shariah contracts in international islamic banking...

JURNAL PENGAJIAN ISLAM, AKADEMI ISLAM KUIS ISSN 1823-7126 BIL 7: 2014

Shariah Contracts in International Islamic Banking Transaction

MUHAMMAD RIDHWAN BIN AB. AZIZ1

Abstrak

Artikel ini membincangkan berkenaan akad-akad Shariah yang diguna pakai dalam transaksi perbankan antarabangsa Islam. Metodologi kajian yang digunakan dalam artikel ini adalah berdasarkan metodologi penyelidikan dokumen dalam menghuraikan setiap akad tersebut dengan terperinci berdasarkan pandangan ulama’ Islam. Dalam pada itu, penyelidikan lapangan melalui temubual dengan beberapa orang pegawai bank Islam yang menawarkan produk pembiayaan bagi transaksi perbankan antarbangsa Islam juga telah dilakukan. Artikel ini dibahagikan kepada dua bahagian iaitu bahagian pertama memperincikan semua akad yang digunakan oleh institusi perbankan Islam dalam pembiayaan perbankan antarabangsa mereka dan bahagian kedua, menghuraikan tentang instrumen-instrumen yang telah diparaktikan oleh institusi ini dalam menyediakan produk pembiayaan perbankan antarabangsa kepada pelanggan.

Kata Kunci: Al-Wakalah, al-Kafalah, Bay’ al-Dayn.

Abstract

This article tries to explore the Shariah contracts applied in international Islamic banking transaction. The methodology of research in this article is through document analysis in examining all Shariah contracts in international Islamic banking transaction based on Muslim scholar’ opinions. In addition, this article also uses the interview method with relevant Islamic banks officers that offer Islamic banking products with respect of international banking transaction in their respective banks. This article will be divided into two section namely section one discusses all the Shariah contracts involve in the international Islamic banking transaction, and section two examines Islamic banking instruments provided by Islamic banking institutions in giving financing to their customers.

Keywords: Al-Wakalah, al-Kafalah, Bay’ al-Dayn.

1 Senior Lecturer at Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), emel: [email protected].

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Muhammad Ridhwan Bin Ab. Aziz Introduction

Islam as an all-encompassing way of life has a unique system in dealing with international banking transaction between two nations or two individuals from different companies or countries. Although international banking transaction is seen more global and wider in its application, but the similar concepts and principles of domestic dealing and transactions are also applied in this kind of business. This is because, all the concepts and principles for both types of transactions are derived from the same sources namely al-Qur’an, al-Hadith, consensus of jurists (Ijma’) and Ijtihad.

The main problem here is what are the Shariah contracts applied for international banking transaction and are these contracts suitable and valid to be used in the Islamic banking industry? This article tries to solve these issues by discussing all the Shariah contracts practiced in the international Islamic banking transaction as well as examining all the instruments provided by local Islamic banks for international transaction.

1. Shariah Contracts in International Islamic Banking Transaction.

There are three Shariah contracts that directly involve in the financing arrangement in the transaction for international Islamic banking namely al-Wakalah (Representative), al-Kafalah(Guarantee) and Bay’ al-Dayn (Sale of Debt) as follows:

a. Al-Wakalah (Representative). Generally, the contract of al-Wakalah2 can be divided into two categories namely specific representative and general representative. Specific representative is when the agency or Wakilcarry out specific task for example, an agency for purchasing import goods from specific country. This kind of representative is bounded upon what has been assigned to, whereby the person is required to carry out his obligation as wished3. In contrast, general representative is a kind of representative where the agency is allowed to do all relevant jobs for instance, when A says to B, “You are my agency in all matters”. In this case, the agency has full power to carry out his task in his own way. The agency can represent the representative in all matters except in the matter that can cause harm to the agency or to the person who gives the agency4.

According to jurists from Shafi’i, Hanbali and Maliki schools of Islamic jurisprudence, the Wakil is bounded upon the customary practices of certain places and society. If the Wakil acts

2 Lexically, al-Wakalah means “to safeguard”. See for instance, Ibn Manzur. 1994. Lisan al-Arab. Beirut: Dar al-Sadir. Vol. 11. p.734. Scholars from Hanafi school define al-Wakalah as assigning someone to carry out his job in matters permissible by Shariah. See al-Kasani. 1998. al-Bada’i’ al-Sana’i’. Vol. 6. p.19. Yet, Shafi’i’s jurists define representative as representing somebody in carrying out his work. See al-Sharbini al-Khatib. 1994. Mughni al-Muhtaj. Beirut: Dar al-Kutub al-Ilmiyyah. Vol. 2. p.217. The legality of al-Wakalah contract is mentioned in al-Qur’an in Surah al-Tawbah verse 10, Surah Yusuf verse 55 and Surah An-Nisa’ verse 35. 3 Ibn Abidin. 1979. Hashiyah Radd al-Muhtar. Beirut: Dar al-Fikr. Vol. 4. p.416; Ibn Rushd. 1995. Bidayah al-Mujtahid wa Nihayah al-Muqtasid. Beirut: Dar al-Fikr. Vol. 2. p.297. 4 Ibid.

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differently from the custom, he actually has transgressed others’ entitlement without consent. For example, he cannot buy goods with unused currency of that place5.

The majority of fiqh scholars agreed that Wakil, which has been given full power to carry out his job is bounded with what is normally practiced by the people. As such, he cannot sell goods except by using the usual currency in use and sell lower than the normal market price, which may result any loss to the transaction. In the case of Wakil for purchasing goods, the Wakilis treated in similar way as for the Wakil in selling goods in terms of the conditions decided by the person who gives the representative in matters of price, type and character of the buying goods. The Wakil is permitted to buy for himself since the Wakil is regarded as buying for himself6.

b. Al-Kafalah (Guarantee).

The contract of al-Kafalah7 is also directly connected with the international Islamic Banking transaction. The contract of al-Kafalah has two essences namely proposal (Ijab) by the guarantor and acceptance (Qabul) by the debtor8. Conversely, according to the majority of Muslim jurists, the essence for guarantee is only one namely proposal by the guarantor. This is because the contract of guarantee from the perspective of Shariah is a form of debt claimant and it is adequate by the proposal given by the guarantor only9.

Meanwhile, there are four conditions for the validity of the contract of al-Kafalah, as follows:

i. Condition for Guarantor.

Guarantor must has sound mind and puberty (Baligh), whereby the contract of guarantee is not valid when it is involved child and insane since guarantee is a kind of charity contract. Charity contract is a contract involves with property then, person who is not eligible to give charity cannot participate in the contract of guarantee10.

5 Al-Shirazi. 1976. Al-Muhadhdhab. Misr: Mustaffa al-Babi al-Halabi. Vol. 1. p. 353; Al-Sharbini al-Khatib. op.cit. Vol. 2. pp.223-229; Ibn Rushd. op.cit. Vol. 2. p.298. 6 This view is shared among all the jurists. See Al-Kasani. op.cit. Vol. 6. p.29; Al-Sarakhsi. 1989. al-Mabsut. Beirut: Dar al-Ma’rifah. Vol. 19. p.39; Ibn al-Hummam. 1995. Fath al-Qadir. Beirut: Dar al-Fikr. Vol. 6. p.57; Al-Sharbini al-Khatib. op.cit. Vol. 2. p.229; Al-Shirazi. op.cit. Vol. 1. p.354; Ibn Rushd. op.cit. Vol. 2. p.298; Ibn Qudamah. 1992. al-Mughni. Beirut: Dar al-Fikr. Vol. 5. p.107. 7 Scholars from Maliki, Shafi’i and Hanbali define guarantee as a combination of obligation between guarantor and guarantee in matter of debt. See Ibn Qudamah. op.cit. Vol. 4. p.534; Al-Sharbini al-Khatib. op.cit. Vol. 2. p.198. Contract of al-Kafalah can be divided into two types namely al-Kafalah Bi al-Nafs or guarantee for oneself and al-Kafalah Bi al-Dayn guarantee for debt. See Ibn Rushd. op.cit. Vol. 2. p.296. Once in the life time of the Prophet Muhammad (s.a.w.), he refused to pray (praying for dead body) for a companion who has a debt of only two dirhams. But, when one of his companion willingly and guaranteed to pay for the debt, he (s.a.w.) then agreed to pray for the companion. This event is a legal basis for the permissibility of al-Kafalah contract in Islam. See al-Shafi’i. 1968. al-Umm. Misr: Kitab Sha’ab. Vol. 1. p.227. 8 This view is given by Abu Hanifah. See for instance Ibn al-Hummam. op.cit. Vol. 5. p.390; Al-Kasani. op.cit. Vol. 6. p.2. 9 Al-Sharbini al-Khatib. op.cit. Vol. 2. p.200; Al-Shirazi. op.cit. Vol. 1. p.340; Ibn Qudamah. op.cit. Vol. 5. p.535. 10 Al-Kasani. op.cit. Vol. 6. p.5; Al-Sarakhsi. op.cit. Vol. 20. p.8; Al-Sharbini al-Khatib. op.cit. Vol. 2. p.198.

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Muhammad Ridhwan Bin Ab. Aziz

There are two conditions for debtor namely he must able to give the guarantee by himself or via his representative. As such, guarantee given by dead and bankrupted person are not valid because the persons do not leave their properties for debt repayment. Secondly, the guarantor should understand the contract of guarantee fully although the person is not there or in imprisonment11.

iii. Condition for Creditor.

Creditor should be well recognized and his name can be stated clearly. Moreover, creditor should present in the session of contract (Majlis al-‘Aqd) and if the creditor is not present at that time then later, he is informed and agreed upon the contract, this contract of guarantee is not valid because acceptance of the proposal was not made in the session of contract. Guarantee means transfer of entitlement and the contract cannot happen unless there are offer and acceptance12.

iv. Condition for Guarantee.

Guarantee should be in the form of debt, goods, oneself or action. Trust goods such as property belonging to partnership or selling goods not yet be delivered are not valid to be guaranteed13. In addition, the contract of al-Kafalah may be terminated in either case as below:

i. Termination of Guarantee for Property.

This kind of guarantee will be terminated when payment of debt was settled or goods has been delivered to the creditor. This settlement can be done by any party either by the guarantor or by the person under guarantee. This is because entitlement is a form of settlement therefore, when the settlement was made then the objective of the guarantee is accomplished so, the contract will be resolved14. Similarly, when the creditor settled down his debt towards guarantor either by way of Hibah (gift) or similar action then, the contract of al-Kafalah is terminated. This contract is also resolved by transferring the guarantor’s obligation towards other person and he accepted15.

ii. Termination of Guarantee by Personal Appearance.

Termination of guarantee happens when the person under guarantee appeared in a place that the judge can put him on trial. This contract is terminated because the guarantor has completed his responsibility namely by bringing the person under guarantee on the trial.

11 Ibn Rushd. op.cit. Vol. 2. p.294; al-Kasani. op.cit. Vol. 6. p.6; Ibn al-Hummam. op.cit. Vol. 5. p.419. 12 Al-Kasani. op.cit. Vol. 6. p.6; Ibn al-Hummam. op.cit. Vol. 5. p.417; al-Sarakhsi. op.cit. Vol. 20. p.9. 13 Al-Kasani. op.cit. Vol. 6. p.7; Ibn al-Hummam. op.cit. Vol. 5. p.402. 14 Al-Kasani. op.cit. Vol. 6. p.11. 15 Ibid.

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ii. Condition for Debtor.


Similarly, in the case when the person died therefore, the guarantor can get off from the obligation since it is considered as matter of external incapability to bring the person16.

c. Bay’ al-Dayn (Sale of Debt)17.

Debt here is included to the debt of the price of selling goods, loan replacement, fee for certain benefits, penalty payment and indemnity. This type of sale may happen either for person who has debt or person who has no debt. Majority of jurists agreed that sale of debt for debt is not valid either the sale is made by person who has debt or person who has no debt18.

For instance, sale of debt for person who has debt happens when he says: “I purchase from you 10 kilogram of wheat at price of RM 15.00, with condition that the delivery is made after one month”. When the time is due, the seller was not able to settle his debt (unable to deliver the goods) and then says to the buyer: “Sell the debt to me with condition that you extent the time and I will add extra quantity of goods”. As such, the buyer sells the debt to the seller, but the delivery of the goods was not happened. This kind of sale is considered as riba and it is unlawful from the Shariah perspective19.

Sale of debt to person who has no debt happens when the person says: “I sell to you my 10 kilograms of sugar, in the hand of A at price of RM 15.00 and you need to pay it after one month”. This type of sale is also not valid to be practiced20.

Meanwhile, scholars of different views regarding sale of debt in cash. Majority of fuqaha’ validated this sale when the sale is for person who has debt. This is because matter that will nullify the legitimacy of sale of debt for debt is when a person sells an item that he cannot afford to deliver it since in reality the goods itself is not belonging to him21.

Nonetheless, the debt here does not need for delivery (buyer does not receive the item from the seller) for example, the debtor sells the debt to person who has debt with a replacement of other type of debt. In this case, the sale of debt is nullified and he is forced to replace with the second debt. Nevertheless, scholars from Zahiri school of the opinion that sale of debt to a person who has debt is not valid since there is an element of Gharar (uncertainty) and sale of Gharar is void22.

In the case of sale of debt to person who has no debt in cash, scholars from Hanafi and Zahiri of the views that the sale is not valid because of the selling of undelivered item. Therefore, the contract of sale of debt to person who has no debt is not legitimate since debt cannot be delivered to person who has debt23.

16 Al-Kasani. op.cit. Vol. 6. p.12; Al-Sarakhsi. op.cit. Vol. 19. p.166; Ibn al-Hummam. op.cit. Vol. 5. p.393. 17 Bay’ al-Dayn or sale of debt is a sale transaction upon debt. See Hashim Kamali. 2000. Islamic Law in Malaysia: Issues and Development. Kuala Lumpur: Ilmiah Publisher. p.250. This type of sale can be in the form of cash or delay transaction. See Wahbah al-Zuhayli. 1984. Al-Fiqh al-Islami wa Adillatuh. Damshiq: Dar al-Fikr. Vol.4. p.432.18 Mustaffa al-Khinn et.al. 1998. Fiqh al-Manhaji. Damshiq: Dar al-Qalam. Vol. 3. pp.38-39.19 Al-San’ani. 1979. Subul al-Salam. Beirut: Dar al-Fikr. Vol. 3. p.45; Al-Shirazi. op.cit. Vol. 1. p.262. Nevertheless,there is no specific proof to confirm that this kind of sale is valid from the perspective of Shariah and there is also no specific proof to invalidate it. According to Ibn Qayyim, this type of sale is lawful since there is no proof from al-Qur’an and al-Hadith and also consensus of ‘ulama. See Wahbah al-Zuhayli. op.cit. Vol.4. p.434. 20 Al-San’ani. op.cit. Vol. 3. p.45; Al-Shirazi. op.cit. Vol. 1. p.262. 21 Al-Kasani. op.cit. Vol. 5. p.148; Ibn Qudamah. op.cit. Vol. 4. p.120; Mustaffa al-Khinn et.al. op.cit. Vol.3. p.39. 22 Ibn Hazm. 1970. Al-Muhalla. Qahirah: Matba’ah al-Jumhuriyyah. Vol. 9. p.7. 23 Al-Kasani. op.cit. Vol. 5. p.158.

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In this regard, seller is unable to deliver the selling item to person who has debt. This kind of sale is not valid because among the conditions in a sale contract is that the item should be delivered to the buyer. When this condition is not fulfilled, the sale of debt is also nullified24.

According to a view from Shafi’i school of fiqh, it is permissible to sell fix debt that can be easily converted to cash term since this kind of debt can be delivered without any obstacle such as payment for indemnity. Besides, according to Hanbali, it is valid to sell fix debt that can be converted to cash term to person who has debt, but he invalidated to sell it to person who has no debt25.

For Maliki, sale of debt to person who has no debt is valid with two conditions. Firstly, the sale is not involve with any element that not permissible by Shariah law such as riba and gharar. Thus, the debt becomes a permissible item and can be sold such as loan or debt not in the category of food stuffs26.

If replacement for debt is happened then, the price of the debt should be equal in order to avoid riba and the debt cannot be paid in gold currency/money if the debt is in the silver currency/money to avoid cash sale for deferment price. Secondly, person who has debt should affirm that debtor will able to settle the debt when the time is due and he should attend in the session of contract for the confession27.

2. Instruments in Islamic Banking.

There are various types of Islamic instrument for international Islamic banking transaction offered by Islamic banking institutions in Malaysia. Amongst the instruments are as follows:

a. Bank Guarantee-i (BG-i).

Bank Guarantee-i is an irrevocable written obligation issued under contract of Kafalah by the Bank to assure payment in case of demand by beneficiary. The Bank in essence, acts as a guarantor. In this guarantee, the bank will responsible on behalf of his client when there is a default in payment or breaking of agreement contract as been agreed by both parties (client and third party)28. This facility is a combination of two Islamic contracts in Islam namely al-Kafalah and al-Wadi’ah. Therefore, BG-i is a contract made between bank and another party, which states the bank’s agreement to carry out the liability or obligation towards bank’s client in the case when the client fails to fulfill his promise29. 24 Ibid. 25 Al-Shirazi. op.cit. Vol. 1. p.262; Ibn Qudamah. op.cit. Vol. 4. p.120. 26 Ibn Rushd. op.cit. Vol. 2. p.146; Al-Dardir. op.cit. Vol. 3. p.63. 27 Ibid. 28 Bank Islam Malaysia Berhad; http://www.bankislam.com.my/en/Pages/BankGuarantee-i.aspx?tabs=1 Accessed on 16th June 2014. See also Sudin Haron and Bala Shanmugan. 1997. Islamic Banking System: Concepts & Applications. Petaling Jaya: Pelanduk Publications. p.138. This concept also refers to the guarantee given by one party to the owner of the goods. This facility is a contract of guarantee by Islamic banks towards third party where client is responsible to fulfill his obligation to the third party. See Ab. Mumin Ab. Ghani. 1999. Sistem Kewangan Islam Dan Pelaksanaannya di Malaysia. Kuala Lumpur: Jabatan Kemajuan Islam Malaysia. p.276. 29 Ab. Mumin Ab. Ghani. op.cit. p.276.

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In practice, Bank Islam Malaysia Berhad (BIMB)30 offers BG-i for its client in carrying out project, completing project under construction or other type of guarantee that conform to the Shariah requirements31. BIMB will help its client to convince the third party that the client will obey all obligations pertaining to the settlement of his debt or in completing his project or other kind of requirement32. The features of BG-i facility offered by BIMB are as below:

i. BG-i is issued under the principle of al-Kafalah.ii. This facility is issued to assist client for completing certain jobs, settlement of

debt or other needs. This facility is given normally for the tender guarantee,performance guarantee, sub-contractor guarantee, safe-deposit guarantee, customfree duty guarantee and custom bond.

iii. The bank will ask the client to deposit certain amount of money in the bank underthe principle of al-Wadi’ah in order to obtain this facility33.

For CIMB Islamic Bank Berhad34, the similar facility is also called Bank Guarantee-i, based on al-Kafalah concept. Through this facility, the bank is responsible to pay for the beneficiary or seller certain amount if the bank’s client fails to fulfill his obligation based upon the agreement with the seller35. A Bank Guarantee-i (BG-i) is a guarantee issued by a Bank at the request and for account of the applicant whereby the Bank undertakes to pay the beneficiary up to the guaranteed sum in the event of a valid claim received by the Bank under the BG-i. This BG-i is based on the Kafalah concept which refers to a contract of guarantee or surety given by one party to discharge the liability of a third party in the case of default36.

30 BIMB is one of the fully Islamic bank in Malaysia. BIMB was established under Company Act 1965 on 1st March 1983 and began its operation on July 1983. The establishment of BIMB is a positive sign for the formation of dual banking system in Malaysia. The objective of BIMB is to be an alternative for the conventional banking system based on interest system. See Wong Choo Sum. 1995. “Bank Islam Malaysia: Performance Evaluation 1983-1993”. Leading Issues in Islamic Banking and Finance. Petaling Jaya: Pelanduk Publications. p.84. 31 Islamic Banking Practice: From the Practitioner’s Perspective. 1994. BIMB, pp.99-100; Bank Islam Malaysia Berhad. http://www.bankislam.com.my. 16th December 2010. 32 Muhammad Kamal Azhari. 1993. Bank Islam: Teori Dan Praktik. Pustaka Fajar. p.156. 33 Interview carried out with Rahemi Bin Jusoh, Credit Officer, Bank Islam Malaysia Berhad, Machang, Kelantan on 25th June 2007 at 9.35 a.m.; Islamic Banking Practice: From The Practitioner’s Perspective. 1994. BIMB. p.100. 34 CIMB Islamic Bank Berhad was officially established after a merger with Commerce Tijari on 6th June 2005. Currently, this bank has become a global bank that offers Islamic commercial products and services in its 233 branches throughout Malaysia. This bank also operating in Brunei and Bahrain. Among the Islamic products provided by CIMB is investment products, consumer products and asset management that can cater different need of customers personally and commercially. See CIMB Islamic Bank Berhad. http://www.cimbislamic.com. 6th October 2010. 35 Interview carried out with Mustapa Bin Kamal, Bank Officer, International Financing Unit, CIMB Islamic Bank Berhad, Kota Bharu, Kelantan on 7th October 2007 at 4.00 p.m.; CIMB Islamic Bank Berhad. http://www.cimbislamic.com. 6th October 2010. 36 CIMB Islamic Bank Berhad; http://cb.cimbislamic.com.my/index.php?ch=ci_biz_tr&pg=ci_biz_tr_tra&ac=28&tpt=cimb_ibiz# Accessed on 16th June 2014.

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The facility of LC-i as being offered by BIMB based on two Shariah principles namely al-Wakalah and al-Murabahah37. LC-i based on principle of al-Wakalah is a situation in which one party named another party to be his representative. This type of LC-i needs advance payment from the client according to the value of the buying item. The client is required to deposit certain amount of money in BIMB account based on the price of the goods38. BIMB as an agent for the client in payment of goods will issue LC-i based upon the valid conditions of sale from the Shariah perspective. Then, BIMB will make payment using the deposited cash of the client from his account. BIMB will charge fee and commission to the client for all services it rendered to the client based on the principle of al-Ajr wa al-‘Umulah (base on certain fee)39. After application has been made, BIMB will examine and process the application and if the bank satisfied, the bank will issue LC-i to the client. The client will sign an agreement with the bank and the bank will issue the LC-i after all relevant documents have been checked and approved by the officer40. By using this facility, exporter can avoid any default of payment by the importer since guarantee has been given by the bank. The importer also will feel safe and comfort to make a deal because payment of the transaction can only be made after the delivery of the goods and be confirmed by the bank41.

c. Islamic Accepted Bill (AB-i).

This facility is an Islamic financial product for international Islamic banking transaction, which is somewhat similar to the Bankers Acceptance in the conventional banking system. This facility uses the principle of al-Murabahah and Bay’ al-Dayn42. There are two methods of financing under this facility, as follows:

i. AB-i (Purchase).

This type of Islamic Accepted Bill uses the principle of al-Murabahah. This financing begins when client asks the bank to provide financing facility for him in purchasing certain goods, but not related to the fix asset or property. The bank will appoint the client as his agent for buying the desired goods on behalf of the bank. The bank then, will pay the price of the

37 Sudin Haron. 1996. Prinsip dan Operasi Perbankan Islam. Kuala Lumpur: Berita Publishing Sdn. Bhd. pp.115-118. For the purpose of this article, only LC under al-Wakalah principle will be explained in order to tally and make comparison with LC provided by CIMB Islamic Berhad. 38 Ibrahim Shahbudin. 2001. “Trade Finance Facilities”. Seminar Paper on Islamic Banking and Finance Lectures Series, Hotel Sheraton & Tower, Kuala Lumpur. 19th -20th September 2001. pp.10-11. 39 Islamic Banking Practice: From the Practitioner’s Perspective. 1994. BIMB. p.101. 40 Interview carried out with Rahemi Bin Jusoh, Credit Officer, Bank Islam Malaysia Berhad, Machang, Kelantan on 25th June 2007 at 9.35 a.m.; Bank Islam Malaysia Berhad. http://www.bankislam.com.my. 16th December 2010. 41 Ibid. 42 Islamic Banking Practice: From The Practitioner’s Perspective. 1994. BIMB. pp.104-105; Sudin Haron. op.cit. p.251.

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b. Letter of Credit-i (LC-i).


goods using the bank’s fund and sell the goods to the client at price which consists of buying price plus profit margin43.

The client is allowed to pay in installment until the date of maturity. The client will submit all relevant documents to the bank before the bill can be issued. The debt in this facility can be securitized (can be traded in the second board of Bursa Malaysia) using the principle of Bay’ al-Dayn in the form of Bill of Exchange44.

ii. AB-i (Sales).

This facility uses the principle of Bay’ al-Dayn. For this type of facility, the bank will purchase client’s debt, which usually be securitized under the Bill of Exchange. In this facility, the exporter will provide exports documents as required under the contract of sale or LC. The client will submit the documents to the bank in order to be purchased by the bank. Since the export document needs to be sent to the importer, the bank will ask exporter to issue a new bill of exchange as a replacement under the principle of Bay’ al-Dayn, which has certain duration of maturity date45.

d. Export Credit Refinancing-i (ICR-i).

This facility offers financing to the direct and non-direct exporter46 with no interest basis. This scheme is introduced to expand the export trading for Malaysia products, which is controlled by the Central Bank of Malaysia. This scheme uses Shariah principle of al-Murabahah and Bay’ al-Dayn47, which can be divided into two categories, as below:

i. ECR-i Pre-Shipment.

This facility is provided to exporter for purchasing of raw material or finished goods for the purpose of exporting. Exporter who wishes to obtain this facility needs to be an agent for the merchant bank in order to purchase the raw material for production under the principle of al-Murabahah. When the goods has been delivered, the bank will pay to the supplier according to price stated in invoice and bank as the owner of the goods will sell it to the exporter in credit at agreed price consisting of the cost of the goods plus profit margin48.

43 Bank Islam Malaysia Berhad; http://www.bankislam.com.my/en/Pages/AcceptedBills-i.aspx?tabs=1 Accessed on 16th June 2014. See also Islamic Banking Practice: From The Practitioner’s Perspective. 1994. BIMB. pp.104-105; Ab. Mumin Ab Ghani. op.cit. pp.273-274. 44 Ibid. 45 Ibid. 46 Non Direct Exporter is person who supplies domestic materials to the exporter. See Nor Mohamed Yakcop. 1996. Teori, Amalan dan Prospek Sistem Kewangan Islam Di Malaysia. Kuala Lumpur: Utusan Publications & Distributors Sdn. Bhd. p.83. 47 Nor Mohamed Yakcop. op.cit. pp.83-84. 48 Ibid.; Ab. Mumin Ab Ghani. op.cit. pp.274-276.

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Shariah Contracts in International Islamic Banking TransactionMuhammad Ridhwan Bin Ab. Aziz

ii. ECR-i Post-Shipment.

This facility is offered to exporter who exports his goods by credit. Exporter who sends his goods to importer becomes the owner of the export bill and he appoints trading bank as the collection agent for collecting the payment from the overseas importer. Since payment can only be claimed at future date, exporter who needs fund will sell the bill to the trading bank based on Shariah principle of Bay’ al-Dayn49.

The bank will buy the export bill with an agreed price (face value of the bill minus bank’s profit). This means that bank will advance the payment to exporter before it receives the payment from the importer. Afterwards, the bank will sell the bill to the Central Bank and when the expiry date is due, the Central Bank will sell it back to the trading bank based on the face value of the bill50.

e. Collection Bills.

This service is based on al-Wakalah principle and provided to exporter. For this kind of facility, the bank will represent the client for collecting the sale revenue based upon bill of exchange and send all the relevant documents to his agent in oversea. The similar service is also provided by the bank when the bank acts as a representative bank in oversea to collect sale revenue of foreign traders51.

f. Money Transfer.

Money transfer involves the transfer of fund from A to B as required by the customer. Bank acts as the agent on behalf of the customer (based on Shariah principle of al-Wakalah) will transfer the fund as requested by the customer through application draft, consignment transfer or telegraphic transfer. The bank will use branch service bank or its agent located at nearest to the B. Usually, the bank will retain one account with the agent for smooth process52.

The fund transfer through application draft and transfer by order begin when the bank directs its agent to pay to specific party by asking its agent to debit his account when the transmitted process is done. In case when the transfer involves the exchanging of foreign currency, the bank will sell the foreign currency to its customer. The bank usually imposes minimum service charge for this kind of services rendered to the customer53. Below is the brief objective/purpose and contracts applied for all of the above mentioned instruments:

49 Nor Mohamed Yakcop. op.cit. pp.83-84. 50 Ibid.; Ab. Mumin Ab Ghani. op.cit. p.276. 51 Sudin Haron. op.cit. pp.250-251; Islamic Banking Practice: From The Practitioner’s Perspective. 1994. BIMB. p.106.52 Islamic Banking Practice: From The Practitioner’s Perspective. 1994. BIMB. pp.105-106.53 Ibid.

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Table 1.1: Selected Facilities of Islamic Trade Financing Item Facility Shariah Contract Objective/PurposeA Bank Guarantee-i

(BG-i)Kafalah Payment guarantee

B Letter of Credit-i(LC-i)

al-Wakalah and al-Murabahah

Trade Settlement

C Islamic Accepted Bill (AB-i)

al-Murabahah and Bay’ al-Dayn

Import Purchase and Export Sales

D Export Credit Refinancing-i (ICR-i)

al-Murabahah and Bay’ al-Dayn

Export Refinancing

E Collection Bills al-Wakalah Obtain payment and deliver document

F Money Transfer al-Wakalah Payment transfer

Source: Bank Islam Malaysia Berhad; http://www.bankislam.com.my/en/Pages/ShariahContractsConceptsforTradeServices.aspx?tabs=1; CIMB Islamic Bank Berhad; http://cb.cimbislamic.com.my/index.php?ch=ci_biz_tr&pg=ci_biz_tr_tra&tpt=cimb_ibiz; Accessed on 16th June 2014.

Conclusion.

This article has discussed three main contracts of Shariah that are applied in international Islamic banking transaction. It can be concluded that most of the instruments in international Islamic banking transaction use these three contracts of Shariah.

In this article, explanation also has been done in terms of all facilities and instruments of international Islamic banking transaction that practiced by the local Islamic banks. Indeed, these instruments can be a better alternative for all Muslim’s importer and exporter in trading internationally since all these instruments are based on valid Shariah contracts in Islam.

References.

Ibn Hazm. 1970. al-Muhalla. Qahirah: Matba’ah al-Jumhuriyyah al-Arabiyyah.Ibn al-Hummam. 1995. Fath al-Qadir. Beirut: Dar al-Kutub al-Ilmiyyah. Ibn Manzur. 1994. Lisan al-Arab. Beirut: Dar al-Sadir. Ibn Abidin. 1979). Hashiyah Radd al-Muhtar. Beirut: Dar al-Fikr. Ibn Qudamah. 1999. al-Mughni. Riyad: Dar Alim al-Kutub. Ibn Rushd. 1995. Bidayah al-Mujtahid wa Nihayah al-Muqtasid. Beirut: Dar al-Fikr. Kasani. 1998. Bada’i’ al-Sana’i’. Beirut: Dar Ihya’ al-Turath al-Arabi. Khinn, Mustaffa et.al. 1998. al-Fiqh Manhaji ala al-Madhhab al-Imam al-Shafi’i. Damshiq:

Dar al-Qalam. San’ani. 1979. Subul al-Salam. Qahirah: Maktabah Atif. Sarakhsi. 2001. al-Mabsut. Beirut: Dar al-Kutub al-Ilmiyyah. Sabiq, al-Sayyid.1994. Fiqh al-Sunnah. Beirut: Dar al-Kitab al-Arabi.

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BIL 7, ISU 1:2014 e-ISSN : 1823-7126

Shariah Contracts in International Islamic Banking TransactionMuhammad Ridhwan Bin Ab. Aziz

Sharbini al-Khatib. 1958. Mughni al-Muhtaj. Qahirah: Matba’ah Mustaffa al-Babi al-Halabi. Shafi’i. 1968. al-Umm, Misr: Kitab al-Sha’ab.Shirazi. 1976) al-Muhadhdhab. Damshiq: Dar al-Qalam. Zuhayli, Wahbah. 1985. Fiqh al-Islami wa Adillatuh. Damshiq: Dar al-Fikr.

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