ISRA – the International Shari`ah Research

Academy is the new kid in town. As with

any new organization, people would be

anxious to understand its role and the

value proposition it brings. In conjunction

with the launch of our maiden ISRA Bulletin,

we would like to shed light unto our

background, why we are here and what

we offer. We will also take this opportunity

to dispel some of the misconceptions

or queries that lingers in the mind of our

customers.

Why is ISRA here? Amongst the most frequently asked

question is “Why is ISRA here”? The best

person to answer this question is of course

our executive director, Dr. Akram Laldin.

“ISRA is here to fill up the gap that we

have in the industry. On the ground i.e.

people in the industry may have certain

concerns, how to address this issue, how

to address that issue. However, there is

no dedicated institution that is doing this

job. We do have universities conducting

research, but of course in higher

education institution, the research done

is not focused on Islamic finance alone.

What we need is a focused research

where you address the burning issues in

the market. Therefore, in ISRA, this is the

mandate that is given to us, to identify the

pressing issues in the market, co-operate

with the academic and do research

on the area,” he explained our role in

simple terms.

Does that mean we only focus

on applied research at ISRA?

“When we talk about Islamic

finance, we cannot confine

ourselves to only focus on

research that addresses the

issue of the day. From the

western experience, the financial industry

developed based on a very concrete

framework or building blocks. Likewise,

in Islamic finance we need to develop

the concrete theoretical framework that

underlie the whole practice (fundamental

research) besides addressing the day to

day issue (applied research),” Dr. Asyraf

Wajdi Dusuki, ISRA’s Head of Research

Affairs, clarified. In other words, at ISRA

we have both the fundamental and

applied research because both are

important. Applied research will help the

industry resolve short term issues while

fundamental research will help propel the

industry towards orderly development.

With regards to these pressing issues

in the industry, one must wonder, isn’t that

what Shari`ah advisory boards do i.e. help

address these pressing issues? Having

been a Shari`ah advisor himself, Dr. Akram

pointed a simple

reason why

r e l y i n g

on the

Shar i`ah

advisors

a l o n e

w o u l d

not be

WHY IS ISRA IN TOWN?

Dr Akram Laldin, Executive Director

www.isra.my

sufficient to help the industry with these

pertinent issues. “We have to understand

that the Shari`ah board, even though

they exist within the financial institutions,

there are many limitations. One, Shari`ah

advisors are part-timers. They have their

core-business; sometimes it’s teaching,

while some are attached to administrative

posts. So definitely their full time focus will

be more on their core job. Secondly and

more importantly, even based on my own

experience being on the Shari`ah advisory

board, there is no in-depth research that

is being done to address the issue that

is brought to us in the Shari`ah board

meeting. Probably there might be some of

the scholars that sit on the board that do

research, but these are more ad-hoc kind

of an arrangement. When you have an

issue, you try to see a number of references

and discuss the various views and fatwa

and try to come out with a solution by

adapting to certain views. However there

is no deep analysis to determine which is

the best view, the strongest view and the

most practical view for example? So we

here at ISRA, it is our aim to provide the

Shari`ah scholars the research findings and

resources in order to assist them in making

their decision,” Dr. Akram elaborated.

What are our aims?We have chartered our short term and long

term aims. As Dr. Akram pointed out in the

beginning, in the short run we are trying to

address the immediate issues that need

to be resolved. We have three research

units under Research Department at ISRA

– banking, Takaful and capital markets, and

for the short run we focus on research in

pertinent issues in these different units. Our

approach in doing research is unique. As our

core business is to focus on applied research,

from the very beginning we engage with

the industry to ensure that we are focusing

on the right areas. “Before embarking on a

research we would first obtain feedback from

the industry via the ISRA-Industry discussion

series. Based on their feedback we will

prioritize the research areas and assemble

our research team that comprise of experts

from the industry and the academia. ISRA’s

researcher will be spearheading the team,”

Dr. Asyraf provided the workings of ISRA’s

research department.

Within the six month of our operation

wehaveembarkedon15researchprojects

andsevenofthesehavebeencompleted.

For an update on our research projects

please refer to the Research Update

Section. One example of the pressing

issue that we addressed in the banking

sectorforinstanceisthedisputeresolution

mechanisminIslamicbanking.Thisisoneof

the issues that sometime haunt people in

theindustry.Wheneverthereisanydispute

and there is a need to bring the matter

to court, players are not sure about the

outcome.Theyareconcernedifthejudge

hasproperawarenessandknowledgewith

regards to the details of Islamic banking.

How shall we address this issue? One of

thealternativesthatweareproposingisto

strengthenthearbitrationframeworkwhere

thepartieshavetheoptiontoappointan

arbitrator that they are comfortable with.

This will minimize the concern on whether

thedecidingpersonhastheexpertise.ISRA

willconductfurtherresearchonthisoption

and hopefully this can help the industry

addresstheissueofdisputeresolution.

“Besidesaddressingtheburningissues

in the short run, our immediate aim is to

recruitthenewbreedofShari`ahscholars,”

Dr. Akram highlighted. By new breed of

Shari`ah scholars, we refer to those that

have the competency in Shari`ah, finance

and legal knowledge. “This will start from

next year when we have our scholarship

fund. We have budgeted for five

scholarshipsnextyearandwewillidentify

potential candidates who will major in

Shari`ah, minor in finance and law. So they

willbehavingthesethreespecializations,

meaning that they will have good

knowledge in Shari`ah and reasonable

knowledge in finance and law. So we

hope that when these people graduate,

they will be the new breed of Shari`ah

scholars;probablythesecondgeneration

oftheShari`ahscholarswhowillhavethe

ability to understand finance as well as

Shari`ahandlaw,”Dr.Akramsharedhow

ISRA would help the industry tackle the

dauntingissueoflimitedShari`ahscholars.

In the long term, one of our aims

is to develop ISRA’s research portal; a

one-stop centre that people can refer

to. On the internet you can find variety

of information, but the information are

scattered here and there and it is not

classified. This is one of the challenges that

we are taking. We are extracting, without

jeopardizing the intellectual property,

and make the information accessible

according to topics. “Lets say you want to

find something on Musharakah, you can

go to the Musharakah section and find

details – what are the products, what is

Musharakah Mutanaqisah, what are the

issues, what will happen upon default etc.

We will try to make it as comprehensive

as we can and furthermore we will try to

link this information with the fatwa that

is available on the different issues,” Dr.

Akram provided a glimpse of his vision for

ISRA’s research portal. This will facilitate

information gathering by the industry and

academia, and they can be assured that

the information are from a reliable source.

Of course we need to develop this bit by

bit.

Besides the research portal, ISRA would

also like to a certain extent, harmonize

the different interpretation and views of

Shariah that exists in the industry in the long

run. We will achieve this via the Shari`ah

parameter that we are developing. “ISRA

is not a Shari`ah standard setting body. We

do not issue fatwa, nor do we issue Shari`ah

standards. How we are different from the

standard setting body is that, standard

setting body will come out with a particular

standard. But we are looking beyond that.

We will try to set the parameter. We will

give the different alternatives that are

available which is within the parameter

(i.e. boundary) of Shari`ah. We are not

confining to just one school of thought

but we will provide all the views that are

within the Shari`ah boundary. We are

currently also working closely with BNM

to come up with something similar. With

that, hopefully to a certain extent this will

guide the market and nobody can claim

that they are superior or more Islamic than

others as these practices are all within the

Shari`ah parameter, Dr. Akram pointed out

the features of the Shari`ah parameter.

This is the harmonization that ISRA aiming

to achieve.

With regards to the geographical

location that we focus on, as an

international establishment ISRA will not

only to look at local issues but we will

COVER STORYInternational Shari’ah Research Academy for Islamic Finance� �COVER STORY

also look at international issues. “In doing

so, for next year we are trying to get

strategic alliances with other research

organizations. For the past few months, we

have been in good contact with Bahrain

Institute of Banking and Finance (BIBF),

Islamic Research and Training Institute

(IRTI), Research Department of Emirates

Islamic Bank, Shariah Compliant Division

of Ar-Rajhi Saudi and Durham University

in the UK where they have a pool of

PhD students doing research on Islamic

finance,” Dr. Aysraf enlightened on ISRA’s

strategic alliances thus far. “Insha’Allah

next year we plan to have at least two

overseas thematic workshops which will

discuss international pressing issues,” he

gave a glimpse of what ISRA has on the

table for next year in the international

forefront.

How are we different from other institutions?As there are increasing numbers of

institutions set up to develop this growing

industry it is therefore imperative that

ISRA clarifies where we fit in the big

picture. What is our niche? How are we

different from other organizations? First

and foremost it’s important to establish

how ISRA and INCEIF complement each

other as both are under the umbrella of

BNM. Nonetheless INCEIF and ISRA focus

on different realms of the industry. “First

of all I have to clarify that ISRA is within

the set-up of INCEIF. However we are an

autonomous body within INCEIF. We meet

with INCEIF at certain level of governance.

We share the same governing council

and BOD. As it is now we also share the

same EXCO with INCEIF. We meet there.

However we are autonomous in terms of

administration as well as funding. We have

our own fund,” Dr. Akram crystallized the

organization structure and ISRA’s meeting

point with INCEIF. The major difference

between INCEIF and ISRA is that, INCEIF

is a university which offers academic

qualification. At ISRA we do not offer

academic qualification, we only conduct

research. We work closely with INCEIF

definitely but we don’t offer any academic

qualification.

Asaproactiveregulator,BNMhasalso

set up the Islamic Banking and Finance

Institute Malaysia (IBFIM). Some people

are also curious as to how ISRA and

IBFIMaredifferent?“IBFIMisalsoabody

established under BNM, but the main

focus of IBFIM is training and advisory.

That’swhytheyhavethedifferenttraining

programmes for the industry. In ISRA we

don’t conduct training, except for the

Shari’ahadvisorswherewewillgivethem

updates and specific trainings. Besides

thatwedon’thaveastructuredtraining

programme for anyone. On top of that,

IBFIMisalsodoingadvisorywork;advising

onunittrustforexample.InISRAwedon’t

do that. In addition, IBFIM is also a profit

making body, but ISRA is a non-profit

making institution because we have our

endowmentfund,”Dr.Akrampointedout

thedifferentroleofISRAandIBFIM.

Simplyput,ISRAiswhereShari`ahand

marketintegrates.Thisisourniche.“Ithink

we have the combination of Shari`ah

peopleandthepeopleintheindustrythat

is working together. This is the wonderful

thing that we have at ISRA. We have

the opportunity to bring these people

togethersowecantapintotheirresources

andexpertise.This istheultimategoalat

ISRA because without the co-operation

ofShari`ahandmarket,therewillbealot

ofhindrancesinthedevelopmentofthe

industry,”ourexecutivedirectorstressed.

Our aspirationSome people may perceive ISRA as

only a co-ordinating body, linking up

the academic and the industry. “That is

partially our role,” says Dr. Akram. “We

areheretobridgewhatneverhappened

before. This is an avenue that we are

opening for both the academic world

and the market.” he added.

NonethelessISRAdoesnot

only do co-ordinating

work. We have our in-

house research as

well.

“For the time

being, due to the

limitation that

wehavenow,

e spec ia l l y

w i t h

human resource, we have to we have

included outsiders (both academicians

and practitioners) to be part of our

research team. Even when we coordinate,

we are the authority in the output that we

get. Sometimes even we at ISRA forget

that we are just 6 months old,” Dr. Asyraf

pointed out. The expectation on ISRA is

high. But we take that as a motivation

to achieve our aims. In charge of the

research affairs, Dr. Asyraf elucidated

that the co-ordinating role of ISRA will

always continue in the future because

we want every sphere of the system to

develop; not only the market, but also

the academia. “Insha’Allah even when

ISRA has grown to a full fledge research

academy, having maybe 30 to 50 of

our own researchers, we will still provide

grants for universities to conduct applied

research. We will still request the university

to discuss the research area with the

industry. This is part of our mandate,” he

reminded.

Simply put ISRA is here to assist

everyone. “I always emphasise on the

need for all of us to work together. Whether

the Shari`ah scholars, the academician,

the market players and the regulators. All

of us should be together. I believe that

when we are in a team, we can produce

wonders and we can become the best in

the global industry,” Dr. Akram concluded

our vision, mission and hope for the future

to come, Insha’Allah.

COVER STORYInternational Shari’ah Research Academy for Islamic Finance� �COVER STORY

Dr Asyraf Wajdi, Head of Research Affairs

Novation Agreement fromthe Islamic Perspective

By Dr. Uzaimah Ibrahim

In the recent 12 court cases judgement involving BBA house financing facilities in Malaysia, the high court judge,

Dato’ Wahab Patail, classified the BBA cases into two broad categories; BBA with novation agreements and BBA

without the novation agreements. The learned judge said that BBA with the novation agreements are bona fide sales

transaction while those without the novation agreements are not bona fide sales transaction. During the initial days of

Islamic banking in Malaysia, there was a novation agreement involved in house financing but this is not the case any

longer. Some opine that novation should never have been scrapped out from the Islamic home financing facility,

as it offers fairness to both parties, namely the banks and their customer. This article aims to discuss the features of a

novation agreement from the common law perspective and compare this to the Shari`ah viewpoint.

stipulated date. As such, the bank shall

be bound by all terms and conditions

therein and shall perform all obligations

on the part of the purchaser/customer.

In return, the bank is entitled to receive

the transfer of the property to affect the

bank’s ownership over the said property.

Executing the novation agreement

does not intend to terminate the original

contract, i.e. the S&P. The original contract

remains enforceable and binding, except

that it is now binding on the new obligor,

i.e. the bank. Perhaps such a difference

does not really matter in common law but

is a vital aspect that must be considered

from Shari`ah point of view.

Novation agreement vis-à-vis Shari`ah principlesMany claim that this agreement is similar to

the Shari`ah principles on Buyu’ al-amanah

(trust sales) that include Murabahah (mark-

up sale), Tawliyyah (sale at cost price) and

Wadhi’ah (discounted sale). Some others

view novation as resembling Hiwalah

(transfer of debt), since it involves transfer

of contractual obligations. However, none

of these contracts fit well within the ambit

of novation agreement, as shown in the

table below:

Novation is a settled principle of the

common law. It is an agreement that

enables substitution of either an obligation

to perform or a party of an existing

contract. It also includes a substitution

of a new debt for an old one, where the

old debt is extinguished by the new debt.

In some instances, novation may take

place when the original parties continue

their obligation to one another, but a new

agreement is substituted for the old one.

Thus, a Novation Agreement is the legal

instrument executed by all parties involved

for the said substitutions.

A novation agreement is completed

and valid if all parties of the original

contract give their consent. The obligee

(the party who benefits from the novation)

must be given notice about the novation.

In addition, the obligor (the party who

makes the novation) must make the new

obligee aware and ensure that the latter

gives his consent.

According to common law practices,

once a novation agreement is executed,

it shall have the following effects;

• Transfers all duties, obligations or

benefits arising from the original

contract from the original obligor to

the new obligor;

• The original obligor is free from the

obligations that arise from the original

contract;

• The original obligor cannot be sued in

case of non-performance by the new

obligor;

• The obligee maintain the same status

as in the original contract; and

• The original contract is terminated.

Novation agreement in Islamic financing facilitiesIn the Islamic banking industry, initially,

novation agreement was part and parcel

of the Islamic home financing facility. The

executed documents for such facility

mainly include;

• Sale and Purchase Agreement, i.e.

S&P (between the vendor/contractor

and the purchaser/bank’s customer);

• Novation Agreement (signed by

the vendor/contractor, purchaser/

customer and the bank); and

• Property Sale Agreement (between

the bank and the purchaser/

customer).

By executing the Novation Agreement,

the bank agrees to become a party to the

Sale and Purchase Agreement, in place of

the purchaser. This will be immediately be

followed by the Property Sale Agreement,

whereby the bank sells the property to

the customer on deferred payment terms.

Being in place of the customer, the bank

is deemed to have been a party to the

Sale and Purchase Agreement from the

What is novation?

International Shari’ah Research Academy for Islamic Finance� �SECTOR REPORT • banking

Research Consul tant , ISRA

ConclusionThe above list of differences is not exhaustive. There may be other differences between a novation agreement and Buyu’ al-amanah or Hiwalah. Shari`ah compliance was not the reason why novation agreement was no longer used in the house financing. Instead, the reason cited was that the vendors/contractors felt uneasy when they have to sign two agreements, as well as to deal directly with the banks. Hence, it is no longer in use and the standard Bai’ Bithaman Ajil home financing facility consists of a Property Purchase Agreement and a

Table 2: Comparison between novation and Hiwalah

Novation Agreement Buyu’ al-amanah (trust sales)

It does not constitute a new contract of sale; it is merely an agreement to substitute a contracting party of an existing sale;

The terms and conditions of the original contract (S&P) are binding on the new obligor (the bank); and

It requires the consent of the original obligee (the vendor/contractors). Thus, this makes him a party of the agreement.

These are sales at either mark-up price, cost price or at a discount. The terms may be different from the first sale;

Since these sales are independent from the first ones, the latter do not bind the parties of the second sale; and

The consent of the vendor of the first sale is not required.

Table 1: Comparison between novation and Buyu’ al-amanah

Property Sale Agreement only, which are executed by the bank and its customer. Moving forward, research needs to be carried out to better understand novation from Shari`ah perspective. Is it sufficient to use existing contracts in Islamic finance to achieve the effect of novation or is there a need to explore into new contracts? If we need new contracts, what shall be the features, rights and obligation that it will carry? These aspects need further research and ISRA will certainly keep you posted with the updates!

International Shari’ah Research Academy for Islamic Finance� �

EDITORIAL TEAM

Advisors:Dr. Mohamad Akram Laldin

Abu Bakar Sidek

Dr. Asyraf Wajdi Dato’ Dusuki

EditorShabnam Mokhtar

shabnam@isra.my

Features EditorMohammad Ashadi Mohd Zaini

ashadi@isra.my

Zaharuddin Muhamad

zaharuddin@isra.my

Nusaibah Mohd Parid

nusaibah@isra.my

Coordinating ProducersHaji Abdul Rahim Haji Sairan

rahim@isra.my

Wan Aznira Wan Abdullah

aznira@isra.my

Coordinating PhotographerNoor Aznir Nizam Noordin

aznir@isra.my

Disclaimer:

While every care is taken in the

preparation of this publication, no

responsibility can be accepted for any

errors.

Copyright: All or any other portion of this

bulletin may be reproduced provided

acknowledgement of the source

is made. Notification of such use is

required. All rights reserved.

Address: 2nd Floor, Annexe Block

Menara Tun Razak

Jalan Raja Laut

50350 Kuala Lumpur

MALAYSIA

General Line : +603-2781 4000

Fax : +603-2692 4094

Email : info@isra.my

Website: www.isra.my

SECTOR REPORT • banking

It is an agreement to substitute a contracting party who is purchasing a property. Thus, there is no requirement of a party being a debtor;

The original party (purchaser) is free from the obligations arising from the original contract; and

The new obligor becomes the party of the original contract retrospectively from the date of the contract.

It is an agreement allowing a debtor to transfer his debt. Thus, it is required that the transferor be a debtor to transferee;

The transferee may still have a right of recourse against the transferor in cases of death and liquidation/bankruptcy of the payer; and

The transfer of debt shall take effect immediately upon the conclusion of the contract.

Novation Agreement Hiwalah

The relationship between leakage in commodity Murabahah and Sukuk pricing

By Shabnam Mokhtar

Commodity Murabahah has been

extensively applied in the Middle

Eastern market while it is a relatively new

product in Malaysia. Although much

has been discussed and written about

commodity Murabahah (also known as

Tawarruq or reverse Murabahah), this

article aims to shed light into how the

leakage in commodity Murabahah may

affect the pricing of Sukuk.

Leakage in commodity MurabahahAAOIFI Shariah Standard No. 30 defines

Tawarruq as purchasing a commodity

for a deferred price and selling it to a

third party for a spot price so as to obtain

a fixed income deposit since now he will

be receiving a fixed return i.e. the mark

up charged in the selling price of the

commodity. The Islamic bank would now

on-sell the commodity to another broker,

gets the cash and invests it elsewhere. This

is illustrated in Diagram 2 below.

Going back to our original

apprehension in the introduction, what

leakage are we referring to? How can

commodity Murabahah cause leakage in

the Islamic finance industry? Is the whole

operation or activities of commodity

Murabahah susceptible to leakage? These

are some vital points that we must clarify

to help enhance our comprehension of

the matter and avoid creating confusion

in the market.

“The concern of abuse that allows

leakage of Islamic funds into conventional

financial market only arises from the

deposit taking activities,” Badlisyah Abdul

Ghani, the CEO of CIMB Islamic clarified.

He highlighted that it is important to know

that there is nothing wrong with commodity

Murabahah as a financial product from

Shari`ah perspective. It is valid under the

Shari`ah principle of Tawarruq.

“There are many commodity

Murabahah products out there that are

genuine and are managed in a 100%

Shari`ah compliant manner; including

the utilization of the proceeds from such

product. The wrongness of commodity

Murabahah arises only when the product

Diagram 1: Commodity Murabahah employed in financing

Broker AIslamic bank

ClientBroker B

1

$

24

3

$

1. Islamic bank buys commodity on spot basis from broker A

2. Islamic bank sells the commodity to Client using Murabaha on deferred basis (cost + profit)

3. Client sells the metal to Broker B on spot basis and obtain cash

4. Client makes periodic payment to Islamic bank

cash. It can be applied to facilitate true

commodities trading or can be employed

as a financing and deposit instrument

in the Islamic finance industry. Diagram

1 below illustrates a basic structure

of commodity Murabahah used in a

financing transaction. Simply put, if the

client is looking for funding, the Islamic

bank buys commodities (metals on LME or

CPO as for the case in Malaysia) and sells

this commodity to the client on a deferred

basis. The client as the owner of the

commodity now sells the same commodity

to another broker so he could obtain the

cash he was looking for and utilize it in his

operation. The ability to give the client the

cash he was looking for renders popularity

to commodity Murabahah.

On the other hand, when using

commodity Murabahah as a deposit

mobilizing instrument, since the client has

the money and is looking for avenues to

place the fund and earn return, he would

first buy the metal (using the bank as his

agent) and then sell it to the Islamic bank

on a deferred basis. Effectively the client

has made a placement that resembles

Diagram 2: Commodity Murabahah employed in deposit mobilization

Broker A

Islamic bank

Client

Broker B

1

$

24

3

$

1. Client buys commodity on spot basis from broker A

2. Client sells the commodity to Islamic bank using Murabaha on deferred basis (cost + profit)

3. Islamic bank sells the metal to Broker B on spot basis and obtain cash

4. Islamic bank makes the payment of selling price upon maturity

International Shari’ah Research Academy for Islamic Finance� �SECTOR REPORT • capital market

Research Consul tant , ISRA

is abused to facilitate collection of Islamic funds for usage in activities that ultimately

involves non-Shari`ah compliant activities and worst, investments in riba-based financial

instruments. This abuse leads to the leakage of Islamic funds into the conventional riba-

based financial industry,” the well-known banker elaborated.

Avenues that lead to leakage of Islamic fundOne must wonder how this leakage could creep into the deposit taking leg of

commodity Murabahah? Referring to Diagram 2 above, when the Islamic bank has

sold the commodity to Broker B, it will obtain cash. The next question is, what does the

Islamic bank do with the cash? Does it invest in its own operation (which is of course

Shari`ah compliant) or does it enter into a back to back commodity Murabahah

transaction with a conventional bank? If the Islamic bank enters into parallel commodity

Murabahah arrangement with a conventional bank, now the Islamic fund is placed with

a conventional bank.

The follow-up question would be, where does the conventional bank place this

fund? Does it have a Shari`ah compliant asset to invest in or does the conventional

bank utilize the Islamic fund to finance its conventional asset? The problem of leakage

would slither in when the conventional bank uses the proceeds it has obtained from

commodity Murabahah to finance its conventional activities or invest in non-Shari`ah

compliant activities. Simply put, the counterparty of the commodity Murabahah deposit

opens the avenue for leakage (via the utilization of proceed). The same problem may

occur if a client places the fund directly to an Islamic window of a conventional bank.

The phenomenon is depicted in Diagram 3 below.

Diagram 2: Commodity Murabahah employed in deposit mobilization

Broker A

Islamic bank

Client

Broker B

1

$

24

3

$

1. Client buys commodity on spot basis from broker A

2. Client sells the commodity to Islamic bank using Murabaha on deferred basis (cost + profit)

3. Islamic bank sells the metal to Broker B on spot basis and obtain cash

4. Islamic bank makes the payment of selling price upon maturity

Broker A Client/Islamic bank

Conventional BankBroker B

1$

2

3$

Leakage: Where is this

proceed invested

Diagram 3: Leakage in commodity Murabahah deposit placement

1. Client/IB buys commodity on spot basis from broker A

2. Client/ IB sells the commodity to conventional bank using Murabaha on deferred basis (cost + profit)

3. Conventional bank sells the metal to Broker B on spot basis and obtain cash

How deep is the leakage? In other

words, how severe is this problem? Although

a full fledge research would be needed to

ascertain the exact depth of the problem,

Badlisyah provided some estimate of the

outflow. He noted that out of the reported

US$1.3 trillion Islamic funds currently

managed in the Islamic finance industry,

more than half of the amount is estimated

being managed by conventional banks

with Islamic window under the commodity

Murabahah products, which can be in the

form of a fund or a treasury product.

“The situation becomes worst when

Islamic banks who genuinely take

Islamic funds innocently place it in the

abusing bank’s commodity Murabahah

product. When the banks who have these

commodity Murabahah products is asked

where the funds are actually utilized and

for them to disclose their matching Islamic

assets they would respond that they are not

required to do so under law or regulation.

Many of them even refused to include a

provision in the commodity Murabahah

agreement that states the proceeds are

to be used for 100% Shari`ah compliant

purposes because they do not want to be

trapped by the requirement,” Badlisyah

shared his experience in the market.

Implication from leakage of Islamic fundsWhy should the leakage of commodity

Murabahah be an important concern

to the Islamic capital (ICM) market

participants? What will be the implication

from this leakage? According to Badlisyah,

ICM products are seen as tools to facilitate

effective liquidity management for

Islamic banks and Islamic investors and

it competes directly with commodity

Murabahah products. ICM’s growth

and success will replace commodity

Murabahah and prevent the leak while the

failure of ICM will benefit the commodity

Murabahah abuser. We can thus say that

there is negative relationship between

the demand for commodity Murabahah

and ICM instruments because both are

substitute product.

“The leakage essentially causes the

demand for ICM product to be weak. Both

ICM product and commodity Murabahah

provides fixed income return however

commodity Murabahah typically provides

better return than ICM products as banks

can simply quote a higher return while

the return on ICM products depends on

credit rating and appetite of investors.

As such, more Islamic banks and Islamic

investors prefer to place their investment in

commodity Murabahah, thus causing the

majority of Islamic funds to be placed in

conventional banks with Islamic windows.

This inadvertently will cause the market

demand for ICM product to become

smaller,” Badlisyah enlightened.

International Shari’ah Research Academy for Islamic Finance� �SECTOR REPORT • capital market

He further explained that since the

conventional banks are now middleman for

the Islamic funds, the issuer of ICM product

is then dependent on the conventional

bank to take up any offering of new ICM

products. “As a result the expected higher

price tension that you would expect

from a larger investor base (i.e. both

conventional and Islamic investors) is lost.

The cost of ICM products becomes higher

and becomes less attractive. Data shows

that the price for ICM product particularly

Sukuk are now about 20bps to 50bps more

expensive than conventional bonds in the

global debt capital market,” Badlisyah

quoted.

Contrary to the global Sukuk market,

the Sukuk pricing in Malaysia has been

cited to be tighter than the conventional

bond. Badlisyah upholds that this is the

positive impact resulting from no leakage

in commodity Murabahah. “All commodity

Murabahah products in Malaysia have to

be managed in line with the Islamic Banking

Act 1983 which requires 100% Shari`ah

compliance in business operations. With

no leakage into the conventional market,

Islamic funds are forced to find Islamic

assets. As a result, it adds to the demands

for ICM products on top of demands from

conventional investor base. That is why in

Malaysia Sukuk is 3-20bps cheaper than

conventional bond,” he reasoned.

ConclusionSukuk pricing is certainly an area that

warrants attention for research and will

benefit the issuer and investor in the

Islamic capital market. The broader

research topic may look into factors

affecting Sukuk pricing. While there may

be a number of other determinants that

influence pricing, research should be

carried out to explore if the non-leakage

in commodity Murabahah is one of the

reason contributing to tighter pricing in

Malaysia. A comparative analysis could

then be undertaken to evaluate factors

affecting pricing in the Middle East Sukuk

market. One needs to keep in mind that the

leakage may not be a direct independent

variable that affects Sukuk pricing, it may

however be an intervening i.e. indirect

variable that affects the demand (or

investor base) for Sukuk. Therefore, besides

studying the determinants of Sukuk

pricing, one could also embark on a study

to determine factors influencing Sukuk

demand, where the leakage may have a

more direct impact. Wait for ISRA’s findings

on the topic!

Badlisyah Abdul Ghani, CEO, CIMB Islamic

International Shari’ah Research Academy for Islamic Finance� �SECTOR REPORT • capital market

Interested to buy copies of

ISRA books?

Contact Haji Abdul Rahim Sairan for further info and price!

rahim@isra.my

By DR. ASYRAF WAJDI DATO’ DUSUKI

International Shari’ah Research Academy for Islamic Finance� �

The Concept of Insurable Interest from Shari`ah Perspective

By Zaharuddin Muhamad

The term insurable interest was originally

coined in 1774, in conjunction with the Life

Insurance Act in Britain. Insurable interest

is an important pre-requisite for insurance

contract because an insurance contract

without insurable interest is technically

null and void for all purposes. This article

aims to give some background on the

origin of the insurable interest concept in

the conventional space and evaluate the

concept from Shari`ah perspective.

Background of the conceptThere is no formal and authoritative

definition of insurable interest. In general,

a person who may suffer financial loss from

an event has an insurable interest in the

property or event. A common example

always cited to exemplify the concept is

as follows. “If your house (that you own) is

damaged by fire, the value of your house

has been reduced, and thus you have

suffered a financial loss resulting from the

fire. By contrast, if your neighbour’s house

(which you do not own), is damaged by

fire, you have not suffered a financial loss.”

You therefore have an insurable interest in

your own house but not in your neighbour’s

house. Thus you can insure your house, but

not your neighbour’s house. Diagram 1

below illustrates the concept of insurable

interest in the general and life insurance

category.

General Insurance

• You have an insurable interest in any

property you own or which in your

possession.

• The insurable interest must exist

both at the time the insurance is

purchased and at the time a loss

occurs.

Life Insurance

• Everyone is considered to have an

insurable interest in their own lives as

well as the lives of their spouses and

dependents.

• The insurable interest only needs

to exist at the time the policy is

purchased.

Diagram 1: The concept of insurable interest

The Life Assurance Act of 1774 in Britain

was enacted at a time when wagering

(gambling) contracts were still enforceable

at common law since it was passed before

the enactment of the Gaming Act of 1845.

The purpose of the Life Insurance Act was

therefore to prevent wagering under the

veil of insurance. Before the enactment

of the Act, there were instances where

some prominent leaders’ and celebrities’

life were insured and eventually these

figures were found dead mysteriously. Just

imagine, if anyone could buy insurance

on a celebrity’s life for example, the

person would obtain a sum of money if the

celebrity dies. This would open up avenue

for life threatening moral hazards. The

person who bought the insurance could

arrange for the death of the celebrity.

The Act wanted to curb the risky moral

hazard that could prevail in the society if

just anyone could take insurance on any

unrelated person’s life or property.

Insurable interest from Shari`ah perspectiveThe concept of insurable as described

above does not contradict with the

requirement of Shari`ah. However, for a

Takaful contract to be Shari`ah compliant,

insurable interest is not the only element

that must be present. In other words,

the concept of insurable interest alone

would not make a Takaful contract

Shari`ah compliant. We have to evaluate

the operation of claims in the Takaful

sector for us to further understand this.

The Takaful buyers pay certain premium

(money) in order to enjoy certain benefit

or protection in future. If the benefit in

future is paid in monetary forms, and there

was no property damages (life insurance

for example), this would result in exchange

of money for money and thus stumble into

the problem of riba.

In cases that involves property

damages, the exchange of money is

allowed because the payment of money

was actually a compensation for the

damage suffered. This is allowed by the

Maliki school and is known as Hibah

Bitthawaab. Nonetheless, in my opinion,

payment of money to compensate for

future damages, physical damages to a

person’s body or any other payment that

is compulsory in Islam, does not qualify as

property damages that is specified in the

Maliki school. Therefore payments for these

types of claims should not come from the

participant’s premium pool.

Insurable Interest and Takaful Act in MalaysiaIn Malaysia, the concept of insurable

interest has been included in the

Conventional Insurance Act 1996 to ensure

this Act conforms to the Contracts Act

1956. On the contrary, as far as the Takaful

Act 1984 is concerned, the concept of

insurable interest has yet been included in

the Act.

In order to avoid the same legal

reparation that happened in the recent

BBA cases, it is proposed that the Takaful

Act include clauses on the importance of

the concept of insurable interest and a

Shari`ah guide to insurable interest.

SECTOR REPORT - takaful

Associate Researcher, ISRA

This year was a relatively short year for ISRA, as we had only half

year to charter our beginning. Nonetheless every month was filled

with activities reflecting the enthusiastic spirit of the team behind

the scene. Established on March 26th this year and after running

the errands to assemble the team, we first organized ISRA Tea Talk

in July for AIBIM members and with a group of Shari`ah advisors, to

introduce ISRA and garner support from both the market players

and the Shari`ah scholars. Other major events organized by ISRA

include among others the Thematic Workshops, Luncheon Talks,

Islamic Finance Seminar, MoUs’, besides ISRA’s participation in

events organized by the industry.

International Shari’ah Research Academy for Islamic Finance10 11EVENT UPDATES

Following this, the month of August was

filled with ISRA-Industry discussion series

to gauge the experts’ view on pressing

issues in the market. The Takaful unit kick

started the discussion series on August 19th

followed by the Banking unit on August

28th. After a short break in September

due to the month of Ramadhan, ISRA

organized its first thematic workshop on

Dispute Resolution in Islamic Banking on

30th October. The thematic workshop

involved a focused group discussion

approach where Mohamed Ismail

Mohamed Shariff, a renowned lawyer

from SKRINE presented a paper on the

recent judgement of 12 BBA cases in the

first session followed by three discussion

sessions. The participants in the thematic

workshop were selected experts in the

industry, former judge, Shari`ah panel and

academician to ensure feedbacks and

inputs collated are concrete and relevant

to the market. ISRA would soon publish a

monograph that captures the presentation

and discussions of the Dispute Resolution

thematic workshop. Make sure you keep

your eyes on this! We welcome feedback

from the broader market participants and

academia alike!

November was the month of the

year as we had the inaugural ISRA Islamic

Finance Seminar (IIFS) and ISRA Launching

officiated by the honourable prime minister

of Malaysia, Datuk Seri Abdullah Ahmad

Badawi who was represented by the

Minister in the Prime Minister’s Department

Datuk Seri Ahmad Zahid Hamidi. The

governor of Bank Negara Malaysia, Tan

Sri Dr Zeti Akhtar Aziz was also present

for the launching which was held on the

November 11th. During the launch, ISRA

also took the opportunity to sign a MoU

with AIBIM to co-operate on expanding

research and training development model

in Islamic Finance. Earlier in August ISRA has

already signed another MoU with MNRB

Re-Takaful to work together in developing

an alternative model for reTakaful.

The seminar received overwhelming

responses. We could still recall how we had

to explain to callers one day before the

event how we were already overbooked.

IIFS and the launching attracted around

400 participants from market players,

regulators and academia. There were

eight papers presented during the seminar as highlighted in Table 1 below. Sheikh Esam

M Ishaq, a well known Shari`ah advisor also joined the panel discussion during the seminar

together with Badlisyah Abdul Ghani, CEO of CIMB Islamic and Dr. Aznan Hassan. The

papers, power points and video of the presentations can be downloaded at ISRA’s

website: www.isra.my – go to our download section! Don’t forget to pay us a visit!

Last but not least, in the final month of the year ISRA organized the Council of Scholars

meeting and the International Shari`ah Scholars Dialogue (ISSD) gathering about 70

prominent Shari`ah scholars from around the globe. The objective of the dialogue is

to enhance the existing collaboration efforts on Shari`ah matters and strengthen the

framework for cooperation and harmonisation amongst Shari`ah scholars. It will thus

provide the opportunity to deliberate and exchange ideas on the latest development in

Islamic finance. The Islamic capital market also held its ISRA-industry meeting discussing

issues in the Sukuk market.

Fiqh Aulawiyyat in reTakaful - Risk-

Based Capital (RBC) Standards in

Islamic Institutions.

Shari`ah Inspection in Surplus

Distribution – Islamic Views and its

Current Implementation

Ownership and Hibah Issues in Takaful

- Classical Discourse and Current

Implementation

What is the Future Outlook for Shari`ah

Harmonization?

Shari`ah Audit for Islamic Financial

Services: The Needs and Challenges

The Status of Wa’ad and its Implications

in Contemporary Islamic Banking

The Importance of Islamic Fixed

Income Securities in Developing the

Islamic Financial Markets

“Shari`ah-Compliance or Shari`ah-

Driven Approach?: Towards Full

Appreciation of the Philosophical Roots

of Islam

Azman Ismail

CEO, Independent Islamic Financial

Planners Sdn. Bhd

Dr. Younes Soualhi

Deputy Dean, IIUM Institute of Islamic

Banking and Finance

Dr. Azman Mat Nor

Assistant Professor, Kuliyyah Of

Economics & Management Sciences,

IIUM

Dr. Muhammad Syafii Antonio

Member, Shariah Advisory Council,

BNM

Dr. Abdul Rahim Abdul Rahman

Associate Professor, IIUM Institute of

Islamic Banking and Finance

Dr. Nurdianawati Irwani Abdullah

Assistant Professor, Kuliyyah Of

Economics & Management Sciences,

IIUM

Shamsun Hussain

Director, Global Markets, CIMB

Islamic

Dr. Aznan Hassan

Shariah Advisor, Bursa Malaysia

International Shari’ah Research Academy for Islamic Finance10 11EVENT UPDATES

Exclusive Interview with Prof. Dato’ Dr. AbdulShukor HusseinMember, ISRA Council of Scholars

In your opinion, how could ISRA contribute

to the development of the Islamic finance

industry?

ISRA is exploring into a new area in

Islamic finance, into a high prestige

and contemporary research in Shari`ah

and finance. This is a novel and fresh

effort in Malaysia and I think there are

not much focused efforts similar to this

outside Malaysia. If ISRA blends three vital

ingredients in its operation; high calibre

researchers, opportunity to work with the

industry and focus on the applied issues

in the market, ISRA can contribute to the

systematic development of the Islamic

finance industry globally.

Based on my experience as the

Chariman of the National Fatwa Council,

the way we operate and make decision

nowadays are different. As the world

is growing in complexity, the decision

making in any organization must be based

on facts and sound research findings.

As ISRA’s operation is not focused only

in Malaysia, the global Islamic finance

industry will benefit from its findings as well.

There are at least two avenues where ISRA

can help. Firstly, ISRA can help identity

the current hurdles and hindrance in the

industry and explore practical approaches

to resolve the issues. This would be on the

short run. Secondly, ISRA can also help in

the long term development of the industry.

ISRA may help in assessing information on

where the industry is currently at and where

we should be? What is the gap that needs

to be filled for the industry to advance?

These are some vital information needed

to charter the future of this young industry.

What is unique about ISRA is its ability to

blend theoretical and practical aspect of

Islamic finance. This is what we need to

move forward.

What are some pressing Shariah issues that

the industry is facing currently?

The Islamic financial system used to be

seen as an alternative to the conventional

system that has strong footing in the global

economy. Nonetheless, with the current

financial meltdown in the conventional

space, we have an opportunity to

propose the Islamic financial system as

the mainstream system. Not merely an

alternative anymore. In order to do this,

we have to think how we can convince

people that we truly are a viable solution.

This is the challenge. I was overseas recently

and there is increasing interest even in the

western world to look for an alternative

financial system. We at USIM have also

received queries from interested parties to

learn about the Islamic financial system.

This was not the case years ago. They

would not even want to ask what Islamic

finance is. What more studying about it.

The financial meltdown has changed this.

People are more open to discover what

we have to offer. We have to seize this

opportunity to improve and strengthen

our industry so it would be a concrete and

complete financial system that may offer

solutions to the current financial turmoil.

What other challenges are we facing?

As a young industry, we are still struggling

in creating awareness amongst players

and consumers. Even in Malaysia, if I may

categorize it as the most established Islamic

financial system, our Islamic banking asset

has not even reached 20% of the total

banking asset. This shows how young the

industry is. Therefore the struggle to create

awareness would continue for quite some

time in the future.

Secondly as I said before, how do we

convince people that our system is the

best? We have to be vigilant because

human being by nature tends to remember

unpleasant events rather than the good

achievement we have attained. If there

is embezzlement or big write offs in the

Islamic banks for example, people would

recall this easily, although it may have only

happened once in 5 years. Furthermore

we are facing increasing competition from

other nations in the world to become the

Islamic financial hub. We have to always

be on our best form to convince people

we are the preeminent.

The next challenge is with regards to

the enforcement of our legal framework.

This is a very important aspect. In Malaysia,

although the religious matters are under

the jurisdiction of state government,

commercial matters still fall under the

federal jurisdiction or the civil court system.

Islamic banking cases are not brought to

Shari`ah court. Foreign investors would

like to have certainty of law and would

want to see that their rights are protected.

We need ensure that our judicial system

have a consistent approach in providing

judgement to Islamic banking cases. This

is an imperative aspect that we must pay

attention to if we would like to see the

industry grow further.

What do you think the industry can do to

increase efficiency?

One approach is to develop the human

capital in the industry. Efficiency is about

minimizing cost and time. Lets take for

example the product development team

in a bank or even a team structuring

solutions for corporate financing. It’s

often very challenging to make the

Shariah team member understand the

conventional product structure and need,

while its similarly challenging to make

the conventional banker to understand

Shari`ah requirement. If we can train

International Shari’ah Research Academy for Islamic Finance1� 1�SPECIAL INTERVIEW

Exclusive Interview with Prof. Dato’ Dr. AbdulShukor HusseinMember, ISRA Council of Scholars

workforces with 2 in 1 skills (Shari`ah and

finance), we can save time and cost. We

can save time because he understands

the requirement of both worlds and we

can save cost as we can employ less

people.

Another sphere that the industry can

improve is in the area of technology. In this

cyber-age, technology is imperative. The

banks can’t afford to just offer traditional

services. For example people are moving

towards a cashless payment system

nowadays. Using cheque for payment was

the method in the 80s. But now we merely

see the physical money anymore. Fund

transfers are executed online. Business

people discuss ideas, but don’t hand

over physical cash anymore. The industry

must therefore invest in technology. This

may involve a big outlay of cost in the

beginning. Eventually the cost saving that

technology brings will definitely increase

efficiency.

Last but not least, we must constantly

seek improvement. We can’t have a

perfect system overnight. We must start

somewhere and improve along the

way. It’s detrimental if we ever feel we

can stop from improving our industry. To

achieve constant progression, the policy

makers or bankers need to consider three

elements on a continuous basis – Shari`ah,

technology and the contemporary market

need. If we focus on these three elements,

Insha’Allah we’ll increase efficiency in a

consistent manner.

Moving on to the consumers, usually

Muslims are very much concerned with

halal food. But it’s not the same case when

it comes to halal finance. What’s your

thought on this?

This is related to the level of awareness and

understanding in the society. If we look at

how our society has progressed, we can

slowly witness that people understand

halal is not limited to food only. True this

was the case before. But now there is

increasing discussion amongst the layman

about halal in textile, attire, make-up

and even beauty for example. People

are becoming increasingly aware about

halal finance too. It’s a matter of time and

International Shari’ah Research Academy for Islamic Finance1� 1�

competition for the Islamic banks.

Competition will push for improvement

and development. In 5 years, even if we

do not replace the conventional system,

we will Insha’Allah develop tremendously.

With one condition though; we must co-

operate and work together.

What is your last note to our readers?

For us to move the industry forward, we must

first have confidence in what we are doing

today. Then we need to convince people.

If we ourselves do not belief in what we

do, it will difficult to convince others. Then

we need to live up to face competition

from the conventional players. We must

however never belittle other systems. We

must see this as a healthy competition.

If our vision and mission is clear and we

emphasize on both halal and toyyibah,

Insha’Allah the consumer would see the

value proposition of the industry. Then we

would garner solid support from them.

resources that we put in to educate our

consumers that halal encompasses the

whole aspect of life, not only limited to

food.

In relation to this it is important for us

to understand the concept of halal and

toyyibah. This is mentioned in the Qur’an.

While halal refers to the permissibility

from Shari`ah point of view, toyyibah

refers to the accompanying quality

that must come with it. Take finance for

example. Halal finance means amongst

other, riba-free finance. However, the

quality of services offered by the Islamic

banks represents the toyyibah realm.

If consumers have to wait two hours to

withdraw money or 3 months to obtain

approval for Islamic financing, there is

no element of toyyibah here. If we want

to convince people that Islamic finance

is the ultimate solution, the halal and

toyyibah aspect must be emphasized. If

we focus only on the halal aspect and

forgo the toyyibah part, we will eventually

lose out to our competitors.

Where do you see the Islamic finance

industry in the next 5 years?

With the financial meltdown in the

conventional space coupled with

increasing interest and awareness

about Islamic finance, I think this

is an opportunity for our industry

to flourish. More and more

banks, conventional banks,

are interested in Islamic

banking. We can see this in

Malaysia. Conventional

banks are offering

Islamic windows and

setting up Islamic

subsidiaries. All

these mean

h e a l t h y

SPECIAL INTERVIEW

Since its inception, ISRA has initiated a

number of research projects in the area of

Islamic banking, Takaful and Islamic capital

market, comprising of ten short-term

research projects and five medium-term

projects. Out of the 15, eight projects have

been successfully completed, as follows:

As for the on-going projects, the areas that

are being researched are as follows:

1. Maqasid-driven investment guidelines;

2. Alternative model for ReTakaful;

3. Regulatory and legal reforms;

4. Alternative dispute resolution

mechanisms;

5. Review of legal cases in Islamic banking;

6. The Concept and Practice of Wa’ad

(Undertaking/Promise); and

7. Equity-based sukuk.

As ISRA is an industry-driven research

centre, the research areas chosen by ISRA

are based on consultative discussions with

the industry players and regulators, as well

as Shari`ah advisors and academicians. The

discussions are done with an objective of

encouraging an exchange of ideas among

the stakeholders on the current issues facing

the Islamic financial services industry.

The discussion series would also serve as the

platform to discuss on methods by which

ISRA would be able to address those issues

through research efforts, which calls for the

co-operation of all parties, to ensure the

research outcomes would be able to meet

the relevant needs and requirements of the

industry.

With the active participation of scholar

academicians and banking experts, it

is envisaged that ISRA would be able to

produce research outputs that are in-

depth, practical and most importantly, of

clear benefits to the global Islamic banking

system.

ABSTRACT OF PAPERS TO BE PRESENTED AT INTERNATIONAL SHARI`AH SCHOLAR DISCOURSE (ISSD)

1. Circulation of Islamic Sukuk: The Shari`ah Issues and its Possible Solutions

This paper aims to discuss on sukuk

trading in the secondary market, with

delineations on the general

guidelines for sukuk

trading in the

secondary market,

and various Shari`ah

opinions with regards

to sukuk trading. The

1. Report on the governance

framework of the Malaysian Shariah

Advisory Council

2. Adaptation of the concept

of Insurable Interest in Takaful

practices

3. Secondary Sukuk trading: Shari`ah

Issues and Solutions

4. Dhawabit (Parameters) for the

application of the principles of

Maslahah and Dharurah in Islamic

Finance

5. The role of the Shariah Advisory

Councils in regulating the activities

of Islamic Banks

6. Waqf Shares: exploring ways of

using shares, Sukuk, intangible rights

and usufructs as the subject matter

of Waqf

7. Tawarruq and its current method of

implementation

8. Islamic securitization and its

contemporary applications.

focus on this paper is on the Shari`ah

issues pertaining to secondary sukuk

trading, such as the trading of debt-

based sukuk, the trading of sukuk in which

the underlying assets comprise tangible

assets, usufruct, cash and debts, and the

sale of sukuk at a discount. The paper

concludes by proposing several solutions

to address the aforementioned issues.

2. Dhawabit (Parameters) for the Application of the Principles of Maslahah and Dharurah in Islamic Finance

This research is an attempt to suggest

the parameters of and limits to the

application of maslahah and dharurah

in Islamic finance. It begins with the

definition of maslahah, dharurah and

dhawabit, their related concepts and a

summary of usuli views on its authority and

legality. It then discusses the parameters,

and their respective prerequisites.

Three prerequisites are proposed; first,

identification of the characteristics

of maslahah and dharurah; second,

identification of the core qualifications

of bodies or individuals proposing

the parameters; third, identification

of the maqasid of Islamic finance to

ensure adherence to the parameters

of maqasid. On the basis of these

prerequisites, the research proposes a

number of parameters. The research

ends with findings and recommendations

for a balanced and comprehensive

examination of this pressing issue.

3. Adaptation of the Concept of Insurable Interest in Takaful Practices

This paper aims to explain the concept

of insurable interest and its application

and relevance to the Takaful industry.

The paper begins with a historical

background on the origin of this concept

and the reasons for its introduction. Next,

this paper elucidates on the common

misconceptions about insurable interest

and the differences between this concept

and other Takaful/insurance-related

concepts. Following that, the applications

of insurable interest in contemporary

Takaful practices are explained, together

with its Shuratic dimensions that aim

to ensure that all Shari`ah tenets are

complied with. The paper concludes by

proposing several steps to be undertaken

with regard to insurable interest, including

the amendment of relevant laws.

International Shari’ah Research Academy for Islamic Finance1� 1�RESEARCH UPDATES

Review of fatwas issued during Albaraka Banking Group’s 29th Symposium on the Islamic Economics, which was held 6th – 7th September 2008 (by Shaikh Abdullah bin Sulaiman Mannea)

Fatwa no. 1/15: The Shari`ah ruling on agents representing the two parties to a contractit is permitted for a bank to appoint

its customer as an agent to purchase

commodity and then the same customer will

offer the commodity for sale, while he is in his

capacity as an agent for the bank. However,

if the customer sells to himself, whereby he is

taking charge of both sides of the contract,

it is permitted if the price is specified by the

principal (in this case, the bank).

This fatwa is related to two issues:

First: If the agent sells the commodity which

he has purchased to a third party, by virtue of

the agency conferred to him by the principal

who asked him to do so, there are no disputes

among the scholars against its validity; and

Second: If the agent sells the commodity to

himself, whereby he is taking charge of two

sides of the contract, this issue is argued

among the scholars. Some scholars permitted

it, if there are no doubtful elements, while

some did not permit it, on the grounds of

purification of the personality. Ibnu Qudamah

said in Al-muqni’, “It is not permitted for one

who is appointed as an agent in a sale to

sell to himself. He said in the Hashiyah, this is

the madhhab (of Hanbali) and the majority

also ruled the same. He further said, that in

the Hashiyah, “This is because the custom in

sale is that one sells to another person, so it

is in a wakalah contract. Also, he is subject

to suspicious in selling, so it is in buying for

himself.”

In another version reported from Imam

Ahmad, it is permissible for an agent to take

charge of both sides of the contract, if there

are no doubtful elements. He said in Al-muqni,

“It is also reported from him, that is Imam

Ahmad that, it is permitted for an agent to

sell to himself, if he adds to the normal price,

with which the sale was done by auction, or

he appoints another person as an agent and

he will be one of the buyers”. He mentioned

in the Hashiyah about the permissibility of the

agent to sell to himself; if he was permitted,

then it is permissible and he represents the

two sides of the contract. This is the most

authentic view”.

However, having observed that

representation of the two sides of a contract

by a customer in the banking transaction has

predominantly become mere form (not the

actual purpose of the contract), a situation

whereby neither buying nor selling was

executed by the agent and at the same

time, he obtains actual profit margin

through ribawi (interest-based) terms.

It is representation by an agent of both

sides of the contract that served as a

justification for the prohibition of tawarruq,

as practised by the banks.

In order to preserve the reputation of

Islamic banking, I am of the view that there

is a need to review the arrangement of

an agent taking both sides of a contract.

It should be prevented, in consideration

of transparency and to prevent criticisms

that Islamic banks are involved in interest

based-transactions and factors that

have the probability to lead to form in

transaction.

There are many examples to support

that it is permissible to declare something

as lawful and then recommend that it

should be prevented on the grounds of

precaution and avoiding ambiguities.

One example is bai’ inah , in which its

procedures are in accordance with a

valid sale, but having observed that there

is a trick to attract riba, the majority of the

scholars disallow it. Similarly, the case of

riba al-fadhli (riba, which is addition to the

original amount borrowed), having seen

it as a means that leads to riba al-nasiah,

the majority of scholars prohibited it.

Another example is the tradition

reported by ‘Aishah, may Allah be

pleased with her, who said that, Sa’d

bin Abi Waqas and Abdu bin Zam’ah

reported to the Prophet s.a.w. in dispute

that occurred between them. Sa’d said,

“O you the Apostle of Allah, this son

belongs to my brother called U’tbah bin

Abi Waqas. He gave me a testate that

he (the son) is his child, you can see his

resemblance. Indeed, the Prophet s.a.w.

saw a manifest resemblance with U’tbah,

but ruled by saying “he is yours O you

Abdu bin Zam’ah”. “A child belongs to the

bed while the adulterer owns nothing”.

“O you Saudah the daughter of Zam’ah,

veil yourself from him. She (‘Aishah) said,

he never saw Saudah throughout. In this

verdict, the Prophet s.a.w. attributed

the child to the bed owner as that is the

original presumption, and he attributed

him to who is not the owner of the bed

on the grounds of precaution, in order not

to violate principle of maharam (degree

of consanguinity either by birth or breast

feeding, precluding marriage).

The Prophet s.a.w. combined both

the original presumption and precaution

when he saw a strong resemblance with the

one who is not the bed owner. Here, we can

observe the fatwa that ruled that the sale is

valid if the agent sells to himself, at a specific

price, as determined by the principal. It is

apparent that when the principal determines

the price for the agent, it is not considered

as agency in sale, because the act of

determining the price by the principal is

considered as offer to sell, made by him to

the agent. If the agent communicates his

acceptance, then, the contract has been

concluded by offer and acceptance made

by the eligible parties. There is neither an

agent nor principal in the contract, but all

that took place is that the contract was

concluded between the two parties of a

valid contract, who are the seller and the

buyer.

The summary of this fatwa is as follows:

1. It permitted for a client of the bank

to represent the bank in an agency

capacity, to buy the commodity required

by the client of behalf of the bank, and

then the client buys the commodity

from the bank, after the bank has taken

possession of the commodity. For this

type of transaction, there are no disputes

among the scholars;

2. It is not permitted for a client to take

charge of the two sides of the agency

contract, whereby he purchases the

commodity for the bank and in turn

sells it to himself, on behalf of the bank.

The impermissibility is upheld, in order to

avoid doubtful elements and protect

the Islamic banking system against

accusations that its products are merely

tools to justify riba;

3. A group of ulama prohibited an agent

from taking charge of both sides of a

contract; agent of his principal in buying

and selling on behalf of the bank. Even

though some ulama permit it, if there are

no doubtful elements, suspicious of form

is in existence and it is more dangerous

than the suspicious involved by way of

negligence, if he buys or sells at less than

the normal price; and

4. It is not considered as taking charge

of both sides of the contract if the

principal sets the price, in which case it is

considered as offer and if accepted by

the client, the sale is completed primarily

from the seller and buying from the client.

In this regard, there is neither agent nor

principal. The contract was concluded

by its primary parties, i.e. the seller and

the buyer.

International Shari’ah Research Academy for Islamic Finance1� 1�FATWA SECTION

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