Islamic Finance

• Islamic bank can mobilise various forms of deposits such as:

  • Wadiah (safekeeping)
  • Qard al-Hasan (benevolence loan)
  • Mudarabah (profit sharing)
  • Wakalah (agency)
  • Bay al-Tawarruq (commodity murabahah)
• Islamic Investment Deposit:

  • Mudarabah (profit sharing) has two types:

  1. Mudarabah mutlaqah (unrestricted mudarabah)
  2. Mudarabah muqayyadah (restricted mudarabah)
• Islamic Investment Deposit:

  • Wakalah (agency) includes wakala bil-istishmar (agency for investment)
• Islamic Investment Deposit:

  • Bay al-Tawarruq (commodity murabahah)
• Uses of funds in Islamic Banking (Asset side):

  • Bay Bithaman Ajil for home financing / Murabahah
  • Bai Bithaman Ajil for vehicle financing
  • Musharakah Mutanaqisah
  • Ijarah - Ijarah Muntahiyah bi al-Tamlik
  • Ijarah - Ijarah Mawsufah fi Dhimmah
  • Ijarah - Aitabait
  • Simple Istisna (customer has own financing)
  • Parallel Istisna (customer has not enough financing)
  • Bay al-Inah
  • Bay al-Tawarruq
  • Bay al-Dayn
• Saving/Current:

  • Wadiah Yad Amanah
• Wadiah Yad Amanah is not suitable to structure Islamic banking deposit product since it is a mere trust and charitable engagement with restrictive features such as non-guaranteed and non-utilization of the deposited asset
• The issue of Bay’ al Dayn is one of the most contentious issues in modern Islamic finance, especially in the development of Islamic capital market products
• Classical scholars held different views on the permissibility of Bay’ al Dayn
• Those who allowed Bay’ al Dayn did so under strict conditions to avoid Shariah issues like gharar
• In Malaysia, scholars have permitted Bay’ al Dayn as a concept used to develop Islamic capital market products
• However, global acceptance of Bay’ al Dayn is limited, as scholars in most jurisdictions except Malaysia reject its permissibility
• Bay’ al Dayn might take different dimensions and forms in modern Islamic capital markets compared to its classical applications
• The paper discusses the meaning of Bay’ al Dayn, arguments for and against its permissibility, and its implications on the Malaysian Islamic capital market products
• Dayn in the Shariah means debt, where one party is paid in cash and the other is on responsibility to be paid later
• Debt can arise from deferred payment sales where the price will be paid in the future
• Dayn is a responsibility on the debtor to pay a certain amount in the future
• Qard is similar to dayn but implies pure lending or borrowing without any other transaction
• Dayn is considered a form of property or commodity in Islamic finance
• Bay’ al Dayn is the sale of debt, where the creditor sells their payable right upon the debtor to the debtor or a third party
• Debt is usually sold at a discount price to the buyer in Bay’ al Dayn transactions
• Debt can be sold in cash or in other forms of property
• In Malaysia, Bay’ al Dayn involves selling debt resulting from exchange contracts like murabahah, bai` bithaman ajil, ijarah, istisna, and others
• Bay' al-dayn is the sale of debt either to the debtor or the third party usually at a discount price by the cash price or by another debt
• Bay' al-dayn has mainly two forms:

  • The sale of debt with cash price, which can be further divided into two:

  1. Sale of debt with cash price to the debtor
  2. Sale of debt with cash price to the third party

  • The sale of debt with deferred price, which also has two sub-divisions:

  1. Sale of debt with deferred price to the debtor
  2. Sale of debt with deferred price to the third party
• Opinions on the permissibility of Bay' al-dayn have created a disagreement among scholars
• Some scholars permitted or prohibited Bay' al-dayn in general
• Some scholars differentiated their rulings based on the various forms and features of Bay' al-dayn, whether the debt is sold at cash or deferred or to the debtor or third party
• Sale of Debt with Cash Price to the debtor:

  • Majority of scholars from the four major schools of law viewed this type of sale as permissible
  • Arguments include references to Quranic verses permitting trade and forbidding usury, and a hadith allowing the sale of what is under the right when the buyer is the debtor and payment is made on the spot
  • Some scholars like Ibn Hazm, Ibn Abbas, and Ibn Mas'ud viewed this sale as not permissible, citing Quranic verses and hadiths prohibiting the sale of uncertainty and debts by commodity
• • Some Hanbali scholars agree with the first opinion but add conditions such as the debt must be certain and the exchanging goods should be possessed on the spot
• • Majority scholars of Hanafi School and some Hanbali and Shafie scholars, along with Ibn Hazm, do not permit selling debt to the third party with cash price at all, citing the presence of uncertainty and potential conflicts
• Sale of debt with cash price to the third party:

  • Some scholars from Shafie and Hanbali schools permit this type of sale, arguing that there is no authentic source prohibiting it
  • Maliki scholars impose eight conditions for permitting this type of sale, including expediting payment, debtor confirmation, and absence of enmity between buyer and seller
  • Shafie jurists impose conditions such as the debt being a spot debt in nature and the buyer paying the price on a spot basis
• The creditor is not able to submit the sold item to the purchaser as the debt is under the liability of the debtor and to possess what is under others' responsibility cannot be imagined, therefore, it is not permitted as it is not capable of submission, subsequently contains risk to the sale
• The risk might also arise from the fact that the debtor may deny his debt or delay in payment or he may become poor. In those cases, it is not possible to get the debt from him
• There is a Hadith of the Prophet (peace be upon him) which clearly states: "Don’t sell what you do not possess"
• It is based on another Hadith of the Prophet (peace be upon him) which prohibits selling or giving an item that the seller or giver is unable to deliver to the buyer or given: "Don’t sell the fish while they are in the water"
• On the same ground, there is a Hadith, which states: "The Prophet prohibited the sale of a missing slave or the offspring of the offspring"
• The contemporary scholars have looked into these arguments and disagreed on deciding the preferred opinion. Some scholars mostly from Malaysia preferred that selling debt with cash price to the third party is permissible
• The main reason for prohibiting bay‟ al-dayn by the Hanafies and also conditions imposed by the Malikies and Shafies is mainly because of the element of risk and uncertainty for the buyer as the debtor may not pay the debt. If this uncertainty could be avoided by having strong regulatory, supervision, and control by the government then it should be permitted
• Debt securities instruments based on the principle of bay` dayn are regulated by Bank Negara Malaysia and the Commission to safeguard the rights of the parties involved in the contract