BBMF3153 ISLAMIC BANKING
Tutorial 3
1. Discuss the time value of money concept in Islam.
The Islamic Fiqh Academy of the OIC and Shariah boards of all Islamic banks approved the
legality of time value of money in the pricing of goods which involves sales contracts. However,
time value of money is not recognized at all in debt contracts due to the riba element involved.
In sales contracts, Islamic jurists allow the difference between cash and credit prices of a
commodity. It means the same goods can be sold on credit (deferred) basis at different prices
(normally higher) than the cash (on the spot) transaction.
What is prohibited is any addition to the price once agreed because of any delay in its payments.
This is because the commodity once sold (on credit), generates debt and belongs to the purchaser
on a permanent basis and the seller has no right to re-price a commodity that he sold and which
does not belong to him.
2. Explain “Gharar” and its classical example. Discuss the hadith related to the
prohibition of gharar.
Gharar is the uncertainty and/ or ignorance of one/ both parties in a contract over the substance
or attributes of the object of sale, or doubt over its existence and availability at the time of
contract.
Classical examples of Gharar sale:
- Sale of fish still in the sea
- Sale of birds in the sky
- Sales of unborn animals
- Sales of runaway animal
- Sales of milk in the udder/ gland of an animal without measurement
Rationale for the prohibition of Gharar:
- To ensure full consent and satisfaction of the parties in a contract
- Without full consent, a contract may not be valid
- Full consent may only be achieved through certainty, full knowledge, full disclosure and
transparency
- Gharar in commercial contracts may lead to injustice, exploitation and/or enmity among
contracting parties
Example:
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→ Short- selling
→ Options
3. Differentiate Gharar Fahish and Gharar Yasir. Give FOUR (4) examples for each
category of gharar. (the examples must be different from the examples given in
the lecture notes)
Gharar Fahish
-An uncertainty which is so great that it becomes unacceptable; It is so vague that there is no
means of quantifying it.
-The contract could be invalid
Example:
-Selling the goods that seller is unable to deliver
-Selling goods without proper description, such as shop owner selling clothes with unspecified
sizes
-Selling goods without specifying prices
-Selling goods on the false description
-Making a contract conditional on unknown event
Gharar Yasir
-It is found in nearly all contracts
-If the ignorance is over an aspect of sale that is not likely to obstruct completion and delivery,
the basic purpose of the sale is fulfilled and it remains valid.
Example:
-Selling the goods without allowing the buyer properly examine the goods
-Charging a fixed amount for a LRT fare for a certain distance even though a passenger does not
travel the whole distance.
-Charge same amount of buffet fee to the customers even the portion of the foods consumed will
be different
-Same membership fee being charged to all customer even the frequency of the customers utilize
the service would not be same
4. Discuss FIVE (5) consequences of Gharar.
➔ Entering into a contract in absolute risk or uncertainty about the ultimate results of the
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contract
➔ Inadequacy and inaccuracy of any vital information which leads to uncertainty and
exploitation of any of the parties.
➔ Full consent and satisfaction of the parties in a contract cannot be reached due to
uncertainty, lack of knowledge, lack of disclosure and lack of transparency therefore the
contract may not be valid.
➔ Gharar makes the outcome of the contract unpredictable/uncertain.
➔ In commercial contracts, Gharar may lead to injustice in the society, exploitation of poor
people and/or enmity among contracting parties.
5. Is lending/ borrowing activities is haram in Islam? Discuss lending as compared to trading?
Which one is more preferred in Islamic banking practice? Why is it preferred by Islamic banks?
➔ No, lending/ borrowing activities is not haram in Islam if lending/ borrowing money to
the borrower for the period of loan without seeking any wordly compensation. Islamic
Banks will not take or give any loan or enter into contracts seeking any increase over the
principal of loans or debt created as a result of any credit transaction.
➔ Act of lending is an act of charity. Lending should be a benevolent act. If money is
needed other than for commercial purposes, such need should not be exploited where the
borrower is put under undue burden. While trading is one of the commendable
profession and Islam has put a tremendous emphasis on it for the acquisition of
wealth. It needs someone to put effort and only get profit. In the Quran Surah al-Baqarah,
verse 275. (2:275) mentioned that “Allah has allowed (profit from) trade and prohibited
riba”
➔ Trading is more preferred in Islamic banking practice because Islamic banks are
profit oriented and not a charitable organization. Islamic banks are doing business
with the available funds and passing on a part of the income to the fund owners –
depositors and investors. Trading will create economic value while lending not.
6. Discuss the advantages of having Islamic windows/subsidiaries in Islamic banking system
and operations?
Answer:
An Islamic window refers to services that are based on Islamic principles but provided by a
conventional bank. Islamic banks operate in the form of ‘windows’ in conventional institutions
even in Muslim countries.
Furthermore, in order to start Islamic financial institutions in a secular country, it faces many
political, legal and societal constraints.
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Thus, by having Islamic windows in Islamic banking system, it helps to overcome legal
disabilities and complications as this operating structure has invariably been proven to be
practical and effective in some countries such as Europe and America.
Malaysia has as well moved from a window based system to subsidiaries which has then
improved the ability of Islamic banks to accommodate the increasing demand of Islamic
banking products.
To promote the growth of islamic bank, and to penetrate into muslim and non-muslim market.
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