Shariah Issues in Islamic Banking : Bay Al-Inah, Tawarruq and Wa’d

Recent achievements in Islamic banking do not indicate an advance in the jurists interpretation of riba. Writings on riba have been extensively concerned with the expositions of riba, but with disquisitions about riba. Thought about riba, and any other Qur’anic penetrative codes, must be a story of movements in outlook and ever-changing ideas, and developments taking place in contemporary social sciences. Its province is destined by God, may he be exalted, in a way to be determined and re-determined in the course of time by drawing insights from different branches of human science. The subject of riba, and other divine codes in Qur’an regarding dealings and transactions is such that no cohesive delineation of the scope can be regarded as final.

A rule making body issues authorative shari’a auditing standards for all Islamic banks and other Islamic businesses and it will be the most effective way to eliminate problems within the Islamic economy. The most effort to develop a body of consistent standards for shari’a audits has been undertaken by

There is a differences between the conventional and the Islamic Hire Purchase Law (IHPL) on transfer of ownership in the hire purchase asset. It is to be noted that the conventional and the AITAB have similar meaning and implication on the hire purchase law in shariah. Some Muslim scholars raise the issue on how transfer of the ijarah property should be completed. Whether the transfer would be automatic under the hire purchase contract or a separate sale contract should be prepared and signed by the parties. In this regard, some Muslim scholars mention that the transfer of ownership in the ijarah goods (by way of sale) must be evidence in a separate contract as has been mentioned

The contract of Istisna’ may involve in the construction project of specified building. This is because Istisna’ allow the idea where a product or building that will be built and sold according to the specification within the period of time. Moreover, Istisna’ is not specify in a particular identified place in the construction project. To comply the condition of Istisna’, both parties in contract must go through all the stages to accomplish the project.

In addition, Islamic bonds are still far superior as compared to conventional binds, underpinned by the following factors: • Fairness and transparency. The financier and customer share the risks and rewards based on an agreed profit-sharing ratio. The roles and responsibilities of the parties to a contract are also explicitly disclosed and transparent. Asset-backed transactions. Islamic financial transactions must be backed by an underlying tangible asset or legitimate productive activity. This discourages over-exposure of the financing facility beyond the value of the underlying asset, and hence provides continuous security to the investors Ethical investment. Islamic finance prohibits the charging or paying of interest, and imposes restrictions on unethical and speculative financial activities

BUYERS agrees to purchase and SELLER agrees to sell the following described property, to wit:

The failures and bailed out of large banking and financial institutions during economic turmoil of 2008-2009, is an emblematic of the excessive and imprudent lending and securitisation activities. Most economist, politicians and commentators referred the crisis being a reminiscence of capitalism and its inherent greed. The conventional economics, which ignored “centrality of human beings and their well-being” (Asutay, 2007), has led to the emerging calls for economics well-being thus contributed to the rapid development in Islamic finance globally. Reilly (1990) commented that this “phenomenon is the search for a new and just economic and political structure to replace the unacceptable and/or unworkable socialistic or capitalistic systems” or in other words, a moral economy. The discussion hereafter is to look at how moral economy is defined, the articulations and implications and whether Islamic economics as being grounded on the axioms and foundational principles of Islam, can be considered as moral economy from both aspirational expectations and operational aspect of it, thus served as a distinctive moral economy system.

The prosperity and peace of a society much or less depends on its economy. While for the smooth running of both, there are several instructions in Islamic Shariah and allows what is right and forbids what is wrong. When we talk about financial issues, Islamic Shariah strictly condemns Riba. The question may arise why Islam prohibits Riba? While it was already in practice before the advent of Islam and still it is a part of different economic systems throughout the world. It is simply because Islam gives respect to human beings and condemns all the attempts that are harmful and disgraceful for humanity. Therefore, Riba is not only forbidden in Islam but economic experts are also in search of its substitute. Since borrowing on interest rate creates several issues including: less efficient allocation of resources, indebtedness, unemployment and economic instability. While in society it causes injustices, inequity, poverty and imbalance etc. In this paper we are discussing how Riba causes imbalance in the society and instead Riba what Islam demands from its followers.

With its assets estimated to total nearly $1 trillion globally, Islamic finance remains tiny compared to conventional finance with its tens of trillions of dollars. The market in Islamic bonds, or sukuk, is believed to total about $50 billion, roughly 1 percent of global bond issuance. In view of the financial crises which have been affecting the whole world, a solution in the name of Islamic finance could be introduced. As the global economic slowdown becomes more severe and protracted, many countries will be seeking alternatives, and Islamic finance can seize these new opportunities by offering standardized Islamic finance products with prudent regulations and supervisory arrangements. The beauty of the Islamic finance lies in its balanced and integrated approach towards a development policy that is urgently called for in the current crisis, caused by the awesome importance attached to the promotion of the financial sector alone. Islamic Finance is a viable alternative to conventional finance.

The Accounting and Auditing Organization for Islamic Financial Institutions established on Safar 1, 1410 Hijri (February 26, 1990) at Algiers and registered in Bahrain on Ramadan 11, 1411 Hijri (March 27, 1991) has so far (April, 2004) set the following Financial Accounting Standards, Auditing Standards, Governance Standards & Code of Ethics for Accountants & Auditors of Islamic Financial Institutions:

With respect to risk management in Islamic banks, Islamic Financial Services Board (IFSB, 2005), [26], issued guiding principles for risk management in Islamic financial institutions, the board pointed out that these guiding complement the general guiding principles issued by the Basel Committee. to cover specific aspects of the institutions of the Islamic financial services. As follows:

AAOIFI – Introduction • Responsible for formulation and issuance of international Islamic finance standards. • Has issued 68 standards: 25 accounting standards; 5 auditing standards; 6 governance standards (incl. on Shari’a supervision); 2 codes of ethics; and 30 Shari’a standards (rules for application of

Article 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a

Many people are sceptical about Islamic banks performances into the niche as newcomers to the market according to Samad, (2004). As previously mentioned, Islamic finance operates in accordance with the Qur’an. Islamic banks are non-conventional financial institutions which completely prohibit the action of ‘Riba’ (Interest) under Islamic Banking. As Islamic finance follows strict ethical practices in its dealing with jurisprudence to the Qur’an, it is only natural that Islamic banks as new competitors face steep challenges in sharing deposit and credit markets

Several studies such as, [27], [28], [29], [18], [21], highlighted the Risk management for Islamic banks in different countries and the differences between them and Conventional banks. Where [21] conducted a field study of risk management and Islamic banks, where a study on 17 Islamic bank in 10 countries (including Bahrain, Egypt, Malaysia and the United Arab Emirates). And suggests that Risk Management for Islamic banks include three basic components: Establishing Appropriate Risk Management Environment and Sound Policies and Procedures, Banks must have regular management information systems for measuring, monitoring, controlling and reporting different risk exposures, and Banks should have internal controls to ensure that all policies are adhered to. The study arranged the types of risks facing the Islamic banks where the interest rate risk to the most serious and then operating risk, liquidity risk and, to a lesser extent, the credit risk, the market risk are the least danger in Islamic banks.