Since the 1970s, Islamic banking has emerged as a new reality in the international financial scene. Its emergence is regarded as a manifestation of the revival of Islam and the growing desire of Muslims worldwide to live all aspects of their lives in accordance with Islamic teaching.
For the benefit of the readers, we describe below the various concepts of the Islamic banking products which are available in Malaysia.
AL-WADIAH YAD DHAMANAH (safekeeping with guarantee)
The concept of Al-Wadiah Yad Dhamanah refers to deposits which have been deposited with another person, who is not the owner, for safekeeping. As wadiah is a trust, the depository becomes the guarantor and therefore, guarantees repayment of the depositors, when demanded. The depositors are not entitled to any share of the profits but the depository may provide returns as a gift (Al-Hibah) to the depositors as a token of appreciation.
The concept of Al-Mudharabah refers to an agreement made between a party, who provides the capital and another party (entrepreneur), to enable the entrepreneur to carry out business projects, which will be on a profit-sharing basis, according to predetermined ratios agreed upon earlier. In the case of losses, the losses are borne by the provider of the funds.
The concept of Al-Musyarakah refers to a partnership or joint-venture for a specific business with a profit motive, whereby the distribution of profits will be apportioned according to an agreed ratio. In the event of losses, both parties will share the losses on the basis of their equity participation.
AL-MUDHARABAH (cost-plus financing)
The concept of Al-Mudharabah refers to the sale of goods at a price which includes a profit margin as agreed by both parties. In Al-Mudharabah contracts, the price, other costs and the profit margin of the seller must be stated at the time of the agreement of sale.
BAI' BITHAMAN AJIL (deferred payment sale)
The concept of Bai' Bithaman Ajil is similar to the concept of Al-Mudharabah, except that in this case, the sale of goods is on a deferred payment basis.
BAI' AL-DAYN (debt trading)
The concept of Bai' Al-Dayn refers to debt financing, i.e. the provision of financial resources required for production, commerce and services by way of sale/purchase of trade documents and papers. It is a short-term facility with a maturity of not more than a year. Only documents evidencing debts arising from bona fide commercial transactions can be traded.
The concepts of Al-Ijarah refers to an arrangement under which the lessor leases an equipment, building or other facilities to a client at an agreed rental.
AL-IJARAH THUMMA AL-BAI' (hiring followed by sale and purchase)
The concept of Al-Ijarah Thumma Al-Bai' refers to two contracts undertaken separately and consequentially as follows:
(i) Al-Ijarah contract (hiring/renting);
(ii) Al-Bai' contract (sale and purchase)
Under the first contract, the hirer hires the goods from the owner at an agreed rental over a specified period. Upon expiry of the hiring period, the hirer enters into a second contract to purchase the goods from the owner at an agreed price. This concept is applicable for financing of consumer goods and durables.
AL-QARDHUL HASAN (benevolent loan)
The concept of Al-Qardhul Hasan refers to an interest-free loan given mainly for welfare purposes. The borrower is only required to repay the principal amount borrowed, but he may pay an extra amount as a gift (Al-Hibah) at his absolute discretion, as a token of appreciation.
The concept of Al-Wakalah refers to a situation where a person nominates another person to act on his behalf.
The concept of Al-Kafalah refers to the guarantee provided by a person to the owner of a goods, who had placed or deposited his goods with a third party, whereby any subsequent claim by the owner with regard to his goods must be met by the guarantor; if it is not met by the third party.
AR-RAHN (collateralised borrowing)
The concept of Ar-Rahn refers to an arrangement whereby a valuable asset is placed as a collateral for a debt. The collateral may be disposed in the event of default.
The concept of Al-Hiwalah refers to a transfer of funds/debts from the depositor's/debtor's account to the receiver's/creditor's account where a commission or fee (Al-Ujr) may be charged for such service.
The concept of Al-Ujr refers to commission or fees charged for services
source: Bulletin Qariyah Masjid Darul Ehsan, Subang Jaya (1996)