Islamic banks in Malaysia mostly use Wadiah concept to accept deposits from customers. Under this Islamic scheme of savings and current account, you will enjoy interest free safekeeping services of your money, as well as a share of any profit that the bank makes by utilising your deposit. The bank uses an Islamic banking principle that is known as "Wadiah Yad Dhamanah" which means guaranteed custody. This scheme ensures that Islamic financial institutions acquire deposits under Islamic banking principles.
The core of this arrangement is that the bank has the authority to use your deposits and gives a guarantee to return it to you when you need it. You will periodically obtain a share of the profits earned by the bank when it utilizes your money to invest in its business ventures. The portion of profit to be shared with you is at the absolute discretion of the bank. This reward is your alternative to the interest income that you would otherwise receive from a conventional bank.
Mudharabah
An Mudharabah transaction is derived from a partnership based on risk and profit sharing. This partnership is a collaboration between an investor (Rabbul Mal) and an entrepreneur (Mudharib) under which the former provides funds to the latter for the purpose of investment and profit sharing.This is how it works in practice - you, the investor will deposit an amount of money with the bank, which acts as the entrepreneur.
This investment is utilised as business capital by the bank. In this contract you have no authority to interfere in the management of your investment. On the other hand, the bank will have the right to manage your investments as it thinks fit by placing it into businesses that are permissible in Islam, and which it thinks are profitable. Depending on the tenure of your investment, you will be offered a profit sharing ratio which will form the basis of the agreement made between you and the bank. On the date that your investments mature, the bank will distribute your share of accumulated profit into your investment account.
Bai Bithaman Ajil (BBA)
Bai Bithaman Ajil means a "deferred payment sale". It is a mode of Islamic financing used for property, vehicle, as well as financing of other consumer goods. Technically, this financing facility is based on the activities of buying and selling. The property that you wish to purchase for example, are bought by the bank and sold to you at an agreed to price, once the bank and you determine the tenure and the manner of the instalments. The price at which the bank sells you the property will include the actual cost of the property, and will also incorporate the bank's profit margin. There is no interest charged and the extra price compensates the bank for its profit. Instalments remain fixed over the period of the contract and no adjustment is made if interest rates fluctuate. The fixed monthly instalments are determined by the selling price, repayment period and the percentage margin of financing.
Bai Inah
This refers to the selling of an asset by the bank to the customer through deferred payment.
Bai Inah comprises 2 agreements (akad). In the first agreement, the bank sells an identified asset to the customer at an agreed price. The customer can complete the purchase of bank's asset via fixed monthly installments on agreed tenure. While for the second agreement, the bank re-purchases the same asset from the customer at a lower price. Upon completion of the 2nd transaction, the bank will pay the lump sum amount as per agreed by both parties in the agreement.
The difference in the price is therefore the bank's maximum profit, which is determined in advance.
Ijarah
Ijarah means leasing. As in a normal lease transaction, a lessor who owns the leased asset will lease it to the lessee in exchange for rental. The lessee will get the full benefit of using the lease asset within the specified period for as long as he adheres to the lease terms and conditions. At the end of the lease period, the leased asset will be returned to the lessor.
There are some other variants of leasing which incorporate the transfer or option to transfer ownership of the leased asset from the lessor to the lessee at the end of the lease period.
These are referred to as;
Ijarah Thumma Bai - Lease Agreement Incorporating Sale of Leased Asset at the end of the lease tenure
Ijarah Muntahiya Bil Tamlik - Lease Agreement with option to Own Leased Asset at the end of the lease tenure
Ijarah Wal Iktina - Lease Agreement with option to Acquire Leased Asset at the end of the lease tenure
Istisna'
Istisna' is by definition an order sale used mainly in financing assets that are under construction. It allows the Bank to disburse payments according to the stage of completion. As a financier, the Bank rarely orders the asset for its own use. Once completed, the asset will be handed over to the customer through a leasing arrangement (Ijarah), a deferred sale arrangement (Bai Bithaman Ajil), a cost plus arrangement (Murabaha) or a profit sharing arrangement (Mudharabah or Musyarakah).
Kafalah
Islamic banks use Kafalah to issue Bank and Shipping guarantees. Kafalah is a contract made between the Bank and another party whereby the Bank agrees to discharge the liability of a third party in the case of default by the third party. As a surety, the third party will give the bank some form of collateral and pay a small fee for the services.
Under the Kafalah Shipping Guarantee, the Bank gives a surety to the owner of the shipping vessel, to discharge goods to the importer pending receipt of the original bill of lading.
For the Kafalah Bank Guarantee, the bank guarantees the company's standing to facilitate any business endeavours that may require such guarantees.
Musyarakah Financing
Musyarakah a profit and loss sharing partnership. In a Musyarakah financing arrangement, the Bank and the Customer will both contribute their capital as well as expertise in a project. Profit and loss will be shared normally based on the capital contribution.
Mudharabah Financing
As in Musyarakah financing, Mudharabah financing is a form of partnership where the Bank will provide the capital and the customer will provide the expertise. Both will agree on a profit sharing ratio. The customer will be solely responsible for running the business, project or contract without interference from the Bank. All forms of capital loss, if any, will be borne by the Bank and all forms labour loss, if any, will be borne by the customer.
Murabahah Financing
Murabahah financing arrangement is a trust sale financing arrangement. In this financing arrangement, the customer will first identify the goods to be financed. The bank will then secure the goods, add the mark up profit, deliver the goods and collect the payment from the customer - usually in deferred terms. In a Murabahah transaction, the cost price paid by the Bank must be transparent to the customer. Murabahah is widely used in Islamic Trade Finance arrangements.
Wakalah
Wakalah means agency, or the delegating of a duty to another party for specific purposes and under specific conditions. Under this concept, the bank acts as your agent in completing a particular financial transaction. As your agent, the Bank will be paid a certain amount of fee for the services it provides.
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