Muslim was able to develop a banking system without interest to provide financing through productive activities and fulfill consumer needs


Muslim was able to develop a banking system without interest to provide financing through productive activities and fulfill consumer needs. Islamic banking firstly developed is Al-Rajhi Bank on 1957 then follow by Mt Ghamr, Egypt and Lembaga Urusan dan Tabung Haji (LUTH) on 1963. After that, Islamic banking has going through unprecedented recognition rapid growth in Islamic countries and non-Islamic countries. This can be measured from various products and services in Islamic banking industry, Islamic financial markets, various Islamic financial institution is developed and the regulatory framework of Shariah. Malaysia has encouraged many economic sectors to participate in the Islamic financial system and the result lead to financial stability (Governor of Bank Negara Malaysia, Dr Zeti Akhtar). The product offered by Islamic banking is an opportunity for Muslim to make transaction or involve in banking world that is Shariah compliant. Other than that, it is free from prohibited element, which is usury (riba), uncertainty (gharar) and gambling (maisir). Since from that, the demand of Islamic banking product is keep increasing, which is Ijarah, Murabahah, Bai Bithaman Ajil, Istisna and others. Compared Islamic banks to conventional banks it shows from year 2000 to 2006, Islamic banks is better in capitalized and finance share of assets (Ariss, 2010). However, Islamic banks has weaknesses where some of the concept applying in the product offered has some defect that need to be revised back by Islamic financial institutions (IFIs). The product that said has defect is Mudharabah and Musharakah products. Mudharabah and Musharakah has similarity which both of the concept is a partnership contract between entrepreneur and the capital provider in managing business. In terms of bank, the depositor is the capital provider or an investor and Islamic bank is the entrepreneur. The differences of Mudharabah and Musharakah concept is where Mudharabah contract is the investor will provide the capital and the entrepreneur will manage the business and the profit will be divided to the agreed ratio however the loss will be bear by the investor. While Musharakah contract is where both of the parties will become the capital provider and entrepreneur where they will manage the business and the profit and loss will be divided to the agreed ratio. 2. Mudharabah and Musyarakah Contract Mudharabah is a contract of profit sharing partnership where one partner provides capital (Rabbulmal) and one partner become entrepreneur (Mudharib). The profit will be distribute to the agreed ratio and loss will be bear by the capital provider. The advantage behind the Mudharabah contract is there are people who have capital but have no idea how to expand the business, then vice versa where there is people have skill in certain business but not have enough capital. Then Mudharabah contract will fulfill the both parties needs and the partnership is based on trust. There is evidence where during the Prophet SAW era, Saydatina Khadijah give capital to the Prophet SAW to use the money for the business venture in Sham. Mudharabah can be category into two types that is Mudharabah Mutlaqah and Mudharabah Muqayyadah. Mudharabah Mutlaqah is unlimited activities where the capital provider does specifying the detail of the project, location, duration or method of payment to the entrepreneur. While Mudharabah Muqayyadah is limited activities where the capital provider specifying in detail the project, location, duration and method of payment. Here is modus operandi of Mudharabah contract in Bank Islam Malaysia Berhad (BIMB) BIMB will become as Rabbul Mal that is provide financing while customer will become as Mudharib, which is entrepreneur to manage the Shariah compliant business activities. Customer will manage business activities either restricted or unrestricted activities. Profit will be divided according profit ratio and loss bear by BIMB as long not caused by the negligence of the customer. Musharakah also is the profit sharing partnership contract. However, Musharakah contract is different with the Mudharabah contract. Both parties will provide capital and become entrepreneur to manage the business. The profit or loss will be dividing two between the parties. According to Shafie scholars, the meaning Musharakah is a confirmation of the rights of two or more people over a common property. There is evidence in hadith by Prophet SAW, Allah said, I am the third partner as long as any one of them does not betray each other or else I will withdraw from them. Musharakah can be divided into two categories, which is Sharikah Al-Milk, which is partners in ownership, and Sharikah Al-Aqd that is contractual partnership. Sharikah Al-Milk is ownership that get either by choice or mandatorily. While, Sharikah Al-Aqd can be divided into four that is Sharikah Al-Amwal, Sharikah Al-Amal. Sharikah Al-Wujuh and Sharikah Al-Mudharabah. The modus operandi of Musharakah contract is quite same with Mudharabah contract but different in the profit and loss. Most commonly popular of Musharakah contract is the Musharakah Mutanaqisah contract that is use in home financing. 3. Roots of the Problem Profit and Loss Sharing (PLS) In Islamic economic, fair and equitable distribution is important element in any business that should be achieved by the community. In order to achieve the economic justice, Islamic economics requires developing partnership contract where the capital provider and entrepreneur will share the profit and loss. Mudharabah and Musharakah is a partnership contract through the profit and loss sharing (PLS) agreement. According to Rahman Nor (2016), the PLS agreement is less accepted in Malaysia Islamic banking. This is because the contract Mudharabah and Musharakah only contributed 6 percent from the total aggregate financing of Malaysia Islamic banking. This concept is an alternative to the community to have a fair distribution of profit and prevent the gap between the rich and the poor. Other than that, there is issues arise where there is not many record in Islamic banking that offer Mudharabah and Musharakah product. This is because there is a rumor the Mudharabah contracts is contain element of uncertainty (gharar) and speculation. For example, the investor does not know in what business the entrepreneur involve and at the end of period the investor will get their return according to the profit ratio. Then it become a question mark and doubt to the Islamic financial system. The main factor barrier towards the less application of PLS financing is because of the factor moral hazard, operational difficulties and government policies (Mahmood Rahman, 2017). Moral hazard is when there is asymmetric information between the parties. It becomes barrier when one parties has different understanding towards something information other than the other parties. The operational difficulties are occurring when there is issues regarding the application of PLS based financing. It could be the difficulties in financial procedure, cost or lack of skill or experience. Government policies are factor where there is political interference. The government has provided the regulation through to Central Bank that must be followed by all Islamic financial institutions. However, some of the regulatory imposed might by affecting the business activities that both partners are investing for example, taxation, subsidies and others. 3. The Effects of the Issues Firstly, Mudharabah and Musharakah contracts are consider as high risk investments. There are reasons why it has high chance of failure, one of the factor is if the entrepreneur has less skills and experience in managing business. Then the Islamic bank becomes very careful before applying these financing contracts. As we know, the depositors is the capital provider or called as an investor has set their minds that once they invest in Islamic bank they consider their money is safe. Secondly, another effects from this issue is Islamic bank has to increase the selection process before enter into Mudharabah and Musharakah contract with the partner. One of the main criteria that Islamic bank is looking for is the company that invested is the company has a good record of financial performance. For Musyarakah contracts the Islamic bank need to find the partner that has responsibility, skill and experience towards the business. This is because Islamic bank is not the charitable organizations that give the capital share to the partner and dont mind if loss. The business involve must generate profit so the business will be develop. Other than that, the demand for Mudharabah and Musharakah contract commonly come from customer who is still the beginner in their business which small and medium business. The customer needs to generate profit and choose this contract in order to expand their business. This is quite scaring to the Islamic bank because the beginner usually does not have strong record and the unknown business, which has potential towards the failure. In Mudharabah contract, depositors is the capital provider and Islamic bank is the entrepreneur which any loss incur will be bear by the depositors that should not be questioned after. However, if there is any proof that there is negligence or involve in activities prohibited in Islam by the Islamic bank then the depositor has right to make a report of the loss. If the Islamic bank being chosen by only select the company that has good financial performance the main concept of Mudharabah and Musharakah contract to improve the living standard of Muslim and achieve the economic justice through business activities will be contradict. Last but not least, the capital security. Before entered into the PLS contract, the securities is important because it will cover to any loss incurred. The investment contract has high probability of loss and the collateral will become as a capital guarantee. Example of collateral is housing or land asset that can be turn into liquidity has value. Other than that, capital security will push the both partner to give full commitment to manage the business. However, as we know the partner is come from small and medium company or beginners in business that show them cannot afford to have collateral as capital security. 4. Remedial Measures Firstly, in order to prevent high risk in Mudharabah and Musharakah financing, the action taken by Islamic bank is to evaluate all the risk involve and will minimize the loss could be occurred. To minimize the risk there are certain measures will be taken into consideration by Islamic bank however it will costly. The factors that will be focusing to analyze is production cost of the business, market demand of the business, economic condition and financial leverage (Rahman Nor, 2016). This evaluation must be conduct by the expertise that has experience in financing which will take some time to manage the plan. Secondly, Islamic bank has some issues regarding the selection process of partner. In order to prevent it, the Islamic bank has made decision offer the Mudharabah and Musharakah financing only to the company that has strong background or history of financial performance. However, it will contradict with the main concept Islamic ban to achieve economic justice that is fair and equitable distribution that only focus on the big company. Then the Islamic banking will also offer the PLS financing to the small and medium company or the beginner only if they show an effort and convince the Islamic bank about their business activities. It is important so that Muslim community can be successful in the business or financing activities. Thirdly, in the current context of demand PLS financing is commonly from the beginners of the business which is has high probability of loss. Hence the Islamic bank taking action by monitoring the company business activities. This is because to monitor the large companies is not very costly rather than to monitor the individuals business activities. To monitor the large company it is easy to get the sources or data of the financial performance this is because to attract the customer, the company need to disclose all the activities involves and the financial statement every year. Other than that, the Islamic banks should not only focus to find partner good in financial but also expertise to conduct the business and the activities must not contradict with the Shariah. Last but not least issues is the capital security that become as collateral in case any default occurred during the financing. Capital guarantee is important however due to the limitation affordable by the partners, then the Mudharabah and Musharakah financing can still be apply without the collateral. In Islam, Mudharabah and Musharakah concept is to help the entrepreneur without being choosy and it is in line with the spirit of Islam. 5. Similar Issue 5.1 Issues of Agency Problem There is similar issue regarding PLS contract which is agency problem is the main issues. According to Iqbal Molyneux (2005), agency problem is the main issues for bank to offer the equity based on mode financing. This is because, there is claim by the customer there is loss in their financial statements where the customer as capital provider want to avoid from bear the loss for repaying the capital back. The data of Central Bank Malaysia in 2016 show that the partnership financing concept in Islamic bank is amount total RM360 billion, which there is less Islamic bank that applying or offered Mudharabah and Musharakah financing. Other than that, the issues of high risk and business risk become the barrier to apply this product. Then the bank has taken initiative to put the condition before offer this PLS financing. Firstly, the customer need to proposed business activities involves that it will generate profit. If customer is the entrepreneur then if loses happen, the customer has high probability negligence the business activities and customer has to prove it is not guilty. From Shariah aspect there is elements that are contradict, which is trust based contract. Mudharabah and Musharakah is a contract based on trust based concept where the entrepreneur will be honest and use the fund by the capital provider in very efficient manner. However, in the above paragraph did mention the customer need to proof he not guilty then it is contradict with the basic concept of Mudharabah and Musharakah. Hence, several authors has make a research and study the solution to make the PLS contract more convenience in Islamic bank. The entrepreneur also should pay the loss to the capital provider (Bacha, 1997), the entrepreneur also contributed collateral as capital guarantee (Karim, 2000) and using concept of tabarru to guarantee the investment (Khan, 2003). Other than that, the researchers encourage to monitor the financial statements regularly by check the need and balance in order to avoid failure. Furthermore, the researchers also encourage Islamic bank to imposed some certain conditions towards the entrepreneur before fully conduct the business. 5.2 Issues of Musharakah Mutanaqisah In Malaysia, Musharakah Mutanaqisah is a contract that is use in home financing and alternative to Bai Bithaman Ajil (BBA) Home Financing. Musharakah Mutanaqisah is an agreement where one of the partner promises (wad) to buy the equity share of another partner until the ownership of the equity is transferred to the first partner. It is involving a buying and selling contract. Here is the modus operandi of Musharakah Mutanaqisah agreement Customer wills identifies the house he wishes to acquire. Customer will apply the financing from Islamic Bank. Islamic bank approve the application and created a Musharakah Mutanaqisah agreement with the customer to jointly purchase and own the house. The ratio agreed is 9010 where bank will become the owner of the house 90. Customer is lease the house with starting 10 and need to pay monthly payment to the bank. When the customer has done buy portion ownership of the house from the bank, then the ownership of the house is transfer to the customer. However Musharakah Mutanaqisah has become less attractive by the Islamic bank where most of Islamic bank started to stop provided it. This is because the manipulation by the irresponsible authority. Islamic bank prepared the terms and condition in legal documentation but all the content is favored the Islamic bank rather than the customer welfare. When this happen, the customer will agree with the condition and terms without understanding it. In the research by Ali, Hassan and Othman (2017), it concludes that the existing legislation does not enough to protect the consumer rights. The authors recommend to reform the Consumer Protection Act 1999 and Contracts Act 1950 by adding consumer for home financing. 6. Several Products Offered by Islamic Banks in Malaysia There are few examples of Mudharabah and Musharakah financing by the Islamic bank in Malaysia. 6.1 Affin Islamic Bank Berhad Affin Islamic Restricted Investment Account-i Musharakah Mutanaqisah Financing Term Financing-I (MMTF-i) Special Investment Account-i 6.2 Bank Islam Malaysia Berhad (BIMB) Musharakah Mutanaqisah Home Financing. Mudharabah Al-Awfar Deposit. Mudharabah An Najah Structured Investment. Mudharabah Financing. Musharakah Financing. 6.3 Maybank Islamic Berhad Premier Mudharabah Account-i Premier Mudharabah Account-I for SME/BB Net Current Account-I Private Banking Account-i General Investment Account-I (GIA-i) Golden Savvy Account-i Foreign Currency Mudharabah Deposit Placement-i 7.0 Conclusions From the paragraph above, the main concept of partnership is to achieve the economic justice. Other than that, it is to produce the PLS system that is more fair and has the efficient manner. Islamic bank must be differentiating from conventional bank that only have partnership with the strong large company. From the suggestion and solution by the past researcher, the Musharakah and Mudharabah contract will still has an opportunity to develop in Islamic banking sectors. This is because, the partnership contract will become an alternative to share or distribute the risk in the business activities. Other than that, the partnership contract can give advantage between the entrepreneur and Islamic banks to collaborate together to improve the Muslim community. Other than that, the objective of Islamic banking it is to achieve the Maqasid Shariah. As we know there is five important element in Maqasid Shariah which is deen to protect the religion, nafs to protect life, aqal to protect intellect, nasab to protect lineage and mal to protect property. In Islamic banking, the element Maqasid Shariah is where the partner must respect the right ownership of the property or funds, make a transaction business activity that is benefit and follow Shariah and others. Y, i-qN3 (f4Av2l_j-OQ ev)[email protected]
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