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Wednesday, 16 October 2013

Interest (Riba) and its prohibition in Islam

One of the integral parts of an Islamic financial system is the prohibition of interest from the economy. The injunctions regarding the prohibition of interest are contained in the Holy Quran, the basic source of Islamic ideology. It is the opinion of a number of Islamic jurists that the Quranic verses that instruct Muslims are clear and reflect the severity of the admonition to those who do not abide by them.
In all these verses the word ‘riba’ is used, which in Arabic generally signifies increase, excess, growth, rise and the like. In the pre-Islamic period the word ‘riba’ was used conventionally to identify a class of business transactions. The common feature of these transactions was that a fixed amount was required over the principal due.
One form of transaction was that a person sold a product to someone on the agreement that a specified price was payable at some future date. If at the end of the stipulated time the price was not paid by the buyer, then the seller would increase the price and extend the payment period.
Another form was that Arabs used to lend money to each other on the agreement that after a specified period of time the borrower would repay an excess amount over the principal sum due. Yet another form was that Arabs would make a loan to someone on the basis of a monthly fixed return over the principal sum and if at the end of the loan period the borrower was unable to repay, they would increase the monthly fixed return.
As far as financial transactions are concerned, there is no dispute among Islamic jurists that the word referred to in the Quranic verses means an excess of money demanded over the principal sum loaned for a specified period of time. However, there is another class of non-financial transactions that is also classified as riba, on the basis of an explicit injunction from the Prophet. This type of riba is known in Islamic jurisprudence as riba al-fadl. This refers to the barter trade of identical commodities.
It is important to note that the chastisement proposed for the sinners of riba is quite severe. Thus, one is led to ask what is so evil in interest that justifies such an admonition.
Islamic jurists have given several justifications for the prohibition of interest and admonition to those who do not abide by this prohibition. One class of reasoning is primarily concerned with the social and individual evils that result in a society which allows interest.
It is argued that at the individual level, interest creates selfishness, miserliness, greed and malevolence. The very act of lending money on the basis of interest reflects the fact that the lender only cares for the principal and interest on it that has to be paid by the borrower under all circumstances. These arguments get more heated when the borrowing party is a person who needed the loan to meet an unforeseen accident or emergency.
The same argument carried to the social level implies that in such a society, there will be a class of people that accumulates most of the society’s wealth and is hostile towards the rest of the people. Therefore, the institution of interest leads to a highly unstable society.
Although the Quranic verses are clear about the prohibition of interest, and as far as financial transactions are concerned there has never been disagreement among jurists, in the recent past there was a controversy over the type of financial transactions that come under this injunction.
Jaffer Shah and Yaqoob Shah argued that another common feature of the financial transactions prohibited on the account of interest was that these transactions were mainly for consumption purposes, and were demanded by poor people. As such, it was claimed that the production loans prevalent in the present financial system cannot be treated as involving interest.
Two arguments supporting this claim were presented: (i) there is no evidence in history that during the time of the introduction of this injunction loans for production were in existence, and (ii) present production loans are in fact collaboration between the lender and the borrower to increase the wealth of both parties. Furthermore, unlike consumption loans, the lender in the case of a production loan (saver) is economically weak and the borrower (investor) is economically the stronger party. As such, there is no possibility of exploitation. This group claims that debt financing for business capital is the outgrowth of industrialisation and as such it was non-existent at that time. Accordingly, production loans should be excluded from the application of this injunction.
In reply to the arguments raised by this group, Justice Maududi and Justice Usmani have argued that in the first place it is not logical to argue that only those forms of interest are prohibited which existed at that time. For this would have the implication of granting legitimacy to several unanimously agreed prohibitions in Islam.
Orthodox jurists have produced evidence both from historical facts and sayings of the Prophet that supports their view that the injunction also applies to production loans. These types of loans were known even in Babylon and ancient Egypt. There is evidence that the loans were made for trade, agriculture and the purpose of running government machinery. Arabs were in close contact with these neighbouring countries and it is difficult to believe that they were unaware of these financial arrangements. In fact, Makka was the centre of world trade in those days. 
(Business Day / 16 July 2013)

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Takaful Malaysia eyes double-digit growth

PETALING JAYA (Oct 16, 2013): Syarikat Takaful Malaysia Bhd, the country's pioneer Islamic insurer, is targeting double digit-growth in new business this year driven by its family and group segments.
Group managing director Datuk Mohamed Hassan Kamil said the company aims to maintain its lead in the group family takaful business, capturing 40% of the market sector, and 20% of the combined family and general takaful business.
"The company's earnings outlook continues to be strong and we are on track to meet our key performance indicators. The family takaful business will continue to be the major contributor as we continue to be the market leader in group business," Hassan told SunBiz recently.
For the fiscal year ending December 31 2013 (FY13), Takaful Malaysia is looking to rake in RM1.4 billion in new business compared with RM1.1 billion it secured last year. The bulk of the new sales will come from its family business and the rest from the general takaful segment.
"Since the start of our transformation program back in 2007, we have established a five-year track record for consecutive profitable business growth and we hope to maintain our excellent performance with strong underwriting and investment activities," Hassan said.
He noted that Takaful Malaysia will carry on being cautious in accepting only profitable underwriting contracts while avoiding those prone to greater risks.
"This is to ensure that we are able to derive healthier underwriting profits and mitigate increase in the loss ratio of both family takaful and general takaful businesses," he said.
Hassan mentioned that developing new product offerings is definitely an area the company is looking into as it strongly believes this would likely be the key driver of sales.
"Our focus would be in enhancing product packaging of our existing comprehensive investment-linked products in order to offer our customers extra benefits and flexibility when addressing their various protection, investment and savings needs.
This will put our products on a higher platform to compete with our competitors as we hope to package them to suit the growing needs of our consumers," he said.
Additionally, Hassan hopes to continue to increase Takaful Malaysia's market share via its growing agency force to market its products.
"Our aim is to grow our agency force to 2,500 people by the end of this financial year," he said.
"Most importantly, our unique selling proposition as the first and sole takaful operator to consistently offer our valued customers a 15% No Claim Rebate (NCR) should there be no claims made during the coverage period across all general products gives us a competitive advantage in the market," he said.
Takaful Malaysia is hoping to open more Takaful My Care Centres (TMCCs), especially in non-bumiputra or non-Muslim populated areas in tandem with its efforts to promote takaful products to this market segment.
"At present, we have 18 TMCCs and we are targeting to have 25 TMCCs by the end of this year," Hassan said.
Takaful Malaysia's gross contributions are substantially derived from its single contribution products.
"Our key strategy to increase the percentage of regular contributions will be to focus on expanding our retail agency and concentrating on promoting our very comprehensive investment-linked products," Hassan said.
On new growth areas, Hassan mentioned that the development of Islamic loan products is an area he would like to explore further as with the growth of syariah-compliant loans in the market, takaful as a valid risk transfer mechanism would grow concurrently.
"We recognise that these segments usually are sophisticated risks and therefore provide takaful advisory services as to how banks can best protect their interests as they are applicable to consumer banking products and others within the business/commercial/corporate banking space," he said.
"Providing investment-linked products to bank partners with emphasis on education and retirement needs will be an area we intend to look into. Our goal is to keep the product simple with an effective selling process," he added.
Hassan said growth for general products, especially the non-motor business portfolio, will be supported by the strong underwriting margin over the next two years.
"The general business as a whole would be maintaining a 12% underwriting margin due to better cost control. Motor business is still the largest for the industry's general business with an average of 47% for the past 5 years (2008-2012)," he said.
In FY12, the motor segment made up about 48% of the company's total general takaful gross contributions.
The motor claim ratio for the takaful industry as a whole is slightly below 70% for 2012 whereras Takaful Malaysia's motor claim ratio is below the industry average.
Takaful Malaysia's growth areas, Hassan said, are still within the fire and engineering segments.
In FY12, its family takaful generated gross earned contributions jumped 42.2% to RM987.7 million, while the general takaful gross earned contributions reached RM457.1 million. The family takaful business continues to grow with about 67% share in 2012, from about 55% in 2011.
For the last two financial years, Takaful Malaysia's operating revenue registered a growth of about 20%, while its net profit was even more impressive, with a cumulative annual compounded growth rate of 35% for the last five financial years.
(The Sun Daily / 16 Oct 2013)

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Islamic banks 'should issue perpetual sukuk'

Islamic banks have an incentive to issue perpetual sukuk with Basel III in the offing, a leading Islamic finance scholar has said.
According to Shaikh Nizam Yaquby, perpetual bonds/sukuk are classified as tier 1 capital under the new norms.
"Due to their attractive features (low rate of interest, non-dilutive, no redemption, etc) they have been popular amongst issuers."
Shaikh Nizam was speaking during the third Sharia scholar session organised by Waqf Fund, a Bahrain-based special fund to support Islamic finance training, education and research.
Shaikh Nizam said the concept of perpetual or no redemption bonds is very old in the conventional financial industry - dating back to 1700s when the UK government introduced them.
From a Sharia compliance perspective, Shaikh Nizam hailed the financial innovation as a welcome development for Islamic banks, large corporates and governments interested to finance infrastructure projects.
This is because of risk participation and no purchase undertaking (which has been criticised by scholars as a questionable practice).
He also identified some common concerns about the structure of perpetual Sukuk but concluded that those can be easily addressed.
More than 25 Sharia resources from 13 Bahrain-based Islamic financial institutions attended the session, which was held at the Central Bank of Bahrain premises.

(Trade Arabia / 16 Oct 2013)

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