FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME
SHARIAH COMPLIANCE AUDIT
Shariah Audit Risks, Process and
Standards
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSSHARIAH KUBRA
SHARIAH KUBRA
AQIDAH
IBADAT
MUNAKAHAT
POLITIC
SHARIAH
AKHLAK
MUAMALAT AMMAH
MUAMALAT
ECONOMIC
JINAYAT
SOCIAL
3
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSDEFINITION OF SHARIAH KUBRA
Commands of Allah encompasing all aspects of
human life.
4
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSSHARIAH (FIQH)
Understanding/ knowledge of Shariah rulings and
values relating to human conduct derived from their
respective particular evidences.
5
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSHAKIM AND AL-QURAN
Hakim is Allah Taala. The rulings given by Allah are
through al-Qur’an and al-Sunnah.
Al-Qur’an is the words of Allah revealed to the Prophet
Muhammad s.a.w in Arabic conveyed by the angel
Jibrail.
6
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAL-SUNNAH
Consists of the sayings, deeds and approval of
Prophet Muhammad s.a.w. Sunnah is also referred to
as Hadith.
7
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSSOURCES OF SHARIAH
Al-Qur’an and al-Sunnah are the main sources of Shariah.
Two other sources are al-Ijma’ and al-Qiyas:
i.
Ijma’ : Agreement of the Muslim jurisconsults in any
particular age in a juridical rule.
ii.
Qiyas : An application or extension of the law
established by a binding authority to a particular case
(individual deductions of jurists).
8
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSOBJECTIVES OF SHARIAH (FIQH) ARE FOR PROTECTION OF;
1. RELIGION
2. LIFE
3. MIND
4. DESCENDANTS
AND
HONOUR
5. PROPERTY
9
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSRISKS IN AN ISLAMIC BANK
Displaced Commercial Risk
Credit/Market Risk
Rate of Return Risk
Revenue
Profit/Hibah
Financing,
Investment, Forex and Money Market
dealings
Deposit and Other Liabilities
dealings
Liquidity Risk
Operational Risk
Shariah Compliance Risk
10
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSWHY NEED TO HAVE SHARIAH COMPLIANCE AUDIT
Type of Risks
Definition
Shariah
Risk arises from the Islamic Bank’s failure to comply with
Compliance Risk
the shariah principles.
11
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSMITIGATING SHARIAH NON COMPLIANCE RISK
SOME KEY CONTROLS
Develop and implement adequate systems and controls to ensure
compliance with all Shariah rules and principles.
Develop and implement appropriate mechanisms to safeguard the
interest of all fund providers and other stakeholders.
Develop and implement a properly established systems :
-
effective and efficient organisation which have well defined
structure and competent people
-
clear policy
-
clear standard procedures and accounting guidelines
-
well designed and maintained records and reports
12
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT RISKS
“It is THERE but you DON’T SEE it !”
“It is an EAR of the elephant but you write it as
an ELEPHANT !”
Many more…
13
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT RISKS (CONT)
“The bank’s non-performing financing ratio was high at
6% as at audit reference date of 31 March 2007”
14
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT RISKS (CONT)
“The bank’s non-performing financing ratio of 6% as at audit
reference date of 31 March 2007 was comparable of the industry
average of 5.5% as at the same date”
“The ratio has improved significantly from the level of 10% as at the
previous audit reference date of 31 March 2006 mainly due of
recoveries from six corporate accounts totaling RM2.0 Billion”
15
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDS“MICRO” AUDIT PROCESS
(5)
Follow-up on
rectification
efforts
(4)
Table report
to Audit
Committee
(1)
Plan for audit
“Micro”
Audit
Process
(2)
Conduct
audit
(3)
Prepare, discuss
and confirm findings
and recommendations
(report)
Note : Audit Budgeting is considered the “Macro” Audit Process
16
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSPLANNING FOR AUDIT
(1)
Pre audit
review
(2)
Audit
objective
(5)
Audit sampling
scope and
verification
coverage
(4)
Audit
personnel
assignment
(3)
Audit
scope
(6)
Audit
procedures
and control
(7)
Audit
duration
17
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSPRE AUDIT REVIEW
Pre audit review include a review of the following:
Requirements of the Audit Manual and Other Audit Standards.
Observations made in the previous audit report, working papers and
responses.
Outstanding issues.
Latest findings based on summaries of the internal audit reports or any
special reports.
18
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT OBJECTIVE
Effective audit planning requires an
initial statement of the specific
objectives to be achieved.
19
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT SCOPE
The audit scope defines the parameters for the
audit coverage.
20
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT SCOPE (CONT)
Examples:
•
Financing Department ........... or other departments.
•
Treasury Portfolio .......... or other portfolios.
•
Musyarakah Product ..........or other products.
•
IT System ........... or other systems.
•
Process, Product, Department, Manual, System .......... or others.
21
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSPERSONNEL AND ASSIGNMENT
Certain degree of experience and judgment is
required in determining the extent (number and
competency level) of personnel needed for an audit.
22
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSPERSONNEL AND ASSIGNMENT (CONT)
Budgeting and allocating human resources should include the following
considerations:
Extent of coverage for each area
Total budgeted time for the overall audit
The number and availability of auditors
Experience and skills of auditors
Quality of the records and system
The need to provide practical training and exposure to auditors
Even distribution of workload among the auditors
Proper coordination of work and interrelated audit activities to avoid
duplication of effort
Identification and assignment of priority areas to ensure timely
completion of the audit
23
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSSAMPLING SCOPE AND VERIFICATION COVERAGE
A function of audit scope and coverage.
How extensive the sample should be in terms of time
period covered and the number of items to be
selected for review.
What aspects to be reviewed.
24
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT SAMPLING
Process of obtaining a generalized but valid information
about a whole collection of things by auditing only a
portion of that collection
Sampling techniques could economise on the use of limited
available resources and on the amount of time required for
audit
25
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT SAMPLING (CONT)
Can be used in audit
estimate values (variables
sampling) and to investigate the existence of
controls (attributes sampling)
26
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT SAMPLING (CONT)
Sampling can be useful in the following aspects of the detailed
verification work:
To test the existence of controls and the reliability of the systems
(compliance testing)
To determine generally the degree of compliance with Shariah
rules (compliance testing)
27
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDS-
AUDIT SAMPLING (CONT)
Two basic approaches in sampling :
Judgmental or subjective approach
Statistical, probability, or scientific, approach
28
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT SAMPLING (CONT)
In practice, auditors use judgmental approach and select their
samples based on the following:
Objectives of audit
Scope of audit
Availability of resources
Reliability of system
Significance of transactions and portfolio
29
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSAUDIT STANDARDS VS AUDIT
AUDIT STANDARDS
AUDIT PROCESS
AUDIT FINDINGS
30
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDS-
31
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSTHE MEJELLE AS AN AUDIT STANDARD
Complete Code On Islamic Civil Law
Civil code of the Ottoman Caliphate (1877-1962)
In Arabic is Majallah al-Ahkam al- ‘Adliyyah (Book of Rules
of Justice)
32
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSTHE MEJELLE (CONT)
Master architect of the preparation of the Mejelle
was
Cevdet
Pasha,
an
eminent
scholar
and
statesman of the Ottoman Caliphate.
33
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSTHE MEJELLE (CONT)
Did not contain all the provisions of civil law (e.g. family
law)
Introductory part of the Mejelle, consisting of 100 articles,
are legal maxims or legal formulae for immediate
application in the court of law (legal maxims are
comprehensive in character from which the judges and
the lawyers could seek the assistance to base their
judgments and arguments respectively)
34
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSTHE MEJELLE (CONT)
Articles 101 and onwards state the principles of law
governing various section of Islamic commercial law.
Total number of articles is 1,851.
Main school of law relied on was Hanafi with particular
reliance on Zahir al-Riwayah, the most authoritative view
of law in that school of law.
35
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDSOTHER POSSIBLE AUDIT STANDARDS - AAOIFI
Accounting and Auditing Organisation for Islamic
Financial Institutions (AAOIFI) Standards.
36
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDS-
37
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDS-
38
SHARIAH COMPLIANCE AUDIT
-SHARIAH AUDIT RISKS, PROCESS AND STANDARDS-
OTHER POSSIBLE AUDIT STANDARDS - PROFESSIONAL
PRACTICE OF INTERNAL AUDITING STANDARD
39
INTERNATIONAL STANDARDS FOR THE PROFESSIONAL
PRACTICE OF INTERNAL AUDITING
The Institute of Internal Auditors
Professional Practices Department
247 Maitland Avenue
Altamonte Springs, FL 32701-4201, USA
E-mail: [email protected]
Web: http://www.theiia.org
40
OTHER POSSIBLE AUDIT STANDARDS
Internally
Developed
Standards
(subject
to
Internal Shariah Committee approval)
41
The Concept of Riba, Gharar and Other
Prohibited Elements
- Main Auditable Areas and Issues-
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
RIBA
Riba and gharar are prohibited and invalid.
Riba
is
usury
or
interest
and
gharar
is
uncertainty.
43
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
RIBA IN LENDING
Riba in lending and borrowing is the extra amount of
money that is either;
Imposed by the lender on the borrower in the
contract; or
Promised by the borrower in the contract.
44
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
RIBA IN LENDING (CONT)
This kind of riba may occur out of an exchange
between two ribawi materials in the same kind where
the necessary rule(s) are not observed.
The meaning of verse 275 of surah al-Baqarah in the
Quran:
“…but Allah has permitted trade and forbidden
usury…”
45
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
The Prophet s.a.w. said, meaning:
“ Buying and selling of gold with gold, silver with silver,
wheat with wheat, barley with barley, dates with dates
and salt with salt must be in equal weights or measures
and the exchange immediate. If the exchange were
between different kinds you can buy and sell them any
how you like as long as it is immediate.”
46
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUESRIBAWI MATERIALS
Ribawi materials are divided into two bases and under
each basis are the different kinds as follows:
BASIS
BASIS
Media of Exchange
Foodstuffs
Gold
Silver
RM
USD
Grains
Rice
Wheat
Meats
Beef
Mutton
Chicken
Fishes
47
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
RIBAWI MATERIALS (CONT)
BASIS
BASIS
Media of Exchange
Foodstuffs
£
SGD
AUD
HKD
¥
Vegetables
Tomatoes
Beans
Fruits
Apples
Oranges
48
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUESRULES OF EXCHANGE OF RIBAWI MATERIALS
Exchanges
1.
Rules
Ribawi materials of the same kind 1.
of the same basis.
(5 grams of 916 gold for 5 grams
of 750 gold;
2.
10 grams of Basmathi rice for 10
grams of A1 rice)
1.
Ribawi materials of different kinds
of the same basis.
10 kgs of rice for 15 kgs of wheat;
Payment must be on cash
terms.
1.
Difference in weights,
measurements or number of
units allowed,
2.
Payment must still be on cash
terms.
(5 grams of gold for RM200;
RM3,800 for USD1,000;
Materials must be of the same
weight, measurement or
number of units.
1 tonne of palm oil for 2 tonnes of
sugar.)
49
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
RULES OF EXCHANGE OF RIBAWI MATERIALS (CONT)
Exchanges
1.
Rules
Ribawi materials of different kinds 1.
No rules are imposed.
of different bases.
(Difference in weights,
(10 kgs of dates for 1 gm of gold;
measurements or number
30 kgs of wheat for USD10;
of units allowed.)
1 tonne of palm oil for RM1,500)
50
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
Riba buyu’ is sub-divided into :-
1. Riba fadhl i.e. the ribawi materials exchanged are
of different weights,
measurements or numbers.
2. Riba nasiah or riba yad i.e. payment of the price
and delivery of the goods are made at two
different times.
51
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
GHARAR
Hadith of the Prophet s.a.w.:
On the authority of Abu Hurairah
“
r.a. who said:
The messenger of Allah s.a.w. forbade hasat
sale and gharar sale.”
52
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
Gharar is divided into two namely:
1. Gharar yasir, i.e. minor or slight gharar, and
2. Gharar fahish, i.e. major or serious gharar
The Gharar that causes a contract to be invalid is major
gharar.
53
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
MAJOR GHARAR
In general terms major gharar is:
an uncertainty which is so great that it becomes
unacceptable, or
it is so vague that there is no means of quantifying it.
54
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
MAJOR GHARAR (CONT)
More specifically major gharar may occur as follow:
Relating to asset :
Asset or merchandise does not exist;
Asset or merchandise cannot be delivered; or
Asset or merchandise is not according to
specifications.
Relating to price :
Two prices in one contract
Mention of amount of Ibraa’
55
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
EXAMPLES OF MAJOR GHARAR
1. Buying a calf not yet born.
2. Buying a piece of merchandise with more than
one price quoted for it.
3. Buying fish in a large pond.
56
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
MINOR GHARAR
1. Minor gharar or miror uncertainty is forgiven.
2. Contracts involving minor gharar are permissible
and valid.
3. In contracts involving minor gharar the gharar is
taken into consideration in arriving at the price.
57
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
EXAMPLES OF MINOR GHARAR
Purchase of fruits without peeling or cutting off
the skin to see the inside.
Charging a fix amount for a bus fare for a certain
distance even though a passenger does not
travel the whole distance.
58
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
EXAMPLES OF MINOR GHARAR (CONT)
Charging a fixed rate for a hotel
room
per
night even though different guests use different
numbers and quantities of the services in the
room.
Contracts without riba and gharar are fair and
transparent, giving rise to justice.
59
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
SHARIAH REQUIREMENTS
Trade and commerce in Islam MUST conform to the requirements
of the Shariah, which broadly speaking refer to:
Avoidance of prohibitions, (haram matters).
Observing that every contract possesses all its essential
elements and that every seential element meet the
necessary conditions.
Practise “positive values” (avoid negative values).
60
THE CONCEPT OF RIBA, GHARAR AND OTHER PROHIBITED ELEMENTS
- MAIN AUDITABLE AREAS AND ISSUES-
SHARIAH REQUIREMENTS (CONT)
No “Unethical”
Practices
No Riba (Interest)
No Gharar (Uncertainty)
No Maisir (Gambling)
Non “Mal-mutaqawwim” (No
impure and non-benefiting
goods)
Comply with essential elements
and conditions of all contracts
61
Shariah Contracts as an Auditable Area
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
ISLAMIC FINANCE
Islam permits trade and commerce and the contracts that are
applied thereto are termed muamalat in the Shariah;
Muamalat are civil contracts; and
All civil contracts can be used in Islamic finance and banking.
63
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
SHARIAH REQUIREMENTS
Trade and commerce in Islam MUST conform to the requirements of
the Shariah, which broadly speaking refer to :
avoidance of prohibitions, (haram matters), and
observing that every contract possesses all its essential
elements and that every essential element meet the necessary
conditions.
Practise “ positive values” (avoid negative values)
64
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
SHARIAH REQUIREMENTS (CONT)
No “Unethical”
Practices
No Riba (Interest)
No Gharar (Uncertainty)
No Maisir (Gambling)
Non “Mal-mutaqawwim” (No
impure and non-benefiting
goods)
Comply with essential elements
and conditions of all contracts
65
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
SHARIAH CONTRACTS
Trading Contracts
Participating Contracts or Equity Financing
Supporting Contracts
66
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
TRADING CONTRACTS – CASH SALES
i.
Normal cash sales
ii.
Sarf (foreign currency exchanges)
iii.
Exchanges between ribawi materials of different kinds
and of the same basis (gold with money or wheat with
palm oil)
iv.
Bai Dayn (debt trading)
67
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
TRADING CONTRACTS - DEFERRED PAYMENT SALES
Bai Murabahah
(cost plus)
Bai Tawliyah
(novation)
Bai Salam
(sale by order
with advance
payment)
Bai Istijrar
(supply or whole
sale financing)
Bai Wadhiah
(sale on
discount)
Bai Istisna’a
(sale by order with
progress payment)
Bai Inah
(sale on credit and
buy bach on cash)
Bai Bithaman Ajil
(deferred
payment sale)
Ijarah (leasing)
Kiraa’ Waqtinaa’
(leasing then
procurement)
68
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
PARTICIPATING CONTRACTS OR EQUITY FINANCING
Musharakah (joint venture profit sharing)
Mudharabah (trustee profit sharing)
Muzaraah (leasing of land for agriculture)
Musaqat (watering of orchard)
69
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
SUPPORTING CONTRACTS
Rahnu (mortgage)
Kafalah (guarantee)
Wakalah (agency)
Wadiah (safe custody)
Qardh Hasan (benevolent loan)
Hiwalah (transfer of debt)
Tabarru’u (donation)
Hibah (gift)
Wakf (endowment)
Ibraa’ (rebate)
Muqasah (set-off)
70
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREABANKING CONTRACTS – TRADING, PARTICIPATING AND
SUPPORTING CONTRACTS
Mobilisation of deposits as sources of funds:
i.
Musharakah for shareholders’ fund
ii.
Mudharabah for customers’ investments
iii. Wadiah for safe custody and
iv. Qardh Hasan
For application of funds all the contracts of debt financing
(trading contracts) and equity financing (participating contracts)
may be applied.
71
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
The different features of Murabahah, Istisna’a, Bai Bithaman Ajil and
Ijarah.
Murabahah
Sale based on the cost price plus profit.
Cost price or profit must be known to the buyer.
Istisna’a
Order made by the buyer for the manufacture of a merchandise
according to specifications.
The merchandise does not exist at the time of contract.
72
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
Bai Bithaman Ajil
•
Sale with the payment of the selling price deferred to an agreed later
date.
•
Merchandise exists at the time of contract
•
Shariah does not require that the cost price be known to the buyer
Ijarah
Sale of the use of another’s property.
Property rented belongs to the lessor
Lessor has the right to repossess the property on default of the lessee
73
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
ESSENTIAL ELEMENTS AND NECESSARY CONDITIONS IN CONTRACT
To make a permissible contract valid it must have
essential elements and each essential element must meet
the necessary conditions.
74
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
ESSENTIAL ELEMENTS OF CONTRACTS
Example of essential elements of contracts of Sale and Ijarah are :
SALE
IJARAH
seller
seller
lessor
lessor
buyer
buyer
lessee
lessee
asset
asset
asset
asset
price
price
rental
rental
contract
contract
contract
contract
Benefit
Benefit(use
(useor
orusufruct)
usufruct)
75
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
1. Contract of Sale
The essential elements and the necessary conditions in a contract of sale are:
1. Contract : Offer & Acceptance
(i)
In definite and decisive language and absolute.
The Majelle - Majallah Al-Ahkam Al-Adliyah - complete code of
Islamic Civil Law, provides as follows:
Art. 169: For the offer and acceptance the past tense is generally used.
Art. 170: By aourist tense like “Alirim and Satarim” if the present tense is
meant, the sale is concluded, and if the future is meant, the sale is not
completed.
76
SHARIAH COMPLIANCE AUDIT
-SHARIAH CONTRACTS AS AN AUDITABLE AREA-
Art. 171: A sale is not concluded by words in the future tense, such as “I will
take”,”I will sell” which mean merely a promise.
Art. 172: A sale is also not concluded by words in the imperative tense,
such as “sell”,”buy”. But a sale is
concluded by an imperative which of
necessity indicates the present.)
(ii) The acceptance must agree with the offer.
(Mjl. Art. 177: If one of the contracting parties make an offer or something
in any manner whatsoever, the other party must make the acceptance of
it, so as exactly to correspond with the offer. He has no right to separate
either the price or the subject matter of the sale.)
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(iii)
The contract must be made at the one and the same meeting.
(Mjl. Art. 183: After the offer and before the acceptance, if one of
the two parties gives an indication of dissent, whether by word or
act, the offer becomes void, and there is no longer room for an
acceptance.
Art. 185: On new offer being made before acceptance, the first
offer becomes void, and consideration is paid to the second offer.)
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2.
The Thing Sold
(i)
It must exist
(Mjl. Art. 177: The existence of the thing sold is necessary.)
(ii)
The thing sold must be capable of being delivered.
(Mjl. Art. 198: It is necessary that the delivery of the thing sold
be possible.)
(iii)
The thing sold must be of value, and
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(iv)
It must be of pure substance.
(Mjl.Art. 199:It is necessary that the thing sold should be
“mal
mutaqawwim”.
Art. 126: Mal is a thing which naturally is desired by man,
and can be stored for times of necessity.
Art. 127: Mal mutaqawwim is a thing the benefit of which
is
permissible by law to enjoy.)
(v)
The thing sold must be known.
(Mjl. Art. 200: It is necessary that the thing sold should be
known to the buyer.
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Art. 201: The thing sold becomes known by a description of its
qualities and state, which will distinguish it from other things.)
(vi)
The thing sold must be owned by the seller.
(Mjl. Art. 365: In order that a sale may be “nafiz”, it is a
condition that the seller should be the owner of the property sold,
or agent, or natural or appointed guardian of the owner
of the
property, and that there should be no right in any one else.)
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3.
The Price
It must be known in currency and the absolute amount.
(Mjl. Art. 237: It is necessary that the price should be named at the
time of the sale.
Art. 238: It is necessary that the price should be known.
Art. 239: The knowledge of the price comes by a statement of its
description and amount if it does not come by seeing it when it is
shown.)
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4.
The Seller and 5. The Buyer
(The Two Parties to the Contract)
(i)
The two parties to the contract must be capable of taking
responsibility.
(Mjl. Art. 361: In the making of the sale, there is a condition, that the
essence of the contract, should emanate from intelligent persons,
that is to say, from reasonable persons, who possess judgement, and
that they should attach to a subject of sale, which admits of the
consequences of a sale.
Art. 957: Infants, madmen and people of unsound mind are of
themselves prohibited from dealing with their property.)
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(ii)
The two parties to the contract must not be prohibited from dealing
with their property, i.e. they must not be bankrupts or prodigals (safih).
(Mjl. Art. 958: A person who is prodigal can be prohibited by the judge.
Art. 959: A debtor also, on the application of his creditors, can be
prohibited from dealing with his
property by the judge.)
(iii)
There is no coercion or compulsion exerted on either of the two parties
to the contract.
(Mjl. Art. 949: “Ikrah” is of two sorts. The first sort is “Ikrah mulgi”. It leads
to destruction of life in loss of a limb or one of them. It is the compulsion,
which is by a hard blow.
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(..continued)
The second sort is “Ikrah ghair mulgi”. This causes only grief and pain.
It is compulsion which is by things like a blow or imprisonment.
Art. 1006: When they (transactions) take place in consequence of
compulsion which is taken into consideration, an exchange of
property, and a purchase, and a letting, and a conveyance, and a
compromise about property, and an admission, and a postponement
of a debt and causing of a right of preemption to cease, are not held
good, whether the compulsion be “mulgi” or “ghair mulgi”. But if the
person compelled give his consent after the compulsion has ceased,
in that case they are held good.)
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2 - Contract of Leasing
The essential elements are:
1. Lessor
(The necessary conditions are the same as those for buyer and seller in
the contract of sale.)
2. Lessee
(The necessary conditions are the same as those for buyer and seller.)
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3. Contract
The necessary conditions are:
(i) In definite and decisive language.
(Mjl. Art. 443 : Like sale, letting becomes a concluded contract by a
proposal and acceptance.
Art. 435 : Hiring like sale becomes a concluded contract by the past
tense, it
does not become a concluded contract by the future
tense.)
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(ii)
Acceptance must agree with offer.
(iii)
Offer and acceptance must be made at the same meeting.
(Art.445 : As in sales, so also in making a contact of hire,
the agreement of the proposal with the acceptance,
and
the
unity of the meeting for making the contract is a condition.)
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4. Asset
The necessary conditions are:
(i) Belongs to lessor.
(Art. 446 : The letter who makes a contract of letting must be the
absolute owner of the thing, or the agent of the owner, or his
natural or legal guardian.)
(ii) Specified and known
(Art. 449 : The designation of the thing given
for rent is
necessary.
Therefore, if a letter be made of one of two shops, without
giving
the choice or designating one of them, the letting is not valid.)
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(iii) Delivered to lessee.
(Art. 474 : In case there is a condition for a deferred payment of the
hire, it becomes necessary for the lessor to make delivery of the
thing hired, …first. The payment of the hire is only necessary on the
expiration of the time of payment agreed upon.
Art. 475 : When there is a hiring without condition for payment in
advance on afterwards, ….the delivery of the thing let by the letter
…must be made first.
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(iii) (.. continued)
Art. 582 : The delivery of the thing hired to the person who hires it, is the
giving of leave and permission by the letter, in a way that the hirer can
derive benefit from it without hindrance.
Art. 583 : When a good contract of hiring has been made for a
time or distance, it is necessary that delivery be made to the hirer, for
the thing to remain constantly and continuously in his possession, until
the completion of the distance on the end of the time.
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(iii) (.. continued)
Art. 478 : If the benefit from the thing hired ceases to exist, than
the rent becomes no longer payable.)
Examples :
1. The share of the hire for the time when a bath is under repair,
remaining unused, is not payable.
2. The rent for an idle time of mill, consequent on the water of the mill
being cut, is not payable from the time of the cutting of the water.
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5. Benefit
It must meet these necessary conditions:
(i)
It can be fixed in value.
(ii)
The lessor has the power and capability to use and lease
the asset.
(iii)
It must be permissible.
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(iv)
It is known.
(Art. 451 : In a contract of hire it is necessary to make known the
use to which the thing hired is to be put, in such a way as to put
a stop to dispute.
Art. 452 : As regards things like a house, shops, and a wet nurse,
the benefit is known by a statement of the time of the hiring.
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(iv) (.. continued)
Art. 454 : When land (Arazi) is taken on rent, together with the time fixed,
it is necessary to say for what business it has been hired, and if it is for
agriculture, to fix what will be sown, or to make it general, saying for
sowing whatever the hirer wishes.
Art. 457 : It is a condition that the benefit must be able to be received.)
(v) The benefit must not be in the form of any material thing.
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6. Rental
Its necessary condition is that:
(i) It must be known.
(Art. 450 : It is a condition that the rent be known.
Art. 464 : if the consideration for the letting is cash, it is known
by fixing its quantity – like the price of a thing sold.
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(i)
(.. continued)
Art. 465 : If the consideration (Bedel) for the letting is composed of
merchandise
weighed
(Aruz),
(Meozunat)
or
or
things
things
measured
(Mekilat)
numbered
which
on
things
are
alike
(Adediat Muteqarribe) it is necessary to declare the description as
well as the quantity.
Art. 477 : As regards, the obligation to pay the hire, it is a condition
that the thing hired should be delivered, that is to say, the rent is
considered to run from the time of delivery.)
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