This site is solely dedicated to publish my writing, mostly on the topic of Islamic finance. Some of the articles were written as partial fulfillment for completing the Chartered Islamic Finance Professional (CIFP) certifications and for the Ph.D in Islamic Finance that I am currently undertake. Interested parties, including reporter/press or students, may reproduce or quote materials published provided that the credit has to be given to my blog (arzim.blogspot.com). Comments must be accompanied by names or pseudonyms. Anonymous postings and those containing profanities and obscenities will be rejected.

Saturday, February 27, 2010

All Wealth belongs to God and man is only a trustee. Base on this statement explain the rights of various groups to wealth from the Islamic perspective?

Wealth in Islam is divided into two categories: First the public wealth (public utilities and natural resources) that is not owned by individuals, but rather they are the property of the entire nation. In general, anything which does not involve much human effort or cost to make it useful can be concluded, should be belong to society at large. 

Regulatory bodies which govern the financial systems and institutions in Malaysia.

The Malaysian financial system and landscape have undergone a major transformation in this recent decade. The financial sector reforms, with the Asian financial crisis acted as catalyst, have evolved a complex financial system. The rapid growth in the volume of financial transaction and the interdependence to global economy has resulted in greater potential vulnerabilities and risks to the stability of the financial system. 


The application of bay’ al-‘inah (sale and repurchase back) and bay’ al-dayn(sale of debts) is making the Islamic financial industry lost its identity. The issues are serious to the Islamic financial market movement, as it is not about minor details of religious practices (furuq) but sadly dealing with the fundamental (usul) of religion. This time it is riba or usury. Its application in Islamic financial market is partly caused by the lack of knowledge in riba that is both definite and decisive. For this reason, it is critical to put things straight and get to the basics again. This project paper endeavours to explore the critical issues in regard to both instruments and other concepts available in Islamic commercial law that can be employed as alternatives.

Rationality of decision making by market players is by itself ethical. As such there is no need to regulate a market that is functioning efficiently. Do you agree? Discuss.

I disagree because there were many cases that shown the market players try to take advantage in the loop holes of the system for example insider dealing. The regulations to control the market are needed because eventually, fraud will happen in the market. This happen because there is incentive, coming from greed intensity, will lead that to happen. There is also an opportunity for it to happens and it is hard for unethical people for not to make bad things. These are some of the justifications for the needs of laws and regulations to be in place in order to prevent it. There are also the needs for protection of interest of the market player for their rights and to preserve justice and equality.

The issue of moral hazard and adverse selection issues in musharakah contracts and proposal for risk mitigation.

1.0       Introduction

Commonly, business ventures start off with a loan. For Muslims, loans cannot be made or accepted according to traditional banking methods because this invariably entails the payment and receipt of interest and therefore is not permissible. Islamic banking allows prospective clients to borrow money while still adhering to Shariah law through profit-and-loss sharing scheme of financing; mudarabah[1] and musharakah contracts. Musharakah (partnership) is the second basic Profit and Loss Sharing (PLS) concept in Islamic banking. 

The Islamic legal maxim “al-ghorm bil ghonm” that is, “no reward without risk” is an important principle in Islamic finance. Discuss why this is so?

The explicit Quranic verse (Al-Baqarah : 275) says that “Allah hath permitted trade and forbidden riba (usury)....”, to counter back the claims made by the Meccan pagans that the trade (al-bay) is like usury. For them, the excess return over the loans provided to debtors are exactly the profits gained from the trade. However, when one looks closely to the nature and function of riba, it is, in fact, an extremely oppressive business activity.

In an Islamic hire purchase scheme, suppose an Islamic bank is required to purchase a car before leasing it to the customer. Discuss how this could affect the bank’s profit and loss?

Accounting and Auditing Organisation For Islamic Financial Institutions (AAOIFI) was formed to undertake responsibility for issuing accounting standards that adhere to the requirements of Shariah. In Shariah, it recognises the application concept of ‘substance’ and the ‘form’ and does not particularly endorsed to the concept of ‘substance over form’. 

The supply of savings in an Islamic finance is free from the influence of external intervention such as the interest rate. If this is true, how this will motivate people to put their money in Islamic bank deposits?

The reason for the prohibition of riba (interest or usury) is because it is unjust to the borrower. However, in some case, it might also unjust to the lender and the lenders to the banks are the depositors. Banks collect the saving of all small savers and give loans to the entrepreneurs who required capital for business. 

Explain the process of deposit creation in an Islamic bank.

There is no difference between the deposit creation between conventional and Islamic banks because both banks mobilise deposits as their primary source of funds[1]. However, the process of financing services and credit facilities provided by the Islamic banks make it difference from its conventional counterpart. Islamic banks eliminate any interest (usury) elements when providing the financing services. The process of deposit creation can be viewed at 2 different level; micro and macro level.

Compare and contrast salient features of the cost of deposits in a mudarabah deposit and an interest-bearing fixed deposit.

Under conventional banking, the cost of deposits in an interest-bearing fixed deposit is fixed and guaranteed regardless of the actual outcome of investments done by the banks. In summary, whatever the rate for cost of deposit is indicated, the realised cost of deposit would be the same at the end of maturity period for fixed deposit. 

What are the underlying features of the neo classical model of economic thought? What worldview does it represent? How are they at cross purpose with the Islamic world view?

The economy is literally a social science that study the human behaviour given the scarcity of resources whilst wants are unlimited and the need to choose between competing alternatives. It is also studies the production, distribution, trade and consumption of goods and services. It can be said that the early economy thought started as a protest by Europeans towards Christianity orthodox school which has firmly grips them in every way. Such economists can be seen to be into political economy in their publication whereas be a neoclassical economy in other publication. This happens because the needs for anti-establishment during the period have led them to be secular in all way and to separate everything inclusive of economic activities with religion.

How is wealth conceived or perceived with respect to its significance and role to social progress during the pre-industrial and post-industrial eras?

In traditional era, the wealth will be associated the land held by the person. Generally, the leader or master encompassing of the kings and aristocrats will have plenty of lands. This will determine their economic level in the society of the leaders. At one point, king in feudal system threaten by his aristocrats who having plenty of lands but rebellious toward him. The feeling existed because of the hierarchy of this aristocrat in the economy. One of the factors that have lead to the rebellious and anti-establishment of aristocrats was from the introduction of taxes imposed to the productions from the lands onto them.

What is your understanding of the term 'fair price'? Do you think it is the same or rather does it have the same meaning between the era of pre-indutrial and post-industrial?

The ‘fair price’ is the unbiased estimate of price of goods and services given any constraints in production, distribution, opportunity costs, risk and return. It will be achieved when demand and supply at point of equilibrium.

The application of Wadiah and Qardh principles in Islamic deposit accounts and the Shariah implications for the use of each of the respective principles

Wadiah is defined as “setting up an agency contract for the purpose of protecting one’s wealth” by Maliki school of law. Other school of thoughts basically agrees to the main element of definitions, which is, the delegation to another party of the function of protecting one’s wealth. Wadiah is basically a benevolent act by the keeper and the nature of wadiah is amanah (a trust). The basic concept of wadiah yad al-amanah (safe custody based on trust) is that the trustee will only be responsible for damages to the assets or property entrusted in case of negligence and the trustee cannot mix the assets or property with his or other people’s properties. 

The criteria of the debt that can be the subject matter of debt transfer (hiwalah) and debt sale (bai’al-dayn) in Islamic commercial law

Hiwalah or hawalah is an effective mode for the security of debts. The word hiwalah is derived from tahwil, which conveys the meaning of shifting a thing from one place to another place. In the language of law, it means “shifting or assignment of debt from the liability of the original debtor to the liability of another person”. It can also be defined as substitution of one obligor for another with the agreement of the creditor.

Friday, February 26, 2010

The Islamic commercial law principles and rules that govern the sales on credit (buyu’al-Aajal) and the discussion of whether “Da’ wa ta’ajjal” which is known in Islamic legal literatures as “give discount and receive sooner” can be practiced by parties in Islamic transactions in the context of rebate and debt-discounting

Buyu’al-Aajal also known as Bai’ Bithaman Ajil (BBA) in Malaysia, is a sale contract in which the payment of the price is deferred and payable at a certain particular time in the future. It is a trading at cost plus specified mark-up. It is basically a variation of murabahah (cost plus) whereby the deferred payments would be in the form of instalments whereas for murabahah, the deferred payment would be paid lump sum in the specific time in the future. In general, the majority of Islamic jurists are unanimous in allowing the activity of BBA. 

The Differences Between Contract of Istisna’ and Contract of Salam

Salam (spot payment for deferred delivery) and istisna’ (staggered payments for deferred delivery) are the sales of a special nature. Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid on the spot. The wisdom behind permissibility of salam due to the needs of the seller. If the price is not paid to him in full, the basic purpose of the transaction will be defeated. On top of that, the quantity of the commodity must be agreed upon in unequivocal terms plus exact date and place of delivery must be specified in the contract.

What is the difference in value systems of societies prior to industrialization and those we find today, especially the economic values of profits, success, efficiency, equity and well being?

Industrialisation also known as Industrial Revolution, is a process of social and economic, whereby a human society is transformed from traditional to industrial state. The transition has brought tremendous change in the philosophical view of society, and this, in turn, bring the modernisation process in social and economy into technology revolution.

How muqassah or set-off is affected in the settlement of financial obligations in Islamic commercial transactions?

Muqassah is generally a clearance of obligation and involves setting off debts of the debtor and creditor who is indebted to each other. The debts set off must be identical in all aspects or when the debt is of different value, the smaller debt is reduced from the larger debt. The legality of muqassah can be divided into three opinions. First, one group of Muslim jurists opined the muqassah is a approved method for the settlement of debts. The subject matter doesn’t come under purview of sale of debt (bai’ al-dayn)