Norms Relating to Riba, Gharar, Tawun

13 islamic banking norms relating to riba exchange

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13 Islamic Banking
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Norms relating to Riba: Exchange / Transfer of debt Bills Discounting & Treasury Operations When debt is sold or transferred to a third party for money, it must be sold at par. Conventional finance however, undertakes such debt resale at a discount to the par value, such as, in case of bills discounting, asset securitization. So do Islamic banks in Malaysia, which essentially treat debt as any other “asset” with a potential for income. Majority of jurists however, assert that bai-al-dayn or sale of debt cannot be for a negotiable price. It is transferable, but only at par with nominal value. 14 Islamic Banking
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Norms relating to Riba : Exchange / Transfer of debt Loan Parking At times debt transfer takes place not in the form of bai-al-dayn involving a sale but in the form of hawala-al- dayn or a mere transfer of debt. In such a case, adequate precautions need be taken to ensure that riba does not enter through the back door in the shape of fee or ujr. In fact, fee or service charge or ujr remains the single most abused mechanism that can potentially permit riba through the back door unless adequate precautions are taken. For example, scholars insist that in all such cases where, there is a justification for payment of fee or service charge, such fee should not be linked in any way to the amount of debt involved and must be based on actual expenses incurred in the process. 15 Islamic Banking
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Norms relating to Riba: Exchange / Transfer of debt Common Shares At times, tangible assets and debt are combined together and sold. For example, a stock is an evidence of part-ownership in a company that owns physical assets as well as accounts receivables or debt. Contemporary jurists hold that in such cases, one has to determine whether debt or physical assets constitute the “significant” part. If physical assets constitute, say 51 percent of the total assets, then such a stock indicating part ownership in the combined assets may sell at a negotiable price. Or else, it would be treated as “being in the nature of debt or money” and hence, must sell at par value e.g., shares of banks. 16 Islamic Banking
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Norms relating to Riba: Exchange / Transfer of debt Selling Debt for Another Debt Another interesting possibility involves selling debt for another debt. This is considered forbidden and can take several forms, such as, compounding of debt, modern forward and future contracts, swaps etc. All these mechanisms involve exchange or linking of two debts. 17 Islamic Banking
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Norms relating to Riba: TVM Time value of money is an important cornerstone of modern finance. Postponement of consumption involves sacrifice and hence, the individual needs to be compensated for “waiting”. An individual would prefer now over tomorrow, since he would now have the alternative of “investing” for a rate of return.
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