Before understanding the detailed differences between Islamic and conventional banking products and transactions, it is important to know the differences of Islamic banking and conventional banking as a whole. This is because they are extremely different in many ways. The key difference is that Islamic Banking is based on Shariah foundation.
Thus, all dealing, transaction, business approach, product feature, investment focus, responsibility are derived from the Shariah law, which lead to the significant difference in many part of the operations with as of the conventional. Shariah based products and services are said to be originated during Prophet's period. These products and services have undergone the process of cleansing where any prohibited elements were removed by Prophet Muhammad (pbuh) such as al-bay' (trade), mudarabah (profit sharing), musyarakah (joint venture, profit and loss sharing), murabahah (cost plus), and Ijarah (leasing).
On the other hand, Shariah compliance products and services are the products and services that comply with the requirements to the Shariah itself. The good example would be the Sukuk that is invented from the application of rules from the Shariah based products. Therefore, it is permissible and complies with the requirements of Shariah. Shariah compliance products and services are also can be said as the modern day products and services after Islamisation of it.
While, the conventional product mostly based on the principle of interest. This is prohibited by Allah as mentioned in the Surah Al-Baqarah, ayah 275:
الرّÙبَا ÙˆÙŽØَرَّمَ الْبَيْعَ اللَّه٠وَأَØَلَّ
"Allah has permitted trading and forbidden interest"
Therefore, the financial products offered by the Islamic banks just like the conventional banks, aims to gain profit. However in the Islamic financial system, the intermediaries are not allowed to deal with interest or to engage in any business or trade prohibited by Islam.
DIFFERENCES BETWEEN ISLAMIC HIRE PURCHASE (AL-IJARAH THUMMA AL-BAI') AND CONVENTIONAL HIRE PURCHASE
Hire purchase aims to protect the interest of the hirer, in particular, and other parties involved such as owner and guarantor, in general. Interestingly, we will find that most principles in hire purchase are in fact in line with Shariah, except in certain aspects (Irwani, 2007). Even though in practice Islamic hire purchase may seem quite similar to conventional hire purchase, but they supposed to be distinguished because both have different principles. There are several differences features between Islamic hire purchase and conventional hire purchase.
Al-ijarah thumma al-bai' unites Ijarah (lease) contract and Bay' (sale) contract in one trading document. Under Ijarah contract, the bank as the owner of an asset lease to the customer (hirer) on the predetermined rentals for an agreed period. The hirer enters into a second contract to purchase the goods from the owner at an agreed price upon expiry of the leasing period.
On the other hand, Al-ijarah thumma al-bai' is regarded as a financing instrument. One of the most important elements in any Islamic transaction is that its origin and purpose must be legal. Hence, a customer whose income derives from any has forbidden source or who intends to use hire purchase for illegal activities. For instance, alcohol, gambling, or prostitution cannot take out an Islamic hire-purchase facility. In Malaysia, the customer will be offered conventional hire purchase instead of an Islamic facility. An Islamic hire-purchase facility is applicable to all types of goods, movable or immovable, including real property (Seif El-Din, 2007).
There is a basic difference in documentation. Customer will need to sign two agreements which are hiring agreement ('aqad ijarah) and a sale and purchase agreement ('aqad bai') under Islamic hire purchase. The purchase price in Islamic hire purchase is calculated by adding to the cost price with the amount of profit based on the murabahah principle. It is determined based on the market value at the time of agreement and the installments are computed by dividing the purchase price with period of agreement, which is usually in months. In Islamic hire purchase transaction, the owner will bear basic and structural maintenance of the goods, while the hirer is made responsible for operational and routine maintenance since he uses the goods. Customer will be charge only 1% as the penalty for late payment. Finally, an Islamic facility requires its user to use takaful as an insurance coverage for the goods.
Modes of operation in Al-Ijarah Thumma Al-Bai' as below:
SELLER
4
3
1
2
BANK
CUSTOMER
5
6
7
1. Customer picks a car you would like to have.
2. Customer asks the bank for Ijarah of the car, pay the deposit for the car and promise to lease
the car from the bank after the bank has bought the car.
3. Bank pays the seller for the car.
4. Seller passes ownership of the car to the bank.
5. Bank leases the car to customer at a rate agreed upon for a specified period of time.
6. Customer pays Ijarah rentals. The customer agrees to pay for road tax and insurance coverage
and will be responsible for its maintenance.
7. At end of the leasing period, the bank sells the car to customer at the agreed sale price.
In conventional hire-purchase transaction, hire purchase is commonly recognized as an ordinary type of loan. A customer whose income derives from any forbidden source or who intends to use hire purchase for illegal activities for instance, alcohol, gambling, or prostitution can use the conventional hire purchase. This is because there is no such limitation as Islamic hire purchase. The application of conventional hire purchase is limited to consumer goods, motor vehicles, and machineries. Thus, in conventional hire-purchase facility, customer cannot use this facility to buy a house or other immovable property.
The purchase price of goods in conventional hire purchase is determined by adjusting for timing its cost price with the prevailing interest rate. The interest rate is floating based on the annual rate. All costs and responsibility of maintenance also will be bear by the hirer alone. Conventional hire purchase is a hiring of goods with an option to purchase at the end of the agreement. There is no limitation of its sources of funds in conventional hire-purchase facility (Irwani, 2007).
In respect of the agreement, conventional hire purchase has a standard hire-purchase agreement based on the Hire-Purchase Act 1967, which incorporates details of the transaction, conditions and warranties, parties' rights and obligations, offenses, and penalty. One of the significant differences between the Islamic and conventional facilities is regarding the imposition of a late penalty fee. Defaulters under conventional hire purchase will be charged 8.0% per annum. Some banks do not even impose this penalty, not only because the amount is very low, but as an attraction to their potential customers. Finally, the conventional user will necessarily subscribe to a comprehensive conventional insurance policy for the goods (Seif El-Din, 2007).
The Islamic banking industry has adapted many important conventional products capable of being provided subject to Shariah compliance. Although Islamic hire purchase facing a number of questionable conceptual issues but it seem to have a very promising future prospect (Dusuki, 2006). Competitive services and attractive features that offered will increase awareness among the Malaysian public to use the Islamic hire purchase. Bank Negara Malaysia and banking industries should formulate a better developed hire purchase facility to make this industry more successful.
DIFFERENCES BETWEEN ISLAMIC CREDIT CARD AND CONVENTIONAL CREDIT CARD
General definition of credit card is standard size plastic token, with a magnetic stripe that holds a machine readable code. Credit cards are a convenient substitute for cash or check, and an essential component of electronic commerce and internet commerce. Credit card holders (who may pay annual service charges) draw on a credit limit approved by the card issuer such as a bank, store, or service provider. Cardholders normally must pay for credit card purchases within 30 days of purchase to avoid interest and/or penalties (Business Dictionary, 2011).
Credit card is one of the various products in banking sector. In Islamic credit card, it is a shariah credit card that similar to conventional credit card except it is not permissible for an institution to issue credit cards that provide interest bearing revolving credit. There are several differences between Islamic credit card and conventional credit card. In Islamic credit card, it involves the concept of bai' al-inah where it have two agreements (akad). In the first agreement, the bank sells Bank sells the merchandise to customer at cost plus (deferred payment basis) to the customer at an agreed price. While in the second agreement, the Bank repurchases the merchandise from the customer at cash that is lower price.
In term of interest, there are no interest is charged for the Islamic credit card. Bank is compensated with a fixed monthly fee. As we know, interest (riba) is prohibited in Islam and there are many verses in Quran stated about the prohibition of riba. For example,
3:130
"O you, who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful" (Ali-'Imran 3:130).
Islam allows the use of credit card so long it not engages with the element of interest. Dr Monzer Kahf in Live Fatwa on Islam on line dated August 8, 2001 responded, "Signing a credit card contract and using it in a way that generated payable interest is haram. It is then borrowing on interest. Signing the contract, using it, and making the payments within the grace period and making no cash withdrawals (whenever cash withdrawals generate interest), is permissible because it amounts to a contract that gives you a choice to deal or not to deal with interest"( Prof. Dr. Mohd. Ma'sum Billah, 2010).
Besides, Islamic banking also imposed the restriction on transaction where it only permit the holders of the card to carry out halal transactions, which prohibit transactions related with categories that do not meet shariah requirements. These categories such as discos, purchase of beers, massage services, pork and gambling. Next, Islamic credit card will impose the fixed amount by 3% of outstanding balance when there are late payments by the card holders and this 3% is typically donated to charity (sadaqah). The fee charged for withdrawal service is not very high as compared to conventional bank. There are also difference in the price which is the bank's maximum profit is determined in advance, unlike the conventional credit card whereby the interest charged is undetermined and it may increase from time to time.
Islamic banking institution proposed to offer Islamic credit card based on the bai`al-inah concepts:
3. Bank sells the merchandise
to customer at cost plus profit
(Deferred payment basis)
CUSTOMER
BANK
4. Bank simultaneously buys back on
1. The customer cash basis (at cost value)
approach
bank for
credit facility
ASSET
2. Bank identifies asset
e.g. merchandise
In conventional banking, credit card is a plastic card issued by a bank authorizing payment for purchases. It allows a person to purchase goods and services by paying with money borrowed from creditor. The borrower then repays the credit card with its interest and the interest of conventional credit card is charged on the outstanding balance. Credit card does not withdraw money from the consumers account for every operation but the issuers of the card lend money to the customers.
Conventional credit card is different where it allows the customer to make payments on installment basis though interest that charged on the amount. The interest is variable and depending on the outstanding amount. So, we can see that conventional credit card is involved with the riba (interest) which is the element that very prohibited in Islam.
In terms of transaction restrictions, there are no such restrictions on items that can be purchased by customers. Customers can purchase anything that they like and desire to buy included non-halal transaction and this is contradicted with the Syariah law. Next, conventional credit card will impose the variable and compounded fees when there are late payments by the card holders. This will burden the customers because they must pay the high amount of fees. The charged for withdrawal service is also impose with the high fee such as RM 50 is charged for every withdrawal. The charged is undetermined and it may further increase from time to time.
Nowadays customers are more conscious about the usage of the Islamic credit cards. Not only this credit card is interest-free, but there is no profit charges if full payment is made before the due date. With Islamic credit cards, customers will also be able to pay zakat online, and to have takaful. Unlike conventional, the Islamic credit card holders are able to know the maximum profit charged to them within certain contract period. Islamic credit cards are also now being accepted worldwide (Nuradli & Hanifah, 2009). The Islamic credit cards are based on the Shariah contracts, which are free from the riba and gharar, have fixed profit margin, impose zero percent interest on easy payment plan and charge low profit rate on the outstanding balance. So, with all these features, it can encourage Muslim and Non Muslim customers to use the Islamic credit cards.
DIFFERENCES BETWEEN HOUSE FINANCING-I AND HOUSING LOAN
When asked about the difference between these two types of financing, the general answer is that both are the same, except in a conventional loan, the purchaser will pay interest, and in Islamic financing, the purchaser will pay a profit.
House financing-I is a Syariah-Based financing facility to finance the purchase of all types of residential properties including houses, flats, apartments or condominiums. This financing facility can also be used to refinance existing housing loans, taken either from conventional housing loans or other house financing-i schemes. The amount of financing provided by the Islamic banking institution depends on the market value or the price of the property. The margin of financing could be up to 95% of the property value, depending on the policy of the Islamic banking institution. The period of financing can be as long as 30 years or until the purchaser reaches age 65. All the components to determine the selling price have to be fixed because the selling price has to be fixed at the time the contract is made. Hence, the profit rate for the BBA financing is fixed throughout the period of financing.
A customer purchases a house from the bank under the Bai' Bithaman Ajil (BBA) contract whereby the payment is on the deferred terms or usually by way of monthly installment. Islamic financing works on the concept of buying and selling where the banking institution purchases the property and subsequently sells it to customer above the purchase price.
Modes of operation in The Bai' Bithaman as below:
BANK
NOVATION
DEVELOPER
CUSTOMER
Flow of asset/commodity Flow of fund
A common home Islamic financing facility is offered under the Shariah principle of Al-Bai Baithaman Ajil (BBA). In BBA financing, a bank's customer buys a property from the vendor under an agreement of sale. The bank then, at the request of the customer and with the consent of the vendor, steps in to become a party to the sale agreement by executing a novation agreement between them, making the bank now the purchaser of the property. The bank's purchase price is described as the loan facility amount.
At the same time, between the bank and the purchaser, the bank sells the property to the customer at a selling price which comprises the bank's purchase price and a predetermined profit margin. The agreement is usually called the property sale agreement. Since Islamic financing entails a predetermined profit to be made by the bank, a customer will never have to worry about a sudden hike or changes in the interest rates. Right from the onset, he will know the total amount which he has to pay to the bank. His monthly installment of the bank's selling price will not change throughout the tenure of the financing.
Buying a house is the single biggest purchase that we make in our life. Under conventional financing, the outstanding loan consists of principal plus the interest charged. The interest is actually the banking institution's cost in obtaining the funds. In a conventional loan, the customer will repay to the bank the loan amount, together with interest at the prescribed rate. The prescribed rate is based on a margin above the bank's base lending rate (BLR), and both the margin and the BLR are variable from time to time. In a case of late payment or default, the bank is entitled to charge compound interests. Interest payable may also be capitalized and the capitalized amount will be subject to further interests.
DIFFERENCES BETWEEN TAKAFUL AND CONVENTIONAL INSURANCE
The account is known as Al-Tabarru', which means donation, the other one is treated in line with the principle of Al-Mudharabah. It specifies from the outset how the profits from Takaful investments are to be shared between the operator and the participants based on principles of Al-Mudharabah, the ratio could be 5:5 or 6:4 or 7:3 as agreed between the participant and the operator. Participants own the Takaful funds and managed by the operator. Participants give up individual rights to gain collective rights over contribution and benefits. Company is better known as operator, which acts as trustee, manager and also entrepreneur. The minimum age for a person to hold a Takaful certificate is 15 years and infant below 15 should also have the right to be insured under the supervision of respective guardian. Takaful practices are free from the elements of Riba and other prohibited elements, but is evolved around the elements of Al-Mudharabah, al-Tabarru' and other Syari'ah justified elements. The funds shall be invested in any interest free from Shari'ah justified scheme. The entire procedure shall comply with the guidelines of the Shari'ah. Investment returns must not be driven by any unethical commercial activities. The entire operation aims at paving the way of brotherhood, solidarity and mutual cooperation. Regulations affecting Takaful are based on the Qur'an and Hadith.
Besides, there is hadith that mentions about the prohibition of gharar in buy and sale contract whereby Takaful is free from this characteristic.
أن النبى عليه الصلاة والسلام قد نهى عن بيع الغرر
Meaning: "Verily, the Prophet s.a.w. forbids gharar trading".
Modes of operation in wakalah concept as below:
Al- Wakalah is a contract of agency. According to this principle, a person (A) will delegates his right or business to other people (B) to act as his representative. B is known as the agent or Wakil. The agent is responsible to contribute his/her knowledge, skills and ability in performing the task assigned to them because both A and B have a contractual relationship. In Takaful operation, a Takaful company as the insurer/operator has the right to employ the agent either on a full-time or part-time basis. The agent is presenting his/her company in which these selected people have to promote and develop the products offered by their company as they are bound to the contract of al-Wakalah.
The Takaful operation is still new to the market compared to the conventional insurance companies. Thus, strategies must be taken into consideration in order to increase the awareness of its existence because it can be as an alternative and substitutes to the existing conventional insurance system. Therefore, it is under the agent's responsibility to identify the potential participant and disseminate information regarding the concept and policy practiced in Takaful business. They need to explain thoroughly to people so they will get comprehensive understanding and lead to no misconceptions.
Furthermore, the agent is obliged to convince people of its advantages compared to the conventional in order to gain competitive advantage and good credibility. This can also be a proof that Islam has always provides a comprehensive ways of life.
An agent may also assist the Takaful Company by collecting the fund. Since they are representing their company, it is very important for them to produce good image and build strong relationship in effort to maintain good credibility and integrity of Takaful business. In modern days, there are increasing number of companies have embarked on implementing the concept of Al- Wakalah in their Takaful operation.
If we compare the modes of payment applied between both the Islamic and conventional insurance, we can see that they are basically different in several ways. In conventional insurance system, the agent will receive their commission by deducting some percentage contributed by the participants. For instance, Mr. X is appointed as an agent by one of the insurance company. In the agreement, it has been confined that Mr. X would get his commission of 20% from each participant. Let say the contribution paid for each participant is RM300, thus, he will receive a commission of RM60 per participant. However, Islamic insurance system believes that the above transaction is rather unfair. An agent is representing and working for the company. Therefore, they should be treated as an employee and the Takaful operator as the employer, who is obliged to pay sum amount of money in terms of salary to the appointed agent.
The above diagram explains how the al-Wakalah model is applied in Takaful fund such as General Takaful and Family Takaful. For example, A is the Takaful operator, B works as an agent or Wakil represents A and C as participants or policyholders of the Takaful business. Take note that C is obliged to pay his contribution (premium) to A. However, C could give his contribution to B as B has been authorized to collect the contributions not only from C as well as other participants. The contribution collected will then be pooled into the Takaful fund. The fund will be managed by A based on the principles of Mudharabah and tabarru`. Thus, it can be concluded that all participants are actual owner of the fund.
While, the insurance account is known as general insurance account and life insurance account of fund. It may offer bonus or profit in general terms only especially with profit policies, there is no exact specification with regard to the profit-sharing in contract. It may also decide to give or not to give bonus for any particular year depending on the result of the investment returns. The rate of bonus can vary from year to year up to the discretion of the Board of Directors of the company. Insurance is a buy-sale contract. In which policies are sold and the policy holders are the purchasers. Relationship between the company and the policy-holders is on one to one basis. The minimum age for a person to buy a policy is 16 years, but an infant between the age of 10 and 16 may also have the right to have it under respective guardian. Insurance practices involve Riba (interest) and some other elements, which may not be justified by the Shari'ah principles. The funds may also be invested in an interest-based scheme. They can also be invested in any scheme or project which may not be supported by the Shari'ah discipline. The operation aims a commercial gain on the basis of the principles of business. Insurance law is based on the human thoughts and cultures.
ISLAMIC PAWNBROKING AND CONVENTIONAL PAWNBROKING
PAWNBROKING-i
Pawnbroking-i is one of the scheme or services that provide a source of immediate financing to assist individuals in overcoming cash-flow needs. The loan granted is based on four concepts:
Qardhul hasan (loan without interest)
A bank will grant a benevolent loan to the applicant who wishes to pawn his valuable item. The loan will be issued under the concept of Qardhul hasan, whereby the customer is only required to pay the amount borrowed.
Al-wadiah yad dhamanah (keeping valuable goods by guarantee)
The bank accepts custody of the valuable asset on a Wadiah concept whereby the bank promises to keep the valuable asset in a safe place. The bank will need to take precautionary measure such as providing security and insurance to ensure its safe returns once the customer pays his debt. Under the Wadiah concept, the bank will charge the customer for the services rendered in keeping the valuable asset.
Ar-rahnu (collateral)
Prior to disbursement of cash to the applicant, the applicant is required to place a valuable asset as collateral for the loan extended by the bank.
Al-Ujrah (safe keeping)
States that the lender is allowed to charge a reasonable fee for the services rendered in keeping the pawned items safe and in good condition.
The storage fee is based on the value of gold and not on the amount of the loan. The fee is charged differently by each Islamic pawnbroker. In the Islamic-based pawnshop, gold is the only permitted item. It is because gold have several advantages as collateral over other items. Firstly, gold is easily resold and so there is potentially auctioning the collateral should the borrower not redeem the pledge. Secondly, gold's purity can be easily determined and so the risk of mispricing the collateral can be minimized. Thirdly, gold chains and rings typically require only a small flat envelop for storage and so can be kept securely in the bank safe at little, if any, additional cost. Finally, women often receive gold chains and bracelets as wedding gifts and generally retain personal ownership of these items especially in Malaysia.
The valuation is based also on the purity of the gold item. For example, 85 carat gold carries a value of RM25 to RM26 per gm. The gold will be valued at the prevailing market price. In terms of legislation, the Islamic pawnbroking system is subject to certain laws but no specific acts. For example, ar-rahnu schemes in Bank Kerjasama Rakyat (M) Berhad Act 1978, the Co-operative Societies Act (1993) and the Development Finance Institutions Act 2002. In addition, Bank Kerjasama Rakyat Malaysia Berhad has introduced separately the ar-rahnu manual guidelines (Azila Abdul Razak, 2008).
Principally, Islamic pawnbrokers would prefer the customer to redeem their collateral within six months. However, if there is no repayment, there is an extension period of three months after which the client is informed that the item will be sold by auction within a further of two months period. Based on the Manual of Islamic Pawnbroking of Bank Kerjasama Rakyat Malaysia Berhad, any surplus from the sale of the gold over the amount owed to the pawnbroker, including accumulated deposit fee and any costs related to sale, has to be returned to the customer.
Modes of operation - Ar-rahnu (Pawnbroking) Business.
Custodial fee/
Al Ujrah
Qardhul hassan
Wadiah yad dhamanah
Islamic Pawnbroking
(Murtahin)
Rahnu
Borrower
(Rahin)
Pledge
CONVENTIONAL PAWNBROKING
In conventional pawn broking, the loan process can be described according to this chronology. First of all, the customer must be 18 years of age and can show a valid identification card. Not like the banking system, the pawnbroker will not make any credit scoring and will not ask the purpose of the loan. Secondly, when a customer walks in a pawnshop with their pawned item, they will be entertained by a clerk or an officer that is expert as a valuer. The task of the valuer is to access the value of the pawn (used as a collateral) to make loan. Based on this, the valuer decides on the size of the loan. Commonly, in the case of conventional pawnshop in Malaysia, customers can negotiate the amount of loan with the pawnbrokers. In addition, the customer must also repay the loan with interest, usually 2-2.5 percent of the loan per month.
In most transaction, pawnbrokers make loans with maturities up to six months. If a customer is not able to repay the loan with interest within a predetermined of period, the loan can be extended within which the pledge may be redeemed for a further period of not less than three months by paying the interest that have built up over time. If the pledge shall not be redeemed within the six months period or the extension period agreed by both parties, there will be two possible outcomes:
If pawned for a sum nor exceeding two hundred ringgit, the pawn item shall become the property of pawnbroker
If pawned for a sum exceeding two hundred ringgit, the pawnbroker can dispose the pledge by auction.
It also has been reported that in conventional pawn broking, they do not return the surplus after the goods have been auctioned off. This irresponsible act will no doubt be a burden to the customers who need the money. As such, the customers should enquire to the pawnbroker the surplus that has been taken by the pawnbroker after the auction of the goods.
DIFFERENCES BETWEEN PAWNBROKING-I AND CONVENTIONAL PAWNBROKING
Generally, the modus operandi for conventional and Islamic pawnshop transaction is quite similar. Despite the similarities, the contract (aqad) in the Islamic pawnshop is different from the conventional pawnshop. It is because Islamic pawn broking is based on four concepts that are qardhul hasan, al-wadiah yad dhamanah, al-rahnu and al-ujrah rather than conventional pawn broking that did not apply at all these four concepts.
Moreover, for redeeming process in conventional pawn broking, if a customer is not able to repay the loan with interest within a predetermine of period, the loan can be extended within which the pledge may be redeemed for a further period of not less than three months by paying the interest that have built up over time. The interest that has been imposed is higher and this totally different from Islamic pawn broking that not charged any interest for the services.
In addition, the conventional pawnbrokers also do not return the surplus after the goods have been auctioned off. This irresponsible act will no doubt be a burden to the customers who need the money. This is different in Islamic pawn broking operation because any surplus for the goods that have been auctioned will be return back to the customer. They will only take the amount of the debt that they lend to customer.
Furthermore, in conventional pawn broking, it also has been reported that some dishonest pawnbrokers had asked for 50 cent for each replacement of pawn receipts and extension of pawning period. This is illegal because according to Pawn broking Act, customers are allowed to get a free replacement for any torn, destroyed or lost pawn receipts. Most of conventional pawnshop neglect to follow this guideline when customer asks for an extension for the pawning period. However, the Islamic pawn broking still keep on following the act and not asked for any additional amount to be paid in the case of each replacement of pawn receipts and extension of pawning period.
ISLAMIC BANK GUARANTEE AND CONVENTIONAL BANK GUARANTEE
BANK GUARANTEE- I
Bank Guarantee-i is an irrevocable obligation in the form of written undertaking of a bank to pay an agreed sum, in case of default by a third party in fulfilling their obligations under the terms of the Bank Guarantee-i. Customer approaches the bank for guaranteed surety. The bank agrees to discharge the customer's liability in case of defaults. The bank gives the guarantee under the concept of Kafalah . Bank Guarantee-i is not a financing instruments but merely a guarantee. Bank Guarantee may be issued in respect of 'performance of a task'. Besides, all Bank guarantee-i must have specific expiry date and claims period. The period of Bank guarantee-i issued must not exceed one year except Bank guarantee to cover government contracts and Bank guarantee in respect of contracts for a specified period. Benefit of Bank guarantee-i is widely accepted, thus giving the beneficiary more confidence, (Bank Islam). Islamic banks are required to calculate the commission as a fixed amount on the guaranteed amount, without taking into account the period of the guarantee, (Financial Islam.com)
The concept of Al-Kafalah refers to guarantee in regard to two categories:-
i. Guarantee in regard to goods:
Refers to the guarantee provided by a person to the owner of goods who had placed or deposited his goods with a third person, whereby any subsequent claim by the owner for his goods must be met by the guarantor and the third person.
ii. Guarantee on a person :
Refers to the guarantee provided by a person (first party) to the second party whereby the first party guarantees joint-responsibility with the third party.
Mode of operation in bank guarantee-I as below:
1
The bank may provide the facility of a bank guarantee to its customers for certain purposes under the principle of al- kafalah.
2
The bank guarantee may be provide in respect of the performance of a task or the settlement of a loan.
3
The bank may require the customer to place a certain amount of deposits for this facility which the bank accepts under the principle of al-wadiah yad dhamanah.
4
The bank charges the customer a fee for the services it provided.
BANK GUARANTEE
A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee. Anyone can apply for a bank guarantee, if his or her company has obligations towards a third party for which funds need to be blocked in order to guarantee that his or her company fulfills its obligations. In case of any changes or cancellation during the transaction process, a bank guarantee remains valid until the customer dully releases the bank from its liability.
In the situations, where a customer fails to pay the money, the bank must pay the amount within three working days. This payment can also be refused by the bank, if the claim is found to be unlawful. Bank guarantees carry a risk for the issuing bank, which becomes liable to pay out against the guarantee in the event of default. Accordingly, the bank takes a liability risk and will first assess the client's financial position before issuing any guarantee, in order to determine whether the client's reputation and creditworthiness warrants the bank taking a risk on the performance of the client. The bank may take the necessary security to minimize any potential loss. The administrative expenses incurred in the process of issuing a guarantee justify the commission charged by the bank.
Different between Bank guarantee-i and Bank guarantee
Islamic banks are required to calculate the commission as a fixed amount on the guaranteed amount without taking into account the period of the guarantee, as opposed to conventional banks which calculate guarantee commission based on the guaranteed amount and period of the guarantee.
ISSUES IN ISLAMIC BANKING PRODUCT AND SERVICES
Lack of expert people in theory and practice of Islamic finance.
The shortage of well-trained and skilled personnel, with a thorough understanding of both the theory and practice of Islamic finance, together with a belief in the concept and total commitment to it, is one of the major obstacles to the growth of Islamic finance. While the industry is growing at a rate of 15-20 per cent per annum, the addition of new products to meet the needs of existing and new customers in a highly competitive global financial environment is key to maintaining and boosting business. Lack of qualified manpower is one of the biggest hurdles in the advancement of Islamic banking. Pioneers in Islamic banking developed their financial instruments and carefully trained their staff. There is no training institute to meet manpower needs of existing and future Islamic banks. It is pertinent to note here that bank staff shall need a different orientation in the Islamic framework.
Non-muslim customers more prefer to choose Islamic home financing.
In the case of basic home financing, Islamic products under the Bai Bithaman Ajil (BBA) structure, which is deferred payment sale, might offer more competitive deals than conventional banking. In comparing the two models, Bank Negara Malaysia, on its website, explains an ordinary conventional housing loan is based on debtor-creditor relationship and the interest rate charged is based on a certain percentage above the base lending rate over loan period. Fluctuation in the base lending rate will affect total loan cost. At the same time, amount outstanding in conventional loans are normally capitalized. However, under the BBA scheme, a seller-buyer relationship is established and the selling price is fixed upfront. The sale price is then repaid in installments, with the amount remaining fixed throughout the financing period. This eliminates the customer's interest rate risk and furthermore, arrears will not be capitalized. In short, the BBA scheme eliminates additional or hidden costs that will change the price of the property purchased that providing clients with a better value-for-money option compared to conventional home financing.
The issue in Bay' al-Inah concept
The contract of Bai' al-Inah normally involves a sale of an asset or property by a first party to second party for immediate or spot payments followed by an immediate sale of the same asset by the second party to the first party for a higher amount on deferred payments. The asset is by no means useful to both party either for consumption purposes or derivation of usufruct (manfaah). In fact, this device is used to avoid the Quranic prohibition of interest as riba since the main objective of the contract involves two consenting parties both of whom are willing to pay and receive a contractual rate of return on a loan. Even though bay'al-inah is not a loan, it resemble one when both parties ignore the real intent of buying the said property. For example, the purchase of the consumer goods is for the purpose of consumption. Similarly, a trader who purchases an asset will later sell it with intention of making a profit. In other words, the object of sale must offer benefit to the buyer. However, in bay' al-inah sale this condition is not met by both contracting parties.
CONCLUSION
In conclusion, Islamic banks have been operating like other traditional bank about four decades. They also mobilize deposits and produce loans based on Islamic Law (Shari'ah), which are different from the other conventional or commercial banks. Therefore, Islamic banking differs from conventional banking in several ways, such as the prohibition of transactions based on interest rate and the requirement that bank's operations be carried out according to certain procedures through the use of certain financial instruments.
However, the Islamic bank can also offer products and services which are similar to those offered by a conventional bank. All the products that are offered by Islamic banking are based on the syariah. Thus, it is definitely different with conventional product in terms of it contract and the concept that has been applied. Among the concept that exist in the Islamic products are like Mudharabah, Musyarakah, Murabahah, Bai' Bithaman Ajil (Bai Muajjal), Ijarah, Qardhul Hasan, Istisna' and Ijarah Thumma Al-Bai'. In general, Islamic banking products are more complicated than conventional because of the syariah-compliance requirements as defined in the product-specific fatwa. Consequently, the sale of a syariah compliant product requires the special knowledge of a well-trained sales force.
As a muslim, we should choose Islamic product from the Islamic bank since it is non-interest based financial institution which complies fully with Islamic laws and has creative and progressive financial engineering to offer efficient and competitive banking, investment, trade finance, commercial and real estate financing services. "For Muslims, they should go for Islamic products because it is a religious requirement. Riba is a serious offence in Islam and the punishment in the hereafter is harsh. However, this should not be a deterrent factor for non-Muslims as the principles in Islamic finance are not just about religion. They are about transparency, ethics and fairness, as well as promoting entrepreneurship and sharing of risks between financiers and customers. (Mashitah Osman, 2008)
