Oct 30, 2018 5:54pm

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The issue about the status of Multi Level Marketing when there are certain parties that abuse the concept of MLM business such pyramid scheme. Pyramid scheme is absolutely different with the MLM business. The recruitment of a new member or participant is their main income sources. In the pyramid scheme, there is no product being moved because their income comes from the registration fee of new participants. This is not permissible and any operation of this business strategy must avoided by Muslim because this activity is persecuting people which is the upper level will get more money. In real MLM business, money is made only when the person moves product, not when people signed up.

 

Public perspective of Multi Level Marketing was the upline in the company earn commission from the sales of downline. This was the most common criticism against MLM because they assumed that the downline whose tried to sell the products and the upline just waited for the sales to generate by the downline. The truth was the upline also played an important role in the business. They have to trained the downline on how to promote the products, ways to attract the consumers and other things.

 

The perspective of MLM in public’s eyes was the members of MLM earn profit and income without spending a capital and less effort. It is due to the misperception from the public that fails to distinguish between MLM business with pyramid schemes that hidden behind MLM company. The actual MLM business need the members to have the startup capital and operating cost as well as high effort to achieve higher income. The capital and effort is usually much less than the issued capital.

 

The public assumed that there is possibility of gambling in MLM business. The risk of building a network by recruiting new members are acceptable risk-taking in business. However, shariah issues may arise if the company not recruit new members to carry out the business through marketing of the product, otherwise used for head hunting to earn commissions through the new recruitment. Although in shariah this method is not considered as gambling because gambling is done as money game that taking other people’s property with haram’s way.

Execution of Trades
 Computer systems record buy and sell orders so quickly that investors can know their price and other details within seconds. In addition, because electronic trading eliminates handling of transactions by people, errors have become infrequent. Though the long-established standard of three days remains in effect for verification that money has changed hands and the shares have been recorded in the buyer's account, in practice, electronic trades accomplish all of that in seconds.

High-Frequency Trading
Electronic trading has encouraged the phenomenon of high-frequency trading. People using this trading style buy and sell stocks within the same day, sometimes executing a full buy-and-sell cycle within minutes. Though this gave rise to what is commonly called "day trading" for individuals, the true impact comes from institutional investors who initiate trades in millions of shares in a matter of moments. This can trigger a buying or selling frenzy among other investors who want to participate in what they see as a trend developing in a particular stock. This type of trading was unavailable when trading was much slower.

Program Trading and Glitches
Many institutional investors, such as mutual funds, hedge funds and pension funds, use programs to buy and sell stocks. This can result in a sudden sell-off or purchase of stocks, because the program has a specific date and time to make the trade. Investors can be fooled by the sudden volume. In addition, some institutional investors experience technology glitches that can trigger sudden buying and selling. These events can put traders in a panic, because they see no news to justify the trades, and assume that they should buy or sell the stock so they can be in on the action.

Inflation and deflation
Inflation can have an adverse affect on the stock market. Inflation is the rate at which the price of goods and services increases. It is the result of several factors including a rise in the cost of manufacturing, transporting and selling goods. When inflation ia at a low rate, the stock market responds with a surge in selling. High inflation causes investors to think that companies may hold back on spending. This causes an across the board decrease in reveneu and the higher cost of goods coupled with the drop in reveneu causes the stock market to drop. Deflation is when the cost of goods drop. While deflation sounds like it should be welcomed by investors, it actually causes a drop in the stock market because investors perceive deflation as the result of a weak economy.

Forex investments made by individuals on online or we called it as internet platforms are illegal. This decision has been made by the National Fatwa Council's muzakarah. This is because the muzakarah finds that individual forex trades by electronic platforms contain elements such as riba through the imposition of rollover interest, the purchase and sale of debt through leverage, qabd which is not clear when exchange transactions, currency-denominated sales and speculation involving gambling. Forex online is usually not allowed to individuals, but it is allowed to Islamic Banks. This is because currency is a 'ribawi' thing. Mean that, it must be sold in cash and currency exchange occurs on the spot (not delayed). If run online, it will be inconvenient for individuals to make it happen on the spot. That is why it is not allowed. For example; if the exchange of two currencies is different, US Dollars convert to Ringgit Malaysia must comply with "spot transaction" requirements. Means, they must have account that will help them to make the "spot transaction" to avoid the delay in any transaction. In addition, forex activity in the bank's conventional concept it does not take care of the conditions that shariah is subject to. Then, forex activity like this is classified as riba nasiah. Where riba is a matter of illicit and prohibited in transactions according to shariah islam. The forex run by conventional banks is the "forward" forex which is this  forex not illegal transaction in islam. Forex using this 'Forward' value is certainly known to generate more profit than the spot in most cases if appropriate. Forex is based on Islamic perspective it is an activity that is required if it complies with Islamic shariah (avoid usury elements). 

Which mean, any trade and transactions made shall be subject to all that has been defined by shariah. It is to ensure that any activity made does not lead to illegal things. Other example in forex trading, if we have 1000 usd and we trade for 1000 usd with another currency and pay cash ( rule of Sarf in islamic finance), this is acceptable(valid). But, if with them 1000 usd they trade for 2000 or 3000 or more then 1000 usd, it is no more an “investment” it is a speculation, not only they may be exposed to full loss of capital but in addition on what they borrow they will pay interest rates (riba). What is forbidden, clearly, is the speculation. This situation explain to us, that for all these reasons we can not trade more then what we have as money. 

Muzakarah also mentioned that this decision was not applicable to foreign exchange transactions through counters in licensed money changers and foreign exchange transactions operated by financial institutions licensed under the laws of Malaysia. islamic banking activity forex is allowed because they use spot forex transaction, that mean no delay transaction happen between the two parties involved. They have Nostro and Vostro accounts, which mean that account will help them pay on the spot between the two currencies even online. This kind of methods will help them avoid in delay transaction. Besides that, Islamic financial institutions also have Shariah advisors overseeing currency-related activities. So, the way banks make "forex" is different from those who play forex on the internet. This activity needs to get confirmation and approval from their Shariah Advisory Council which they have been already undoubtedly set the strict requirements that must be adhered to in the Islamic shariah. Other than that, forex means foreign exchange. Then, when we mention forex, we know that it is a currency trading transaction. Means that, when buy a currency if we use Al Sarf's sharia contract, it is permissible. From the perspective of fiqhiyyah it is subject to Bay al-Sarf's law which is to be followed by the general terms of sale and special requirements of Bay al-Sarf. The conditions of Bay al-Sarf, there is taqabbudh between the two items involved in the forex platform before the two parties conducting transactions separating from the council. Based on other information, the sale and purchase of the currency shall be levied and shall not be suspended and the sale of al-sarf must be free from khiyar al-Syart. The general terms of sale and purchase is:

·         The parties must have the qualification of contracting (Ahliyyah al-Ta'aqud).

·         The purchase price shall be clearly stated by both parties.

·         The purchase item shall be wholly owned and wholly owned by the seller and may be delivered to the buyer.

·         Sighah akad shall show the plea of ​​both parties, no element of abolition and sighah of consent and qabul must be compatible and conform to each other in terms of its features and rates.

In Malaysia, there are two financial system running parallel to each other.  The conventional system that has existed since the British colonial era and it has been well accepted by people of Malaya and now, Malaysian also accept the system especially the non-Muslim. The system however, is not well received by predominantly the Muslim population of the country because of the system is riba based. The Muslim realised that they need to obligate the shariah rule that prohibited from riba, gharar and maisir.

 The second issue is the comparison between forex in conventional institution and forex in Islamic institution. There is a considerable consensus between Islamic jurists regarding the authority for trading different foreign exchanges with different rates and in cash. This judicial authority is due to independent entity of different currencies and their distinctions in intrinsic value, and purchasing power. Also there is an overall agreement between most of fiqh schools about invalidity of implementing currency futures and forwards because of deferment in settling commitment and rights of parties to a future time. However for validity of different financial instruments in FOREX, following fiqh conditions are necessary; (1) The authority of the parties. (2) The necessity to offer and acceptance in contracts. (3) The forbidden of riba. (4) The forbidden of gharar.

Firstly, as we know in Shariah compliance, the element of the riba is not permissible in trading or forex currency. However, the element of the riba is applicable in the forex of conventional institution. If there are element of riba is involved in forex trading, the Muslims is not allowed to enter in that forex. The Muslims is encouraged and permissible to enter the forex trading in Islamic institutions than the conventional institution. There are the element of the riba in conventional institution and  the conventional forex also involved trading and usury, the usury is also not allowed in Shariah and the Muslims is not encouraged to enter the forex trading in conventional institution because the element of the usury is not permissible in Islam.

The forex trading in Islamic institutions is allowable in a contracts that name Bay’ al-sarf. According to the Ijma Fuqaha, comprising of Hanafi, Maliki, Shafii and Hanbali school of thought said bay’ al- sarf  is considered as a trade where foreign currency is involved but there are several pillars to which al-sarf is based upon in order to fulfil the requirements of the mechanism of Islamic currency exchange. If the several pillars is not followed, the contract may be null or void. It is because in the contract of Bay’ Al- Sarf[U1] [U2]  may be have the element of riba or others elements that are prohibited in Shariah compliance.

 

In addition, the forward forex or hedging is applicable in conventional but not in the Islamic institution. This is because, the majority Fuqaha agrees that forward forex or hedging should not permissible under bay’ al- sarf. The meaning of the forward exchange or hedging an essential instrument where both parties agree to exchange two chosen currencies at a precise time in the future. The instrument that involved in the forward exchange or rate is vital because the purpose of the forward forex or hedging is to protect buyers from currency price fluctuation. However the practice is obviously uncertain and it may have the element of maysir.  We are not certain that the currency of the forex will increase as their plan or may be the rate of the forex may be decreased in their certain of period. In the conventional, the forward exchange or rate is applicable because they want to minimal risk faced by an institution or financial organization. They will protecting the value of the asset from being exposed to the volatility and fluctuation of a market.

Gharar can be translate as “trading in risk”. In every trading it will involves some degree of risk either high or low. It is possible to see gharar as a continuum of risk and uncertainty where in the extreme point of zero risk is the only point that is well defined. Beyond a point on this continuum, risk and uncertainty or gharar becomes unacceptable. Another presented meaning for gharar is ignorance (Jahl). It arises from inadequate information that caused uncertainty and ambiguity. Uncertainty appears when the terms of exchange, such as, price, objects of exchange, time of settlement etc, are not determined exactly. This meaning of gharar is more acceptable. The condition above infer from a fiqh axiom namely gharar prohibition

Besides that, in forex conventional institution there are someone who want to involve in the forex trading but they want to exchange currency sometime in future but already fixing a rate in a contract that is sealed today. It is permissible in the conventional institution but not in the Islamic institution because there actually have an element of the uncertainty. The element of the uncertainty is the rate may actually increase or decreased by the period of the contract end. It also might have someone to loss or gain profit but the systems itself is already at risk. It is very different in Forex in Islamic institution because forex in Islamic institutions is involves two different currencies to be transacted on spot basis or at the same time. The people who involved in forex trading already know what their loss or profit because the foreign exchange is made at the present tense and not in the future.

Ta’widh is a word that derived from the word al-i’wad which means instead. It also defined as a fine in a contract that agreed by the parties as compensation that can be claimed by creditor when the debtor unsuccessful to pay or late payment of debts. Besides, it also means damages charged on the actual loss of the lenders financing effected by delayed payment of the receiver. However, the ta’widh is specifically for Islamic banking. In conventional banking system, there is application of a penalty or gharamah. Gharamah means a fine charged for late payment of debts or penalty, with left out proof of existence of the actual loss. Without any doubt, conventional banking system practiced riba’ or charge interest towards their customer when penalty is implemented. 

Practically, in Malaysia ta’widh is used as a mechanism that helps to avoid disadvantage to Islamic banks. It is dissimilar from interest which charged by conventional banks. In the perspective of Maqasid Syariah, ensuring the sustainability of Islamic banking is important in order to protect religion of Islam. The one who deliberately refuse to pay back their debt is known as tyranny by Prophet Muhammad SAW. In addition, Mazhab Hanafi allowed penalty when detriment happened to any party. Majma’ Fiqh al-Islami also totally agree when penalty clause is imposed towards the financier. Therefore, the implementation of ta’widh is allowable but must be in line with guideline provided by Shariah Advisory Council of Bank Negara Malaysia in its 4^th meeting in 1998 which the ta’widh must not surmount the actual loss suffered by the financier.

The appliance of ta’widh in banking system need some time to change and adjust the banking system accordingly. For example, Bank Islam started to implement ta’widh on February 2010 until now, even though ta’widh was introduced since 1998. The other issue related to ta’widh is some of Islamic bank in Malaysia practiced ghramah instead of ta’widh. Usually, it happens in Middle- East Islamic banks that operate in Malaysia. They usually follow their parental bank based in Middle East country and tolerate by AAOFI opinions.

On 20 May 2010 which was the 101^st meeting, the Shariah Supervisory Council of Bank Negara Malaysia has ruled the concept of ta’widh and gharamah that is permissible, in condition of when financial obligations arising from exchange contracts such as buying, selling, and leasing due to the late payment. Ta’widh can be charged after the end of the repayment period that is agreed by the both parties. It also may recognize as income on basis that it is imposed as compensation for actual loss suffered by Islamic banking institutions. Last but not least, grammah must be channeled to certain charities, cannot be taken into account as income.

According to conventional banking, it charged about 2% to 5% of total loans outstanding as penalty. The penalty will be included in the loan amount. It will be pegged to the percentage of the original loan amount, if there is further penalty. 

For example A makes a housing loan of RM100, 000 and the outstanding is RM90,000. A fails to pay the debt for a month. A set of penalty of 5 percent is imposed. As a result if the amount to be paid by A is: 

• RM90, 000 X 5% = RM4500 

• RM90, 000 + RM4, 500 = RM94500 

• RM94500 X 6.75% (interest rate) = RM6378.75 

• RM94500 + RM6378.75 = RM100, 878.7

Compared to Islamic banks ta’widh rate that is charged 1% and non-compounding. This shows that it cost lower than conventional one. .

 For example, B made a financing from the Islamic banks of RM100, 000. In the first year B failed to pay as installments of RM2, 000 per month. On top of that for 2 months arrears. There are, the amount of ta’widh to be paid is: 

· 1% x RM 4,000 = RM 40 

• RM 40 + (RM2, 000 x 2 months) = RM 4,040

As stated above, the amount of the fine charged by Islamic banks for 2 months in arrears is only RM40 and 2 months overdue installments of RM4, 000. Thus, the total need to be paid by B is RM4,040. Therefore that computation shows the difference between ta’widh and penalty (riba’) charged in conventional banks. In fact, revenue derived from ta`widh must be channeled to charitable purpose or used partly as accordance with the Shari’ah Supervisory Council bank advice respectively.

Practically, Islamic banking has impose amount of money as a compensation or penalty, this amount is actually considered as a cost-benefit charge faced by the bank when the customer does not pay its debts to the banks on the time. There are a different between compensation that imposed by Islamic bank and penalty that imposed in conventional banks. Compensation or penalty that imposed by the Islamic bank are due to the process buying or selling with the promised instalment payment in due time. While, conventional bank penalties are based on the loan contract only. The contemporary scholars has divided three (3) groups to determine the compensation of late payment charge that can be imposed in Islamic banks.  

First group is penalty must be charged in money. Syeikh Mustafa Az-Zahra, Syeikh Muhammad Sadiq Ad-Dharir, Sheikh Abdullah bin Mani, syariah advisory council of Islamic bank Jordan, and majority of syariah advisory of Islamic bank in Malaysia. Based on their opinion, the money that Islamic bank got from the penalty can be use by the Islamic bank. This requirement is based on several arguments. 

Second group is penalty must be charged in money but channelled to the virtues. For this group just same with group first from the point of requiring penalty in the form of money imposed when the customers late to pay their debts, but all the money that Islamic bank got from the penalty can’t be use by their own. All the money must be channelled to the public welfare or faqir miskin. One of the scholars that hold on this opinion is Dr Abd Sattar Abu Ghuddah, it was decided by syariah council AAOIFI for murabahah product.

Third group is penalty should not be imposed. Among the scholars who are agree in this group are Dr Nazih Hammad, Dr Md Ali El-Gari and others. For them, penalty that imposed when the customers failed to pay the debt on the time is a riba.    

After referring to the arguments from three groups and based on current condition, I preferred to the second group’s view. The third group’s view also good but to apply it in current condition, it is not suitable because nowadays lack of trustworthiness in customers’ to pay the debts on the time and to make sure Islamic bank didn’t get burden when the customers late to pay the debt so the ta’widh must be imposed. In Malaysia, to avoid the customers from paying the debt late, ta’widh must be imposed on condition it is actual loss incurred by the Islamic bank. The rate of loss is decided by Bank Negara Malaysia. Other than that, the rate of ta’widh is only 1% and it must be not be a compounding value.  

Explanation & analysis of the issues (form different perspective)

Why kootu fund or informal financing is highly practised by most Malaysians? It was derived from the reasons for the development of microfinance itself. Generally, most of the commercial banks will not offer loans to the poor. This is due to a few factors such as screening problems, monitoring problems, enforcement problems, assumption on the poor, non-collateral clients, uneconomic and small loan size clients. 

Due to these factors, the evolution of microfinance is unavoidable in most of the countries. Microfinance is vital in providing support and enhance the living standard of the poor especially those who runs small business. It will be difficult for them to sustain their business without microfinance from the commercial bank which forcing them to make an informal financing or kootu fund. This is also the reason why microfinance initiatives is the solution to the financial limitations and constraints faced by the poor. With the existence of the kootu fund, they are able to develop and expand their business to a better level and get away from the poverty life. 

However, in Malaysia, it is prohibited to carry out such activities, transactions or businesses. It has been stated in the Kootu Funds (Prohibition) Act 1971 under section 3 that “It shall be unlawful for any person to carry on the business of promoting kootu funds and any person who carries on such business shall be guilty of an offence and shall, on conviction, be liable to a fine not exceeding five hundred thousand ringgit or to imprisonment for a term not exceeding ten years or to both.”. 

The Kootu Funds (Prohibition) Act 1971 is enforced up until today because there are always cases where people has been deceived and scammed by the kootu fund activities or businesses. Let us imagine if there is no such law exist to control the fraud scheme, there will be more victims involved in such cases. Therefore, although kootu funds could help the poor to improve their financial and social status but it is also could bring down the poor to a worst situation than before.

 

 

 

References

Rani, N.S.A., Hamit, N., Das, C.A. and Shaikh, J.M. (2011) ‘Microfinance practices in Malaysia: from ‘kootu’ concept to the replication of the Grameen Bank model’, J. International Business and Entrepreneurship Development, Vol. 5, No. 3, pp.269–284.

Kootu Funds (Prohibition) Act 1971 s. 3 (MYS).

Hasbi Sidek. (2018, 17 September). Main Kutu Satu Kesalahan. New Straits Times Press. Retrieved from https://www.bharian.com.my/berita/kes/2018/09/474595/main-kutu-satu-kesalahan-jsjk

Nowadays, Islamic banks offer different financial services and has grown rapidly in Malaysia. They are unique because they are responsible for fulfilling the social and ethical role inherent in their character as Islamic institutions. First and foremost, Islamic banks are not necessarily profit-oriented but they are aimed at promoting Islamic norms and values as well as protect the needs of the Muslim community as a whole without degrading its commercial viability. 

However, there has been an issue of the Islamic bank which has less emphasis on the social welfare obligations of the ummah. Wahbah Al-Zuhayli, a prominent Syariah scholar, supports the socio-economic framework of Islam financial institution in his famous Al-Fiqh Al-Islami wa-Adillatuh, "The main goal of Islam financial institutions are not profits, but the confirmation of socio-economic social goals development and poverty reduction. With this, Islamic banks may need to be more sensitive to the needs community, promoting more social welfare programs and activities and also making more contributions to poor and needy. 

Bank Islam needs to know more and accept the responsibility to contribute in example through zakat for widespread socio-economic goals to alleviate poverty, health improvement, better education and general social development especially in poor communities. This is for the collection and distribution of funds to the poor provision of generous loans (Qardul Hasan) to eligible individuals and regional investment distribution.

As Islamic banking is considered green, their activities had to be ‘commercial as opposed to predominantly socioeconomic’. Therefore, it would be expected that social welfare oriented activities of Islamic banks will increase as these institutions become more established.

Furthermore, based on the two selected fatwas, a study will be conducted such as analyzing the methodology or fatwa approach taken by the MKI Fatwa Committee Muzakarah and the State Fatwa Committee in setting ASB investment law. Muzakarah Fatwa Committee the National Assembly of Islamic Religious Affairs requires investment in Amanah Saham Bumiputera (ASB) and Amanah Saham Nasional (ASN) since 2008. However, there are 3 fatwa who say they disagree with that view and do not justify the investment of ASB. The three disagreeable fatwa include the Selangor fatwa, the Penang fatwa and the Fatwa of Pahang. The secular fatwa does not legalize ASB obviously involved in mixed-investment activities and associates the SC's syariah advisory council classified as non-compliant fund. Additionally, Penang does not legalize because it sees the largest investment of ASB is the Ribawi Bank while Pahang also decides it is not halal it considers ASB's banking activities not syariah-compliant.

However, in 2017, the three fatwa revised its decision and the fatwa was announced by PNB Chairman, Tan Sri Wahid Omar, during the PNB Syariah Governance and Governance Conference at Universiti Sains Islam Malaysia (USIM). The new fatwa decision on ASN and ASB must be resolved by the three fatwa. On April 27, 2017, the Selangor Fatwa Council reconsidered their fatwa and reached the consent of many in requiring the investment of ASB. Selangor's fatwa says the percentage of investment in its Islamic compliant company has surpassed 66% according to the Securities Commission's standard and this requirement is based on the fiqhiyyah method which means 'Change of Law According to Change' Illah that is why. While the Penang fatwa council also reached the same agreement and required the investment on 15 August 2017. Thus, all fatwa has reached agreement in requiring ASB and all parties should welcome the agreement of the state fatwa on the necessity of investing in ASN and ASB.

Furthermore, based on the two selected fatwas, a study will be conducted such as analyzing the methodology or fatwa approach taken by the MKI Fatwa Committee Muzakarah and the State Fatwa Committee in setting ASB investment law. Muzakarah Fatwa Committee the National Assembly of Islamic Religious Affairs requires investment in Amanah Saham Bumiputera (ASB) and Amanah Saham Nasional (ASN) since 2008. However, there are 3 fatwa who say they disagree with that view and do not justify the investment of ASB. The three disagreeable fatwa include the Selangor fatwa, the Penang fatwa and the Fatwa of Pahang. The secular fatwa does not legalize ASB obviously involved in mixed-investment activities and associates the SC's syariah advisory council classified as non-compliant fund. Additionally, Penang does not legalize because it sees the largest investment of ASB is the Ribawi Bank while Pahang also decides it is not halal it considers ASB's banking activities not syariah-compliant.

However, in 2017, the three fatwa revised its decision and the fatwa was announced by PNB Chairman, Tan Sri Wahid Omar, during the PNB Syariah Governance and Governance Conference at Universiti Sains Islam Malaysia (USIM). The new fatwa decision on ASN and ASB must be resolved by the three fatwa. On April 27, 2017, the Selangor Fatwa Council reconsidered their fatwa and reached the consent of many in requiring the investment of ASB. Selangor's fatwa says the percentage of investment in its Islamic compliant company has surpassed 66% according to the Securities Commission's standard and this requirement is based on the fiqhiyyah method which means 'Change of Law According to Change' Illah that is why. While the Penang fatwa council also reached the same agreement and required the investment on 15 August 2017. Thus, all fatwa has reached agreement in requiring ASB and all parties should welcome the agreement of the state fatwa on the necessity of investing in ASN and ASB.