Back

Shariah Compliant Re-Financing

The National Shariah Committee (Dewan Syariah Nasional) – Majelis Ulama Indonesia (DSN-MUI), after considering the following:

  1. That there is a question among the people regarding refinancing transaction that complies with Shariah requirements;
  2. There is no specific Shariah ruling issued by DSN-MUI with regards to refinancing transaction.
  3. Pursuant to item (a) and (b), DSN-MUI affirms the necessity to issue the said ruling on Shariah compliant refinancing to be the reference for Lembaga Keuangan Syariah “LKS” (Shariah Financial Body/Islamic Financial Institution).

Based on:

  1. Quranic verses
  2. (Al-Maidah : 1)

O you who have believed, fulfill [all] contracts

  1. (An-Nisa’:58)

Indeed, Allah commands you to render trusts to whom they are due and when you judge between people to judge with justice

  1. (Al-Isra’: 34)

And fulfill [every] commitment. Indeed, the commitment is ever [that about which one will be] questioned.

  1. (Al-Baqarah : 278)

O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers.

  1. (Al-Baqarah: 283)

O you who have believed, do not consume one another's wealth unjustly but only [in lawful] business by mutual consent.

  1. (Al-Baqarah: 283)

And if one of you entrusts another, then let him who is entrusted discharge his trust [faithfully] and let him fear Allah, his Lord.

  1. Prophetic Narrations:
  2. Narrated by ‘Ubadah Ibn As-Somit and recorded by Ibn Majah, narrated by Ibn Abbas and recorded by Imam Ahmad, narrated by Yahya from Malik:

The prophet peace be upon him asserted that “harm shall neither be inflicted nor reciprocated.”

Sunan Ibnu Maah: 2331

  1. Allah s.w.t announced: I am the third between two partners as long as both not betray among others. However, if one of the two betray his/her partner then I will leave them.

Recorded by Abu Dawud

  1. View from Scholars:
  2. If one of the partners buy the portion of his/her partner’s share, it is permissible as he buy another’s asset.

Al-Mughni, Ibn Qudamah, 5/35

  1. If one of two partners who has a share in a building sell his portion to a third party, thus it is impermissible. However, it is permissible to sell to his partner.

Hasyiah Ibn Abidin, V. 4 P. 301

  1. This kind of Musyarakah (Diminishing Partnership) is permissible from Shariah perspective -same as Ijarah Muntahiyah Bi at-Tamlik- whereby the bank undertakes to its customer to sale its share once the customer has paid all the amount equivalent to the asset value. In relation with this arrangement, it is considered as Syarikah Al-‘Inan whereby both parties contribute the capital and the bank authorizes its partner to run the project.  At the end of the partnership, the bank then will sell its portion to its partner in total or proportionately. This been done with separate contract and have no relation with the partnership (Syirkah).

(Al-Muamalah Al-Maliah AL-Muasorah, Wahbah Az-Zuhaili, 436-437)

  1. The leased asset is considered as trust under the lessee. Any defection occurred without negligence, the lessee is not obliged to indemnify such asset.

(Al-Mughni, Ibnu Qudamah, 5/267)

  1. AAOIFI Resolution No. 13 (7/1/7)

In principle, the capital of Mudharabah must be provided in form of cash. However, it may be presented in the form of tangible assets, in which case the value of the assets is the contribution to the Mudharabah capital. The valuation of the assets may be conducted by experts or as agreed upon by the contracting parties.

Commemorating the following:

  1. Outcome from the discussion by Working Group Perbankan Syariah (WGPS) for the issue of refinancing with Lembaga Keuangan Syariah “LKS” held at Bandung on 7th-9th February 2013and on 27th-29th September 2013;
  2. Resolutions from the discussion by Working Group Perbankan Syariah (WGPS) with Asosiasi Bank Syariah Indonesia (Asbisindo) on the issue of refinancing among LKS held at Anyer on 20th to 22nd June 2013;
  3. Views from the participants of the round table discussion DSN-MUI held on Wednesday, 4th December 2013.

HEREWITH RESOLVED THE FOLLOWING:

First    : Ruling

In this fatwa, the following are referred as:

  1. Refinancing is granting a new facility to for a new customer or previous customers who have yet to settle his/her debt;
  2. Shariah refinancing is refinancing that adhere to and comply with all Shariah requirements.
  3. Shariah refinancing consists the two scenarios: 1) Financing given to new customer who have acquired the asset in full; and  2) financing granted to the customer who had outstanding debt  to be settled
  4. Taqwim Al-‘Urudh is valuation of goods/assets with the currency agreed by contracting parties.

Second : Shariah Ruling

            Refinancing can be executed by LKS by complying all requirements outlined in this fatwa.

Third : Rulings in accordance with related aqad/contracts of refinancing

            Type 1: The contract of Musyarakah Mutanaqisah

  1. All pillars, conditions, requirements and guidelines with regards the contract of Musyarakah Mutanaqisah (fatwa DSN-MUI No: 73/DSN-MUI/XI/2008 in relation to Musyarakah Mutanaqisah) are complied in the refinancing contract.
  2. Syirkah (Partnership) capital in Musyarakah Mutanaqisah may be in form of cash by agreement of contracting parties and may be also in form of kind (asset), and
  3. If the partnership capital is in form of kind (asset), it may be subjected to valuation


Type 2: The contract of Al-Baiy Wa Al-Isti’jar

  1. All pillars, conditions, requirements and guidelines with regards the contract of Al-Bay Wa Al-Isti’jar (fatwa DSN-MUI No: 71/DSN-MUI/VI/2008 in relation to Sale and Lease Back) must be complied in the refinancing contract.
  2. All pillars, conditions, requirements and guidelines with regards the contract of Ijarah Muntahiyyah Bi At-Tamlik (fatwa DSN-MUI No: 27/DSN-MUI/III/2002 in relation to Al-ijarah Al-Muntahiyah bi At-Tamlik) are complied in Isti’jar in case of the of Al-Ijarah Al-Muntahiyah Bi At-Tamlik; and
  3. Transfer of ownership of the leased asset after the end of the leased period shall be done by hibah arrangement and shall be not done via sale contract.

Type 3: Al-Bay’ (Sale) in the contract of Musyarakah Mutanaqisah:

  1. All pillars, conditions, requirements and guidelines with regards the contract of Al-Bay’ (among others fatwa DSN-MUI No: 71/DSN-MUI/XI/2008 in relation to Sale and Lease Back) are complied in the refinancing contract.
  2. All pillars, conditions, requirements and guidelines with regards the contract of Musyarakah Mutanaqisah (fatwa DSN-MUI No: 73/DSN-MUI/XI/2008 in relation to Musyarakah Mutanaqisah) are complied in the refinancing contract.

Fourth : The mechanism of Musharakah Mutanaqisah

  1. Potential customer seeks refinancing from LKS.
  2. LKS conducts valuation for the customer’s asset to determine the reasonable price in order to determine the capital provided by the customer for the partnership with the LKS
  3. LKS will provide a sum of money as capital for the partnership with customer with condition that the customer fully settle his/her outstanding debt if any;
  4. LKS appoints the customer to be the agent in order for him to undertake Shariah compliant business including Ijarah contract.
  5. The customer and LKS distribute the profit between them in accordance with the pre agreed ratio or based on capital sharing ratio. The losses will be borne based on capital contribution ratio; and
  6. The customer will gradually purchase the LKS’s ownership in the venture in accordance with the agreement.  

Fifth : Mechanism of Al-Bai’ Wa Al-Isti’jar

  1. Customer who owned an asset seek for financing from LKS for purpose of refinancing.
  2. LKS will buy the asset owned by customer by using contract of Al-Bai’ (sale)
  3. Customer then settle the outstanding debt if any,
  4. LKS and the customer enter into a contract of Al-Ijarah Muntahiyah bi At-Tamlik’and
  5. Ownership for the leased asset may only be transferred to customer by arrangement of hibah at the end of Ijarah period.

Sixth : Mechanism of Sale in Musharakah Mutanaqisah

  1. Customer who owned an asset seek for financing from LKS for purpose of refinancing.
  2. LKS will conduct valuation for the said asset in order to determine the reasonable price, for the LKS to buy a portion of it.
  3. LKS then will buy a portion of customer asset and consequently the asset is co-owned by both and under Musyarakah arrangement..
  4. Customer then settle the outstanding debt if any,
  5. LKS and customer execute the contract of Musharakah Mutanaqisah by using the capital that have been mentioned above.

Seventh: If one of the parties didn’t fulfil his/her obligation or if any dispute occurred between the contracting parties, the dispute will be solved by board of arbitrators should the case cannot be resolved by way of Musyawarah (Negotiation between Contracting Parties).

Eight   : This fatwa is effective by its issuance date and if there is any misunderstanding in future, the fatwa will be improvised accordingly.

Click here to view the source