Friday, April 6, 2012

Poverty Eradication through Micro-Public Fund (Zakat)


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Poverty Eradication Scheme? the Micro-Public Fund (Zakat) is the Leading Solution...

Oxford Dictionary defines ‘Poverty’ as being poor, great lack of money or resources, scarcity or inferiority. Others define it as disadvantaged, low income, poor or less developed. These conventional definitions do not seem to differ or vary from that defined by al- Ghazali who gave meaning to poverty as a state of not being able to satisfy one’s needs which are basic in nature.

Poverty to day, is no longer viewed only as a mere economic issue, but also is a complex social and political concern that is yet to be successfully solved universally. The concept of poverty is viewed in the context of society as a whole where it persisted in every community around the world but the extent or degree in which it affected human race varies from one society to another.

Even though it is prevailing throughout the world, poverty has always been ignored and is closely associated with disbelieve (kufr). As said by Prophet Muhammad SAW: “Poverty might lead a person to disbelief”, further clarifies the intensity of this situation. Thus, the Holy Quran cannot emphasis more on the poor and needy as commanded by Allah in Surah An-Nisaa, Ayah 8:

 واذا حضر القسمة أولوا القربى واليتامى والمساكين فارزقوهم منه وقولوا لهم قولا معروفا

“But if at the time of the division, other relatives, or orphans, or poor are present, feed them out of the (property), And speak to them words of kindness and justice”.

 A report states:  "Poverty is a multidimensional phenomenon, encompassing inability to satisfy basic needs, lack of control over resources, lack of education and skills, poor health, malnutrition, lack of shelter, poor access to water and sanitation, vulnerability to shocks, violence and crime, lack of political freedom and voice.

The numbers show little progress in reducing income poverty over the last decade--impressive gains were made in East Asia before the crisis hit, but have been partly reversed, and little if any progress took place elsewhere--and a large majority of poor people said they were worse off now, have fewer economic opportunities, and live with greater insecurity than in the past."

CLASSIFICATION OF POOR AND INSUFFICEINCY OF INCOME

Poverty in Islam is concerned with insufficiency of income and the inability in fulfilling basic human needs. One is considered poor if he does not possess sufficient necessities to fulfill his basic needs.

Therefore, poverty can be interrelated to two basic classifications of poor, which are faqir who are the needy, and miskin who are the poor, as identified and understood in Islam. Faqir is defined as someone who can only satisfy less than half of his basic necessities while miskin is a poor man who can satisfy half or more of his basic necessities, but is still below the minimum requirement of basic necessities required.

Prophet SAW said (about those defined as miskin): “He who does not get enough to satisfy himself, and he is not considered so, so that charity may be given to him, and he does not beg anything from people”.

There are no distinct techniques to measure poverty, as it is always associated with some level of income required to provide for the basic human needs. This human needs refer to the right of food, clothes and shelter as pronounced by the Prophet SAW that are to be identified and met in order to sustain a minimum standard of living.

The poverty line or income level, which serves as an indicator to identify whether a person is poor, is useful where a person is considered poor if his income is below poverty line income.

FACTORS CAUSING POVERTY FROM ISLAMIC PERSPECTIVE

THE NATURE OF MAN

Man is the essential element in any society thus; any problem related to the society must have something to do with individual because it is his actions on the ethical aspects that affect others as a whole.

One of the many reasons poverty persists in any one community is because of the widespread existence of income inequality and unjust wealth distribution. It is due to man’s narrow-mindedness and selfishness as well as ignorance for a collective life has made man a slave to things, which are material in essence.

In fact, poverty is caused by man’s deviation form divine teachings in which he practices unlawful things and the man-made problems such as injustice, laziness, selfishness, dictatorship, fraud, cheating, monopoly practices, speculative hoarding and oppression that with each passing day, making the poor getting poorer and the rich getting richer.

ان الله يأمر بالعدل والإحسان وايتاىء ذى القربى وينهى عن الفحشاء والمنكر والبغى يعظكم لعلكم تذكرون

God commands justice, the doing of good, and liberation to kith and kin, and He forbids all shameful deeds, and injustice and rebellion: He instructs you, that ye may receive admonition”. (16:90).

Mismanagement and  misallocation of funds happening today as a result of so much power in the hands of the elite, who maintain the status quo at national levels is the rationale for the existence of an income gap between the poor and the non-poor.

There are also corruptions and bribery, or the misuse of public power and resource for private benefit and profit by officials such as politicians and policy makers in which they enrich themselves through the misuse of power entrusted to them. Negative attitude, easy access to money as well as deficiency in democratic government initiates corruption and provides an ideal condition for corruption to prevail. Accumulation of wealth by the rich people will therefore hurt the common people as they are left out and the public interest is further disturbed.

Islam promotes just distribution and ethics in everything we do. Those practicing corruption should be penalized for their inefficiency and those who are efficient should be reward for their creditability.


FUNCTION OF GOVERNMENT AND MARKET FAILURE

The government is established as a protector for the public interest. It means that, government will only see to it if there exist to be a market failure in the economic activity. However, there seem to be an interruption in the economic balance when the government is no longer protecting the public and is applying free trade thus causing massive competition to develop.

Government especially in the third world countries tends to borrow from international donor organization such as the IMF, which in turn requires the debtor country to export their production instead of for local circulation. This will have a severe impact when the prices go up, food subsidies are eliminated, basic services cost such as electricity increased and health and educational funds vanish.

In addition to the said government’s failure, inadequate access to employment, lack of physical assets such as land and capital to be owned by the poor, lack of means of supporting rural development in poor region, inadequate access to markets where the poor can make trade, low endowment of human capital and the destruction of natural resources leading to environmental deprivation as well as reduced productivity are merely some of the causes of poverty in light of the function of the government.

Consequently, poor governance and market failure are two aspects, which should be properly addressed to attain justice in the economic activities, which will help in poverty eradication.

POVERTY ERADICATION IN ISLAM

As Muslims, we are to approach poverty like any other problems faced by our society, in accordance with the Islamic teachings and way of life. It is the concern for the poor, which leads us to address their needs through many approaches, instruments and government policies.

 Elements of Poverty Alleviation

It is identified earlier that poverty is a result of diverse factors and therefore has different dimensions in which it would be implemented. These elements are the individual and society’s role in eradicating poverty as well as the government’s role.

Individual and Society’s Role.

As vicegerent of Allah on this Earth, we to live a moderate lifestyle in such a way that we fulfill our material and spiritual needs simultaneously. Islam recognizes differences in individual human potentials because each is endowed with different types and levels of abilities.

Therefore, man is to earn his living according to his capacity and ability as that said by Allah (swt) in the Holy Qur'an (Al- Jumu’a: 10).

It is therefore, the public duty of individuals and society to focus on integrating the Islamic principles, moral and ethical aspect in our daily life, as well as the response from the society about poverty, regardless of involvement of the Government. In other words, the strategy to combat poverty is through harmonious equilibrium in development and Islamic ethical values. There should also be fundamental changes at both the management and policy level, and change in individual character to be more inspired, efficient and selfless individuals in any society.

The Prophet also mentioned the importance of earning an honest living in his many hadith. One of them is reported by Al- Miqdam, who quoted the Prophet saying:

 “Nobody has ever eaten a better meal than that which one has earned by working with one’s own hands”.

ISLAMIC STATE’S ROLE


The Islamic EconomIC approach and Significance.

Creed and Islamic Economy

The basic creed that promotes Islamic economic behaviour evolves from the Islamic concept of God, Allah, with attributes ascribed to Him – Al-Malik (the absolute Owner of All), Al-Rahim (who gives blessings and prosperity, particularly to whom use these gifts as he has permitted), Al-Muhaymin (watches over and protects all things), Al-Wahhab (donates all things to His creatures, even to non-believers), Al-Fattah (opens the solutions to all problems and eliminates obstacles), Al-Razzaq (the Provider of all things that are beneficial to His creatures) and so on.

The Divine attributes do not only have metaphysical significance; a firm belief in them acts as a powerful source of inspiration and guidance in economic pursuits and planning.

These attributes have been described through the Quranic verses and Hadith to construct a mind and guides individual behaviour in a direction, which truly reflects firm belief in Allah’s Unity, Tawhid. Without this firm belief the Islamic economic system and the whole life, falls prey to inconsistency and discord.

How do beliefs in this attribute influence economic attitude? A firm belief in the divine attribute of the Provider eliminates insatiable lust for amassing wealth through unlawful means and cools down impatience. It dissuades from unhealthy competition and egotism.

It relieves tension and anxiety and unhealthy reaction in the event of poor for one’s effort. A firm belief in the divine assurance:

‘Whosoever fears Allah, Allah will appoint a way out for him and will provide for him from (a quarter) whence he has no expectation’ (65:2, 3).

It is not only discourages one from becoming avaricious and resorting to unlawful earning but also plays an important role in guiding policy-makers and planner to cast off the capricious fears of loss due to abolition of unlawful institutions and undesirable policies and programmed.

A firm belief in his attribute, Al-Razzaq, as expressed in the verse: ‘Slay not your children, fearing a fall to poverty, We shall provide for them and for you. Lo! The slaying of them is a great sin’ (17:31), would inspire the policy-makers to be restrained, barring exceptional cases, in launching on economic grounds a country-wide campaign for birth-control, which often provides a refuge for the morally corrupt. Similarly, belief in the Divine Wisdom of unequal distribution of wealth (4:32) shuns class antagonism and persuades the well-to-do to share their fortune to the poor, thus reducing the distance between the haves and haves-nots.

As a conclusion, firm belief in divine attributes not only has a far-reaching influence on the general attitude of the individual, it also touches economic enterprises, policy-making and planning. Without such firm belief practicing the Islamic injunctions poses formidable difficulties and leads one to impracticable compromises, which result in dualism and hypocrisy.

The Government’s Role towards Poverty Alleviation

 Poverty, Employment and Growth

The economic resources of this world belong to Allah who gave them to mankind to benefit from them. So, the duty of man is to properly utilize them for the welfare of society. This world entail:

1. the full and efficient employment of all human and natural resources,
 2. the alleviation of poverty and fulfillment of basic needs, and
 3. the optimum rate of economic growth.

The objective of the alleviation of poverty, the full employment of resources and optimum rate of growth can only be achieved by the active participation of government.

The Islamic government should not leave the allocation of resources only to the blind market forces because; being an impersonal entity, the market may not take care of the total welfare, especially of the poor, of the society. Government should play a positive role in the economy through pragmatic planning and by providing necessary physical and social infrastructure.

The government must invest in this sector since private entrepreneurs may not find enough incentive to invest because of the heavy investment requirement and small monetary return realized over a long period time.

In this case, government investment should be channeled into the improvement of highways, dams, bridges, the construction of irrigation networks, airports, telecommunication services and the provision of other facilities, which would bring about external economies to the different sectors of the economy.

So, Islamic government has a great responsibility to eradicate poverty, fulfill basic needs and improve the living standard of the people. If it fails to do so, the Prophet’s (s.a.w) warning should remind them:

“Whom Allah has made administrator over the affairs of Muslims but remain indifferent to their needs and poverty, Allah will also be indifferent to his needs and poverty.”

Establishment of Equitable Distribution of Income and Wealth

The establishment of an equitable distribution system calls for certain governmental functions, such as:

 i)               the provision of training and rendering assistance for gainful employment to the public. A variety of technical training programs may be launched to assist the unskilled labor force of the less developed countries,

ii)             the government should enforce a just remuneration system so as to fairly distribute the generated income among the factors of production,

iii)           the arrangement of a social security system based on zakat and other charitable revenues. They would serve as insurance to the unemployed, handicapped, divorcees and other needy members of society.

As basic necessities are provided, the national wealth circulates among the members of the community. This is why Islam makes it obligatory for the government to guarantee the provision of basic needs to all. If the existing fund is not sufficient, government has the right to pull resources from the rich in addition to the obligatory dues to guarantee basic needs to each and every one in the society. Ibn Hazm calls for the extra levies on the rich to fulfill the basic needs of the destitute of a society. He says:

“The rich of every locality are obliged to manage the basic needs of the destitute living in it. If the wealth, stored in Baitul-Mal, is not adequate to meets the wants of the indigents, the head of the state may compel the rich to contribute by imposing extra levies on them.”

Government should play a great role through monetary and fiscal policies in reducing the disparity between the haves and have-nots. These policies should be geared towards the benefit of the poor.

It is also one of the responsibilities of an Islamic government to differentiate between the deserving and undeserving of the national help. In this case, government should invest in the social overhead capital such as education, healthy and other infrastructural development so that the poor may benefit more than the rich.

Islam strongly encourages the rich to spend for people in the lower income group over and above compulsory payments so that wealth trickle-down among the various classes of society. In this context, the principle is that the more one has, the more responsible towards providing the poor one is. Allah (saw) says:

....ويسألونك ماذا ينفقون قل العفو...

“And they ask you how much they are to spend; say: what is beyond your needs.”

There are compulsory measures of distribution which also heavily contribute to the reduction of inequality among the people.

The institutions of Zakat, tithe, sadaqatul fitr, inheritance, bequest etc. come under this category. In these cases, one has to dispose one’s wealth to one’s fellow-beings whereby have-nots become better off. Mutual gifts, endowments and other optional charities, on which Islam places a heavy emphasis, also reduce the disparity between the haves and the have-nots of society.

Taxation in an Islamic Economy

The classical Islamic scholars also gave justifications for taxation as a major of sources of government revenue in an Islamic state. This has been supported by Imam Malik:

“If there were no funds in the treasury or the need of the army increased above the capacity of the treasury, the state has the right to levy taxes on the rich up to the level that satisfies the need immediately and until the revenues of the treasury appear.”

Islamic government should make sure that the imposition of taxes does not the kill work incentives of the tax payers. It must carry out some research to find out which particular rates and types of taxation are the most suitable to maximize government revenue in the economy. There should not be any injustice involved with taxation policy in an Islamic state.

Although Islamic state has the right to impose taxes on the poor it should try to minimize their tax burden in general. The bulk of tax revenue should come from the rich of the society because, they are economically more capable to contribute towards revenue collection than the poor.

This is why suggestion has been made that the Islamic state should minimize indirect taxes, which are normally borne by the poor and concentrate on the direct taxes, which are usually collected from the rich.


Thursday, April 5, 2012

Islamic Bullion Bank with Cooperative Model? a brain child idea.....

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Islamic Bullion Bank (IBB) is designed (at brain child idea) to offer money market by Gold Diner, global Asset (gold, silver & diamond) management, global Sukuk issuance, global capital market, Cooperative micro-finance, islamic micro-credit @ al-Rahnu & global equity (gold, silver & diamond) management in accordance with the standard Shari'ah principles. The Risk management of all these services shall be by Takaful providers.

The prime objective of IBB is to provide an effective Gold, Silver & Diamond management for the global Ummatic benefits in the spirit of Shari'ah by having not only commercial gains, but also added opportunities with socio-cultural, political-global and spiritual significance.

Furthermore, through the successful establishment and operation of IBB, the depositor / owner of asset (gold, silver or diamond) may not only hold the certificate of safe keeping, but also grand opportunities in legitimate profit making besides cooperating others towards required financial supports for the project developments, establishment of businesses & needed facilities.

For example: IBB may offer any guarantee with standard financial instrument backed by the ready asset in custody (gold, silver or diamond) to the party who requires financial support for the project, business or facility. A financing bank will offer the facility based on the IBB's issued instrument to effectively support the party towards one's end result. Through such a holistic cooperation, all four parties (including the owner of asset) will have the chance to share income in the project as per mutual understanding. Moreover, IBB may also be able to issue Sukuk guaranteed by the ready asset, participation in the equity market and other global opportunities, to generate income over the deposited asset, which will ultimately befifit not only IBB, but also the owner of the asset coplying the Shari'ah principles of profit sharing technique. In all circumstances the risk shall be minimized by the relevant Takaful coverage.
Though the brain child architecture of IBB of my humble effort had began its structure since 2002 and now may be the right time to be established as the first of kind in today's world of reality.


The establishment of IBB may open up long waited opportunities for all through the centralized management of gold, silver & diamond aiming a discovered effective benefit for the global Ummah, EnSha ALLAH (swt).


It is further clarified here that, though IBB has not been established yet in its capacity as an Islamic bullion bank with operation, but ready with its architecture by conceptual frame works, management structure, Shari'ah regulatory structure, products structure, strategies, Shari'ah instruments, business prospects, lead partners including investors, market zone & operational mechanisms, which may lead to formalization & operation effectively (all are depending on the fulfillment of legal requirements, approval by the relevant authorities & endorsement by the government concern) EnSha Allah (swt).

Islamic Corporate Governance? an integrated culture...

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ISSUE 1:

With whom does ultimate responsibility to comply with Islamic Shari’ah rules lie? Management/the Shari'ah Board or Shareholders?

SOLUTION:

• All 3 (the Management, the Shariah Board and the Shareholders) are equally but respectively responsible for the Shari’ah compliance of all aspects of the company of Shari’ah products and services. Hence, a further illustration to the effect is as follows:

(i) It has been an ongoing confusion among the i-eco-legal environment that, whether the Shari’ah Board is an employee of the management or anindependent authority?
To resolve such a puzzle among the corporate Ummah it is submitted that, in no situation the Shari’ah Board shall be treated as an employee (to follow, fear, favor and please the management or the shareholders or whosoever may be other than to comply the total Shari’ah spirit), but an independent authority to uphold, promote and decide the true Shari’ah standard.
Thus, in their capacity as the independent authority the Shari’ah board is, accountable (to themselves, to the Management, to Public and ultimately to ALLAH (swt) for the accurate Shari’ah views and Solutions with no fear or favor per se.

(ii) Management shall shoulder an AMANAH (trust) in the total operation / management as per the Shari’ah decisions made by the Shari’ah Board. Thus, the Management is accountable based on the holistic Principles of TRUST (to themselves, to the Board of Directors and ultimately to ALLAH (swt) for the accurate operation of Activities in accordance with the Shari’ah Solutions provided by the Shari’ah Board.

(iii) Shareholders are accountable (to themselves, to Public and to ultimately ALLAH (swt), the almighty GOD) for the accurate observation and decision over the total Policies, products, mechanisms and operation of Activities complying with the Shari’ah rules and spirit.

ISSUE 2:

Should shareholders put Shari’ah compliance processes in place? is this more important if Management or Key Personnel is non-Muslim?

SOLUTION:

• Shareholders should concern over the total Shari’ah Compliance of the Policies and Activities in their capacity as the supreme technical and corporate decision makers.

• As far as the corporate operations are concerned, Shari’ah does not concern on the person, race, background, color or even one’s religion of the operator nor the shareholders, but Shari’ah concern is on POLICIES, SYSTEM, ACTION and ACHIEVEMENT, which shall be in total compliance with the Shari’ah Principles and Divine ethics. Therefore, if any personnel of the Management, BOD or Shareholders is a non-Muslim, which may not prevent one to offer Islamic Products so long one is with justifiably compliance with Shari’ah.

ISSUE 3:

As a Takaful or Re-takaful operator do you publish the activities (fatwa, rulings and guidelines) of the Shari’ah Board?

SOLUTION:

• As for the FATWA / rulings/ guidelines of the Shari’ah board in to day’s Islamic Financial environment, Some are published and some are not depending on the respective company / person / Mufti/ Scholar’s Policy.

• Thus, there is no Shari’ah restriction on Publication or non-publication of any fatwa.

• But, my personal understanding, it is better to publish the Fatwas / Shari’ah decisions for public interest with an objective of Ummatic Skill development with Shari’ah rulings (Fatwa). Such attempt may contribute to better understanding of Shari’ah standard, operations, unity, mutual respect and dynamic growth in the Islamic financial industry with right Maqasid al-Shari’ah.

ISSUE 4:

A practical market raised a personal question to me that, Do you undertake a Shari’ah Review? if so can you provide details on how extensive and often in it?

SOLUTION:

• Yes …. I undertake both Shari’ah Review and Shari’ah Audit as well while some occasions am assigned to be the leader of the Shari’ah Review / Shari’ah Audit team on different products and operations in different jurisdictions.

• Details Mechanisms on Shari’ah Review or Audit exercise with authorities and authenticities may be provided in writing or on face to face dialogue on only by official arrangement so that the professional standard is observed.

ISSUE 5:

Should the Shari’ah board have a say in the moral functioning and activities of the organization to reflect the principles of Takaful?

SOLUTION:

Shari’ah and ethics are interrelated or rather complement to each other. Thus, a Shari’ah board is not responsible to provide Shari’ah rulings only, but also the Moral as well as spiritual aspects affecting the operators, participants, shareholders, decision makers and the operations.

• But, Shari’ah Board’s responsibility with Shari’ah Rulings is mandatory by contract while the spiritual and moral concern and contributions to Takaful operators or operations is a directory task in general.

ISSUE 6:

In conventional insurance if there is a deficit, the shareholders provide an injection. In Takaful if there is a deficit the operator provides a Qard al-Hasan loan. As a loan it is an asset of the operator's fund, however in the Takaful fund it is accounted for as an injection. Is this the correct treatment?

SOLUTION:

• If the deficit takes place in the risk management (Tabarru’ / Waqf / Hibah / PSA) account of the Takaful Fund, the injection therein by the shareholders shall be a mandatory, which shall be treated as a Qardh al-Hasan (benevolent loan) refundable from the subsequent surplus of the risk management (Tabarru’ / Waqf / Hibah / PSA) account itself with no extra charge.

• But, if the deficit takes place in the investment account of the Takaful Fund, the injection therein by the shareholders shall be an option thus, once the inject takes place, which may either be with an arrangement of a package of Qardh al-Hasan (benevolent loan) refundable from the investment account itself with no extra charge, or as an Equity participation in the fund to enrich it with mutual terms and conditions between the shareholders and the operator for Participants.

ISSUE 7:

In some cases the Takaful operator pays out more in commissions to the direct agent than it has from the received from the Re-takaful operator (and Re-takaful is a high percentage of the risk). Is it fair that other participants pays for this deficit? what is the alternative?

SOLUTION:

• Participants in takaful practices pay the agreed contribution (Premium) but not liable to pay the commission to the agents appointed by the Takaful operator per se.

• Because of the contractual relation (Privity) between the Takaful operator and the Agents the Takaful operator shall be the one liable to pay the commission out of the received contributions to its agents in accordance with the commission payment policy of the operator.

• Meanwhile, the Re-takaful operator pays the commission to the Takaful operator is in fact the internal corporate policy of the Re-takaful operator. It is thus, irrelevant whether the amount of commission paid by the Re-takaful operator is lesser than the practices of Takaful operator. Because, they are two separate legal entities with their own respective policies.

• Furthermore, the commission paid by the Takaful Operator is generated from the agreed Contributions (Premiums) of the Participant. In this arrangement the privity of contract is between the Operator and the Participants over the Contributions (Premium) and, a separate Privity is between the Takaful Operator and the Agents over the Commission. Thus, no legal relationship exists between the Participants and the Agents per se.

• Therefore, if the Participants are required to pay more contributions, which is based on the underwriting policy, but this does not mean to top up the deficit of the fund caused by the extra payment of commission.

ISSUE 8:

For long tailed coverage, is it proper corporate governance for the operator to share in this surplus, when if the reserves are later increased causing losses, the operator will not share in these losses?

SOLUTION:

• There should not be any wrong if the operator share in the surplus as a form of service charge for managing the risk management fund.

• If in the event the contribution / premium rate is increased due to deficit in the risk management account caused by more claims, the operator shall not be liable to top up in the fund despite earlier sharing in the surplus.

• Despite the above phenomena, it is advisable for the operator not to share in the surplus in order to contribute to a sustainable existence of the risk management account while avoiding unexpected future deficit in the fund.

ISSUE 9:

Should the management / shareholders and Shari’ah board be more accountable? could this be done via an annual participants meeting?

SOLUTION:

• Since all three components of the corporate governance namely; the Shari’ah Board, the Management and the Shareholders are equally, but respectively accountable with Shari’ah compliance in all aspects of policies, procedures, technicalities, products, business, operation and management thus, it is utmost important for all to exchange mechanisms and share views in regular dialogues with day to day’s decisions , actions and achievement so to establish an atmosphere of harmonization, compliance, standardization while avoiding confusion and overlapping.

• It is therefore suggested here that,

(i) All three components namely; the Shari’ah Board, the Management and the Shareholders shall respectively on monthly basis hold corporate review or postmortem (muhasabah) session on three fundamental aspects :
(a) What have been planned?
(b) What have been performed? and
(c) What shall be done further?

(ii) Shari’ah board shall hold monthly session on decision making / Shari’ah solution to provide decisions / Shari’ah Solutions on all relevant aspect of the company. The decision shall be made with proper understanding (on relevant Dive Rulings, Shari’ah standard, Fiqh and other relevant policies) in accordance with applied Shari’ah principles and Divine spirit, which shall neither be in fear or in favor per se.

(iii) Shari’ah board shall not only to function in decision making but shall also undertake a monthly audit exercise to ensure the decided solutions have been carried out by the management in accordance with the Shari’ah spirit.

(iv) Shari’ah Board shall prepare a comprehensive annual report on total decisions with relevant facts and phenomena of the year, the Audit report on performance and future suggested plan affecting Shari’ah compliance.

(v) All three components (the Shari’ah Board, the Management and the Shareholders) shall hold an annual review session before the annual report is prepared.

(vi) Two components (the Shari’ah Board and the Shareholders) shall hold a combined annual General Meeting (AGM) with comprehensive postmortem, report presentation and future plan for the company. This shall be witnessed by the selected key Management team.

ISSUE 10:

Should policyholders have a say in the election of the Shari’ah Board? or should it be just a shareholders' decision?

SOLUTION:

• Policy holders may (if so wish) share their views on the selection of the Shari’ah board on a non-binding capacity.

• Shareholders shall have the capacity to decide on the nomination / selection of the Shari’ah Board facilitated by the Management, which shall be finally approved by the Central Bank or the Ministry of Finance or the Insurance Commission depending on the authority with locas standi in respective countries.

• This is because, the Shari’ah Board is not an employee but an independent authority, who is nominated by the company to an ultimate approval by the Regulatory authority of the country concern, to ensure the total Shari’ah compliance of the policies, technicalities, products, business, operations and all other relevant aspects and activities of the company.

• Furthermore, the decision, Shari’ah solution or opinion provided by the Shari’ah Board shall not be meant for the private interest, but for Public interest (Ummatic benefits) without fear or favor per se.

• Thus, neither the policy holders or the shareholders nor the management have the locas standi to elect any Shari’ah Board on their own comfort, but can only recommend, nominate and facilitate to the submission of the selected names to the right authority (Central Bank or alike) for the final approval to create an independent Shari’ah Authority for advising and facilitating the company’s activities in accordance with the Shari’ah Principles and the Divine standard.

ISSUE 11:

Is there a need to have a "participants' advocate" independent of the Takaful operator?

SOLUTION:

• It is not a mandatory but recommended to establish a “Participants’ Advocate” for furtherance facilities not only to participants but also to Takaful operator to enjoy over the Takaful scheme by holistic cooperative spirit.

• To have such a “Participants’ Advocate” may contribute to the followings:

(i) To have a sustainable transparence relationship between the Takaful Operator and the Participants;

(ii) Rights and obligations of all parties involved in the Takaful operations will be correctly observed in reality;

(iii) No unfair advantage nor unlawful gain will be expected over one another;

(iv) Underwritings, management, claims and distributions shall take place accurately (by complying the right Shari’ah spirit) without unjust enrichment;

(v) Contribute to a sustainable growth in the Takaful industry with holistic phenomena;

(vi) The true spirit of Takaful with brotherhood, solidarity and mutual cooperation will be honored in action and achievement.

"NO RISK is a RISK"... Takaful provides safeguard.

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Greater risk of an individual, family, community, entity, corporate, or government be against one's life, bodily, dignity, future, wealth or businessis is: "not taking the risk" by ignoring it or its poor management.

It is a wise step for any human, socital, corporate, entity, wealth or government culture to act smartly as per plan, and no plan shall be designed by 'no risk taking'.

Thus, behind every successful life, family, community, nation, entrepreneur or entity is evidentially contributed by smart action with wise plan by incorporating appropriate risk taking against unpredicted catastrophe.

Takaful (Islamic insurance), is a scheme designed in the holistic spirit of Shari'ah principles of mutual cooperation, soliderity, brotherhood, shared-responsibility, utmost care & concern among the Ummatic (humanity) environment across the univers by diminishing the issue of one's race, religion, colour, nationality, gender or status by promoting a theme of "Ummatic globalization".

Thus, Takaful scheme provides a meaningful safeguard against risk (loss, damage, catastrophe or disaster) be on one's life, dignity, future, wealth, business or entity. All Takaful schemes are further cooperated by Re-takaful arrangement. Hence, Takaful stands in its capacity as an "Eco-Peace" for the Ummah (humanity).

CAPITAL GUARANTEE IN ISLAMIC EQUITY FINANCE ?

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1. In an equity financing deal (Mudharabah / Musharakah), which is only with sharing in profit & loss by risk sharing principles, the capital / profit / income can not be guaranteed therein. Thus, a bank / fund manager / fund custodian in the above type of deal, is not allowed to provide any capital / profit / income guarantee to the customer / fund owner concerned.

2. But, if the bank / fund manager / fund custodian wishes to take a takaful coverage to protect the managed capital (owned by the customers) against the deficit risk in the undertaken capital itself (but not on profit / income per se), is allowed.

3. If the Central Bank of a country concerned / IDB / Re-takaful, is arranged to provide partial or full guarantee (by way of donation / Qardh Hasan /re-takaful against the deficit risk in one's undertaken capital itself (but not on profit / income), is also allowed.

4. the abovementioned-Guarantee is a cooperation for the noble cause of providing greater benefit not only for the industries, but also for the customers, which eventually contributes to the development of Islamic financial system for the benefit of the Ummah in general.

Thus, it is justified by the Qur'anic principle".... cooperate each other in righteousness & piety, but do not cooperate each other in sin & rancor..." (5:2).

Islamic Venture Capital? 'development' with cooperative culture

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Islamic finance provides two basic mechanisms for any corporate or legal entity to be adapted for raising required capital against any underlying project. One of those methods is equity financing, through the issuance of shares to public, especially by listed companies. The second method is debt financing through the issuance of bonds in the stock market or loan from banks or private investors.

As far as Islam financial system is concerned, all those adapted methods of financing shall be with Shariah compliant, or at least, there are some restrictions in using the mode of financing specifically in the case of debt financing where the avoidence of riba or any other haram elements such as uncertainty (Gharar) or gambling (Maisir) shall be observed in any deal. Many scholars are of the opinion that buying, selling or holding shares is lawful given that the company’s core businesses are in line with the Islamic law.

Islamic venture capital is a type of equity financing through the use of Musharakah (Partnership). In fact, venture capital as a concept is not a new, but it had a historical track record. It can be said: “although the concept (venture capital) as such is not new, a formal market for venture capital in the U.S. started only after World War II. Venture capital institutions currently manage over $50 billions in the U.S and over $60 billions in Western Europe".

Investors involve in venture capital to finance projects, which may require a large amount of capital and, it may not be available with the project’s owner. In common practice, businesses adapt venture capitalization through financing technology based projects fully or partially.
 
Thus, it is strongly advisable for G2G cooperation with mutual contracts or win-win strategy to help each other in the era of globalization. Furthermore, some Muslim nations have enough recourses, but they are in many sectors possess lack of skills and expert in managing projects. Mean while several other Nations possess standard skills & resources.
 
Therefore, it will be of great advantage for Muslim countries to establish mutual cooperation in tech-resources & skill exchange deals to florish nations with mutual cooperation. For example, The United Arab Emirates and Malaysia had built jointly a Technological City in Dubai. We need to take the hands of each other to live in the new era of globalization.

However, Islamic Venture Capital is operated generally based on the principles of Musharakah (Partnership or Joint venture), which is going to be illustrated further in the following sections.

Corporate Idea of Musharakah based Venture Capital

Musharakah means sharing or partnership. In the context of business and trade it refers to a joint enterprise in which all the partners share profit or loss in the joint venture. It is a contract based on mutual consent, whose validity does not depend only on conditions of a valid contract, but the parties herein shall have the legal capacity in entering in to a valid contract, with mutual consent, and shall be free from duress, fraud or misrepresentation.

Governing Principles & Terms of Reference of al-Musharakah backed Venture Capital

The governing rules & terms of reference shall be spelt out during the formation of the Musharakah contract. Thus, the principles of distribution of profit and loss, the nature of capital, management and termination of Musharakah illustrated as follows:

Distribution of Profit

The share of profit ought to be distributed in a Musharakah backed Venture Capital contract shall be transparent and agreed upon by contracting parties. If any aspect of the profit clause is not determined, then the contract is in invalid. The profit sharing ratio shall be based on actual profit accrue to the business not on how much each contributed. If the profit is distributed on capital ratio and at predetermined rate then such contract is invalid, but a question may arise as;

Does it necessary that, the ratio of profit of each partner shall correspond to the ratio of the capital invested by the partner? There are differences of opinion among Islamic jurists on the issue.

According to the Imam Malik and Imam Shafi', the contract is valid if the distribution of profit is based on the capital contribution. For instance, if “A” contributed 40% of the capital in Musharakah, he is entitled to 40% of the profit generated from such business. If he receives more or less than the ration he contributed then, the contract is invalid. However, the view of Imam Ahmad, the contract still valid even if the ratio of profit differs from the ratio of capital invested provided that the partners are mutually agreed upon.
 
For example A may invest 40% of the capital in the business, but the investor may receive above 60% of the profit provided that, the partners accept it. Imam Abu Hanifah shares the same view with Imam Ahmed that, ratio of profit to the capital contributed may differ, but with condition that, all partners are active participants. If there is a sleeping partner in the venture, the profit shall correspond with the ratio of the capital invested by such sleeping partner otherwise invalid. (Taqi Usman, 2004).

Sharing in Loss

There is no disagreement among jurists in case of sharing in loss. All Muslim jurists unanimously agreed that, in case of loss, partners must share it accordingly to the amount of capital each partner has invested in to the business. This argument is based on principles of a legal maxim as follows:

“Profit is based on the agreement of the parties, but loss is always subject to the ratio of investment.”

Nature of Injected Capital

Most of the jurists are of the opinion that, the capital shall be in monetary form, but not on commodities. However, there are differences of views on the issue.

Imam Malik argued that, partners can contribute capital in a form of money since it is not a condition for the validity of a Musharakah, but it may also be permissible to invest in kind with condition that, the partners' share is subject to market price of that, commodity.

According to Imam Abu Hanifah and Imam Ahmad who disagreed while ruled out that, no contribution in kind is acceptable in a Musharakah. Their arguments are base on the following two reasons:

(i) commodities are naturally not the same, even if the same in form but differ in qualities and values, hence Musharakah is invalid if the propertties in the deal are distinguished from one another.
(ii) the share-capital redistribution cannot be possible, since commodities are subject to price fluctuations. But he agrees on commodities as capital if the commodities are dhawat-ul-amthal. A Dhawat-ul-amthal is a type of commodity, which if destroyed can be compensated by similar commodity like rice. Imam shafi is also of the same opinion that if the commodity is dhawat-ul- amthal then is acceptable on the ground that it can be mix with other commodities of the same type, but he disagreed on dhawat-ul-qeemah (commodities, which can not be compensated with similar commodities like cattle). (Taqi Usman,2004).

To conclude here that, the share capital can be in form of money or commodities, the market value of the commodities shall determine the share of the partner in the venture capital.

Management of Musharakah backed Venture Capital

In a common practice of partnership, all partners have the right to take part in the management as well as to work for it. However, there are two possibilities that, a management can be in the hand of one partner due to mutual consent of other partners. But in this case the sleeping partners will receive their profit in accordance with the ratio of the their respective invested capital. Alternatively, all partners can work as a team and each shall be treated as an agent of the other in the venture, in which all shall enjoy with equal rights in day-to-day dealing of the business.

Termination of Musharakah Backed Venture Capital Deal

Underlying circumstances where a Musharakah backed Venture capital deal may be terminated:

1. Every partner has the natural right to terminate a partnership at any time on own wish. If the contract is terminated at will, and the asset is in a form cash, then it will be distributed according to the contributed ratio of shares of each partner.

But if the asset is in form of non-liquid, then there are two options:

(a) to distribute the physical asset based on the value of that asset.
(b) incase of dispute, then the physical asset will be sold and the cash shall be distributed on contributed ratio.

2. In case one of a partner dies, the partnership shall be liquidated. However, if the legal heirs of the diceased partner accept to continue with Musharakah then is also permissible with any terms mutually agreed upon by all new partners.

3. If one of the parties becomes insane the partnership shall be terminated. But if all remaining partners agreed to continue the venture along with the shares of the insane partner the partnership can be continued and the share of prfits shall be distributed to the insane's guardian accordingly.

Those conditions are considered both express & implied terms, which shall also be stipulated in the contract at the time of its formalization (Taqi Usman, 2004). As the holy Prophet (SAW) ruled out to the effect:

“All the conditions agreed upon by the Muslims are upheld, except a condition which allows what is prohibited or prohibits what is lawful”.

Modern Operation of Musharakah Backed Venture Capital Model

In this Musharakah backed Venture Capital model, the bank identifies potential companies with approval upon due diligence.

Short listed Companies issue Musharakah preference shares to the bank at discount if the bank wants to buy the paper through Wadiah or discount sale. Incase the bank does not intend to buy the paper, the companies can sell it directly to the investors via the Musharakah deposits.

For example, the bank may require $ 70 million to finance four short and medium investments projects. Bank will issue $ 70 million worth of Musharakah shares to investors at $ 1 each. In this case the bank acts as an agent for both investors and the companies for which the bank shall hold the right to charge some fees for services rendered. If in case the project gains $ 105 million, the net asset value per unit will increase to $ 1.5. In this case investors will enjoy capital gains. However if the project fails to succeed the investors will suffer loss in their capital accordingly.(Rosely, S. A. 2001).


Practical Phenomena of Musharakah backed Venture Capital

In realty, venture capital is a real business deal in which both parties venture capitalists (the venture capital company) and the financed company work together and share efforts and returns, because simply there is no gain without pain, where the rejection of riba (usury) begins.
Furthermore, the minimization of the use of banking services specially the loan facilities while moving towards investments companies, which offer asset backed risk sharing facilities based on Musharakah, may protect all parties involve in the venture better with sustainable results. The following some steps are highlighted to be noted in an Islamic venture capital deal.

• the Company “Sharikah” is of a pharmaceuticals in nature, it has the relevant skills to develop a new type of product and has no enough capital to finance the project.

• the company found a venture capital company, which is going to finance about 90% of the total cost based on Musharakah contract, and later on the profit or loss, which shall be divided according to the principle of Musharakah.

• After the establishment of the venture capital, and the investment opportunities identified, the venture capitalist has the right to monitor the investment and analyze it step by step to make sure the project is successful and beneficial for both parties.

• The contribution of the venture capital company can be converted into common stock, but it is not Islamic to be converted to preference stock, which allows its holder to receive fixed dividend and that is, resemblance to riba.

• The full amount of the agreed capital may not necessarily be provided at lump sum, but by progress payments as per the development of the project.

• The Board of Directors shall contain members from both the venture capitalist & the financed company as per mutual agreement.

• To minimize the risk, the venture capital firm can build a portfolio investment by investing in other companies (Diversification).

• After the project completion the recipient company has the chance to go for public upon satisfying the venture capitalist as per agreement.

• The profit earned from the project will be shared between the involved parties based on pre-determined ratios.

Final Remarks

Indeed, the the paradigm of Islamic venture capital is a timely for the benefit of the corporate Ummah in particular, as a mechanism for raising of funds through the use of the Islamically accepted concept of Musharakah. It may help to a sustainable development not only among the sectors of Muslim owned, but also non-muslim owned projects with much safe guard equally to economy, soci-cultural, human value with professionalism and personality & environmental.

Islamic Accepted Bill in the Global Trade?

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Islamic Accepted Bill is one of the instruments traded on Islamic Inter-bank Money Market (IIMM) and based on the concept of al-Murabahah /Bai’ al-Dayn. Islamic Accepted Bills is an order to a bank by its customer obliging it to pay a certain amount of money to the holder of the acceptances bill. The bank makes payment in lump sum for the goods purchased by its customer on its behalf and sells those goods to the customer on the deferred payment basis. These due payments represent profit for the holders of the Islamic Accepted Bills that are traded in the secondary market to another party. It attracts a very attractive price because it is a negotiable instrument. The customer is, therefore, financed at a very attractive rate.

Islamic Accepted Bill is similar to Bankers Acceptance. Bankers Acceptance is a bill with a certain face value issued by a bank to the customer at a discount. The discounted value of the bill is credited to the customer’s account while the customer pays back the face value at the maturity date. For example a Bankers Acceptance Bill might have a face value of USD 2 millions, while the amount of money credited to the customer’s account is USD 1.9 millions.

The difference between the face value and the discounted value (the amount of money credited to the customer’s account) represent interest payment. Bankers Acceptances are used for project financing and traded on the secondary market. The Islamic Accepted Bill is introduced as an alternative to Bankers Acceptance in view of the need to provide customers an Islamic alternative. The difference between the Bankers Acceptance and Islamic Accepted Bill is the absence of interest payments in the case of Islamic Accepted Bill. Interest is not allowed in Islam and, therefore, the profit in Islamic Accepted Bill is said to be derived from trading which is permissible. The profit by trading is derived through the contracts of Murabahah. Murabahah refers to the sale of a good at a price based on cost-plus profit margin agreed by the both parties. Here the Islamic bank appoints a customer as agent to purchase the goods at cost. The bank guarantees the payment to the supplier. Then, the bank sells the goods to the customer where credit to be settled in say, 90 days. The selling price includes cost and profit which is called a mark-up price. The bank then draws a bill on the customer who accepts the bill at the mark-up price. The holder of the bill, i.e. the bank can sell the bill to the third party at a price not less than the cost. Such sale is based on the bay’ al dayn contract. Bay’ al dayn refers to the sale of a debt arising from a trade transaction with a deferred payment.

Islamic Accepted Bills are widely used in financing imports and exports. It is an alternative to the Bankers Acceptance Bill that is used to finance purchases and sales by conventional banks. Islamic Accepted Bill, however, is used only in transactions involving halal goods and services. Examples of using Islamic Accepted Bills in imports and exports are as follows:

Islamic Accepted Bill-Imports (al-Murabahah / al-Bai’ al-Dayn).

The customer can approach the bank to provide financing for his working capital requirements to import inventories or raw materials. The bank purchases the required goods and settles the purchase price from its own funds. Then, the bank sells the goods to the customer at an agreed price comprising its purchase price and a profit margin and allows the customer to settle this sale price on a deferred term of 30 days, 60 days or 90 days. Lastly, on the due date the customer pays the Bank the agreed sale price on maturity date of the financing. The sale of goods by the bank on deferred payment term constitutes the creation of debt. This debt is securitized in the form of a bill of exchange drawn by the bank on the customer for the full amount of the bank’s selling price payable at the maturity. Islamic Accepted Bills are traded in the secondary market based on bay’ al dayn concept. This makes them an attractive financing instrument with low cost.

Islamic Accepted Bill – Exports or Sales ( al-Bai’ al-Dayn).

The bank finances exports and sales under the principle of al- Bai al-Dayn. Under this bill, an exporter who wishes to avail himself of this facility, prepares export documents as required under the sale of contract or letter of credit. He represents these documents to the Bank to be purchased. As the export documents have to be sent to the buyer overseas, the exporter is requests by the bank to draw another Bill of Exchange drawn on the bank. This bill is known as Islamic Accepted Bill-Exports (IAB-Exports). The IAB-Exports can be traded in secondary market.

NO! TO RIBA (Usury) IN ECONOMIC PROSPERITY?

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The term of Riba (Usury / Fixed Interest) can be understood in many ways by different sources. All these definitions are based on the concentration of incremental value of the transaction between the two persons (lenders and borrowers, bankers and customers.) Riba is not only cover in one area but it can be in different field in economic. For example, in daily life also incur riba. The meaning of Riba can be defined and understood as the lending of money at illegal high rate of interest. But in Islam Riba is different meaning.

Riba technically prefers to the premium that must be paid by the borrower to the lender along the amount principal (amount as a condition for the loan) with increment amount. This can know as an extra amount in one of two homogeneous equivalents being exchanged without the increase by return for time.
 
It is the lending of money on interest. It is the cause of any risk, independence of any labor or effort. Allah has strictly forbidden Riba. However, the world today, including the Muslim world, is influenced with Riba. The Prophet Muhammad has confirmed this teaching in Hadith reported from Abu Hurairah;

“Their will come a time, he said, when you will not be able to find a single person in the world who will not be consuming Riba. And if any claim that he is not consuming Riba then surely the rapor of Riba will reach him”.

Riba is considered as a grave sin in Islam. The Hadith above implied that no one could escape from Riba. The true believers must wage the greatest possible struggle to keep himself and his family free from Riba, to guard himself from Riba. If he does not fight himself from Riba and does not respond to oppression in the world where caused by Riba then his faith is empty.

Riba is forbidden irrespective of business nature, it prohibits in all form whether in the form of consumption or production. Any payment relates for a loan and it’s compensating of time for a high rate of return value is considered as Riba.

Riba in Arabic comes from the roof word “raba” mean to cut or to prosper and in the Qur’an had mentioned the meaning of riba. There are certain views of jurists about riba. Some of them are unanimous with the loan transaction such as Malaki held the view that the lenders or borrower can pay or receipt profit of the loan which is contradict by Allah but Shari'ah and Hambali schools are not agree in this transaction.
 
What the amount of interest value can consider as Riba? The amount receive from the riba is prohibited event it is as small rate or high rate (from 1%-25%) It does not mean that the amount of interest as 50-100% wills the case of Riba. Riba never defines as undue profit.

“O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper”. (al-Qur'an).

Formation of Riba: Islamic law prohibits Riba as a predetermine payment on borrowed funds irrespective of the purpose for which the funds are used. According to the purpose of used, Muslim jusrists classify Riba into two forms: Riba al nasiah and Riba al- fald.

Riba al-Nasi’ah: (Usury of credit):

This term in Arabic known as to “postpone” Muslim identifies this Riba in loan as giving to the lender a fixed increment after interval of time over the fixed period and increase of credit over the principal. On the other hand riba al nasi’ah prefer to the repayment in the period which instrumental in earning for the lenders a fixed increment rather than delays in repayment.
 
This was common practice in the pre- Islamic and in the early Islamic era. This form of riba established in all credit transaction where loan was advanced to person on the payment of monthly interest over the principal. In case the debtor unable to repay the principal and accumulate surplus, he will receive an extension of time to pay the loan but at the same time the sum of payment has increased double. In this sense of practice, the Qur’an has prohibited it in surah al-Baqarah verse 276-278.

This forbidden was not limit the transaction even this is in the consumption or product loans transaction. In legal terminology of the Shari'ah, Riba is defined as surplus, profit or increase in loan and sale and it spreads in all economic sectors, in trades commerce and credit for no equivalent return.
 
Therefore, the practice of riba is unlawful for Islamic because the greater benefit is given to the rich who becomes richer whilst the poor and weak suffers. And from this is will creates different socio- economic classes in society. Ulama' have come to a outcome regarding the Riba in banks. In one of the legal compendiums, they declared:

"An interest transaction in banks is classified as Riba al-Nasi'ah. This can occur in two ways, when someone deposits their valuable or when someone borrows money (al-Qard) for a period of time and incurs interest either way. Therefore its unlawfulness is the same as the prohibition of Riba and this sin is the same as the sin of involving in Riba."

Riba al-fadl:

It describes as excess over and above the quantity of the commodity advance by the lender to borrower. This is known as exchange of something with different amount of quantity. And this also considers as riba which has been prohibited in Qur’an and Sunnah.

Riba and investments in Shares:

Regarding shares and stock market investments, Ulama' have classified this under the category of Awraq al-Naqdiyyah. Basically this is something, which is allowed, with certain conditions and it is also subjected to Zakah payment, provided that it fulfils the Nisab and Hawl and its Nisbah is 2.5% of its value.

"Shares is defined as, one of the equal parts into which the capital of a company is divided, entitling the holder of the share to a proportion of the profits. Dealing in shares is permissible in the Shari'ah."

Shaikh Syed Mutawalli ad-Darsh mentioned that:

"Money in Islam has a role to play. It should not be kept away, hoarded in a vault or safe but should circulate to allow people to make use of its benefits. That is why the books of Fiqh say that the guardian of an orphan must invest that inheritance in a good manner so that Zakah would not deplete the wealth of the child”.

One may buy shares in any company, which is offering good services to the community, and companies, which do not pursue unlawful trade. For example, we are not allowed to buy into the banking sector because it is ridden with interest. We are not allowed to buy shares into breweries because they are producing something, which is Haram. We are not permitted to buy shares in chemical companies, which produce products, which damage people and the environment. But companies, which are good, pose no problem.

Riba in the Qur’an:

Riba has been mentioned in 12 verses in four surah in the qur’anic: these entire sources represent Riba as a opposite of positive activities of trade daily activities. These Qur’anic verses were the 1st to prohibit Riba among Muslim believers such as Surah al-Nisa verses 160-161.

“For the iniquity of the Jews We made unlawful for them certain (foods) good and wholesome which had been lawful for them; in that they hindered many from Allah’s Way” And “That they took usury, though they were forbidden; and that they devoured men’s substance wrongfully; we have prepared for those among them who reject faith a grievous punishment.”

These verses remind Mankind about Riba, which regarded to the practice of Jewish and it was prohibited between Jews. Riba has been the first mentioned in the Qur’an. It has prohibited for the Muslim Ummah. In the verse 130 of Surah al-Imran, Qur’an has been mentioned any person involve in any transaction that double or multiplied the value are in the case of Riba.

“O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper”.

The nature of Riba is under the entire tribes sign the indebtedness to the lender. This practice was common in the pre-Islamic usurers, the repayments amount was double of the original loan .It was prohibited compound usury.

Surah al-Baqurah 2:275-281 says to the effect: that whose involve in Riba will accompanies by a treat of the hereafter. “Those who devour usury will not stand except as stand one whom……but who repeat the ( offence) are companions of the five, they a hide there in (for ever)" (2:275-281).

The meaning of Riba and interpretation of the verse (30:39) was confirmed the subject in which Allah, the most high commended among the acts of the Jews in taking Riba and it had been prohibited for them.
 
Riba in the Qur’an has mentioned as a system of economic injustice and it will lead to evil. Riba comes from exploitation and oppression that is sometime canceled in ultimate disguised .It is essentially the lending of money on interest and the influence of Riba was directed toward the realization and preservation of social justice and unity of society. Riba is the most powerful and most dangerous attaches upon mankind.

In the early era, Riba has been described as ‘ increase in capital at the expense of wealth of other’ it can be understood as Riba is the loss of one the power become poor and the gain of other (the rich become richer) .It is not fair for the Muslim ummah . Allah (swt) does not allow us to do this.
 
This business transaction does not the good attribute of the business, rather than it is the opposite of business of religious. Allah, Almighty allows only the permissible transaction (Halal) and Riba is forbidden (haram). In Islam, all aspect of business transaction should be done in mutual consent and each of the parties should gain the satisfaction among themselves in the business transaction. This was stated in Surah al Nisa 4.29:

“O ye who believe! Eat not up your property among yourselves in vanities: But let there be amongst you Traffic and trade by mutual good-will: Nor kill (or destroy) yourselves: for verily Allah hath been to you Most Merciful.”

The first teaching of Islam spreaded to mankind in the Qur’an regarding the matter of Riba. It was specifically related to the case of lending and borrowing. Lending should be use only for the purpose of helping those are in need and it is humanitarian institution, the lenders and borrowers have bond close relationship of spiritualized. And this relationship ought to be a human, fraternal. When the lenders do not involve in any Riba (give higher rate (interest) to the user) lender will become predator.
 
On the other hand, lenders’ wealth will become witnessed in destroying at fraternity and destabilizing the social order. Riba will be the case of destroying the concept of society as family where formerly the community was the insurance, which insured individuals against losses; now individuals have to find for themselves such as in the insurance case. This type of transaction is closely inter-linked with Riba. There is evil life for those were engaged in Riba for the purpose of seeking the wealth of mankind. The Qur’an has stated that

“Those who engaged in Riba and never give up his action then he will take note of war from Allah (swt) and His messenger"

Riba, which has been existed in the Prophet Muhammad (saw)lifetime and it practice until modern day.

Case of Riba:

If RM.100 000 were lent at a compound rate of 10% per annum for two years, the borrower would be called upon to repay RM 121 000 at the end of the contract. The lender can achieve the same goal by offering RM.100 000 at the simple rate of 21%. What would be the grounds for distinguishing between the two arrangements? Likewise, the term "exorbitant rate of interest" is also arbitrary. A 10% rate of interest may be exorbitant for one person while 21% may be normal for another depending on their respective financial positions and prospective uses of funds.

Riba in Hadith:

There are several hadiths suggest the divine prohibition of riba. The Prophet (saw) had explained the various injunctions against riba to his companion. There are two hadith relevant to the concern of riba, which has been the most influential in shaping the fiqh conception of riba:

“Every loan that attracts a benefit is riba”. Gold for gold.., if it is hand to hand”.

The Hadith on riba in sale:

The actual concept of this riba is going beyond compensation for lending money. This is no interest in loan but it is a sale of excess or delay in exchange of certain type of property such as foodstuffs and currency.
 
Therefore, we need to consider riba in sale to has a full meaning of its. And this type of exchange was fully mentioned in the hadith that we can be used in this practice as long as the exchange with equal amount. There is no excess or increase value in delay. Due to the first form of riba, the Prophet advises conducting such exchange through the medium of money that mean one selling his good for cash and then buying other’s good with cash. Such this transaction is applicable in Islam.

The Sunnah on Riba in loan:

The second hadith is related to common practice in the modern economic life. Profit on loan is banned without regard to whether the fungible subject matters of the loan. In the Hadith of Prophet Muhammad (saw) said:

“ …a man would sleep and honesty would be taken from his heart and only it trace will remain in his heart…” Bukhari.

This is a sign for those who conduct any transaction of Riba in the last Day of Judgment. Riba has blinded Muslim, Riba has destroyed value, and corrupted mankind and non-can be trusted.

Riba in Qiyas and Ijma:

In the book of Imran Hussein, he had taken one example about Riba has practiced or has been fulfilled in miserable lifetime. He mentions,
 
One man from othaman Khalifa had borrowed money on interest from Europe. This amount of interest is over his effort, at the end, this man submits to European financial black mail…”
 
He has mentioned about the financial imperialism. This is common practice in the Muslim world nowadays. This action is not mentioned in the Qur’an. In the world to day Riba can be many other forms, which are readily identifiable by businessmen. Some of businessmen will glue new form of Riba.
 
Muslim must make them aware of the different form of Riba, and must exercise the greatest care to avoid them. Some forms of buying and selling money today take the form of borrowing from a bank on interest. It is a form of Riba and is strictly prohibited. The Prophet had taught that when the two things are bought and exchanged not the same in nature or equal money value is invalid such as gold for silver.