Islamic financial planning
. BY DR ZURINA SHAFII
Rebate for early settlement
The Syariah does provide for early settlement in the form of ibra’ but the
method of calculation needs to be more transparent
R
etail Islamic financing for
home and vehicle purchases
based on Bay’ Bithaman
Ajil (BBA) does not provide for
early settlement. The price is fixed,
as once the sale transaction takes
place, the customer has to pay the
whole profit amount accruing to
the bank. Thus, Islamic financing is
labelled as expensive compared with
conventional financing, which can
be terminated at any time since the
income of the bank is based on the
interest rate charged during the term
of financing. The shorter the time of
financing, the less interest is accrued
to that financing body.
However, Islamic banks do give
rebates (ibra’) to customers upon
early settlement of financing, based
on the concept of dho` wa ta`ajjal.
This practice was approved by the
Shariah Advisory Council, at its
24th meeting on April 24, 2002/11th
Safar 1423 although it is a departure
from the general principle of sale
prescribed in fiqh muamalat that once
a price is agreed upon, both sellers
and buyers have to honour it. The
bases for this decision are to protect
the public interest (maslahah) and to
keep the Islamic financing products
competitive against their conventional
counterparts. There is also no
uncertainty (gharar) in price as the
clause that promises ibra’ is stated
clearly in the financing agreement.
With the clause, which is stipulated
in the “method of payment” section,
the bank is bound to honour that
promise.
However, the granting of a rebate
should entirely be at the discretion
of the seller and the rate of discount
cannot be specified in the contract.
The contract per se cannot contain a
stipulation for subsequent increases
or decreases in price.
The practice in the industry is that
ibra’ as an early settlement can only
be made available to customers a year
after the contract has been signed.
The discount is calculated using the
declining profit method. As a result, the
customer will benefit from not paying
the profit for the remaining period.
Here is a case study of how ibra’ is
treated by an Islamic bank. A friend
invested in real property and arranged
for Islamic financing for the amount
of RM184,883.
Other information on the
financing is as follows:
Bank’s purchase price
RM184,883
Bank’s finance rate (BFR) at
date of transaction
6.75%
Effective profit rate
((EPR): BFR - 1.95%)
4%
BFR as at Feb 2, 2009
5.95%
Ceiling profit rate (CPR)
10.75%
Selling price at EPR
317,757.50
Sale price at CPR
• Disbursed Jan 12, 2009
• Period of financing = 30 years 621,306.00
Redemption sum for early
settlement on Nov 30, 2009
(upon sale of house)
213,507 at EPR
The term of the financing was
concluded at EPR of 4% (or BFR
– 1.95%) subject to CPR. The bank
may at its discretion charge the
price at CPR if it needs to, due to
the fluctuation of the market rate.
At first sight, it may indicate that
Islamic finance allows several prices
to be applicable to a contract, but
it is not the case since the Syariah
resolutions allows Islamic financial
institutions to grant ibra’ where there
are fluctuations in the original price
of EPR.
After 11 months, my friend
sold the house and the amount she
had to redeem was RM213,507.
This means that the profit taken
by the Islamic bank for taking the
risks of financing for nine months
before the settlement of the account
on Nov 30, 2009 was RM28,624
(the difference between the bank’s
purchase of the house from the
vendor of RM184,883 and the
redemption amount she paid back
to the bank of RM213,507), not
including the payments made during
the financing period. The bank
charged an exorbitant amount of
profit and kept my friend in the dark
on how it calculated the amount of
rebate or ibra’. The exorbitant profit
charged might be due to the fact
that she settled the sale price after
a period of less than a year, but she
was never told what the optimal
period to settle the sale price was.
If my friend were to take a
conventional 30-year loan of
RM184,883 at an interest rate of
10.75% , the amount of settlement
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personal finance
p43
Q
I work as a part-time freelancer. I do not find many guidelines on what
is taxable and what is not. I do not contribute to the EPF [Employees
provident Fund]. Can the following expenses be deducted from my personal
income?
1. Monthly handphone charges
6. Books
2. Dental treatment or medical fees
7. Seminars
3. Sports equipment
8. Entertainment
4. Monthly food
9. Any others?
5. Monthly petrol
What items are tax-deductible?
Expenditure
Tax
Comments
deductible?
1. Monthly phone
charges
Yes
Provided you can show that they are incurred from
business-related calls
2. Dental or medical
treatment
No
These are private expenses.
3. Sports equipment
Yes
Your may claim capital allowance for these business
assets if your business is instructing/coaching sports.
Otherwise, up to RM300 per annum is deductible as
a personal relief in arriving at the chargeable income.
Yes
4. Monthly food
No
Yes
This is a private expense.
Deductible if your activity is catering or baking.
5. Monthly petrol
Yes
Tax-deductible subject to the exclusion of a
reasonable portion for private use.
6. Books
Yes
You may claim up to RM1,000 pa as a personal
relief for purchase of publications for personal
enhancement.
You may claim in full if the books are to keep you
updated in your business — for example, fashion
magazines for a self-employed tailor.
You may claim capital allowance if the books are
reference texts for your business — for example, law
reports for a freelance lawyer.
Yes
7. Seminars
Yes
No
Yes
8. Entertainment
(Note:
Entertainment
is a complicated
subject tax-wise.
Expert tax advice
is recommended
if you incur
substantial amounts No
in entertainment.)
If you attend seminars to keep abreast of the latest
development in your area of expertise.
If the seminar is for personal/private interest — for
example, a seminar on tai chi as you are into staying
healthy.
If you entertain your clients and such entertainment
is related to your business, 50% or 100% of the
entertainment expense is allowable. If you are a
freelance writer and have drinks with your sources,
50% of the expense is allowable. If you are a
freelance hairdresser and offer refreshments to your
customers, 100% of the expenses is allowable as the
expense “is directly related to sales”.
If it is social and private in nature.
after 11 months would have been
RM184,082, much less than the
settlement she paid. Of course, she
also has to take into consideration the
penalty for early settlement.
As the financier decides whether
or not to give ibra’, it also has the
right to determine the method of
calculation and amount. But the lack
of information on how the amount
is calculated reduces transparency,
reducing customers’ trust in the Islamic
financial system. Several Islamic banks
such as Hong Leong Islamic and CIMB
Islamic define ibra’ as the difference
between the CPR and EPR but gave no
explanation on how the calculation is
done.
Mohd Nasir Mohd Yatim in an
article entitled “A Review on Conflicting
Issues in a Deferred Payment Sale
Product of a Shari’ah-Compliant
Banking Business” published in the
International Journal of Economics and
Finance states that “in exploring the
practices of ibra’ or rebate, this study
noted that there was an element of
incompleteness in the documentation
of the financing. There was a lack of
clarity in the documentation for partial
redemption”. The author added that this
is contravenes Islam, which encourages
one to make decisions and act wisely,
objectively, efficiently, effectively,
fairly and justly and not oppressive
unnecessarily.
In conclusion, Islamic banks have to
resolve the issue on how they calculate
ibra’ upon early settlement so that
there is fairness and transparency.
Dr Zurina Shafii is an Islamic financial planner
(IFP) and director of the Islamic Finance &
Wealth Management Institute of Universiti
Sains Islam Malaysia (USIM). She holds a
Bachelor’s in Accounting from UiTM and a
Master’s and a PhD in Islamic Finance from
Durham University, UK.
Comments: [email protected]: attn:
Zurina Shafii
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