Chapter 1: RESEARCH OVERVIEW
Islamic Banking Background
Islamic banking is basically a system of fiscal intermediation ; its most of import aim is to avoid payment and reception of involvement. In other words is about carry oning banking dealing with the doctrine of the value system of Islam. Islam does non merely forbid covering with involvement but besides with erotica, porc, gaming, spirits and any other thing, which are considered Haram harmonizing to Islamic jurisprudence ( Shariah ) .
Islamic banking implies banking operations, which are following with rules given in the basic Islamic jurisprudence ( Shariah ) . While some of these criterions are shared by conventional and Muslim fiscal systems, certain criterions are sole to Islam.
The pioneering attempt, led by Ahmad El Najjar, took the signifier of a nest eggs bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967, by which clip, there were nine such Bankss in the state, and [ over the following three decades a diverse figure of Islamic Banks, Islamic Investment Banks, and Islamic Development Banks emerged, and finally standard authorities endorsing in some Muslim states, e.g. Pakistan, Malaysia, Gulf States and across the universe. They have mostly focused on seeking to go major participants in international banking and developing instruments kindred to those used by other Bankss whilst happening proficient legal accounts to suit those developments with the judicial admissions of Islamic Law. Thus they can frequently be seen as an effort to do banking patterns more acceptable to Muslims and to supply competition for non-Muslim Bankss. ] ( Islamic Party of Britain, 2003 ) .
Actually, some Islamic banking limitations are terrible plenty to render certain conventional banking patterns and minutess wholly void. Prohibition of gharar and riba are two of the most of import limitations compulsory by the Quran and the Sunnah. Most of the current Islamic bookmans agree that riba, which literally means “ an extra ” , includes both usury and involvement. The prohibition of riba is fundamentally considered to be the most important of all Islamic banking rules. Gharar signifies uncertainness, deficiency of specificity, or ambiguity in the footings of a fiscal contract.
1.1.2 THE IDEOLOGY OF ISLAMIC Banking:
Muslim Bankss have devised many advanced fiscal merchandises established on the profit-sharing rules risk-sharing of Islamic banking. Islamic banking, founded on the Qur’anic governing out of bear downing involvement, has changed from a bad construct to keep near more than 196 Bankss runing in 45 states with multi-billion dollar sedimentations planetary. The basic rule of Islamic banking is the sharing of loss, net income and the prohibition of RIBA ( involvement ) . The cardinal rules of Islamic Banking can be summed up as follows:
Principle of Sharing of Profit and Loss: [ Participatory funding ]
As described in the Shari’ah, translated into banking footings, the depositor, the bank and the loaner ought to all portions, the wagess and the hazards of funding concern ventures.
In Islam, net income is the recognized wages for capital. A depositor in an Islamic bank be able therefore, make incomes on his or her sedimentation in assorted ways. Via return on his capital while that capital is employed in a concern venture ; via sharing of net income while his capital is portion of the capital that is occupied in a partnership, and in conclusion via rental incomes on an plus that has been partly financed by his capital. The rule which thereby emerges is that Islam supports investings in order that the society may profit.
Principle of Prohibition of Usury
“ Afraid of Allah and give up what remains ( due to you ) from Riba ( vigorish ) ”
Verse 278 of Surah Al-Baqarah “ Quran ” .
The mainly first-class known feature of Islamic banking is the ban on involvement. The definition of involvement in traditional footings was “ otiose consideration without complement ” or “ to guarantee equivalency in existent value ” and that “ numerical worth was of no effect. Any preset payment above and beyond the existent sum of principal is out. Sharia permits merely one type of loan, and whereby the lender does non bear down any involvement or excess sum over the money loaned. The rule obtained from the citation emphasises that connected or indirect benefits are out.
As riba is prohibited, investing can merely be made in allowable activities and trade goods. Furthermore, providers of capital become depositor alternatively of creditors. Such as, one can non cover in the export and import of intoxicant. in the same manner, it is prohibited to put in a casino.
Principle of acceptable minutess:
Investings ought to non promote patterns or output that are even discouraged by Islam or forbidden. Islamic banking operates in conformity with the regulations of Shariah, below Islamic trading minutess. Islamic banking is restricted to islamically acceptable minutess, which exclude those affecting gaming, porc, intoxicant, etc. for case a real-estate loan might non be made for the building of a cabaret or Wine saloon ; and the bank might non loan money to other Bankss at involvement.
Principle of moral buying and ethical investment:
Making money from money in Islamic jurisprudence ( Shariah ) non acceptable and it is merely a medium of exchange. A cardinal feature of Islamic banking is deal chiefly in money and fiscal securities. The intent of this is to affect in merely principled, honest buying and investment.
This rule which thereby comes out is that Islam supports investings in order that the community may profit. All money ought to be invested in industries Muslims believe ethical and the receiving or giving of involvement is prohibited and money can non be simply traded for money and therefore money can be used to purchase services or goods, which can so be sold for a net income.
Principle of Certainty:
Uncertainty, Risk or Speculation is besides prohibited. Under this prohibition any dealing entered into should be free from uncertainness, hazard and guess.
This is based on the rule of ‘uncertain additions ‘ which, on a rigorous reading, does non even let an project from the client to refund the borrowed chief plus an sum to take into history rising prices. Therefore, options and hereafters are considered as un-Islamic and so are forward foreign exchange minutess because rates are determined by involvement derived functions.
Based on the above-named rules, there is a assortment of Islamic banking instruments and minutess in trend. Musharaka is a concern construction in which the bank non merely makes a fiscal part to the endeavor, but may besides take part in pull offing the venture. Net incomes are shared between the parties harmonizing to a pre-determined ratio, and losingss are borne by them in proportion to their capital parts. In footings of categorization, this is an equity-based dealing.
In Mudaraba, the bank provides the needed fiscal resources, but does non take part in pull offing the endeavor. It is a signifier of partnership in which one party provides the financess while the other provides expertness and direction. Net incomes are divided among the parties harmonizing to a reciprocally agreed ratio. Fiscal losingss are borne by the investor entirely. This is besides an equity based dealing.
Murabaha is an agreement in which the bank, alternatively of progressing a loan to the client wishing to buy certain goods or equipment, purchases the points and sells them to the client at cost plus a declared net income.
In tawarruq, the bank buys an plus and instantly sells it to the client on a deferred payment footing. The client so sells the same to a 3rd party for immediate bringing and payment.
Consequently, the client receives a hard currency sum and has a deferred payment duty for the dirty monetary value to the bank. The plus is typically a metal, like Cu or Pt.
Islamic banking in Soudan:
The traditional banking system was inherited from the Anglo-Egyptian condominium ( 1899-1955 ) . When the National Bank of Egypt opened in Khartoum in 1901, it obtained a privileged place as banker to and for the authorities, a “ semi-official ” cardinal bank. Other Bankss followed, but the National Bank of Egypt and Barclays Bank dominated and stabilized banking in Sudan until after World War II. Post-World War II prosperity created a demand for an increasing figure of commercial Bankss.
Before Sudanese independency, there had been no limitations on the motion of financess between Egypt and Sudan, and the value of the currency used in Sudan was tied to that of Egypt. This state of affairs was unsatisfactory to an independent Sudan, which established the Sudan Currency Board to replace Egyptian and British money. It was non a cardinal bank because it did non accept sedimentations, lend money, or supply commercial Bankss with hard currency and liquidness. In 1959, the Bank of Sudan was established to win the Sudan Currency Board and to take over the Sudanese assets of the National Bank of Egypt. In February 1960, the Bank of Sudan began moving as the cardinal bank of Sudan, publishing currency, helping the development of Bankss, supplying loans, keeping fiscal equilibrium, and reding the authorities. Banks were nationalized in 1970 but in 1974, foreign Bankss were allowed to open subdivisions in Sudan. Banks are required to keep 20 % of entire sedimentations as a statutory modesty with the cardinal bank. They must besides direct to the agricultural sector 40 % of the financess that they have for loaning under the new recognition ceilings. Presently there are about 26 Bankss with entire capital of over US $ 700 million ( Bank of Sudan, 2007 ) . With opening up of the Sudanese economic system to the great extent in the last few old ages, new Bankss like Al Salam bank, from the United Arab Emirates ( UAE ) , Babylos Africa Bank started to come in Sudanese market. These foreign Bankss are coming with immense capital, new engineering, new thoughts and new vision.
In Sudan a figure of Islamic Bankss and their subdivisions are now in operation and supply involvement free loans and work on the footing of net income sharing.
The Faisal Islamic Bank of Sudan ( FIBS ) is one was incorporated in 1974 as a public company under the company Act ( 1952 ) with headquarter in Khartoum. The Faisal Islamic Bank, whose chief frequenter was the Saudi prince, Muhammad ibn Faisal Al Saud, was officially established in Sudan in 1977 by the Faisal Islamic Bank Act. The “ unfastened door ” policy enabled Saudi Arabia, which had a immense excess after the 1973 Organization of Petroleum Exporting Countries ( OPEC ) increases in the monetary value of crude oil, to put in Sudan. Members of the Muslim Brotherhood and its political arm, the National Islamic Front, played a outstanding function on the board of managers of the Faisal Islamic Bank, therefore beef uping the bank ‘s place in Sudan. Other Muslim Bankss followed.
Due to its success, other Muslim Bankss were established and the Sudanese governments have supported the Islamic banking motion. As a consequence, three other Muslim Bankss were opened in 1983, there were:
EL-Tadamon Islamic Bank, the Sudanese Islamic Bank and the Islamic Co-operative Development Bank owned by co-operative brotherhood. In 1984, two other Muslim Bankss started operations, there were: Al-Baraka Bank ( Sudan ) and the Islamic Bank for Western Sudan.
The former government in Sudan enacted Torahs in September 1983. As a consequence of this non-islamic commercial Bankss were asked to alter their concern activities to be consistent with Islamic Shariah, and in September 1984, the banking system was “ Islamized ” . A figure of Islamic Investment Company and Islamic were besides established. E.g. Islamic Investment Company and Islamic Development Company and they were licensed under the Companies Act of ( 1925 ) to work in Sudan.
Letter of Credit:
One of the most of import elements in international trade is that of the methods of payment. The marketer would wish to be certain to have the contract monetary value for the goods that has shipped. On the other manus, the purchaser would wish to do payment when the marketer has complied all of his duties under the contract of sale. The marketer will seek to obtain the contract monetary value for the cargo every bit early as possible and the purchaser besides will seek to detain to do payment until he have the shipped goods in manus. Therefore, there have been confronting with several jobs sing to the methods of payment in international trade in the yesteryear. Consequently, if the marketer is diffident with the credit-worthiness of the purchaser, the marketer will wish to qualify for the full payment in progress of the cargo. The marketer besides may claim for the payment after the bringing of the related paperss. Alternatively, the parties may take the 3rd parties ( normally, Bankss ) in order to manage over their payment systems.[ 1 ]
It can be divided into two major classs of the methods of payment under international jurisprudence such as the payments without interjection of Bankss and the payments with interjection of Bankss. The payments without interjection of Bankss are the payment on “ unfastened history ” or “ direct payment ” and the payment by “ measure of exchange ” . The payments with interjection of Bankss are “ corporate agreements ” and the payment under a “ documental recognition ” . Albeit there are several manners of payment in international commercialism, the research worker will analysis throughout the thesis merely on the legal application of documental credits under one of Islamic banking merchandise ( Murabaha Finance ) .
“ Documentary recognition ” is one of the most indispensable methods of payment which has been using in international trade since several centuries ago. In the instance of The Bhoji Trader,[ 2 ]it has been described by the tribunals as “ the life blood of international commercialism ” . It is besides the most unafraid method for a marketer to have the contractual payment and the most common method of payment for the goods in international trade.
Murabaha merely means ‘mark-up sale ‘ . It is a peculiar type of sale that Islamic law considers as a trust contract, because the marketer and the purchaser do non negociate the monetary value, but instead hold on a certain net income border added to the cost, as dependably declared by the marketer. Originally, murabaha was non conceived of as a manner of finance, since it was non needfully concluded on the footing of deferred payment. Murabaha sale for hard currency was the regulation instead than the exclusion. The displacement to recognition murabaha, or murabaha with deferred monetary value, is a first necessity for its transmutation into a technique of finance. Credit murabaha can be used by non-financial houses to finance the purchase of goods by families and concern concerns. Its rise to a to the full fledged fiscal technique used by fiscal mediators, nevertheless, requires farther amendment of the original contract ( Hassan, 1990, p. 36 ) .
Indeed, Bankss and other fiscal establishments which would wish to rehearse recognition murabaha would necessitate to presume, more or less, a commercial intermediation map, in add-on to their original map as fiscal mediators. They would hold, in fact, to play the dual function of intermediary purchaser and marketer between the ultimate purchaser and marketer. However, fiscal establishments are non specialized in commercialism and they are non equipped to execute expeditiously the economic maps of bargainers. Therefore, they would wish to go the least possible from their traditional fiscal intermediation map and to maintain their commercial function to the rigorous minimal necessary to follow with Islamic rules. More peculiarly they would wish to avoid keeping stock lists of goods and to market them over a drawn-out period of clip. This is achieved though the 2nd amendment to the original construct of murabaha, that is to state the demand that the sale contract be preceded by the client ‘s promise to purchase the coveted goods, one time they are acquired by the moneyman ( Ahmed, Shaghil 1999, p.65 ) .
The ensuing funding technique may therefore be distinguished from the original murabaha sale on two evidences: ( a ) recognition is an indispensable characteristic, and non merely a mere possibility, ( B ) the being of a anterior promise to buy3 is a requirement for the extension of recognition. For the interest of lucidity, we will mention to this funding technique as ‘financial murabaha ‘ .
The range of fiscal Murabaha:
Murabaha finance may be used, and is really used, as an option to conventional Bankss ‘ recognition, if the latter is tied to the purchase of goods. However, Islamic Bankss and other fiscal establishments intervene in this market in a radically different manner, as compared to conventional Bankss. While the latter have the pick between direct loaning to the purchasers and refinancing the recognition originated by the Sellerss, Islamic fiscal establishments can merely finance the purchasers. Refinancing is excluded, as it amounts to the purchase of debts, on which no net income can legitimately be made. On the other manus, while conventional Bankss assume a strictly fiscal intermediation function, Islamic fiscal establishments utilizing fiscal murabaha have to further presume some sort of commercial intermediation. It was noted earlier that, by agencies of the ‘promise to purchase ‘ device, Islamic fiscal establishments may avoid constructing up stock lists of goods.
Furthermore, they normally mandate the prospective purchaser to choose the provider of the demanded goods, to negociate with him the footings and conditions of the hard currency sale contract and to look into, on bringing, the conformance of the goods with the needed specifications. This process minimizes for the moneyman the hazard of purchasing goods that would be subsequently refused by the client. However, Islamic fiscal establishments have decidedly to presume to some extent a commercial map and can non move as pure fiscal mediators. They assume the commercial hazard attached to their ownership of the demanded goods for the period of clip passing between their acquisitions of the goods from the provider to their bringing to the client. This commercial hazard is specific to fiscal murabaha and can non be wholly avoided, notwithstanding the abovementioned devices taking at restricting it. It adds to the recognition hazard ( delayed payment or default ) which is common to both Islamic and conventional fiscal establishments. Furthermore, the commercial hazard confronting Islamic fiscal establishments may even be greater, in the instance where the promise to purchase is considered non-binding.5 This is because an extra cost may be incurred for marketing goods acquired on the footing of a anterior promise to purchase, that the client subsequently refused to honor[ 3 ].
The range of recognition murabaha Credit murabaha provides an option to merchandise recognition and retail merchants ‘ recognition extended by concern concerns to other concern houses or to consumers. They operate in a really similar manner, with two exclusions. On the one manus, in the instance of a bipartite recognition offer ( price reduction for early payment or full monetary value for a longer payment period ) , the pick should be made in progress and the contract should be definite with respect to the selected footings. On the other manus, the deferred monetary value is definite and the contract should do no reference of any extra cost on possible overdues.6 The effectual usage of recognition murabaha will nevertheless be earnestly hindered, if the Sellerss are non expeditiously backed by fiscal establishments. Indeed, the experience of trade recognition in interest-based economic systems shows that refinancing is of critical importance for Sellerss ‘ recognition. Sellers who extend recognition to their clients may of class maintain the fiscal claims in their portfolios to adulthood. But they often sell them for hard currency before adulthood. In any instance, Sellerss need to hold the confidence of neutralizing their receivables when needed without incurring an inordinate cost. Otherwise, the Sellerss ‘ chance cost would be higher and they would non be able to offer competitory recognition footings. Business houses financing trade on the footing of recognition murabaha have the same demands of fiscal support to enable them to widen recognition to their clients. However, one time the recognition is extended, it becomes a debt that can non be sold at a price reduction without go againsting the shari’a regulations.
Business houses would practically discontinue to utilize recognition murabaha, unless an appropriate option was found for the sale of receivables. Is it acceptable to displace recognition Murabaha from the system and to trust wholly on fiscal murabaha extended by Islamic Bankss? Some Muslim economic experts advise Muslim Bankss to go involved in existent business,7 and particularly merchandise. This would be achieved either through merchandiser sections staffed with equal commercial accomplishments or through the constitution of merchandiser subordinates ( Aspinwall and Eisenbeis, 1985, p. 667 ) . The chief advantage attributed to this manner of making concern is that the Islamic Bankss would presume the concern hazard implied by the trade activity and therefore pull an income which is unequivocally riba-free. One can non undervalue this advantage of the bank-trader method over the murabaha method, as presently practised in Islamic Bankss, in footings of their comparative compatibility with shari’a. However, this solution is earnestly obnoxious on macroeconomic and societal evidences. Furthermore, it does non work out in all instances the funding job. For one, Islamic Bankss raise largely short-run financess, therefore they can non utilize them, beyond certain bounds, in long-run investings, like the acquisition of equity capital in trade subordinates. Second, the suggested method would take to the constitution of fiscal imperiums commanding and ruling a big portion of the economic system. At the same clip, it would repress the bargainers to powerful fiscal establishments. It is good known that the resulting monopoly power is the beginning of both economic waste and societal unfairness. As a affair of fact, the subscription of commercial banking establishments to the capital of concern concerns is in many states tightly regulated ( Omar, 1992, p. 65 ) . Third, trade recognition is so closely linked to merchandise itself. Traders view it as an indispensable device to advance and spread out gross revenues. Fourth, the ascertained turning importance of trade recognition in the developed market economic systems seems to connote that the proviso of recognition by concern houses is efficient under certain market conditions. The riddance of recognition murabaha would therefore intend a loss of efficiency. Finally, the bank-trader method solves the refinancing job merely if it takes the signifier of merchandiser sections. But, when Islamic Bankss set up trade subordinates, these are financially independent of the mother-institutions. Therefore, if the subordinates need liquidness to refinance the recognition they had already extended to their clients, they find themselves in precisely the same state of affairs as any other marketer vis-a-vis the resources of the mother-banks. Therefore the constitution of trade subordinates does non extinguish the demand to plan appropriate methods to back up financially the recognition activity of bargainers.
Since bargainers ‘ recognition should stay in the system, solutions need to be devised to the impossibleness of refinancing Sellerss ‘ recognition. Trade refinancing may be looked at as a fiscal back-up provided by Bankss and other fiscal establishments to Sellerss subsequent to their extension of recognition. The common rule underlying the development of Islamic options to conventional refinancing involves the replacing of the subsequent fiscal back-up with a anterior fiscal support provided to the Sellerss. Contrary to conventional refinancing, which is based on the price reduction of debt instruments, the alternate anterior support is based on the net income and loss sharing ( PLS ) rule. Sellers may obtain the needful support either straight in the fiscal markets through the issue of PLS certifications or from fiscal mediators. These techniques will be detailed below.
1.4.1 Murabaha LC:
There are two types of Murabaha contract were known in Islamic laws, local Murabaha and international Murabaha ; the type that concerns us in this research is international Murabaha. International Murabaha is the kernel of this paper due to the widely uses of the documental recognition in this portion of Murabaha[ 4 ]. Letterss of recognition are unfastened under this type of finance by the bank.
The Murabaha sale contract is in struggle with the Uniform Customs and Practice for documental recognition ( UCP ) . Articles 4 provinces that “ A recognition by its nature is a separate dealing from the sale or other contract on which it may be based. Banks are in no manner concerned with or bound by such contract, even if any mention whatsoever to it is included in the recognition. Consequently, the project of a bank to honor, to negociate or to carry through any other duty under the recognition is non capable to claims or defense mechanisms by the applicant resulting from its relationships with the publishing bank or the beneficiary “[ 5 ]. It ‘s clear besides by article 5 of the UCP that the parties to the recognition operation are covering in papers and non in goods.
Articles 4 and 5 is about the autonomy missive of recognition, which mean the paying bank, as the agent of the bank which issued the missive of recognition, will hold to pay without conditions if the donee of the missive of recognition complies with the demands for payment under the missive of recognition. In other words the footings and conditions under the gross revenues and purchase contract between the marketer and purchaser will do no consequence to the payment by the bank under the missive of recognition.
Meanwhile in Murabaha dealing the topic of sale should be objects goods or trade goods against money moreover the original purchase contract between the trader and the seller ( bank ) has to be valid harmonizing to Islamic jurisprudence ( share’a ) , if non the Murabaha operation besides invalid ( Abd Al-Halim Umar ) . Consequently there struggle between the rule of missive of recognition and the rule of Murabaha which is missive of recognition covering with papers and the contract between the marketer and the purchaser will do no consequence to the LC dealing, on the other manus the Murabaha dealing covering with the goods or trade goods[ 6 ].
This struggle originating when the capable affair of the contract in LC dealing are non-permissible in Islamic jurisprudence ( share’a ) , such as spirits, riba and porc.
Furthermore in the missive of recognition there the purchaser when he request the point and open the missive of recognition and the bank import the point inconformity with stipulate papers the purchaser has no right to reject the goods or decline even though the contract of sale is non completed yet to pay, adversely to Murabaha financing the purchaser can decline to accept the goods even though the bank has order the goods and incurred the cost of import.[ 7 ]
The research will be carry oning to analyze the application of the LC under Murabaha financing under Islamic banking in Sudan.
What is the method of the application of Murabaha finance under the missive of recognition presently used in Sudan Islamic banking?
What are the Muslim legal expert ‘s positions ( Fatwa ) sing the issued missive of recognition in Islamic banking?
Whether is a struggle between the Islamic jurisprudence ( Shariah ) and the rule of missive of recognition in using Murabaha finance under missive of recognition in Islamic banking?
The proposed thesis is to analyze on the legal application and the maps of the Murabaha under documental credits ( Murabaha LC ) under Sudan Islamic Banking, with the undermentioned intents:
To analyze the legal application of the Murabaha missive of credits ( Murabaha LC ) under the Islamic Banking in Sudan.
To analyze the map of the Murabaha under documental credits ( Murabaha LC ) under Islamic banking.
To analyze the Muslim legal expert ‘s positions ( Fatwa ) sing the issued missive of recognition in Islamic banking.
SCOPE AND LIMITIONS OF THE STUDY:
Unquestionably, before the beginning of any research, it is highly indispensable to be familiar with the historical background of the topic. Therefore, foremost of all, the research worker will show a brief background history of the Islamic banking in general so the Islamic banking in Sudan, Historical Background of missive of recognition. Furthermore, the research worker will try to analyze the rule of Murabaha Finance and its process.
As a concluding point, the research worker aims to analyze the legal application of the documental credits in Murabaha Finance under Sudan Islamic banking throughout this thesis.