah)

which are centralized on the objectives of accomplishing the development of both the

spiritual and social-economic well-being. The main objective of this study is to

analyze the debt-based (bayʿ bithaman ājil) and equity-based financing (mushārakah

mutanāqīṣah) from perspective of maqāṣid achievement. Although there have been

many literatures discussing the debt-based financing (bayʿ bithaman ājil) and equity-

based financing (mushārakah mutanāqīṣah), analysis on maqasid achievement is still

lacking. Bayʿ bithaman ājil and mushārakah mutanāqīṣah concepts normally being

applied in home financing facilities. However, bayʿ bithaman ājil is said to be most

popular in Malaysia country as compared to the mushārakah mutanāqīṣah. It also

considered as a most debated Islamic financing modes among Sharīʿah scholars

locally and internationally in term of its validity and Sharīʿah compliance. The aim of

this paper is to review the contract, structure, features, procedures and also the issue

pertaining to both Islamic contracts. This study also intends to measure the maqāṣid

achievement towards the products using four specific Sharīʿah objectives: Sharīʿah

compliant, fair and transparency, maintaining harmony and marketability. Semi-

structured interview and survey questionnaire will be conducting to achieve the

research objectives. The findings of this thesis indicate that, mushārakah mutanāqīṣah

home financing achieves higher level of maqāṣid because the mean score for each and

every parameter is relatively higher than the bayʿ bithaman ājil contract.

iii

لبحثا ملخص

لها والخدمات التي متنوعة من المنتجاتمجموعة تقدم لمؤسسات المصرفية الإسلاميةاالمنتجات ومع ذلك، يجب أن تكون .العملاء المختلفة احتياجات مختلفة لتلبية خصائص

على أساس الشرعية المقاصد المعروفة باسم الشريعة اف أهد بما يتماشى مع المصرفيةالمقدمة هذه الدراسة من الرئيسي وكان الهدف. الازدهار الاقتصادي و الروحية فتحقيق التنمية هد

والتمويل القائم على حقوق المساهمين ( البيع بثمن آجل) القائم على الديون التمويل لتحليل كثير من النقاش حول اكال وإن كان هن. المقاصد تحقيق من منظور( مشاركة متناقصة)

البيع من المفهوم. المقاصد منظور تحليل البيع بثمن آجل ولكن تفتقر إلى و متناقصة مشاركةومع ذلك، . تمويل الإسكان منشأة مشاركة متناقصة لازما يشيع استخدامها في و بثمن آجل

بالإضافة إلى و متناقصة مشاركة مقارنة ماليزيا شعبية في قال البيع بثمن آجل المشهور الأكثر ليين والمح للمحل جدل كبير بين العلماء المفهوم الإسلامي من ذلك، كما أنها واحدة

العقد، هو استعراض من هذه الرسالة والغرض. الشريعة الامتثال و صحة من حيث الدوليينالمنتجات المصرفية القضايا ذات الصلة على حد سواء الإجراءات و هيكل، وميزات و

أربعة أهد المنتج باستخدام المقاصد قياس مدى تحقيق هدفت هذه الدراسة إلى. الإسلامية و نزيهة وشفافة، والحفاظ على التناغم و المتوافقة مع الشريعة الإسلامية من محددة اف

أهد تحقيق اتل والاستبيان( كل هي مقابلات شبه)اتشبه منظمة مقابل سيتم إجراء. التسويقكل دلل مع تحقيق أعلى متناقصة تمويل الإسكان مشاركة وأظهرت النتائج أن. اف البحث

.البيع بثمن آجلتمويل الإسكان في معلمة مما

iv

APPROVAL PAGE

I certified that I have supervised and read this study and that in my opinion, it

conforms to acceptable standard of scholarly presentation and is fully adequate, in

scope and quality, as a research paper for the degree of Master of Science in Islamic

Banking and Finance

………………………………….

Zaharuddin Bin Abdul Rahman

Supervisor

This dissertation was submitted to the Kulliyyah of Institute of Islamic Banking and

Finance and is accepted as a partial fulfilment of the requirements for the degree of

Master of Science of Islamic Banking and Finance

…………………………………..

Ahamed Kameel Bin Mydin Meera

Dean, Kulliyyah of Institute of

Islamic Banking and Finance

v

DECLARATION

I hereby declare that this dissertation is the result of my own investigations, except

where otherwise stated. I also declare that it has not been previously or concurrently

submitted as a whole for any other degrees at IIUM or other institutions.

Wahidah Binti Shari

Signature………………………… Date……………………………..

vi

INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

DECLARATION OF CORYRIGHT AND AFFIRMATION OF

FAIR USE OF UNPUBLISHED RESEARCH

Copyright © 2013 by Wahidah Binti Shari. All right reserved

CREATIVITY IN PRIMARY SCHOOL STUDENTS IN

NATIONAL AND ISLAMIC RELIGIOUS SCHOOLS

I hereby affirm that The International Islamic University Malaysia (IIUM) hold all

rights in the copyright of this work and henceforth any reproduction or use in any

form or by means whatsoever is prohibited without the written consent of IIUM.

No part of this unpublished research may be reproduce, stored in a retrieval

system, or transmitted in any form or by means, electronic , mechanical,

photocopying, recording or otherwise, without prior written permission of the

copyright holder.

Affirm by Wahidah Shari

…………………………… ……………………..

Signature Date

vii

ACKNOWLEDGEMENT

All praise due to Allah and salutations upon His Holy Prophet Muhammad (SAW). I

thank to Allah for having inspired me to tread and path of the acquisition of Islamic

learning. I pray that this humble effort be accepted by Him, Inshallah.

First of all, I wish to express my deep and abiding gratitude to my king and

considerate supervisor, Assistance Professor Dr Zaharuddin Abdul Rahman. His

guidance and erudition permeates the pages of this thesis. May the almighty showers

His richest blessings upon Him. Special thanks to my husband Mohamad Hanif, my

son Mohamad Aqil Hasif, my parents whose constant encouragement and support

inspired me to overcome all obstacles. Thank you for your boundless patience.

Finally, my sincere gratitude goes to the University for having afforded me this

opportunity to continue my studies.

23rd

July 2013

viii

TABLE OF CONTENTS

Abstract ………...………………………………………………………….. ii

Abstract in Arabic …………………………………………………………. iii

Approval Page ……………………………………………………………... iv

Declaration Page …………………………………………………………... v

Copyright Page ……………………………………………………………. vi

Acknowledgement ………………………………………………………… vii

List of Tables ……………………………………………………………… x

List of Figures ……………………………………………………………... xi

List of Abbreviations………………………………………………………. xii

CHAPTER ONE: INTRODUCTION ………………………………….. 1

1.0 Introduction …………………………………………………... 1

1.1 Background of Study …………………………………………. 1

1.1.1 Problem Statement …………………………………….. 4

1.1.2 Objective of the Study ………………………………… 6

1.1.3 Research Questions ……………………………………. 6

1.1.4 Contribution of Study …………………………………. 7

1.1.5 Organization of Study …………………………………. 8

1.2 Literature Review …………………………………………….. 8

1.2.1 Institutional Level ……………………………………... 9

1.2.2 Individual Scholars ……………………………………. 11

1.2.3 Industry Players ……………………………………….. 15

1.3 Research Methodology ……………………………………….. 17

1.3.1 Research Objectives …………………………………… 17

1.3.2 Research Design ……………………………………….. 18

1.3.3 Application of Sekaran’s Operational Method ………… 18

1.3.4 Data Collection ………………………………………... 19

1.3.5 Sampling ………………………………………………. 20

1.3.6 Data Analysis ………………………………………….. 23

CHAPTER TWO: MAQASID AL-SHARI’AH ………………………… 24

2.0 Introduction …………………………………………………... 24

2.1 Maqasid Al-Shari’ah ………………………………………………. 24

2.2 Maqasid Al-Shari’ah in Islamic Home Financing ……………. 25

2.2.1 First Parameter: Shari’ah Compliant ………………….. 26

2.2.2 Second Parameter: Justice and Transparency …………. 32

2.2.3 Third Parameter: Harmonious Relationship ..…………. 35

2.2.4 Fourth Parameter: Marketability ………………………. 38

ix

CHAPTER THREE: CURRENT PRACTICE OF BBA AND MM …... 42

3.0 Introduction …………………………………………………… 42

3.1 Debt-Based and Equity-Based Financing …………………….. 42

3.2 Bay’ Bithaman Ajil (BBA) …………………………………… 43

3.2.1 Current Practice of BBA Home Financing …………….. 44

3.2.2 Specific Elements and Conditions of BBA ……………. 46

3.2.3 Issues in BBA …………………………………………. 48

3.3 Musharakah Mutanaqisah (MM) …………………………….. 51

3.3.1 Current Practice of MM Home Financing ……………… 52

3.3.2 Specific Elements and Conditions of MM …………….. 54

3.3.3 Issues in MM …………………………………………... 57

CHAPTER FOUR: FINDING …………………………………………... 59

4.0 Introduction …………………………………………………... 59

4.1 Data Collection and Response Rate ………………………….. 59

4.2 Respondents Profile ………………………………………….. 59

4.2.1 Demographic Characteristics ………………………….. 60

4.4.2 Home Financing History ………………………………. 61

4.4.3 Islamic Financing Knowledge ………………………… 63

4.3 Validity and Reliability Test ………………………………….. 65

4.3.1 Validity Test …………………………………………… 65

4.3.2 Reliability Test ………………………………………… 65

4.4 Comparison From Perspective of Maqasid Achievement …….. 66

4.4.1 Frequency Analysis Result ……………………………. 66

4.4.2 Descriptive Analysis Result …………………………… 72

CHAPTER FIVE: CONCLUSION ……………………………………... 75

5.0 Introduction …………………………………………………... 75

5.1 Objectives and Results ……………………………………….. 75

5.2 Summary ……………………………………………………… 77

5.3 Suggestion and Recommendation ……………………………. 78

BIBLIOGRAPHY ……………………………………………………… 80

APPENDIX ………………………………………………………………... 85

x

LIST OF TABLES

Table No. Page No.

1.1 Research objectives and Research questions 6

1.2 Islamic Financing by Concept (as at end of May 2012) 16

1.3 List of local Islamic bank based on the concept used in 22

Islamic home financing

1.4 The distribution of the target samples 23

for the questionnaires

4.1 Demographic Characteristics 60

4.2a Have you ever bought a house 62

4.2b Which banking institutions would be the option 62

to finance your dream house

4.3 Do you know how BBA and MM contract 64

works in Islamic home financing

4.4 Reliability Statistics 66

4.5a Providing fair dealing 67

4.5b Having a valid offer and acceptance (‘aqad) 68

4.5c Fulfill valid condition from Shari’ah perspective 69

4.5d Free from interest element 70

4.5e Providing Islamic home financing with affordable price 71

4.5f Best alternative to conventional housing loan 72

4.6 Descriptive Statistics for BBA and MM 73

xi

LIST OF FIGURES

Figure No. Page No.

1.1 Operationalizing the concept of achievement maqāṣid 19

3.1 Modus operandi of BBA home financing 45

3.2 Modus operandi of mushārakah mutanāqīṣah home financing 53

4.1 What are the preferred criteria in selecting home financing facility 62

4.2 Do you know various Islamic concepts used 64

in Islamic home financing

4.3 Comparison between BBA and MM 74

From maqāṣid al- Sharīʿah perspective

xii

LIST OF ABBREVIATIONS

AAOIFI Accounting and Auditing Organization for Islamic Financial Institution

BAFIA Banking and Financial Institution Act

BBA Bayʿ Bithaman Ājil

BIMB Bank Islam Malaysia Berhad

BNM Bank Negara Malaysia

C Concept

c. Copyright

D Dimension

E Element

et al. (et alia): and others

IBIs Islamic Banking Institutions

IDMAC International Development Management Conference

IIUM International Islamic University Malaysia

ISRA International Shari’ah Research Academy

JAKIM Jabatan Kemajuan Islam Malaysia

MM Mushārakah Mutanāqīṣah

n. d. No date

OIC Organization of the Islamic Conference

PLS Profit and Loss Sharing

PPA Property Purchase Agreement

PSA Property Sale Agreement

SAC Shari’ah Advisory Council

SC Shari’ah Committee

Sd. Standard Deviation

SPSS Statistical Package for the Social Sciences

v Verse

1

CHAPTER ONE

INTRODUCTION

1.0 INTRODUCTION

The first chapter intends to give a brief description of this study. This chapter will be

sectioned into three headings: background of study, literature review and research

methodology. Section 1.1 will explain the background of study, the problem

statements, and the objectives of the study, research question, contribution and

research organization. Meanwhile, section 1.2 will review past literature related to this

research topic. The literature has been written by three categories of researchers such

as institution, individual scholars and industry players. Final section will determine

the method that will be adopted in this study.

1.1 BACKGROUND OF STUDY

Economy is an essential element in the development of a country that eventually

affects the social well-being. Sudin & Wan Norsofiza1 defines economy as a branch of

knowledge about the ways people use existing resources to create products and

services for their use. A wise choice of limited resources to meet unlimited needs will

lead to economic justice. The Islamic economic system has been in existence since the

earlier prophets. The Islamic economic system aims to promote equality in wealth

1 Sudin & Wan Norsofiza, Islamic finance and banking system: philosophies, principles & practices

(Selangor: McGraw Hill, 2009).

2

distribution because Allah strongly condemns the monopoly of wealth by a particular

group.

Currently, Islamic banking industry plays a significant role towards the growth

of the economy worldwide. Although the Islamic banking industry began with

conventional banking that existed about 420 years ago (Homoud, 1986) it has shown a

gradual change since 1963 with the establishment of Islamic bank in Egypt namely

MitGhamr Local Saving Bank. The vast development of interest-free banking system

becomes clearer by offering a wide range of products and services in accordance with

Sharīʿah principles in the industry.

In Malaysia, Bank Islam Malaysia Berhad (BIMB) was the first Islamic bank

established in 1983 to spearhead the introduction of Islamic banking products and

services (International Sharīʿah Research Academy [ISRA], 2011). The establishment

of BIMB aims to cater to the needs of the Muslims in Malaysia by offering banking

products and services which are commonly available at conventional banks. Even

though on the surface, an Islamic bank offers similar range of products found in

conventional bank, the legal structure are free from the elements of ribā, gharar, and

maysīr. Good response among the Muslims to the Islamic banking product and

services has driven the conventional banks to offer Islamic banking products and

services through the Islamic banking windows, and to also branching into operating

Islamic subsidiary.

Islamic banks offer various banking products and services with different nature

to meet the different needs of the customers. Yet, the Islamic banking product offered

by the Islamic banks must be in line with the Sharīʿah objectives (maqāṣid Sharīʿah)

which are centralized on the objectives of accomplishing the development of both the

spiritual and social-economic well-being (Asim Anuar, Ezry Fahmy &Jhordy, 2009).

3

The Guidelines on Introduction of new products produced by Bank Negara Malaysia

(Bank Negara Malaysia [BNM], 2012) state that,

The new Sharīʿah -compliance products must

meet the following condition: a) the products

(including its accompanying documentations)

must be approved by the financial institution’s

Sharīʿah Committee (SC), b) the product’s

underlying Sharīʿah contract, structure and

features must be similar to the products that have

been approved by the SAC; and c) the product

must be consistent with the SAC resolutions.

This clearly shows that, each and every Islamic banking product must go through

various processes before being introduced in the industry. It is to ensure the ability of

Islamic banking products to compete with the conventional banking instruments and

become the best alternatives available to the Muslim community to substitute the

interest-based loan.

However, as we can see that, there are a number of Islamic banking products

being in dispute both in theories and applications among the Sharīʿah scholars. One of

the controversial products argued by the Sharīʿah scholars is Islamic home financing

which uses the contract of bayʿ bithaman ājil (deferred payment sale)2. Most of the

Islamic banks in Malaysia adopt the contract of bayʿ bithaman ājil (BBA) in Islamic

home financing compared to muḍārabah or mushārakah (partnership) contract. The

bayʿ bithaman ājil contract, however is not accepted in the Middle East countries such

as Saudi Arabia, Bahrain, and Dubai because of the structure of the contract is similar

with bay’ al-ʿīnah which involves the sale and buy back. The dominant contract that

are used in the Middle East country for Islamic home financing are mushārakah

2 Dzuljastri Abdul Razak&Fauziah Md. Taib, “Diminishing Partnership Home Financing Concept as an Alternative to Bai Bithaman Ajil (BBA): Empirical Evidences from the Perceptions of Shari’ah Scholars and Bankers” (2009) The 3rd ISDEV International Islamic Development Management Conference (IDMAC 2009): Islamic Capital Market.

4

mutanāqīṣah, ijārah muntahiyah bit tamleek, istiṣnā, and Forward ijārah (Kuwait

Finance House Research Ltd, 2010).

With regard to the dispute raised by the various Sharīʿah scholars pertaining to

the BBA home financing (debt-based financing), I realizes the importance and the

needs to further investigate the products to ensure it is complying with the objectives

of Sharīʿah (maqāṣid Sharīʿah) from every aspect. Researcher like Eddy Yusof et al.,

(2009) suggest that, debt-based financing (bayʿ bithaman ājil) is against the maqāṣid

Sharīʿah as there is no equality between poor and rich, while the equity financing

(mushārakah) may be evidenced to offer a better spectrums of customer regardless of

their financial capability. However, this suggestion maybe misleading, hence will be

discussed in this thesis. Furthermore, to what extent the mushārakah contract is

claimed to achieve the maqāṣid Sharīʿah? It is therefore, the aims of this research to

look into the maqāṣid aspect and how the debt based financing and the equity based

financing can fulfill the Sharīʿah objectives.

1.1.1 Problem Statement

Like any conventional bank, an Islamic bank is a financial intermediary between

surplus and deficit unit. Islamic bank also offers various products which are normally

available at conventional bank. What should distinguish an Islamic bank from the

conventional is that the Islamic bank aims to establish distributive justice free from all

sorts of exploitations (Elmelki anas, 2009). Furthermore, Islamic banks should not

only base on profit maximization, but they must also be concerned with social

welfare. In achieving the goal to establish distributive justice, each and every Islamic

financial institution must ensure that all products offered by them are not only

Sharīʿah compliance in their form but also their substance. On the other hand, the

5

product and services must also target to achieve the highest objectives of Sharīʿah

(maqāṣid Sharīʿah) which benefit the people and remove hardship from the

community (Mohd Herwan & Mohd Hawari, 2011).

Based on the statistic from BNM3, bayʿ bithaman ājil can be regarded as the

most popular Islamic financing contract in Malaysia, though it is not accepted by

many Sharīʿah scholars. In Malaysia, bayʿ bithaman ājil has been taken as the

underlying concept for most of the Islamic financing products in the last two decades.

In most cases, bayʿ bithaman ājil is being applied for home financing. However, there

are number of cases decided in Malaysian court of law which are normally on the

validity of bayʿ bithaman ājil contract and its implementation. In the verdict made by

the court in the case of Affin Bank v Zulkifli Bin Abdullah4 bayʿ bithaman ājil gives

the burden to the customer when it carries a higher financing balance compared to

conventional banks particularly when the customer is in default or at an early

settlement. As a result, some of the Islamic banks had introduced another asset

financing contract namely mushārakah mutanāqīṣah (diminishing partnership) as an

alternative to bayʿ bithaman ājil (Nooraslinda, Rohana, Rafidah, Roshayani,

Mardiyyah & Abdul Razak, 2011). This issue motivates the researcher to look at the

structure of a bayʿ bithaman ājil and the extent to which it brings benefits to society.

Although there have been many literatures discussing the debt-based financing

(bayʿ bithaman ājil) and equity-based financing (mushārakah mutanāqīṣah), analysis

on maqāṣid achievement is still lacking. This presents the gap in the literature. This

study raises the question on how the maqāṣid Sharīʿah can be achieved through these

two products.

3 Bank Negara Malaysia, Monthly Statistical Bulletin September 2012 at [XLS, 63K], <http://www.bnm.gov.my> viewed on 27 November 2012. 4 See Affin Bank Bhd v Zulkifli Abdullah [2006] 1 CLJ 438 for the detail cases

6

1.1.2 Objective of the Study

The main purpose of this study is to measure the maqāṣid achievement towards the

current practice of home financing. Main objective is expected to be achieved at the

end of the study through supplementary objectives listed below:

i. To examine the characteristic of maqāṣid Sharīʿah in two Islamic home

financing products namely bayʿ bithaman ājil (BBA) and mushārakah

mutanāqīṣah (MM)

ii. To examine the current practice of home financing in Islamic banking

industry.

iii. To compare between bayʿ bithaman ājil (BBA) and mushārakah mutanāqīṣah

in the perspective of maqāṣid achievement.

iv. To suggest any improvement in the current practices of Islamic home

financing in order to achieve the Sharīʿah objectives.

1.1.3 Research Questions

For the purpose of achieving those research objectives, research questions have been

outlined in table 1.1 below:

Table 1.1

Research objectives and Research questions

No. Research objectives Research Questions

i. To examine the characteristic of

maqāṣid Sharīʿah in two Islamic

home financing products

namely bayʿ bithaman ājil

(BBA) and mushārakah

mutanāqīṣah (MM).

a. What are the characteristics of

maqāṣid Sharīʿah?

b. What type of maqāṣid Sharīʿah

needs to be achieved in Islamic

banking products?

7

ii. To examine the current practice

of home financing in Islamic

banking industry.

a. What is the Modus operandi of

debt-based (BBA) financing and

equity financing (mushārakah

mutanāqīṣah) practiced by modern

Islamic banking institutions?

b. Is the practice considered as

Sharīʿah compliant?

c. Does the current practice able to

achieve maqāṣid Sharīʿah?

iii. To compare between bayʿ

bithaman ājil (BBA) and

mushārakah in the perspective

of maqāṣid achievement.

a. To what extent bayʿ bithaman ājil

and mushārakah achieve the

Sharīʿah objectives?

b. Which is more ideal to be practiced

in modern Islamic Banking from

perspective of maqāṣid al-

Sharīʿah?

iv. To suggest any improvements in

the current practices of Islamic

home financing in order to

achieve the Sharīʿah objectives

a. What is the drawback of the Islamic

home financing?

b. How it can be improved to ensure

that it achieves the objectives of

Sharīʿah?

1.1.4 Contribution of Study

Proper discussion throughout this paper will contribute to the body of knowledge as

this study address the issue pertaining to the maqāṣid al-Sharīʿah from a different

angle. The nature of the study helps the reader to have a better understanding of the

concept of maqāṣid al- Sharīʿah by highlighting the different definition and opinion of

maqāṣid al-Sharīʿah from various scholars. Besides, this study also presents the

specific characteristic of Sharīʿah objectives as a yardstick to measure the level of

maqāṣid achievement based on the Islamic banking products.

In addition, new perspective of study relating to the maqāṣid achievement on

debt-based financing (bayʿ bithaman ājil) and equity based financing (mushārakah)

8

brings about the awareness among the practitioner and the public to look for the best

alternative for asset financing to be practiced in the future. The finding of this study

would also provide the starting point for Islamic banking institutions to move forward

in line with the Sharīʿah principle so as to ensure the survival and growth of the

Islamic banking industry.

1.1.5 Organization of study

This paper consists of five chapters. The first chapter offers the layout of this research.

This chapter has been divided into three sub-sections which briefly explain the

background of the study, literature review and the research methodology adopted in

this thesis. The next chapter will focus on the objectives of the Islamic law (maqāṣid

al- Sharīʿah) in the perspective of Islamic home financing. Then the following chapter

will elaborate on the current practice of Islamic home financing using two Islamic

principles termed as bayʿ bithaman ājil and mushārakah mutanāqīṣah. It also

discusses some issues or arguments arise in these products. Meanwhile, chapter four

will offer the research finding to evaluate the variables. Finally, in Chapter 5, I will

conclude the whole research study and also to see whether each research objectives

has been achieved or not. I will also provide some recommendation for future

research.

1.2 LITERATURE REVIEW

Extensive researches have been done by the academician, practitioner and scholars

related to the topic of this study. In this section, I will classify the literature into three

categories of researchers. The immediate category will view on the research done by

the institutional level. Later, followed by the discussion carried by individual scholars

9

and final category will be focusing on the discussion by the industry players or

practitioners.

1.2.1 Institutional level

Literature review under the institutional level will be classified into two sub-topics.

The first literature consists of discussion on mushārakah mutanāqīṣah, while the other

will focus on bayʿ bithaman ājil.

a) Mushārakah mutanāqīṣah

Among the literature reviewed under the mushārakah mutanāqīṣah is research entitled

mushārakah mutanāqīṣah and Its Sharīʿah Parameters by Dr. ‘Abd al-Sattar Abu

Ghuddah. The paper was presented at the 15th

session of the International Islamic Fiqh

Academy of the Organization of the Islamic Conference (OIC), in 2004 held in

Musqat, Oman. The presentations lead to the resolution issued by the institution as

follow:

Mushārakah mutanāqīṣah is permissible, if the

laws of partnership are observed and the following

rules are taken into consideration: a) Non-

existence of undertaking for either of the partners

to purchase the shares of the other partner at cost

price. b) Non-existence of stipulation for one of

the partners to bear the entire insurance or

maintenance expenses. The expenses should

instead be borne in proportion to each partner’s

shares. c) Profit should be distributed based on the

profit sharing ratio. d) Detailing the contract and

obligations involved in the mushārakah

mutanāqīṣah transaction. e) There should be no

stipulation to prevent either of the partners to

withdraw his contribution (funding).5

5 ISRA, Al-mushārakah Al-mutanaqisah And Its Shari’ah Rules (Resolution No. 136 (15/2) 2004 by The International Council Of Fiqh Academy) <http://www.isra.my/fatwas/topics/commercial-banking/financing/mushārakah/item/> viewed on 16 January 2013

10

The other issue arising in the implementation of mushārakah mutanāqīṣah has

been discussed by Sharīʿah Advisory council of Bank Negara Malaysia in its 56th

meeting held on 5th

February 2006. The discussion resolved that:

In implementing mushārakah mutanāqīṣah

contract, it is permissible for the contracting

parties to: a) combine the two contacts of

mushārakah and ijārah in one document of

agreement, as long as both contracts are concluded

separately and clearly not mixed between each

other; and b) impose a pledge on the shares owned

by the customer because the right of beneficial

ownership is recognized by Sharīʿah.6

For the purpose of helping the Islamic financial services industry to identify,

understand, apply and distinguish the contract of mushārakah mutanāqīṣah from other

contract prevalent in the industry, Sharīʿah Advisory Council of Bank Negara

Malaysia has issued a draft of Sharīʿah Parameter for mushārakah contract in 2010.

The parameter highlights various financial instruments including mushārakah

mutanāqīṣah, mushārakah financing and mushārakah investment. In particular,

specific features of mushārakah mutanāqīṣah were outlined in the parameter.7The

existence of parameter support two resolutions regarding the mushārakah

mutanāqīṣah made by the International Islamic Fiqh Academy of the Organization of

the Islamic Conference (OIC) and Sharīʿah Advisory council of Bank Negara

Malaysia.

6 BNM, Resolution of Shariah Advisory Council of Bank Negara Malaysia, <http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/07_shariah_resolution.pdf> viewed on 23 January 2013, page 10/37 7 Draft of Shariah Parameter Reference 4: Mushārakah contract, http://www.bnm.gov.my/guidelines/05_shariah/04_draft_shariah%20parameter_spr4.pdf viewed on 23 January 2013

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b) Al-bayʿ bithaman ājil

Another research area is the issue of ibrāʾ (rebate) in bayʿ bithaman ājil contract.

Sharīʿah Advisory council of Bank Negara Malaysia in its 24th

meeting (24th

April

2002) resolved that the Islamic banking institutions are allowed to provide ibrāʾ to the

customers who make early settlement and the clause shall be stipulated under the

method of payment.8 In addition, the council in its 101

st meeting on 20

th May 2010

decided that:

IBIs are required to grant ibrāʾ to all customers

who settle their financing before the end of their

financing tenure, but is not limited to the

following situations: a) customer who makes an

early settlement including those arising from

prepayments, b) settlement of the original

financing contract due to restructuring exercise, c)

settlement by customers in the case of default, d)

settlement by customers in the event of

termination of financing before the maturity date.9

The guidelines issued also include the calculation of ibrāʾ together with illustrations

on the implementation of ibrāʾ. This is because, ibrāʾ is one of the issues arises in the

bayʿ bithaman ājil contract being discussed in most Islamic banking cases in

Malaysia. Another issue will also be included in this thesis.

1.2.2 Individual Scholars

There are some other literature under reviewed were conducted by individual scholars

who aware on the issues and attempted to resolve it for the benefit of the Islamic

financing industry and the Muslim community. As for the individual scholars, the

8 BNM, Resolution of Shariah Advisory Council of Bank Negara Malaysia, <http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/07_shariah_resolution.pdf> viewed on 23 January 2013, page 31/37 9 BNM, Guidelines on Ibrāʾ (Rebate) for Sale-Based Financing, <http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/ibra.pdf> viewed on 25 February 2013, Page 6/21.

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researcher has sub-divided the literature into two categories. Bayʿ bithaman ājil and

mushārakah mutanāqīṣah represent the first category, while the maqāṣid Sharīʿah

represents the second category.

a) Al-bayʿ bithaman ājil and Mushārakah mutanāqīṣah

The most recent article written by Apnizan Abdullah entitled ‘Does Our PLS (Profit

and Loss Sharing) Paradigm Resemble Its True Concepts?’ was published in ISRA

bulletin in December 2012. In the article, the writer stresses that the true profit and

loss-based financing (muḍārabah and mushārakah) concept was not correctly

implemented. He further argues that, although the mushārakah mutanāqīṣah connotes

the PLS paradigm, the corresponding substance is virtually a debt-based instrument.

However, in my opinion, the argument is unfounded because writer does not give any

proof to support the argument.

In section two (Islamic banking products) of a book written by Saiful azhar

Rosly,10

one issue of bayʿ bithaman ājil contract is addressed. The issue addressed is

“what type of bayʿ bithaman ājil to offer – a fixed rate or a flexible rate bayʿ bithaman

ājil?” He further explains that the floating rate bayʿ bithaman ājil is a better option to

the bank only if the interest rate goes up. Otherwise, it will cause the Islamic bank to

suffer losses if the interest rate declines. The writer suggested partnership contract

known as mushārakah mutanāqīṣah as it can solve the problem of choice in uncertain

economic condition.

In other sub-topic under the same section, the writer argues on the availability

of ‘iwad (equivalent counter value) in the profit generated from the contract of bayʿ

10 Saiful Azhar Rosly, Critical issues on Islamic Banking and Financial Markets: Islamic Economics, Banking and Finance, Investments, Takaful and Financial Planning, (Kuala Lumpur: Dinamas Publishing, 2005), 141.