This study aims to examine the scholars’ views on the legality of bilateral rebate in Islamic financial transactions. It also aims to evaluate the contemporary application of…
Abstract
Purpose
This study aims to examine the scholars’ views on the legality of bilateral rebate in Islamic financial transactions. It also aims to evaluate the contemporary application of bilateral rebate in Islamic banking operation as an alternative to the conventional mechanism in handling the events of early settlement of debt, early termination of debt facility and early withdrawal of term deposit.
Design/methodology/approach
The study used deductive and inductive methods to analyze the juristic literature of all the major schools of law on the legality of both bilateral and unilateral rebate in a financial transaction.
Findings
The study found bilateral rebate (ibra’ mutabadal), instead of unilateral rebate, to be the best and fairest Islamic mechanism to overcome injustice in several events that may impact the bank’s liquidity such as that of early settlement of debt facility and early withdrawal of term deposit in the sense that the interest (maslahah) of both transacting parties is equally secured.
Research limitations/implications
This study has its limitation, as it only covers the applicability of bilateral rebate in Islamic banking operation. It does not include the applicability of bilateral rebate in other segments of Islamic finance such as Islamic capital markets and Islamic insurance (Takaful business).
Practical implications
This paper has practical implication for Islamic banking industry particularly with regard to its liquidity management in the event of early settlement of a debt facility, early termination of an Islamic facility and early withdrawal of Islamic term deposit. It may also assume policy implication in the event that the regulator adopts the legality of bilateral rebate in its Islamic banking policy and guidelines.
Originality/value
This paper offers an Islamic alternative to the conventional mechanism in handling the event of early settlement of a debt facility, early termination of an Islamic facility and early withdrawal of Islamic term deposit. Under conventional banking, there are certain fees and charges imposed on customers in the above events like early settlement charge and early withdrawal charge. Unlike its conventional counterpart, Islamic banks cannot opt for the conventional method that seems unjust to the customers as the charge is imposed without Sharīʿah basis. In this case, bilateral rebate serves as a fair mechanism to manage the bank’s liquidity in the aforementioned events.
Details
Keywords
This paper aims to investigate the current regulation of ibrā’ (rebate) set by the Central Bank for the Islamic banks in Malaysia and how far its original concept has been…
Abstract
Purpose
This paper aims to investigate the current regulation of ibrā’ (rebate) set by the Central Bank for the Islamic banks in Malaysia and how far its original concept has been compromised to make it adaptable to the modern financial system.
Design/methodology/approach
This study, with regard to practising ibrā’ in Islamic banking in Malaysia, is qualitative in nature, using semi-structured interviews carried out with two types of informant: members of either the National Sharīʿah Advisory Council (NSAC) or the Internal Sharīʿah Committee (SC). All data are analysed based on the content analysis method.
Findings
The findings reveal that while stipulating an ibrā’ clause makes practising ibrā’ stray from its original concept, it has successfully tackled the current problem. However, the long-term consequences should be a concern, particularly Islamic banking products, which have been significantly influenced by the conventional system, including interest rates and the debt structure, neither of which should be identified with Islamic banking.
Research limitations/implications
This study is limited because it focusses on the practice of ibrā’ in Malaysian Islamic banking. Moreover, data are collected from nine interviewees from NSAC and SC from different Islamic banks. Thus, the results cannot be generalised to other countries.
Originality/value
This paper provides a fresh discussion of ibrā’ from the perspective of regulators and the experience of practitioners in Malaysia, particularly in respect of aspects of Sharīʿah and current actual practice.