This morning on the way to our children’s school we listened to ‘Pedoman’ (Nur Islam Channel) and the topic discussed was Islamic Banking. The good Ustaz was explaining the virtue of the system and so on and so forth, which reminded me of my fourth year Islamic Economics course that I took ages ago.
Although I can’t recall 95 percent of what I had learnt during my early twenty’s, the one thing that I still remember is that the system is based on ‘profit and loss sharing’ and the prohibition of ‘riba’ (interest).
Now, a few days ago, I bought a car and took a car loan from one of Brunei’s Islamic finance institutions. I am no expert in Islamic banking so I asked the loan officer to explain to me the difference between the car loan offered by them and those offered by the conventional banks. Well, his answer was simply we’re Islamic! Well, that didn’t answer my question, I pointed out to him that the monthly payment for the loan was exactly the same as the monthly payment that I would need to pay if I were to use a conventional bank. It was only a matter of preference!
I did not want to press the poor guy partly for the fear of rejection of my loan application and partly I knew it was not his fault in the first place. I actually asked the same question to a number of that particular bank’s staff whenever I visited it and I always got the same answer. It makes me wonder whether the bank has ever given its staff a training course on Islamic banking. I feel sorry if it hasn’t and I think it should.
Anyway, somebody please explain to me how Islam are the Islamic banks in Brunei? Frankly, I don’t see the difference between them and any of the conventional banks, in terms of their operation. They may not be involved in the financing of any of the unislamic activities such as gambling, entertainment etc. but I think in terms of profit and loss sharing- which is the basis of the system, they only share the former but never the latter, which to me makes them no better than any conventional bank.
So, please prove me wrong.
Salaam.
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Complex and opaque products being sold that are not understood by the customers nor by the bankers? Sounds familiar.
http://www.ft.com/cms/s/0/f18263ec-2ab8-11de-8415-00144feabdc0.html
Main reason why Islamic Banks needs to train their human resources on the principles and values of the Islamic Finance Industry.
The difference is easy, the 'interest' you pay in Islamic credit is quoted as Bai' or trade. The banks buys the car for you and sells it to you at a higher price.
So the practice is based more on a conceptual perspective rather than payment differences. Credit facilities are generally the same in all financing methods.
I do wonder bout the subject myself. tidak islamnya bank islam?? like the promo aIDiBiBi offer nowadays, I'm so doubtful bout it, if the bank really want to share '1 million dollar' why dont they give the chance to win it to anyone who had opened acc in that bank, regardless of how much saving they have. why have to make so many conditions to enter the promo. and I thought this kind of lucky draw is haram
btw, nice to know u n this blog :D
The key difference between an Islamic Bank and a Conventional Bank is who has ownership of the asset.
In a conventional bank, you borrow money from them to buy a car. They give you the money and expect you to pay it (money) back to them because that’s what they’ve lent you (money), plus interest because they claim that had they not lent you that money, they would’ve made money elsewhere.
In an Islamic bank, you don’t borrow money from them. You get them to buy the car for you, and sell it back to you on an installment/deferred basis. The bank will have ownership of the car and will sell the ownership back to you in installments. So if you’ve made half of the payments already, then you own half of the car (while the bank owns the remaining half).
If all goes well and you complete your payments, you might conclude that numerically, conventional or Islamic, there is no difference. But the difference is when things go wrong. Because in life, there aren’t only rewards, there are risks too.
Say after paying 25% of your payments, your car stops working and needs repair. The automaker apparently went bankrupt, so there aren’t any car parts being manufactured. Your car is rendered useless.
With a conventional bank, you would be left carless with another 75% of payments to make. Because you borrowed money and that’s what you need to pay back - money. Whatever happens to the car is your problem.
With an Islamic Bank, you had gone into a “partnership” with them to buy a car. The bank buys it first, and will sell it to you portion by portion back slowly. So whatever happens to the car, whatever risks, the bank makes a loss because the bank owns it. As a client, you can't lose more than what you've put in right? And it is because of that ownership, because of them bearing the risks that they have a right to charge a profit/fee to you.
So going back to your scenario. You’ve made 25% of your payments. The car (75% owned by the bank, 25% by you) is rendered useless. Your partnership with the bank ends. You call your losses in terms of the 25% installments you’ve made. And the bank will call its losses in terms of the 75% it could have collected from you. (Sharing profits/losses equally)
Similarly, if you’ve only made 1% of payments then you only lose your 1% and the bank loses 99%. The partnership begins with 100% ownership and risk on the bank, which will slowly be transferred to the client based on the number of payments. Whoever owns the car bears the risk. And because the bank owns the car for you first, bearing all the risk for you first, they have a right to charge you a profit/fee for it.
It all comes down to the risk equals rewards basic. Islamic Banking is all about fairness. I think it’s fair. Don’t you? :)
With regards to the "1 million dollar" comment, I thought the whole reason behind the campaign was to encourage savings? The more you save for yourself, the better chance you have of winning?
It was never to "share" 1 million. If it was given to anyone regardless of their saving, everyone one would have an "equal" chance. That would be like a lottery. Not Islamic at all.
I love the idea of the campaign. Encouraging savings. The best way to improve our lives is to save more, not borrow more.
In participating in the campaign, while I was hoping to win prizes, even though I didn't win for the first draw recently, I realised that I had the CAPABILITY to save if I really tried.
I realised that I don't have to spend every single dollar up until the next payroll. I'm thankful to the bank for teaching me that I CAN save.
Sikit-sikit, lama2 jadi bukit ;)
Love your comments Mr Anonymous 2..its the simplest and easy to understand explanation for IB..You've incorporated the basic and most important elements of Islamic banking, i.e. ownership (milkiyyah) and the 'Iwad factor...Couldnt explain it better than you..:)..
Just to share:
http://www.asiaone.com/Business/My%2BMoney/Opinion/Story/A1Story20090519-142394.html
I don't understand. Does this mean that if I were to use the islamic financing to buy a car, and for some reason I cannot pay for my car, then is that the end of story? I mean, I just return the car back to BIBD and I'm home free since the bank will bear the losses anyway?
What I also don't understand is that why does the 'profit rate' of the islamic bank equal the interest rate of the conventional bank (i.e regardless of the banks, the monthly payment is the same)?
Please don't try to 'islamize' an act that is clearly forbidden.
Salam Freakonomics,
In general, it depends on the concept used by the Islamic Financial Institution (IFI).
Some IFIs uses Murabaha (Markup concept) where the IFI will have the car in their showroom or in their ownership, and sell it to you at market price. Murabaha basically means all parties must know the cost price & profit margin. In other words, the cost price of the car and the profit margin/rate of the financing is noted in the contract. So here justification of the concept in Islamic finance is that ownership prior to contract lies with the IFI & if the car/asset is damaged/faulty, it is theoretically the responsibility of the IFI to maintain/repair it as it is in their ownership before selling/reselling.
The other concept which is more popular in South East Asia including Brunei (Disclaimer: Depending on the financing product) is Bai Inah/ Inah/ Einah. This is a controversial concept such that in the Gulf & Middle East, the IFIs there have generally shunned it, saying it is similar to riba. In Brunei, similar to Malaysia, it is not named Bai Inah but it goes under the guise of Bai Bithaman Aajil (BBA or translated as 'sales against deferred payment'). This involves 2 sales contract. Normally, the IFI sells the customer an item (e.g. US Dollars/ Floor building. It doesn't matter what the item is, as it's a token) at $35k, for instance, in installments, and seconds later, in another contract, buys the same item at cost price $30k, cash or spot price. The essence of these 2 contracts are the $30k one gets, i.e. the financing & the $5k is the profit of the bank. Naturally, it is controversial because the 2 transactions yield something similar or as I might argue, quite similar to a riba transaction in its subtance.
Some scholars appear to advocate BBA (with the concept Bai Inah) hidden under it because they note Shafi'e school as allowing it but according to my understanding, Shafi'e never stated these transactions as valid. It was just that Shafi'e's legal theory looked at form rather than intentions. Intention, as their legal theory, noted is between man & God. As far as its form is concerned, the 2 transactions appear independent & if all Islamic conditions related to contracts are adhered, it 'is' fine, according to the proponents of Inah. But like I said, the issue as the opponents of these concept say, is with substance/essence, and not form. Shafie himself, if I'm not mistaken, stated such legal tricks to achieve illegitimate ends (e.g. riba) were morally wrong, though as mentioned earlier, due to his legal theory did not validate or invalidate the concept.
Okieee, I've gone somewhat overboard w/ my explanation but for more info, on Murabaha, have a look at Taqi Usmani's weblinks (found in my blog) are a good starting point but I don't know any good Bai Inah online materials. If you want to read more on Bai Inah, El-Gamal's book 'Islamic Finance: Law, Economics & Practice' includes some paragraphs on Inah/Bai Inah.
Hope this helps.
Wassalam,
Umar
Oops correction, in my earlier comment, I mentioned Taqi Usmani's link in my blog but the site is down at the moment. Here's another weblink that might be useful on it: http://www.accountancy.com.pk/docs/islam_murabahah.pdf
Salam,
Bagi pendapatku, bank-bank Islam di Brunei masih lagi haram. Kerana banyak perkara:
1. Apabila ketani minta sebarang dokumen ataupun ketani bertanya kepada "orang-orang" di bank Islam, macamana bank Islam mereka beroperasi secara terperinci, macamana urusniaga mereka sebenarnya dibuat, mereka akan menjawab, perkara atu adalah sulit, dorang sama ada nda berani ataupun nda mau menjawap. Ani sudah terjadi kepada penuntut-penuntut yang ingin membuat kajian di bank-bank Islam. Mereka gagal mendapatkan sebarang maklumat terperinci tentang urusniaga mereka dan pihak bank nda memberikan kerjasama. Natijahnya penuntut-penuntut atu hanya bergantung pada brochure2 dan katalog2 yang diedarkan untuk membuat kajian mereka. Ani sudah menunjukkan urusniaga di Bank-bank Islam atu tidak telus dan masih berunsurkan gharar. Urusniaga yang tidak jelas kepada orang yang berakad adalah berunsur shubhah dan gharar. Ini adalah haram dalam Islam.
2. Kalau ketani membali kereta dari bank, dan bank membeli kereta atu daripada ejen kereta contohnya, bank atu hendaklah sudah memiliki kereta atu dan kereta atu sudah berpindah milik daripada ejen kereta kepada bank. Dan pembeli hanya berurusniaga dengan bank sahaja dan bukan berurusan dengan ejen kereta lagi. Dalam erti kata lain, pembeli mesti mengambil kereta atu daripada bank atu sendiri, bukan dari ejen. Tapi secara praktikalnya, bank Islam di Brunei, ketani mengambil kereta atu dari ejen. Sedangkan sepatutnya kereta atu adalah dari bank. Rasulullah telah melarang ketani menjual barang yang belum dalam pegangan ketani. Tapi ani lah yang masih diamalkan bank Islam.
2. Manakala Al-Ijarah thuma al-Bae' (konsep Sewa kemudian beli) juga adalah haram. Kerana Islam melarang ketani beraqad dua dalam satu. Iaitu aqad sewa dan aqad beli dalam satu aqad. Ani adalah haram.
3. Konsep yang dikatakan 'Islamik' oleh bank-bank Islam di Brunei hanyalah sekadar helah untuk menutup urusniaga yang berunsur riba. Helah ani nampak saja halal, tapi natijahnya menyamai riba. Ani adalah haram.
Oleh itu masyarakat brunei haruslah berhati-hati dan mestilah membezakan Bank Islam dari Syara' dan Bank Islam dari segi nama. Terdapat juga bank yang bukan Islam pada nama, tetapi Islam pada kaedah. (Saya tidak ingat nama bank tersebut).
Sekian.
thanks for your great posting
Bathmate
This is very interesting and with the blogger's experience i.e. having difficulty in getting the correct information from the Bank itself, it showed that the Bank cares less to explain clearly the difference(s) between itself and conventional loans. I am quite knowledgable about Islamic contracts but it saddens me that most of the IFIs whether its in Brunei or anywhere else, to the customers, are akin to the conventional bank except for their names and the names of their products. Of course one may notice that the IFIs usually involves thicker contracts or agreements as basically Islamic Banking is all about trading i.e. Bai, leases and other forms of contracts. From a contractual perspective, I can say that most are valid trade/lease contracts which renders them Shariah compliant. However, my problem is, has Islamic Banks been successful in creating wealth for the Ummah? To me the spirit of Islam which endevours to build a stronger ummah through business activities that could create wealth is not really present in the Islamic Banks. Clearly understood that Banks, whether Islamic or conventional needs to make profit so that they can be sustainable. But so far its all about enriching themselves i.e. bottomline, profits etc..etc.. On the contrary, we have heard the success of micro credit scheme (not promoted by IFIs) in countries such as Bangladesh and other poor countries that were able to lift the quality of life of poor people (remember the guy that won the Nobel prize some years back?). Well, to me these micro credits are better and perhaps more Islamic than what we have now... In conclusion, I hope that the IFIs will stop emulating the conventional banks and also start thinking of how it can help the nation and the ummah rather than thinking of bottomline only. If it can achieve this, then and only then it can be labeled as a true Islamic Bank!
This may help you
http://www.islamicadvisory.com/
and will probably help you more since your in UK
Bank Islam dan konvensional adalah sama saja. Mereka mengamalkan riba.
Katalah salah seorang dari saudara saya Abu datang kepada saya dan meminta bantuan kewangan iaitu pinjaman wang untuk membeli baju sekolah anak-anaknya (yang juga sudah semestinya saudara saya). Jumlah yang mahu dipinjam adalah sebanyak RM100 dan Abu berjanji akan membayar balik secara ansuran. Terdetik didalam hati saya,"ini boleh buat duit ni, kalau mintak faedah/bunga/riba' haram jadinya, baik aku ubah sikit".
Saya: "Oklah Abu, macam ni saja lah, sebenarnya dari aku bagi kepada engkau lebih baik aku simpan dalam bank, bertambah jugak duit aku nanti, tapi sebab engkau saudara aku, jadi aku pinjamkan kepada engkau tetapi dengan syarat.
Mat: "Syarat macamana pulak tu?.
Saya: "Aku belikan baju untuk anak-anak engkau dengan harga RM100 dan aku jual kepada engkau dengan RM120, lepas tu engkau bayarlah bulan-bulan RM10 selama 12 bulan, bagaimana? setuju ka? Ini cara islam yang mana aku berjual-beli dengan engkau dan bukan aku kenakan faedah, kalau ada orang lain bertanya engkau cakaplah aku memberi pembiayaan kepada engkau, jangan sebut pinjaman sebab itu nampak tidak islamik".
Mat: "Baiklah, sebab aku terpaksa dan tidak ada cara lain lagi dah maka aku terima sahajalah syarat engkau itu, lagi pun engkau sudah tolong aku maka aku pun kenalah tolong engkau jugak. Tapi eloklah kita berakad untuk memastikan proses ini dikira pembiayaan dan jual beli".
INI ADALAH RIBA, BANK ISLAM CUMA MEMUTAR BELITKAN KEADAAN TETAPI HAKIKATNYA YANG PEMINJAM TERPAKSA BAYAR LEBIH DARIPADA NILAI YANG DIPINJAM.
http://www.youtube.com/watch?v=95vui9vsZ2E&feature=player_embedded
Salam,
For a long time, I have been trying to search any books or articles that can explain me the islamic banking in Brunei if they practice riba. Alhamdulillah, Allah has shown me the door and I did manage to buy a book "Pentingnya Larangan Riba Dalam Islam" and the author was Imran N. Hosein.
I recommend to all muslims wherever you are, try to get this book. It will explain every detail about riba.
After reading the book, I was satisfied! I found out all the Islamic Bankings in Brunei practice 'Riba'. There are two big sins they are facing right now i.e. 1) they practice 'Riba' 2) They make the 'Riba' becoming 'Halal' which against Firman Allah in the Quran.
Anyone who try to hide or turn Firman Allah the other way round, he or she can be considered as kufur!
To those who support someone who try to hide or turn Firman Allah the other way round also included in that group.
Na'uzubillah!
Salam Anonymous,
It is true, in my opinion, that the Islamic financial products in Brunei uses a controversial concept in Islamic financial circles, i.e. Inah under the guise of Bai Bithaman Aajil.
Unfortunately, the question now becomes what can be done? In M'sia, the use of Inah is said to be reduced towards more acceptable financial concepts (though I've yet to assess the products). Meanwhile, in Indonesia, I've been told that such controversial Islamic financial concepts are not used.
To learn from others' experiences, it appears that the impetus now is to (1) Encourage/Push Islamic banks to use more acceptable financial concepts & (2) Minimize personal financing via encouraging savings & reduce the culture of indebtedness. In other words, work towards improving the country's Islamic financial issue, from a demand & supply perspective.
My thoughts.
Wassalam,
Umar
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