Pre Signing and Sequence in Contract Execution of Islamic Banking Products

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PRE SIGNING AND SEQUENCE IN CONTRACT EXECUTION OF ISLAMIC BANKING PRODUCTS

By

Assoc Prof Dr Asmadi Mohamed Naim

ABSTRACT

Pre signing of all transactional documents in one sitting by the customer is among the issues that is questionable as it does not follow the sequence in Shari'ah concept of 'offer and acceptance'. As 'offer and acceptance' or 'ijab' and 'qabul' i.e. sighah in popular juristic view is an absolute, and executed only after the possession of the contracted item, pre signing in normal circumstances has been seen as a promise from one party to purchase or to sell. Hence, the question that arises from such a practice is whether the promise can be considered an 'offer' or 'acceptance', or not? Any compliant issues in contract execution will affect the validity of the contract. Therefore, this study aims to discover a few objectives such as the Shari'ah view on sequence of contract execution in Islamic banking products; and Islamic banks' practices in executing contract in vehicle financing, house financing and personal financing. The paper also discloses Islamic views on contract execution and how Islamic banks practice contract execution with customers. The paper suggests that the offer and acceptance should be done in a proper manner as described by Islamic jurists where technology devices and communication technology should be used to overcome pre-signing needs.

Keywords: Pre-signing, sequence of contract, Islamic banking product, Shari'ah

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1.0 Introduction

As Islamic banking is moving towards a maturity phase, there are many calls from various quarters that Islamic banking must move towards fulfilling the objective of Shari'ah (maqasid) instead of just fulfilling the contractual element of the transaction. Although the Shari'ah Committee (SC) is a compulsory element in Islamic financial institutions, there is still a lot of confusion in terms of how the institutions have harmonized Shari'ah pronouncements with their practices. Hence, before moving towards absorbing 'maqasidic approach' in Islamic finance, there are findings of consistent loop holes in the institutions in their implementation of rulings, standards and pronouncements of Shari'ah committee.

Perhaps individual pronouncements from certain bank's SC was to allow leniency in the way the standards are to be implemented. Hence, there is a need to examine the accuracy of Islamic banking practices or degrees of compliances, and among the topical issues is the manner in which Islamic banks executed the financial contracts.

"Pre-signing" operationally defined as the event where the customer signs a series of Shari'ah transactional documents (including legal documents) at a single sitting and thereafter the bank shall sign the same documents at a separate sitting on a later date. It is among the issues that have been forgotten by the industry as they assumed that everything is find to conclude the contract in such manner though it does not follow the sequence in 'offer and acceptance' as propagated by Islamic law on trading transactions. Sighah involves 'offer and acceptance' or 'ijab' and 'qabul' and in popular juristic view must be absolute and executed after the possession of the contracted item. But pre signing in normal circumstances has been seen as a promise from one party to purchase or to sell, and the question is can the promise be considered as 'offer' or 'acceptance', or not? Therefore, a thorough study must be undertaken to analyse the juristic views on this matter and to examine how it has been practiced by Islamic banks in Malaysia. At the end of this discussion, some solutions will be recommended to manage the issues relating to pre signing of contracts.

2.0 Objectives

The study aims to discover the Islamic banking practices in concluding the contracts for vehicle, house and personal financing.

3.0 Significance of the study

This study is very significant in that it will discover the degree of compliance of Islamic banking practices in the sequence required for contract execution. It will contribute greatly towards ensuring that industry players observe the conformity required in contract execution to avoid invalidity of the contracts. The findings and recommendations at the end of the study will provide the solutions to ensure accuracy

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or greater compliance to the rules in the execution of contracts. Furthermore, the study will help scholars, practitioners and students to understand the gravity of the issues on pre signing of contracts as they face them in their everyday practices.

4.0 Literature Review

Many statements had been made by various parties in criticizing the practices of Islamic financial system. These critics were not merely from people outside the industry, but came from those who are involved with the industry.

Sharifah (2004) had highlighted in his thesis entitled: "Debt Financing in Islamic finance: Practice in BIMB" that there were few questionable issues with regards to Islamic banking practices such as high profit ratio taken by Islamic banks without considering social obligation that upheld by Shari'ah. Furthermore, in the event of default, the bank also charges many types of penalties which show that the banks are upholding profit based objective only. It seems that Islamic bank is at par of conventional bank in upholding profit as its ultimate endeavor.

On the other hand, Sharifah (2004) also highlighted that contract ceremony in Islamic banking practices have not been taken care seriously by Islamic banks although contract is an important part to determine its validity.

Her statement suited the Abu Zahrah (1977: 20) statement where he explicitly mentioned that any defect in the pillars of contract may invalid the contract. Therefore, both parties should observe the way how they transacted carefully to ensure that their transaction is free from prohibited elements.

Moreover, President of General Committee of Islamic Financial Institutions, Shaykh Salih Ali Kamel declared in his statement at International Forum on Economics Development and Poverty Alleviation at Kuala Lumpur on 3 September 2007 that: "Most of Islamic banks that offer Islamic banking services did not follow the procedures and the Shari'ah rulings"