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8/8/2019 Insuring Shariah Based Deposits
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InsuringShariah BasedDeposits
MohdPisal Zainal,Ph.D.JointDirectorofResearch
InternationalCenterforEducationinIslamicFinance(INCEIF)
Preparedfor
TheDepositInsuranceConferenceintheMENARegion:
EnhancingConfidence
November18 19,2009
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OutlineofthePresentation
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IslamicFinance101
WhatisIslamicFinance?
Afieldofstudyandprofessionalpracticethatconcernstheshariah compliancestatusof,interalia,economics,banking,takaful,assetandinvestmentmanagement,unittrust,wealthplanningactivitiesandbusiness
(Prof.Saiful Azhar Rosly,2008)
isfoundedonshariah principleswhichexpressanexplicitintentiontomeetthefinancialneedsofparticipantswithintegrityandinmannerthatisjust,fair,trustworthyandhonest,whileensuringamoreequitablewealthdistribution
(PrimertoIslamicFinance,MalaysiaInternationalIslamicFinancialCenter(MIFC),BankNegaraMalaysia,2008,p.50.)
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IslamicFinance101 WhatexactlyareShariah Principles?
BasicPrinciples SourcesoftheIslamiclaw(shariah):
TheHolyQuran;
Thetraditionsorknownpractices(Sunnah)oftheProphet
Muhammad(peacebeuponhim);
Consensusofthelearnedscholars(Ijma);and
Analogy(Qiyas),
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Thus,IslamicfinancedealswithstructuringoffinancialproductsorfinancialtransactionsthatareinaccordancewiththeIslamiclaw
(shariah); Primarily,Islamicfinanceconcernswiththe:
Promotionofsocialwelfareandjustice,equitabledistributionofwealth;
Profitandlosssharingbetweenthecapitalproviderandtheentrepreneur;
Theexistenceofanunderlyingasset,i.e.theobligationtobackallinvestmentswithrealassets;
Moneyisnotconsideredasanassetclassbecauseitisnottangible;
therefore,
it
may
not
earn
a
return;
and Thetransactionsarebasedonthefollowingprinciples:
Trade(bay);
Leasing(Ijarah);and
JoinVenture(Musyarakah) andcombinationsofthesebasiccontracts.
IslamicFinance101
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Primarily,Islamicfinanceconcernswiththe:
Prohibitionofactivitiessuchas:
Riba (usury,prohibitedgains);
Gharar(uncertaintyorhazardcausedbylackofclarity
regardingthesubjectmatterorthepriceinacontractorexchange);
Maisir/Qimar(gambling,gamesofchance);and
Exploitation,amongothers.
IslamicFinance101
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UnderlyingaimsofIslamicfinance thesameasthoseofconventionalfinance
Toutilizethefundsofsurpluseconomicunitstofacilitateinvestmentandassetallocation;
Tofacilitatetrade;
To
provide
financial
services;
and
Tocreateinvestmentopportunities.
IslamicFinance101
ToCreateeconomicefficiency
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Thedifferenceis themannerinwhichthey
proceedtomeettheobjectives..
Islamicfinance: The basis is equity (through profit
andlosssharingschemes)andrental
income
Dealsinphysicalassets
Assumes the risks of the purpose
of the funds he is investing in and
shares in preagreed ratios in the
resultantprofitorloss
Assumesbusinessandoperational
riskinexchangeforprofits.
Conventionalfinance: Thepillarisdebt(throughinterest)
Dealsinphysicaland paper
assets
Assumes the risk of default of the
entityorpersontowhomheisadvancing
funds.
Receives the interest payable on the
loan
IslamicFinance101
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WhyistheIslamicfinancebecometheinthingtoday?
Isthisregionalorglobalphenomena?
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RaisonD'treofIslamicFinance TheriseofHNWIs andGovernmentsurpluses
duetotheincreaseinpetrodollar(Ernst&YoungsTheIslamicFundsandInvestmentsReports,2007,2008and2009)
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GlobalAverageOilPriceandTotal
NominalGDPintheGCC
Source:
Ernst
&
Young.
Islamic
Funds
and
InvestmentReport2009
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GlobalAverageOilPriceandCurrent
AccountBalancesoftheGovernmentsintheGCC
Source:
Ernst
&
Young.
Islamic
Funds
and
InvestmentReport2009
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TheRaisonD'treoftheRiseof
IslamicFinance TheneedforMuslimstoconducttheirfinancialactivitiesin
accordancewiththeIslamicLaw(shariah); Muslimsmadeupaboutonefifthoftheworldspopulation,a
smallfraconof1.3billionMuslimscommandsquiteasizeablemarket;
TheavailabilityofvarietyofIslamicfinancial
products/instruments; Competitiverateofreturns/profitsonIslamicfinancial
products;and
Post9/11. AccordingtoForbes(April21,2008),about$200billionworth
offundsoriginatedfromtheMiddleEastfledtheStates.
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Howbigaretheassetsconsideredto
beshariah compliant?Wherearetheseassetsconcentrated?
Whatarethegrowthpotentialforthe
shariah basedassetsclass?
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IslamicFinanceIndustry:FactsandFigures
Regionaland
Global
Growth
Totals
($M)
2006 2007 %Change 2008 %Change 2009 %Change
GCC 127,826.6 178,129.6 39.4 262,665.4 47.5 353,237.5 34.5
NonGCC
MENA
136,157.6 176,822.2 29.9 248,264 40.4 315.090.5 26.9
MENATotal 263,984.2 354.951.7 34.5 510.929.4 43.9 668,328.5 30.8
SubSaharan
Africa
3039.3 4708 54.9 6662.1 41.5 8369.7 25.6
Asia 98,709.6 98,709.6 20.9 86,360.3 27.6 106,797.3 23.7
Australia/Eur
ope/America
20,300.2 21,475.7 5.8 35,105.2 63.5 38,654.8 10.1
GlobalTotal 386,033.3 500,481.9 29.7 639,076.9 27.7 822,135.1 28.6
%ofMENAtoGlobal
68.4 70.9 79.9 81.3
Source:TheBankers Top500IslamicFinancial
Institutions 2009.
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IslamicAssetsintheGCC,2009
Source:TheBanker. Top500IslamicFinancial
Institutions 2009.
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Islamic
Finance
Industry:
Facts
and
Figures
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Top25IslamicFinancial
InstitutionsInstitutions CTRY $M
1 BankMelli IRA 59,621.8
2 Al
Rajhi KSA 43,981.3
3 BankSaderat IRA 43063.0
4 BankMellat IRA 41,650.6
5 KuwaitFinanceHouse KWT 40,002.7
6 BankTejarat IRA 31,807.6
7 BankSepah IRA 26,378.0
8 DubaiIslamicBank UAE 23,941.4
9 ParisianBank IRA 18,319.0
10 BankKeshavarzi IRA 16,675.0
11 HSBCAmanah UAE 16,537.0
12 Nat.CommercialBank KSA 16,135.5
13 AbuDhabiIslamic UAE 15,832.1
Institutions CTRY $M
14 BankRakyat MYS 13,081.0
15 Saudi
British
Bank KSA 12,228.0
16 AlBaraka Banking BAH 11,511.3
17 Riyad Bank KSA 10,809.1
18 Maybank Islamic MYS 10.666.6
19 Eghtesad Novin Bank IRA 10,237.9
20 QatarIslamicBank QTR 9,215.1
21 ArabNationalBank KSA 8,933.3
22 EmiratesNBD UAE 8433.5
23 BIMBHoldings MYS 7459.9
24 BankAlJazira KSA 7338.6
25 EmiratesIslamic UAE 7193.6
Source:TheBanker.Top500IslamicFinancialInstuons2009.
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Top20
By
Countries
Country $M
1 Iran 293,165.8
2 SaudiArabia 127,896.1
3 Malaysia 86,488.2
4 UAE 84,036.5
5 Kuwait 67,630.2
6 Bahrain 46,159.4
7 Qatar 27,515.4
8 UK 19,410.59 Turkey 17,827.5
10 Bangladesh 7453.3
Country $M
11 Sudan 7151.1
12 Egypt 6299.7
13 Pakistan 5126.1
14 Jordan 4621.6
15 Syria 3838.8
16 Iraq 3815.0
17 Indonesia 3388.2
18 Brunei 3201.419 Yemen 1318.3
20 Switzerland 1040.6
Source:TheBanker.Top500Islamic
FinancialInstuons2009.
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WhatisthestructureofanIslamic
FinancialSystem?
Howfinancialproductsclassifiedas
Islamicorotherwise?
WhoaretheShariah Board
Members?
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OverviewofIslamicFinancialSystem:
TheCaseofMalaysia
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ExamplesofApprovedIslamic
FinancialContracts Ijarah (Leasing)
Bai Istijrar (SupplySide)
Bai Wafa (SaleandRepurchase) Ijarah Thumma Bai (LeasetoPurchase)
Mudharabah (ProfitSharing)
Musharakah (ProfitandLossSharing)
BaiInah (SalewithImmediate Repurchase) Bai Salam (AdvancePurchase)
BBA(DeferredPaymentSale)
Istisna (PurchaseOrder)
Murabahah (CostPlusSale)
Qardh Hasan (BenevolentLoan)
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SecuritiesCommissionMalaysia DowJonesIslamicMarket(DJIM) FTSEGIIS
TanSriSheikhGhazali Hj Abdul
Rahman (Chairman)
Shaykh AbdulSattar AbuGhuddah Sh.Essam Ishaq
Tun Dato'SeriAbdulHamid Haji
Mohamad
Shaykh Nizam Yaquby Sh.Dr.MohammedAkram Laldin
Datuk Hj.Md Hashim Hj Yahaya Shaykh Dr.MohamedA.Elgari Sh Dr.Yousuf Alshubaily
Sahibus Samahah Dato'Hassan Hj
Ahmad
Shaykh Yusuf Talal DeLorenzo Sh.Dr.Mohd Daud Bakar
Dr.Mohd Daud Bakar Shaykh Dr.Mohd Daud Bakar
Dato'Dr.AbdulHalim Ismail
Prof.Dr.AbdulSamat binMusa
Assoc.Prof.Dr.AbdulHalim
Muhammad
Assoc.Prof.Dr.Ismaae Alee
Assoc.Prof.Dr.Shamsiah
Mohamad
MembersofShari'ah Supervisory
Boards/Council
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FTSEGIIS Methodology
Source:www.ftse.com/shariahAccessed:September22,2009
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FTSEGIIS Methodology
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NewProductApprovalProcess:A
GenericCase
NotApproved
Source:Schoon,Natalie.IslamicBankingandFinance.London:Spiramus Press,2009,p.138.
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ChangestoExistingProductStructure:
AGenericCase
Source:Schoon,Natalie.IslamicBankingandFinance.London:Spiramus Press,2009,p.139.
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ProductApproval
Process:TheCaseofBank
NegaraMalaysia
(BNM)
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Whattypesofdepositsavailable
underIslamicbankingsystem?Whatistheshariah positionon
insuringdeposits?
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Islamic
Banks Sources
of
Funds Islamicbankingfunds;
Customers deposits
Corporatebankingactivities;and
Treasuryactivitiesorplacements.
l d
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ComparisonsBetweenIslamicand
ConventionalBankingSystemsItems Islamic ConventionalNominalValueGuaranteeof:
Savingdeposits
Demanddeposits
InvestmentDeposits
NoGuarantee FullGuarantee
Equitybasedsystemwherecapitalisatrisk Yes No
Mechanismtoregulatefinalreturnsondeposits Dependingonbanks
performance/profits
frominvestment
Irrespectiveofbanks
performance/profits
frominvestment
Rateofreturnsondeposits Uncertain,not
guaranteed
Usuallycertainand
canbeguaranteed
PLSprinciple Yes No
UseofIslamicmodesoffinancing:
PLSandnonPLS
Yes N/A
Useofdiscretionbybankswithregardtocollateral Possibleforreducing
moralhazardinPLS.
YesinnonPLS
Yesalways
Bankspoolingofdepositorsfundstoprovidedepositors
withprofessionalinvestmentmanagement
Yes No
Source:Errico &Farahbaksh.1998.IslamicBanking:IssuesinPrudentialRegulations&Supervision.
TheIMFWorkingPaperNo.98/30.
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Deposits
of
the
Islamic
Banks ThreewidelyusedcontractsforIslamic
(SavingsandChecking)Depositsare: AlWadiah Amanah/Trust
AlWadiah Yad Dhamanah (safekeepingwith
guarantee)
Mudharabah ProfitandLossSharing(PLS)
Qardul Hassan BenevolentLoan/Fund
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Thesecontractsarethenappliedtothreetypesofdeposits: DemandDeposits
MostlycheckingaccountswhereIslamicbanksarenotobligedtopayprofit.However,banksdoprovidetokenofappreciationknownashibah todepositors;
Contractedeitheralwadiah yad dhamanah (safekeepingwithguarantee)ormudharabah (ProfitSharingorsometimereferredtoasProfitandLossSharing)
GeneralInvestmentDeposits Mudharabah
SpecificInvestmentDeposits Mudharabah
Deposits
of
the
Islamic
Banks
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CapitalGuarantee
NoCapital
GuaranteeShouldshariah baseddepositsbeinsured?
Deposits
of
the
Islamic
Banks
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ShouldShariah BasedDepositsBe
Insured? AlWadiah Yad Dhamanah Accounts(Custodyorsafekeepingwith
guarantee) Accordingthethe ResolutionoftheIslamicFiqh CounciloftheOIC,the
liabilitytoreturntheloan(currentdeposit)willnotbeaffectedbythebankssolvencyorotherwise, thebankwillpaytheamountofthedepositirrespectiveofitsprofitorloss;
Therefore,suchaccountsarenoteligibleforashareinprofits,astheyarenotsubjectedtoriskandthereshallbenoreturnpayabletothem;
AnIslamicbankmayprovidegifts(hibah).Thispracticevaryfromcountrytocountry,orbanktobank.
Mudharabah InvestmentsAccounts Depositorswithmudharabah (PLS)accounts,eithergeneralorspecific
accountsarewillingtotaketherisksassociatedwiththeinvestmentprojectstakenbythemudharib (entrepreneurs)inordertogainpositivereturns;
TheprincipleofNorisk,noreturn(AlGhunm bil Ghurm)applies thatis,earningprofitislegitimizedonlybyengaginginaneconomicventure,risksharingandtherebycontributingtotheeconomy;
Isinsuringthesetypesofdepositscompatiblewithshariah rulings?
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BackgroundofInsuringShariah Based
Deposits TurkeyissaidtobethefirstcountrytoofferIslamicdepositinsurance
schemein2003;
This
scheme
only
invests
the
deposit
insurance
pool
according
to Islamic
investmentprinciples;
TheschemeismanagedbytheAssociationofSpecialFinanceHousesofTurkeybutregulatedbytheBankingRegulationandSupervisionBoard;
MalaysiaandIndonesiahaveintroducedtheIslamicDepositInsurance
parallel
with
the
conven
onal
counterpart
in
2004/2005; TheIADIhasestablishedIslamicDepositInsuranceGroup tostudyIslamic
depositinsuranceissuesandexpectedtocompletetwodraftsoninsuringIslamicdeposits: ApproachesinDesigningIslamicDepositInsurance;and
DepositInsurance
from
the
Shariah Perspective
TheMDIChashostedaConferenceonIslamicFinanceandIslamicDepositInsuranceataGlance,inAugust2008.
What Are Types of Deposits Covered
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WhatAreTypesofDepositsCovered
UnderDepositInsurance:TheMalaysian
CaseInsuredDeposits UninsuredDeposits
Fixeddeposits,currentaccounts,savings
accounts,jointaccountsandtrustaccounts
Conventionalstructuredproductsthatare
notprincipalguaranteed
AllIslamicdeposits* DepositspayableoutsideMalaysia
Principalguaranteedconventional
structureddeposits
Interbankmoneymarketplacements
Foreigncurrencydeposits Negotiableinstrumentsofdepositheldby
banks
Negotiableinstrumentsofdepositheldby
nonbanks.
Repurchaseagreements
Source:www.pidm.gov.my
*AnIslamicdepositinsurancefund,fundedbypremiumscollectedoninsured
Islamicdeposits,willbeseparatelymaintainedtoensurethatthecoverageaccorded
toIslamicdepositsfullycomplywithShariah principles.
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Insurance
Premium:
The
Case
of
MDIC Annualpremiumsareassessedbasedonthe
amountof
insured
Islamic
deposits
held
as
at
31Decemberoftheprecedingyear.
2005 2007:
Thepremiumswereassessedonaflatratebasis,i.e.0.06%ofTotalInsuredDeposits.
2008onwards:
MDICimposeslevypremiumsonmemberinstitutions
atdifferentialrates,basedonthememberinstitutionsriskprofile.
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InsurancePremium:TheCaseofMDIC
FirstPremium:Anewmemberinstuon[asdefinedinregulaon2oftheMDIC(DifferentialPremium
Systems)Regulaons2008]holdingIslamicinsureddepositsorconventionalinsureddeposits,therateforthefirstpremiumforsuchnewmemberinstitutionshallbethesameasthepremiumratefor
category1; TransitionalintoDifferential
Premium:Inrespectoftheassessmentyearof2008only,theannualpremiumrateforpremiumcategory3willapplytoanymember
institutionclassifiedinpremiumcategory4.
Source:www.pidm.gov.my andMDIC.AnnualReport2008.
H D th D it I
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HowDoestheDepositInsurance
Work?TheCaseofMDIC ToensurethattheIslamicdepositinsurance
system
complies
with
Shariah principles,
deposit
insurance(theinsurancecontract)isbasedontheconceptsofKafalah (guarantee)andTabarru(donation);
Inlinewiththeseprinciples,therelevantmemberinstitutionsmakedonationstotheMalaysiaDepositInsuranceCorporation(MDIC),whichthenprovidesdepositorswithcoverageandensurespayoutsintheeventoffailure.
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Shariah ViewsonDepositInsurance
TheObjectivesofDepositInsuranceforIslamicBanks; Thepublicconfidencefactorisparamounttoprotectdeposits
andultimatelyensurestabilityofanybankinginstitution.Oneofthesafetynetarrangementstoprotectthebankingsystemisthroughthedepositinsurancescheme;
Themainobjectiveofthedepositinsuranceschemeinthebankingsystemistominimizedepositors riskoflosingtheir
deposits; InIslamicbanking,theimplementationofdepositinsurance
schemeisequallyimportant,toensurethattheIslamicbankingdepositsareabletocompete withtheconventionaldeposits,inattractingcustomers;
ThemainissuehereiswhetherIslamicbankinginstitutionscanapplythesamefacility.
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Last
Words ThepositiontakenbytheBNMs Shariah Advisory
CouncilisintandemwiththeIADIs viewthat SinceinvestmentdepositswithPLSarrangementsform
thebulkofIslamicdeposits,thesystemmightloseitseffectiveness andhavedifficultyinmaintainingthepublicconfidence ifsuchdepositsarenotcoveredunderthe
system... (IADI.ResearchLetter
,Vol.
1,
Issue
3,
July
18,
2006)
Ineithersystem,adepositinsurancesystemmayleadtotheclassicproblemofmoralhazard;
Howtomitigatetheproblemofmoralhazardand
otherrelatedproblemsassociatedwithdepositinsurancearebeyondthescopeofthepresentdiscussions.
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Summary
&
ConclusionsLastwords;
CommentsandSuggestions;
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ThinkingofBecominganEconomist?
Courtesy:http://gregmankiw.blogspot.com/
September02,09
ThinkAgain
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ThankYou
www.inceif.org
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FurtherReadings
BankNegaraMalaysia.Shariah ResolutionsinIslamicFinance.KualaLumpur:March2007.
DemirgKunt,
Asli,
Baybars Karacaovali,
and
Luv Laeven.
Deposit
InsuranceAroundtheWorld:AComprehensiveDatabase.
Elgari,MohammadAli.GuaranteebytheIslamicBankoftheInvestmentDeposit.J.KAU:IslamicEcon.,Vol.16,No.2,2003,pp.2327.
Ernst&Young.IslamicFundsandInvestmentsReport.Variousyears.
IADI.WhatistheNatureofIslamicBanking?ResearchLetter.Vol.1,Issue3,July18,2006.
McLeod,RossH.IndonesiasNewDepositGuaranteeLaw.AustralianNaonalUniversity.2005.
TheBanker.Top500IslamicFinancialInstuons.Variousyears.
www.pidm.gov.my
Shariah Rulings:
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Shari ah Rulings:
CapitalGuaranteevs.Protection AAOIFI(Shariah StandardNo.13)
Thecapitalproviderispermittedtoobtainguaranteesfromthemudharib thatareadequateandenforceable.Thisiscircumscribedwithaconditionthatthe capitalproviderwillnotenforcetheseguaranteesexceptincasesofmisconduct,negligenceorbreachofcontractonthepartofmudharib.[6/0]
Dallah AlBaraka Itisnotpermissibleforaninvestortodemandfromtheentrepreneur(mudharib)topayhima
fixedpercentageofthevalueofthecontract,besidesthecapitalsum,irrespectiveoftheamountofinvestmentinvolvedorwhethertheprojectisprofitableorinloss.Suchacontractisunlawfulbecauseitinvolvesaguaranteefromtheentrepreneurrespectingthecapitalsum,whereasamudharib isatrusteeandcannotbeheldresponsibleforthecapitalsum exceptincasesoftransgressionornegligence.[alBaraka firstsymposium,FatwaNo.2]
Majelis Ulama Indonesia Inprinciple,thecapitalshouldnotbeguaranteesunlessthelossofcapitaliscausedbythe
negligenceoftheentrepreneur.[FatwaNo:07/DSNMUI/IV/2000]