Background

Saving, deposit box, and check comes hand in hand if we talk about Shariah bank’s
products. As the majority in Indonesia is Muslim, we all know that the Islamic law is
developing extremely fast in the field of banking. There are a lot of Islamic banks that
shows up during the recent years and growing steadily fast, as we can see that in the end
of the 20th century began to stand up Islamic banks that apply for commercial
establishments private or semi-private in the Muslim community in the world. By that, we
all have to study the Shariah Bank’s products that will dominate the world of Islamic
banking and financial markets. Thus, it is essential that by studying the Shariah Bank’s
product we will have a wider knowledge about them.

Savings in Islam is called as Wadiah. Now let us elaborate the definition of Wadiah.
Wadiah’s definition is leaving some property or goods to people who can be trusted to look
after it. By that in the general meaning we can get the idea that Wadiah is savings in
Islamic banking. While deposit box in Islam has a is seperated under the Amanah or
Wadiah. Current account deposits are based on the principle of Amanah / Wadiah or that
of Qard. In the first type, interest-free deposits are held by the banks either in trust
(Amanah), or in safe-keeping (Wadiah). Under Amanah arrangement, the Islamic bank
treats the funds as a trust and cannot use these funds for its operations; it does not
guarantee the refund of the deposit in case of any damage or loss to the Amanah resulting
from circumstances beyond its control. In Wadiah, the bank is deemed as a keeper and
trustee of funds and has the depositors’ permission to use the funds for its operations in a
Shari´ah compliant manner. And check in Islamic banking is deemed as sukuk is s the
Arabic name for financial certificates, but commonly referred to as "sharia compliant"
bonds. Sukuk are defined by the AAOIFI (Accounting and Auditing Organization for Islamic
Financial Institutions) as "securities of equal denomination representing individual
ownership interests in a portfolio of eligible existing or future assets. Sukuk in general
may be understood as a shariah compliant ‘Bond’.
 Definition

SAVING

There are 2 types of saving in Islam, Wadiah Saving and Mudharabah Saving. Wadiah
saving is when clients can withdraw or deposit items such funds at any time, without
any set time. At wadiah savings incentives, customer bonuses (if any), even though
the bonus is not agreed in advance. Goods or funds deposited by customers 100%
guaranteed to be returned by the bank concerned. Customer in this case does not bear
the risk of loss and the money can be taken at any time in full after deducting
administrative costs have been determined by the bank. Thus, in the form of savings
bank products is based on contract wadiah wadiah dhamanah yad, so the bank as the
party that receives the deposit funds are allowed to make it productive.

While Mudharabah saving is where the account holders can take advantage of the
entire network in this case the bank where customers save both branch and ATM
network because it has been connected on-line. Therefore Islamic Bank savings
account holder does not have to worry if you often move or are traveling, because
they still can make transactions in conventional banks are labeled the same as Islamic
banks place to save. Funds held customer / bank managed to gain an advantage that
will be given to customers based on mutual agreement. As well as savings in general,
Mudharabah Savings, a savings product which can be withdrawn at any time or several
times according to the provisions. The bank acts as mudarib (manager of capital) and
depositors as shahibul mall (owners of capital). Bank as mudarib split the profits with
the sahib al-mal in accordance with the ratio (percentage) applies. The revenue
sharing is usually done every month based on the balance which settles.

DEPOSIT

In Islamic banks, current Account deposits are based on the principle of Amanah / Wadiah or that of
Qard. In the first type, interest-free deposits are held by the banks either in trust (Amanah), or in
safe-keeping (Wadiah). Under Amanah arrangement, the Islamic bank treats the funds as a trust and
cannot use these funds for its operations; it does not guarantee the refund of the deposit in case of
any damage or loss to the Amanah resulting from circumstances beyond its control. In Wadiah, the
bank is deemed as a keeper and trustee of funds and has the depositors’ permission to use the funds
for its operations in a Shari´ah compliant manner. Deposits under Wadiah take the form of loans
from depositors to Islamic banks and the bank guarantees refund of the entire amount of the
deposit. While these deposits can be withdrawn at any time, the depositors have no right to any
return/profit on such deposits. However, depositors, at the bank's discretion, may be rewarded with
a Hibah provided such gifts do not become a custom or a permanent practice. In the second type,
the client gives the bank authority to use current accounts funds to invest in its operations, in that
case, the deposit amount is considered as a non-interest loan by the depositor to the bank.
The bank has the obligation of to return the credit balance upon demand clients who have no right
to receive any profit on their balances. The liability to return a Qard deposit is not affected by the
bank’s solvency or otherwise.

There are two main types of account which are commonly known in the Islamic Banks that are:
Current Account and Investment account. Current account deposits are regarded as trusts or safe-
keeping and offer the depositors safety of their money against the bank’s guarantee to return their
funds on demand. Similarly, the current account, as operated by conventional banks, is essentially a
safekeeping arrangement between the depositors and the bank, which allows the depositors to
withdraw their money at any time and permits the bank to use the depositors' money. However,
deposits in these banks have their principal guaranteed, and they may agree to pay a return on the
deposits that is either fixed or floating, but not linked with the outcome of their economic activities.
The mobilized funds are freely used by the banks and are totally liable for their repayment even if
the banks incur a loss.

SUKUK

Sukuk (Arabic: ‫صكوك‬, plural of ‫صك‬Sakk, "legal instrument, deed, check") is the Arabic name for
financial certificates, but commonly referred to as "sharia compliant" bonds. Sukuk are defined by
the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) as "securities of
equal denomination representing individual ownership interests in a portfolio of eligible existing or
future assets. Sukuk in general may be understood as a shariah compliant ‘Bond’. In its simplest form
sukuk represents ownership of an asset or its usufruct. The claim embodied in sukuk is not simply a
claim to cash flow but an ownership claim. This also differentiates sukuk from conventional bonds as
the latter proceed over interest bearing securities, whereas sukuk are basically investment
certificates consisting of ownership claims in a pool of assets.
 Legal Basis
Saving
1. The Qur'an
Q.S. an-Nisa (4): 58
Q.S. al-Baqarah (2): 283.

2. Hadith Apostles:
Cast trustworthy people who believe in you, and ye shall not betray those who have betrayed you.
"(Abu Dawud, at-Tirmidhi and al-Hakim).

3. Ijtihad:
The jurists agree wadi`ah agreement (deposit) and be circumcised, in the framework of mutual help
between fellow human beings.
Since the days of the Prophet Muhammad to the next generations, contract wadi`ah has become
ijma` amali (consensus in practice) for the people and no scholars who deny it.

4. Based on KHES

Article 20 point 17:

“custody of funds between the owners of the fund with the recipient deposit which is believed to
keep the fund.”

Deposit Box
Based on KHES
1. Article 286
“Shunduq use hifzi ida '/ safe deposit boxes can be done the Ijarah contract.”

2. Article 287
“Shunduq use hifzi ida '/ safe deposit box applicable provisions as mentioned in the pillars and Ijara
terms.”

3. Article 288
“Objects that can be stored in shunduq hifzi ida '/ safe deposit box is a valuable object which is
unlawful and not prohibited by the state.”

4. Article 289
“Great cost shunduq Ijara hifzi ida '/ safe deposit box is set based on the agreement in the contract.”
5. Article 290
“Rights and obligations of the lessor and lessee is determined by agreement to the extent and not
inconsistent with the pillars and Ijara terms.”

Sukuk (Check)
Referring to the fatwas of the National Sharia Council of Islamic bonds, covenants can be used in the
issuance of Islamic Bonds, among others: mudaraba (muqaradah) / Qiradh, Musharaka, murabaha,
salam, istisna, and Ijara (DSN 2006).

1. Mudharabah or Muqaradah (Trust Financing, Investment Trust)

Mudharabah is a business cooperation agreement between the two parties with the first party
providing the capital, while others became manager. In the National Board of Sharia fatwa on
Syariah Mudharabah Bonds stated that the Syariah Mudharabah Bonds are Sharia bonds based on
mudharabah with due regard to the substance of the National Sharia Board Fatwa MUI 7 / DSN-MUI
/ IV / 2000 on Mudharabah financing.

2. Akad Ijarah (Lease Operational)

Ijarah is a contract that is based on the existence of those who buy and rent the equipment that is
needed to be rent by a particular client. Holders of Securities Ijarah as owners who take full
responsibility for everything that happens on their property. In the National Sharia Board Fatwa No.
41 / DSN-MUI / III / 2004 on Syariah Ijarah Bonds mentioned that Islamic Bonds Ijarahadalah Islamic
Bonds based on the principles of Ijarah is a contract transfer of rights to (benefit) on an item within a
certain time with the lease payments (ujrah), without being followed by the transfer of ownership of
the goods itself. Coupled with due regard to the substance of the National Sharia Board Fatwa MUI
No. 09 / DSN-MUI / IV / 2000 on Ijarah financing.

3. Akad Musharaka (Partnership, Project Financing Participation)

Securities Musharaka Musharaka contract is based on almost the same with Mudharabah Securities
(almost similiar). The main difference is the intermediary will be the partner of a group of owners
who become bondholders Musharaka in a joint stock company, which in mudaraba, a source of
capital only from one side. In the National Sharia Board Fatwa No. 08 / DSN-MUI / IV / 2000 on
Musharaka financing mentioned that musyarakah financing is based on a partnership contract
between two or more parties to a certain business, which each party contributes funds with the
stipulation that the benefits and risks will be shared in accordance with the agreement

4. Akad Salam (In-Front Payment Sale)

Salam is a sale of a commodity, which the quality has been determined as well as the quantity that
would be given to the buyer at a predetermined time in the future at current prices. In the National
Board of Sharia Fatwa No.05 / DSN-MUI / IV / 2000 on the buying and selling greetings mentioned
that the buying and selling of goods is by means of ordering and payment of the price in advance
with certain requirements called greetings.

5. Akad Istisna (Purchase by order or manufacture)

Istisna is a contract used to sell manufactured goods to the seller's efforts in providing the goods of
material, description and a price. In the National Sharia Board Fatwa No. 06 / DSN-MUI / IV / 2000
concerning the sale and purchase istisna mentioned that buying and selling istisna namely the sale
and agreement purchase in the form of ordering the manufacture of certain goods with the criteria
and requirements agreed between the buyer (buyer, mustashni) and the seller (the manufacturer,
shani).

6. Murabaha Agreement (Deferred Payment Sale)

Murabaha is selling goods at the original price with the added advantage that is agreed upon. In the
National Sharia Board Fatwa No. 04 / DSN- MUI / IV / 2000 on murabaha mentioned that the first
purchase necessary items the customer on behalf of the first party itself, and this purchase to be
valid and free of usury. Then the customer pays the agreed price of goods is in a certain time period
agreed upon.

Comparison on Conventional System

 Sukuk in

comparison on conventional system

Deposit in comparison on conventional system
The depositors from conventional banks receive profit from their investments in the form of
predetermined interest rates irrespective of bank’s performance. This means that if for example, a
conventional bank agreed to pay you 3% in interest for a sum of money over a certain period of
time, then the bank is obligated to pay you the interest at the end of the tenure (even if the bank
makes a total loss on its investments). For that very reason, a conventional bank is allowed to
maximize profits without any general restriction.

In Islamic Banking, on the other hand, bank depositors receive their returns depending solely on the
bank’s performance. Unlike Conventional Banks, an Islamic Bank acts as an intermediary between
the depositor and the entrepreneur. As such, Islamic banks declare their profits on a monthly basis
as part of their risk sharing scheme. Profits are shared on a predetermined profit sharing ratio that is
agreed between the depositors and bank while losses are shared equally between all the
participated parties.
This means that depositor’s profit/loss will vary from month to month directly depending on how
the bank performs. While this may be the case, it is probably unlikely for a bank to under-perform
and for you to actually make a loss on your deposit.

It should be noted that Islamic Banks are not allowed to maximise profits as earning excessive profit
or “Riba” is illegal under Shariah Law. So for example, if you placed the deposit under a 6-month
tenure, there could be as many as 6 different profit rates throughout the period with the final profit
paid upon maturity. Thus any “Interest rates” that you might have seen on Islamic bank websites are

actually reference rates based on the performance of the bank in previous periods.

Saving in comparison on conventional system

Saving account is one kind of Islamic banking products in funding. There are some
differences between saving account in the conventional bank and in the Islamic bank.
According to the Law number 10 of 1998 on the Amendment of the law number 7 of 1992
on Banking, a savings account is a deposit that can only be withdrawn under a certain pre-
agreed condition, but cannot be withdrawn through cashier’s checks, bank drafts, or other
instrumental proxies.
Regarding such definition of saving account in the conventional bank, it is different with
saving account in the Islamic bank. In Islamic bank, it provides an Islamic savings account
that is managed under the principles of sharia. In this case, the National Sharia Council has
issued a fatwa stating that the savings account considered as sharia compliant are those
based upon the wadiah and mudharabah principles.

Implementation in Islamic Banking

Saving Implementation in Islamic Banking

In Islam there are 2 types of saving, Wadiah Saving and Mudharabah Savings. Between Wadiah
Savings Deposits with Mudharabah Savings are not the same. Because the akad of wadiah is based
on a voluntary agreement / social or tabarru then there is no advantage for the results to its
customers. While at the Gains In mudaraba through revenue sharing. At Wadiah Savings Islamic
banks can provide bonuses are directly placed into accounts belonging to customers, wadiah’s bonus
has two requirements, namely: There is agreement in the beginning, and not the amount
determined in the beginning because it was a bonus and voluntary. While the Mudharabah Savings
is savings that binds on the cooperation between banks and customers. On Mudharabah savings,
savers customers act as shahibul mall (the owner of the funds) and Islamic banks as mudharib (the
fund manager). While On Wadiah Savings, customers as the peer of goods or funds and Bank As peer
Institution of goods or funds. Differences in saving deposits and savings mudharabah located three
aspects: the nature of the funds, incentives and refund. The nature of the funds on deposit are
saving deposits was the nature of the savings funds are investment mudaraba. Incentives on saving
deposits in the form of bonuses that are not required upfront and voluntary if the banks want to
give it. As an incentive to the mudaraba savings is in the form of profit sharing that must be given by
the bank if the earn income or profit in any agreed period (usually one month) to depositors in
accordance with the agreed ratio. In the case of a refund, saving deposits will be refunded all
guaranteed by the Bank, but the savings are not guaranteed mudharabah refunded all. Mudharabah
savings are not guaranteed returns linked to the mudaraba principle stating that operating losses are
borne entirely by shahibul maal round loss was not caused by negligence mudharib. Some Islamic
banking experts add difference Mudharabah saving deposits with savings at the time of withdrawal.
Wadiah savings can be done at any time being mudaraba savings can only be made during the
period or specific time.

The similarity of the two products are, product is funding Islamic bank in the form of savings with
wadiah and mudaraba. Both products are equally getting extra, at additional Wadiah Savings in the
form of bonuses, while the Mudharabah is a profit-sharing. Savings fund both products can be used
or managed by the bank.

Deposit Implementation in Islamic Banking

In the case of Islamic banks, current account deposits can be categorized as loans. In fact, the bank
guarantees the full return of these deposits on demand to the depositors, who in turn, authorize the
bank to utilize their funds for any purpose permitted by the Shari’ah at the bank's own risk. Hence, if
there is any profit resulting from the employment of these funds, it accrues to the bank and if there
is any loss, it is also borne by the bank. Loans accounts are not eligible for a share in profits, as they
are not subject to risk and there shall be no return or mark-up payable on them. Therefore, Islamic
banks that have ruled current accounts may be eligible for payment of gifts, but not profits.

Current Account deposits with Islamic banks follow the principle of Amanah, where they cannot be
guaranteed or Wadiah where their principle amount is treated as loan and therefore guaranteed, in
that case the Islamic bank has the permission the deposits in their own operations. The depositors
have no right to any return or profit on such deposits. However, gifts to such depositors can be given
entirely at the discretion of the Islamic banks. And as the banks are not allowed to pay any return for
the use of the depositors’ funds that take the form of loans, awarding such gifts should not take the
form of a custom or a permanent feature of a bank’s operations.

Current Account deposits with Islamic banks can also be based on the principle of Qard, in which
case the bank gets authority to use current accounts funds as non-interest loans to invest in its own
operations. Current accounts with Islamic banks in case of Qard are similar to current accounts with
conventional banks as regards the obligation of the bank to return the credit balance upon demand.
The relationship between the depositor and the bank is that of lender and borrower whereby the
client is simply the lender and the bank is the borrower. It is of bank’s responsibility to return the full
amount of such deposits even in the case of loss in its overall business. If the bank indicates at the
time of account opening that it will invest the funds deposited under current accounts at its own
discretion in any Shari’ah-compliant business, it can benefit from these accounts without requiring
passing on any part of their profit to the depositors, as they are not subject to risk. The bank will be
liable for any possible loss and the depositors are guaranteed full repayment of the deposits, net of
the service charge, if any. Instead, such accounts may be eligible for gifts for use of the clients’ funds
on a non-regular basis, which cannot be seen as dividends.

Investment accounts in account are deposits that are taken on Partnership Basis. They cover all
those accounts where the client agrees to place deposits for a fixed period of time or term, and are
governed by the Mudarabah (contractual relationship executed between two parties, one supplying
the capital (rabbulmal) and the other supplying the labor and skill as agent or manager (mudarib),
for investing in a pre-determined activity, which grants each party a share of the earnings as
determined at the time of the investment.) contract with the bank. No withdrawal is normally
allowed in case of a fixed term deposit until the end of the period. However, more and more banks
agree with the client on an early withdrawal notice, or they are simply allowing early withdrawals
without notice. Fixed term deposits can be distinguished on the basis of maturity as well as on the
basis of purpose, as it is possible to give special instructions to the bank to invest a particular deposit
in a specified project or trade. This is the case in restricted investment deposits, where the depositor
authorises the bank to invest the fund in specific projects or sectors for a specific period,
determining the level of risk to be taken. There also unrestricted investment deposits where the
depositor gives the Islamic bank unconditional permission to invest the fund without any restriction
as to sector, project or period, etc., provided all transactions are in compliance with Islamic
principles and fall within the bank’s investment criteria.

Term deposits follow Mudarabah rules in a first stage; the bank, as Mudarib, uses its discretion in
managing the affairs of the Mudarabah and takes other necessary actions for the benefit of the
Mudarabah. The deposits are allocated by the bank to a number of investment pools where it puts
the invested amount in Shari’ah-compliant businesses. The investment should through the entire
process of a business activity which involves risk taking at each stage. The Islamic bank bears all
expenses related to general management and distributes the net proceeds between the pools and
then among the depositors represented by the pool. How much profit each depositor earns depends
on the final outcome of the bank's own investment; in fact, the bank proceeds to a constructive
liquidation after the term or at the end of the accounting period, so that the joint relationship starts
afresh for the next accounting period. The rate of return on a deposit in an Islamic bank is directly
linked to the quality of the bank’s investment decisions. Therefore, instead of promising depositors a
predetermined fixed rate of return on their investment, the bank tells them only the ratio in which it
will share the profits with them. Profits are calculated and accrued every month and paid on
maturity of the deposit or as agreed between a depositor and the bank. If a bank contributes part of
its capital in a pool at the time of setting up an investment pool, the partnership will fall under the
rules of Musharakah (joint enterprise in which parties share the profit and loss of the enterprise).
The bank will be an investor just like other depositors. All participants in an investment pool will be
partners among themselves, they will all have the right to participate in the appreciation of the
business as a whole and the bank will serve as the fund manager responsible for investing the funds
of the investment pool.

Sukuk (Check) Implementation in Islamic Banking

The AAIOFI (Accounting and Auditing Organization for Islamic Financial Institutions) is a non- profit
organization,established in March 1991 to maintain and promote Sharia standards in the Islamic
financial industry. Since its establishment," it has been supported by institutional members (155
members from 40 countries, so far) including central banks, Islamic financial institutions, and other
participants from the international Islamic banking and finance industry worldwide"(AAIOFI
,2008,P.1).

The AAIOFI published a standard in May 2003 on "investment Sukuk"which opened the door for the
Islamic financial product. Since then, the sukuk industry has mobilized all short and long-term
savings and idle funds of Islamic investors as well as providing capital and liquidity to the capital
demanders such as business entities and governments.

The Sukuk market experienced a great growth between 2001(USD 500 million) and 2007(USD 60
billion). However, in 2008 the number of sukuk issued globally declined for the first time by over
50%as compared with 2007. Market experts and commentators basically blame:

a) the global financial crisis;

b) lack of standardization in the market and

c) recent high- profile Sukuk defaults by originators (P. 89, Sukuk Guidebook).

Some market analyst believed that one of the major causes of the sukuk market downfall in 2007

was the criticism of Sheik Muhammad Taqi Usmani, a prominent scholar who stated that 85% of Gulf
sukuk do not comply with Islamic Law (sharia). To insure the sharia compliance of newly issued
Sukuk, the AAIOFI issued a six standards resolution in February 2008 as follows:

1. Sukuk to be tradable, must be owned by sukuk holders with all the rights and obligations of
ownership in real assets, whether tangible, usufruct or services. The transfer of ownership should
not be shown as the assets of seller or manager.

2. Sukuk to be tradable must not represent receivables or debts.

3. It is not permissible for the manager of Sukuk to offer loans to Sukuk holders when actual
earnings are smaller than expected ones. It is permissible to establish reserve account for the
purpose of covering such shortfalls, provided the same is mentioned in prospectus.

4. It is not permissible for the investment manager to repurchase the assets from Sukuk holders for
its nominal value when Sukuk is terminated. It is permissible to purchase on the basis of net value of
assets, its market value, fair value or price to be agreed at the time of their actual price.
5. It is permissible for a lessee in Sukuk al-ijara to undertake to purchase the leased assets when the
Sukuk are extinguished for its nominal value, provided lessee is not a partner, investment manager
or investment agent.

6. Sharia supervisory boards should not limit their role to the issuance of fatwa on the structure of
Sukuk, but should also oversee its implementation and compliance at every stage of the operation.

As it can be seen the purpose of the six standards is to enhance transparency and bring the
substance of Sukuk products closer to the basic principles of sharia. Accordingly, the sharia board
advises Islamic institutions to decrease their involvement in debt related operation, as in
conventional financial system and to increase true partnerships based on profit and loss sharing in
order to achieve the objective of sharia. The 2008 Standard & Poor commented that if market
returns to its normal condition, the total value of sukuk issuances outstanding all over the world
would exceed USD 100 billion. This positive outlook for the sukuk market perhaps is the immediate
result of the AAIOFI Sharia guidelines that promises a stronger future for Sukuk market.

Sukuk can be of many types depending upon the type of Islamic modes of financing and trades used
in its structuring. However, the most important and common among those are ijarah, shirkah, salam
and istisna. Among the fourteen eligible sukuks identified by the AAOIFI, following are more
common :

1. Mudaraba Sukuk

These are investment sukuk that represent ownership of units of equal value in the Mudaraba equity
and are registered in the names of holders on the basis of undivided ownership of shares in the
Mudaraba equity and its returns according to the percentage of ownership of share. The owners of
such sukuk are the rabbul-mal. (AAOIFI). Mudarba sukuk are used for enhancing public participation
in big investment projects.

2. Musharaka Sukuk

These are investment sukuk that represent ownership of Musharaka equity. It does not differ from
the Mudaraba sukuk except in the organization of the relationship between the party issuing such
sukuk and holders of these sukuk, whereby the party issuing sukuk forms a committee from the
holders of the sukuk who can be referred to in investment decisions (AAOIFI). Musharaka Sukuk are
used for mobilizing the funds for establishing a new project or developing an existing one or
financing a business activity on the basis of partnership contracts.

The certificate holders become the owners of the project or the assets of the activity as per their
respective shares. These Musharaka certificates can be treated as negotiable instruments and can be
bought and sold in the secondary market.

3. Ijara Sukuk

These are sukuk that represent ownership of equal shares in a rented real estate or the usufruct of
the real estate. These sukuk give their owners the right to own the real estate, receive the rent and
dispose of their sukuk in a manner that does not affect the right of the lessee, i.e. they are tradable.
The holders of such sukuk bear all cost of maintenance of and damage to the real estate. (AAOIFI).
Ijarah sukuk are the securities representing ownership of well defined existing and known assets tied
up to a lease contract, rental of which is the return payable to sukuk holders. Payment of ijarah
rentals can be unrelated to the period of taking usufruct by the lessee. It can be made before
beginning of the lease period, during the period or after the period as the parties may mutually
decide. This flexibility can be used to evolve different forms of contract and sukuk that may serve
different purposes of issuers and the holders.

4. Murabaha Sukuk

In this case the issuer of the certificate is the seller of the Murabaha commodity, the subscribers are
the buyers of that commodity, and the realised funds are the purchasing cost of the commodity. The
certificate holders own the Murabaha commodity and are entitled to its final sale price upon the re-
sale of the Commodity. The possibility of having legally acceptable Murabaha-based sukuk is only
feasible in the primary market. The negotiability of these Sukuk or their trading at the secondary
market is not permitted by shariah, as the certificates represent a debt owing from the subsequent
buyer of the Commodity to the certificate-holders and such trading amounts to trading in debt on a
deferred basis, which will result in riba. Despite being debt instruments, the Murabaha Sukuk could
be negotiable if they are the smaller part of a package or a portfolio, the larger part of which is
constituted of negotiable instruments such as Mudaraba, Musharaka, or Ijara Sukuk. Murabaha
sukuk are popular in Malaysian market due to a more liberal interpretation of fiqh by Malaysian
jurists permitting sale of debt (bai-al-dayn) at a LIBOR +175bps.

5. Salam Sukuk

Salam sukuk are certificates of equal value issued for the purpose of mobilising Salam capital so that
the goods to be delivered on the basis of Salam come to the ownership of the certificate holders.
The issuer of the certificates is a seller of the goods of Salam, the subscribers are the buyers of the
goods, while the funds realized from subscription are the purchase price (Salam capital) of the
goods. The holders of Salam certificates are the owners of the Salam goods and are entitled to the
sale price of the certificates or the sale price of the Salam goods sold through a parallel Salam, if any.
All standard shariah requirements that apply to Salam also apply to Salam sukuk, such as, full
payment by the buyer at the time of effecting the sale, standardized nature of underlying asset,
clear enumeration of quantity, quality, date and place of delivery of the asset and the like. One of
the Shariah conditions relating to Salam, as well as for creation of Salam sukuk, is the requirement
that the purchased goods are not re-sold before actual possession at maturity. Such transactions
amount to selling of debt. This constraint renders the Salam instrument illiquid and hence somewhat
less attractive to investors.

Thus, an investor will buy a Salam certificate if he expects prices of the underlying commodity to be
higher on the maturity date.

6. Istisna Sukuk

Istisna sukuk are certificates that carry equal value and are issued with the aim of mobilising the
funds required for producing products that are owned by the certificate holders. The issuer of these
certificates is the manufacturer (supplier/seller), the subscribers are the buyers of the intended
product, while the funds realised from subscription are the cost of the product. The certificate
holders own the product and are entitled to the sale price of the certificates or the sale price of the
product sold on the basis of a parallel Istisna, if any. Istisna Sukuk are quite useful for financing large
infrastructure projects. The suitability of Istisna for financial intermediation is based on the
permissibility for the contractor in Istisna to enter into a parallel Istisna contract with a
subcontractor. Thus, a financial institution may undertake the construction of a facility for a deferred
price, and sub contract the actual construction to a specialised firm. Shariah prohibits the sale of
these debt certificates to a third party at any price other than their face value. Clearly such
certificates cannot be traded in the secondary market.

7. Hybrid Sukuk

Considering the fact that Sukuk issuance and trading are important means of investment and taking
into account the various demands of investors, a more diversified Sukuk – hybrid or mixed asset
Sukuk – emerged in the market. In a hybrid Sukuk, the underlying pool of assets can comprise of
Istisna, Murabaha receivables as well as Ijara. Having a portfolio of assets comprising of different
classes allows for a greater mobilization of funds. However, as Murabaha and Istisna contracts
cannot be traded on secondary markets as securitised instruments at least 51 percent of the pool in
a hybrid Sukuk must comprise of Sukuk tradable in the market such as an Ijara Sukuk. Due to the fact
the Murabaha and Istisna receivables are part of the pool, the return on these certificates can only
be a pre-determined fixed rate of return
 Conclusion
The formation of Islamic banks and adoption of parallel Islamic banking by several conventional
banks over the years can be an indicator of the high acceptability of this sector by the public. The
main reason for the demand for Islamic banking can be attributed to the desire of people to engage
in financial transactions that adhere to the rules of Shariah. The demand from this segment induces
banks to either offer Islamic finance exclusively or as a parallel service with other conventional
offers. Islamic finance, in theory, is designed to work for the greater benefit of the society. Such
conventional banks are criticized for running Islamic banking branches not to serve this purpose but
to act as profit centers or strategic business units. Islamic units enable these banks to cater to a
segment in the market comprising people preferring the Shariah based system.

All this suggests that Islamic banking is an attractive venture in Indonesia. The high demand for
interest-free services contributes to the immense growth potential of the sector. For competitive
reasons, banks do not entirely abide by the rules of Shariah, and this prevents the system from
having the expected impact.

In conclusion, we all know the system of how the saving, deposits, and checks work in Islamic banks.
Although there is different between the Islamic banking and in the conventional banks likewise how
the savings in the Islamic banks got no any interest while in the conventional banks there is interest,
it is because the Islamic banks comply to the Sharia based on the KHES and other related
regulations, and most importantly it is based and referred to the Islamic teachings.