Islamic Investing in Turbulent Times

This short paper, courtesy of MSCI Barra, analyzes the performance and characteristics of the MSCI Global Islamic Indices during the market turmoil that has unfolded in the last 12 months. It focuses on the performance differentials between Islamic and conventional indices - examining sector allocations, valuations, exposures among other things. It goes further in quantifying the correlation/impact on an Islamic index of avoiding financials and maintaining low financial leverage (as compared to the conventional index).

Islamic Investing in Turbulent Times
MSCI Barra
Research Insights

Islamic Investing in Turbulent Times

The New Central Bank Act 2009 (Act 701): Enhancing the Integrity and Role of the Shari'ah Advisory Council (SAC) in Islamic Finance

The New Central Bank Act 2009 (Act 701): Enhancing the Integrity and Role of the Shari'ah Advisory Council (SAC) in Islamic Finance
Hakimah Yaacob, Researcher, ISRA
ISRA Research Paper (No. 6/2010)

"The new Central Bank of Malaysia Act 2009, known as Act 701, was gazetted on the 3rd of September 2009. Anything related to Islamic finance is thoroughly discussed in Part VII of the Act. The previous Central Bank of Malaysia Act 1958 (Act 519) only discussed the Shariah Advisory Council in one section of Part II under the heading of establishment, capital and administration of the bank, whereas the new Act provides comprehensive details for the function of the Shariah Advisory Council in Part VII. The paper reviews the anomalies surrounding the Shariah Advisory Council (SAC) prior to the amendment of the Central Bank Act and highlights the nature of the amendements made. The paper also elaborates the role of expert opinion (al-ra’yu al-khabir) from an Islamic perspective before concluding by summarizing the effect of the amendment on the industry as a whole."

The New Central Bank Act 2009 (Act 701): Enhancing the Integrity and Role of the Shari'ah Advisory Council (SAC) in Islamic Finance

Shariah Compliant Short-Selling: Mechanism 3

Short-Selling Through Salaam/Salaf

The Malaysian SC recently proposed mechanisms for short-selling through Salaam, something that has been proposed as well as the short-selling mechanism on the Newedge Platform (with presumably exactly the same mechanism), but only gaining currency within Saudi Arabia.

AAIOFI gives details to the Salaam contract in its 10th standard on Salaam sales, but states in Standard 21 Financial Paper (Shares & Bonds) that although the salaam sale may work for fungible commodities, they specifically restrict the use of the salaam sale for short-sales of shares. This judgement put a damper on the use of salaam sales for shorting, but the SC goes into some detail on the exact rationale for the use of the Salaam.

Much of it boils down to issues of fungibility and availability. The SC's justification is in three parts,

1. when shares are not considered too specific an item ('ayn mu'ayyan), i.e., they can be specified as fungible
2. salaam permitted provided object's category, type, and the date of delivery are described (i.e., the contract must specify terms to be fulfilled so the contact can be filled without dispute)
3. delivery can be ascertained (i.e., there is a market for them)

All of these must be fulfilled for the case of commodity salaam, but for shares in particular there has been dispute about whether they are mal mithly (fungible items) or mal qimy (specified items).

Jurists usually specify that salaam is approved when the subject matter is mitly or homogeneous, i.e., objects that can be precisely determined in terms of quality and quantity (see e.g., Bus Fin Review, see Saiful Azhar Rosly and Hamdan Hj Ismail, Salaam as Mode of Agricultural Finance in Malaysia: An Analysis of Risk-Taking Behavior of Contracting Parties for a succinct summary of terms of salaam contracts or Md Ayub, p 244). Correspondingly, most jurists specify that salaam is disapproved for mal qimy. The problem with mal qimy and mal mithly is that objects can only be one or the other, they cannot be mithly some of the time and qimy the rest.

Surprisingly there are some jurists who see shares as mal qimy. I personally see this as wrong-headed. It is not unlike saying that dollar bills are specific since they have different serial numbers. Of course there can be specific categories/classes of shares and shares may not be fungible across classes. Nonetheless, if the salaam contract specifies 100 Class B Shares of XXX Company to be delivered 3M from now, then I would claim it is legitimate as long as the market for these shares is functioning.

They cite the example of a salaam on livestock (which I believe is considered to be mal qimy, i.e., usually nonfungible). Hanafis prohibit salaam sales of animals based on a relatively weak hadith. Malikis, Shafiis and Hanbalis allow it based on qiyas (analogy) of the Prophet (saws) allowed borrowing of a camel. These three schools allow salaam sale of animals conditioned on the specification of its genus, age, gender, color and approximate size (see for example Zuhayli, vol 1, p 251).

[Deleted in Original Posting] In other words, the SC rule that the illah or effective cause of prohibition of bay' as-salaam on certain articles is not whtether they are mal mithly or mal qimy but rather whether the article can be described in enough generality but with correct specification (or 'ayn ghair mu'ayyan) so that there is no dispute when it comes to delivery. The SC thus claim that mal mithly or mal qimy are both possible objects of sale in a salaam sale. This is a clear extension of the standard view of salaam, but it incorporates salaam on mal mithly and salaam on animals (legimated according to Hanafi, Maliki, and Shafi'i as mentioned above) under one umbrella. This qiyas (analogical ruling) gives greater possibilities when it comes to possible deliverables.

Some space is devoted to market failure. The interesting note is that short-sale through salaam will be different to a conventional (naked or otherwise) short-sale because in the former, a 'squeeze' or lack of availability means that the salaams are unwound according to prespecified conditions, i.e., there is not a possibility of a fail, while in conventional shorts, fails are a common market occurence, and squeezes can lead to extreme distortions. This is definitely an area where Islamic Finance can better its Western counterpart.

Comments, Criticisms and Corrections welcome. Please post here and not just on LinkedIn Forum.

(and, blog readers do take a look at LinkedIn group Global Islamic Funds & Sukuk for generally interesting and intelligent debate on this and many more topics)

Shariah Compliant Short-Selling: Mechanism 3

CW: Evaluating the Performance of Ethical and Non-Ethical Funds: A Matched Pair Analysis

Evaluating the Performance of Ethical and Non-Ethical Funds: A Matched Pair Analysis
N. Kreander, R. H. Gray, D.M. Power, C. D. Sinclair
September 2005

CW: Evaluating the Performance of Ethical and Non-Ethical Funds: A Matched Pair Analysis

Islamic Finance, English Law and UK Courts

Can UK Law govern Islamic contracts? Typically, the vast majority of internationally traded contracts are drafted so as to say that English Law applies. But how can English Law apply and Shariah Law apply at once?

This is not particularly new, but many in the Islamic Finance Community are not aware of the implications. In Shamil Bank of Bahrin v Beximco Pharma and Others, the defendants argued that the financing agreements in a Murabaha contract were governed by English Law but only if they were consistent with the principles of Shariah. Moreover, the contract was so worded to provide that it was 'subject to the principles of the Glorious Sharia'a'.

But the court cited standard practices (Rome Convention on the Law Applicable to Contractual Obligations 1980), there could be no two separate systems of law governing a contract. Consequently, the judge held that even if the plaintiff (Shamil Bank) acted in contradiction of the Shariah and this may have contributed to the defendants subsequent default, it was no matter for English courts to decide and that they must decide only in accordance with English Law. (See Shari'a Compliance and the Shamil Bank Litigation for more details).

In a separate case with relatively similar circumstances, Islamic Investment Company of the Gulf (Bahamas) Ltd. V. Symphony Gems N.V. & Others (see Killian Balz, reference below), the defendants argued that the Islamic Bank did not adhere to the Shariah and that requisite deliveries of commodities which were required were not made, rendering the Murabaha agreement (or rather the 'markup' portion) entirely Ribawi. While the matters were the subject of serious deliberation (did failure to deliver the goods amount to a genuine contractual default? Was it truly a contract of 'sale' under English Law or was it a financing scheme? These and more subtleties are discussed in Balz's paper).

Again the English court decided in favour of the bank, claiming no expertise to decide matters of Shariah. In both cases, contravention of Shariah was considered insufficient evidence to decided in favour of defendants or was deemed undecidable by English courts. The courts decided that English Law Only applied. And, in both cases, defendents, presumably expecting to act in an Islamically legitimated manner (i.e., why did they even bother entering into these more expensive and burdnsome financing arrangements unless it actually meant something to them from a moral point of view), were compelled by the courts to act in a very non-Islamic fashion.


Mahmoud El Gamal, in his essay, the Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering argues that this points to (one of the many) failings of the use of Contract Law alone as a means of enforcement and regulation of Islamic Finance. He also cites the many cases of Islamic banks who point to similarities between Islamic and conventional contracts as a reason for their seeking quick approval from regulatory authorities. How can a murabaha be merely a financing arrangement just like an interest-bearing loan in the eyes of the regulator, and yet this same arrangement is expected to be treated as trade, not riba, by the courts? In order to prevent hiyal/ruses, in order to prevent this sort of forcing "shariah compliant" into conventional pigeon holes, we should seek the establishment of strong bodies of regulation and the empowerment of appropriate regulatory institutions.

(This is not to say that Islamic countries are not without their idiosyncracies, as we saw recently with the Malaysian High Court decision declaring BBA non-compliant and the subsequent 31 March 2009 Appeals Court reversal in the case of Affin Bank Bhd vs Zulfikli Abdullah and Others.)

Although El Gamal is correct in thinking that contract-based Islamic Finance does have the (very high) likelihood of being incoherent, there are possible solutions to this, and it may be plausible if not somewhat onerous, through contract. For instance, it could be spelled out that if the bank does not take ownership for the underlying commodity, asking the client to be their agent that the bank (not complying with Shariah) is in default. While this is clearly not a mere sale, being a sale and an agency arrangement, and trade finance, etc, it can be impressed on the courts through appropriate wording (i.e., to give it a look and feel quite different from an interest-bearing loan) that any lack of adherence to the detail of the contact is truly a default. Again, all eventualities must be entirely spelled out to make it "more" likely to adhere.

Certainly the most appropriate way forward is to have a governing body of regulation such as is the case in Malaysia or Bahrain, so that all eventualities are covered by legislation and courts are compelled to uphold the Law or to have some other means of dispute resolution (see for instance, Islamic finance dispute resolution : The need to complement litigation with expert determination or Islamic finance and the Square Mile where there is some discussion of the plausibility of Shariah-friendly arbitration under English Law).

Is this all timely? Not really. The only recent set of rulings were in the very Islamic jurisdiction of Malaysia, which ruled that BBA was not in fact a sale, later overturning it. It does go to show that even when there is a body of law specifically devoted to Islamic Finance, it is not without its glitches. But at the very least, unlike the cases decided by English Courts, it is likely that in an Islamic jurisidiction, consideration to the actual subtleties of Shariah will be given, and the overall coherence of Islamic Finance will be a subject of considerable discussion (see e.g., Dr Zeti Akhtar Akhtar Aziz: Legal & Shariah issues in the Islamic financial services industry )

References

Shamil Bank of Bahrain EC v Beximco Pharma Ltd and Others [2004] EWCA Civ 19. Court of Appeals [2004] All ER 1072

Bälz, Killian, A Murbaha Transaction in An English Court - The London High Court of 13th February 2002 in Islamic Investment Company of the Gulf (Bahamas) Ltd. V. Symphony Gems N.V. & Ors Islamic Law and Society, Volume 11, Number 1, 2004 , pp. 117-134(18), DOI: 10.1163/156851904772841435

Islamic Finance, English Law and UK Courts

Economics of Liability: An Islamic View

As we delve deeper into the various aspects of Islamic finance, it is worth emphasizing the legal implications of applying Shariah guidelines to various financial contracts. While Islamic finance is often distinguished from the conventional financial system, in practice they both co-exist and in more than one ocassion need to be considered side-by-side. In particular, there are significant differences (i.e. treatment of liability, bankruptcy, foreclosure, etc.) that practitioners should be aware of. These go well beyond the usual introductory aspects of Islamic finance (i.e. prohibition of riba, negative screens, etc.) but are of vital importance for fund managers and product manufacturers.

The below paper provides an introduction to Islamic liability, as we aim for more ellaborate and detailed discussions on Islamic tort law and Islamic liablity law (check the upcoming discussion on Islamic bankruptcy). This paper provides a novel comparison between the American system of liability and the Islamic system of liability (and worth checking for other papers of interest available from the International Islamic University Malaysia).

Economics of Liability: An Islamic View
Monzer Kahf
Former research economist at the Islamic Research and Training Institute (IRTI)
IIUM Journal of Economics and Management

Some excerpts: "The Islamic system of liability centers on the materiality of the injury, both in its causality and in its outcome, and it provides a list of compensations. Accordingly, recognizable emotional harm is only the one that can actually be materially checked, and recognizable loss of income covers only that actually forgone income during the off work period caused by the injury."

"Predictability is one of the main characteristics of the Islamic system of civil liability. This provides the producer with better chance of planning and pricing, and while it compensates the injured it deters consumers from exaggerating their demand for compensation."

Economics of Liability: An Islamic View

Sale at Market-Price (Bay' bi Sir' al Suq)

What the Scholars Say
While scholars have stated that price (thaman) must be fully determined at the time of contract, the means of this determination are subject to some disagreement. For many jurists, it is not valid to sell at "the market determined price" or "at the price at which people sell" or a the price "that so and so chooses" since the price is unknown. But this sort of sale, "market order" can have the price specified in such a way that there can be little chance of disagreement.

Imam Ahmad ruled for the validity of sale at the price to be determined by the market at a specified future time, without specifying that price at the time of the contract due 'Urf.

Ibn Taymiyyah states that a price may be determined in exact figures or it may be thaman al-mithl, the price that other people pay, or the market price, provided that only one price prevails, or it may be determined in an manner that the parties find agreeable and is clear enough to eliminate doubts. To avoid confusion, what is referenced in this case is a "market determined price at the item at the conclusion of the sale", not any future price.

He gives as example the ijma' of scholars on the validity of assigning a proper dower (mahr al mithl) in a contract for marage. The idea of proper price (thaman al mithl) is analogous to that of proper dower. He states that there is nothing in Quran or Sunnah against the concept and general custom has validated it.

Ibn al Qayyim hae also favored permitting this type of sale. Other scholars of note who permitted bay' bi sir' al suq include: Al Khatib al Shirbini (Shafii) Abu Ishaq a Shirazi (Shafii), Ibn Juzayy (Maliki), Al Dardir (Maliki), Mari Ibn Yusuf (Hanbali), Ibn Qayyim al Jawziyya (Hnbali), Ibn Hazm all have approved. Ahmad Ibn Hanbal issued an afirmative fatwa on it.

Md Yusuf Musa supported the Hanbali position by observing that specification of an exact figure is not a Shariah requirement. Specifying market prevailing price on a specific date is clear and does not leave room for disagreement and dispute. This view has found support from Ahmad Yusuf Sulayman and Ahmad Hasan. In this there is little chance of excessive gharar in this.

What it means
So, for most, the sale need not refer to a set or specific price in order to be valid. It is still valid and there is no excessive gharar as long as the price is set in a way that is acceptable to both parties and cannot lead to disputes. According to Kamali, this lends credence to his argument that Futures should be acceptable. The sheer fact that futures are extremely liquid and price determination is rarely (never?) an issue in any futures market does give them more justification, certainly but there are many more steps to the argument and many are more debatable.

The acceptability of Bay' bi Sir' a Suq has direct impact on Istijrar (please click for earlier post), of course, since in Istijrar, individual or Sub-Murabahas refer to prices only fixed at the time of execution of that Sub-Murabaha. No offer and acceptance or needed, and price is set only by reference to an underlying market.

It probably does not help with anything illiquid, say Tier 3 assets, priced by model. It appears that this price-referencing mechanism applies only to those fungibles for which there is a price.

References
Mostly paraphrased from:

Dr Wahbah al-Zuhayli, Financial Transactions in Islamic Jurisprudence, vol 1, translated by Md El-Gamal, Dar al Fikr, Damascus, 2002, p 107.

Md Hashim Kamali, Islamic Commercial Law: An Analysis of Futures and Options, Islamic Texts Society, 2000, pp95-96.

See also Islamic Law on Commercial Transactions, Prof Dr Razal Hj Nawawi, CT Publications, Malaysia, 1999, p 97. (Mustapha al Zarqa', Aqd al Bay', is quoted)

Sale at Market-Price (Bay' bi Sir' al Suq)

Sustainable Development from an Islamic Perspective

A recent discussion on our Linked group inquired on the potential convergence between Islamic finance and SRI. Socially responsible investing has evolved over the years - just the same as Islamic finance - and mostrecently much attention has been given to the concept of sustainable development. For the SRI industry this has meant a departure from its negative-screens comfort zone towards a more dynamic and positive-screened methodology. Such approach is also gaining momentum across Islamic finance (for instance Dow Jones having launched their Islamic Sustainability Index).

Here we include a paper from KAU's Islamic Economics Research Centre that provides an analysis of Sustainable Development as it relates to Islamic finance. This provides a broad overview that would be useful before taking on the specifics of SRI.

Sustainable Development from an Islamic Perspective: Meaning, Implications, and Policy Concerns
Zubair Hasan
Professor of Islamic Economics and Finance
International Islamic University of Malaysia, Malaysia

"This paper examines the debate on the meaning of sustainable development and
the policy implications of different approaches from an Islamic perspective.
It integrates mainstream and Islamic positions on the subject and argues that to
whatever definition of sustainable development one might subscribe, eventually,
each ends in an environmental concern."

"It argues that the Islamic approach is more agreeable to environmental protection and concludes that issues surrounding sustainable development have moral, ethical, social, and political complexities and that economics or economists alone cannot resolve the problem."

Sustainable Development from an Islamic Perspective

Regulatory Perspectives on Islamic Finance

An overview of various policy statements, speeches, initiatives, etc from
jurisdictions across the globe (as they relate to Islamic finance). We
have featured below the most pertinent texts as they relate to each
country/region, but for additional readings check the respective archives
links as well.


BCB (Bahrain) - Challenges for Islamic Finance
Text (link might not work, check this blog's summary of the speech) & Archives

CBK (Kuwait) - Development & Integration of Islamic Finance
Text & Archives

DFSA (Dubai) - The DFSA's Islamic Finance Regulatory Regime
Text & Archives

FSA (UK) - Islamic Finance in the UK: Regulation and Challenges
Text & Archives

HKMA (Hong Kong) - The Natural Gateway to Islamic Finance in Asia
Text & Archives

MAS (Singapore) - Singapore's Perspective on Islamic Finance
Text & Archives

MIFC (Malaysia) - A Primer on the MIFC Initiative
Text & Archives

QFC (Qatar) - Business Case : Islamic Finance
Text & Archives

SBP (Pakistan) - Pakistan Islamic Banking: Past, Present and Future Outlook
Text & Archives

Federal Reserve (US) - Islamic Finance 101
Text 1 - The Obama version - November 6, 2008
Text 2 - The Bush version - May 8, 2004 (yes, 2004)

Regulatory Perspectives on Islamic Finance

The Employment of Shari'ah Scholars by Businessmen

Recently came across this article & discussion (in Arabic) from KAU's Islamic Economics Research Centre and wonder if anyone would have come across an English translation. Again we have some very interesting feedback within the Linkedin discussion forum.

The Employment of Shari'ah Scholars by Businessmen
Rafic Yunus Al-Masri
Islamic Economics Research Centre
King Abdul Aziz University, Jeddah, Saudi Arabia

The english excerpt raises some very interesting issues as they relate to agency costs and alignment of interests:

"Abstract. Can a Faqih work as an adviser for a businessman and get paid a salary from him? Why did the Shari'ah scholars prohibit taking a reward for fatwa? Is this salary similar to bribe? Is it permissible for a Faqih to absolutely defend his employer, whether the right is with him or with his opponent? Can a Faqih simply become a means to legitimize the work of the employer? Do the capital owners and businessmen really resort to scholars in order to commit themselves with the legal requirements or they do so just for promoting and marketing their products in religious communities? Is it permissible for the capital owners and businessmen to consult only with the scholars whose fatawa are expected to serve their benefits? For example, is it possible for a Faqih to pass a judgment or give an advice against his employer for the benefit of his employee? Is it possible for the employer to abide by the judgment of the Faqih if it is not in his favour? Do the members of the Shari'ah Boards in Islamic financial institutions work for the benefit of the institutions or for the benefit of the public? How can these bodies gain public confidence? This paper presents brief answers to these questions."

The Employment of Shari'ah Scholars by Businessmen

Buiter: Should you be able to sell what you do not own?

The economist and former MPC member discusses CDS and the promise of Islamic Finance.

Buiter: Should you be able to sell what you do not own?

Istijrar: How does it really work?

The Background

Although technically just a repeat sale or 'supply' arrangement, (see, eg., Md Ayub, pg 355), Istijrar is both a very sophisticated contract and in the form most quoted can have elements resembling 'Asianing' in options (i.e., average price), and barrier options, (although note that it is not really an Asian option, but a series of barrier options). See as well Thomas, Cox and Kraty, Structuring Islamic Finance Transactions, pp 71-2.

The modern use of the contract was begun by Mufti Taqi Usmani and this interesting payoff is described in some detail in papers by Md Obaidullah and Obiyathulla I. Bacha. Istijrar: A Product of Islamic Financial Engineering Dr Mohammed Obaidullah (New Horizon, no 68, Oct 1997). We are asking permission to reproduce this article in electronic format as IIBI has not yet finished scanning their back issues (expected time July 2009, Insh'Alah). (Please check this posting again soon to see if we have received permission)

It is also mentioned in some detail in Obaidullah's online book: part 4, p48ff (190). And, this lecture note by O.I. Bacha, Derivatives in Islamic Finance--An Overview, p 21ff or his paper Derivative Instruments and Islamic Finance: Some Thoughts for a Reconsideration, see pp 23ff.


The Structure

The details of the arrangement are as follows (according supposedly to Dr. Muhammad Imran Ashraf Usmani), see MeezanBank Guide to Islamic Finance, section 19, or Istijrar as well. Please note that although this is a sale, after the execution of the Master Murabaha, no offer or acceptance is issued and sale is concluded merely by posession (bay al-ta'ati or al-mu'atah).

Master Murabaha facility or Istijrar facility agreement is signed between the bank and its client under which various Sub-Murabahas would be extended:

At Time T0:

The Master Murabaha agreement will describe the following formula for the price range an the Murabaha price P*:

1. The upper and lower range around the cost price P0 is determined. This price range may be linked to a benchmark such as 'LIBOR+margin'. Hence the price bound would change when the benchmark shifts.
2. The Murabaha price P* or the exercise price is set. This is the price which may be applied if the market price of the asset goes above or below the price range during time T0-T90.
   

The period during which the above two call options shall be valid is T0 -T90.

At T90:

1. When the Sub-Murabaha or 'Declaration' is signed at T90, the sale is executed.
2. The settlement price Ps is determined at this time.
   

Settlement price Ps may be one of the following two:

• Avg price of asset during T0-T90
• Exercise price fixed by either party afte the market price of asset during time T0-T90 has gone out of the rice range. This exercise price may be the murabaha price P* or some other price fixed by either bank or customer.

At Ts: On the settlement date, the settlement price Ps is paid as set at time T90.

• If a number of Sub-Murabahas have been executed under the Master Murabaha Agreement, then each will be settled according t is own settlement price on the settlement date.
• In order to decrease the price volatility between Declaration Date an the Settlement Date, the duration may be reduced.

Terms Used:
T0 - Time when Master Murabaha agreement or Istijrar agreement is signed.
T90 - Time when declaration is signed
Ts - Settlement Date P0- Cost price
P*- Murabaha Price
Ps-Settlement price
Declaration -- Offer and Acceptance between Custeomer and Bank to sell the asset back to customer.

Pointers:

• Murabaha Price P* is to be determined at the time of extending the Sub-Murabaha.
• The Murabaha Price P* cannot be fixed as the settlement price Ps by the Bank or the Customer during the tenor of the sub-Murabaha T0-T90
• Ps-settlement price may be the prevailing market price of an average of the price during the Istijrar period.
• The price on the settlement date cannot be changed by either party even if the market price has gone out of the pri range during the tenor of the sub Murabaha.

Process Flow:

1. Master Murabaha Agrement/Istijrar agreement is signed at T0
2. Agency agrement is signed (if required) at T0.
3. When the bank purchases the commodity the Declaration (Sub Murabaha) is signed at T90.
4. Ps-the Settlement Price (Contract Price) is paid on the Settlement Date.

Short Discussion

While the features of this derivative contract/arrangement are described in some detail in these papers, the technicalities and legalities and Shariah aspects are less easily found. But the amazing thing is that this arrangement is merely a set of sales.

Islamic Law of sale is such that Istijrar is not considered a set of strange options, no wa'ad is necessary, no khiyar is needed (although they can apparently also be used). In sales contracts there is flexibility according to the payment and settlement of price. Bay' bi Sirr al-Suqq (payment at market-determined price) is the subject of relatively rich discussion and we will go over this, Insh'Allah, in another post, but this is one area of fiqh which touches upon Itijrar. The fact that Istijrar is a repeat sale makes many scholars feel that this flexibility (delay of payment and price set according to market average) should be afforded to this arangement. Moreover, the embedded derivative elements help to reduce the risk, reducing the gharar of the arrangement to something considered to be 'acceptable'.

Please note as well that Istijrar is extremely flexible and can be used for many other types of contract (e.g., ijara, and mudaraba, supposedly) and can probably allow for a great many other payoff profiles. This, using Islamic Law of Sale, is something that has not been used to its fullest as yet in Islamic Finance, and we should probably expect much more future innovation in Islamic Finance using Istijrar.

As we mentioned above, we hope to write more on the notion of sale at market-determined price (bay' bi sirr as-suq) as well as the more conventional delay in payments and more details on conclusion of sale without offer/acceptance.

This is one of the hidden gems of Islamic Finance.

Istijrar: How does it really work?

CBB Industry Reviews

The Central Bank of Bahrain's industry newsletters are quarterly publications that provide updates about the latest developments and opportunities in the Islamic finance, insurance, takaful and capital markets industries.

2008 Archive:
Capital Markets Review (September 2008)
Insurance & Takaful Review (August 2008)
Islamic Finance Review (July 2008)
Capital Markets Review (June 2008)
Insurance & Takaful Review (May 2008)
Islamic Finance Review (April 2008)
Capital Markets Review (March 2008)
Insurance & Takaful Review (February 2008)
Islamic Finance Review (January 2008)

CBB Industry Reviews

Experimenting with New Layout

We are polishing the look & feel of the blog to make it easier to navigate, improve readability and its overall usefulness. Your comments & suggestions are very welcome (please let us know what you rather see more of or less of), as we hope to maximize the usefulness of this resource and minimize noise.

Experimenting with New Layout

Malaysian Islamic Capital Market - Quarterly Bulletins

Please find below the Islamic Capital Market (ICM) Quarterly Bulletins, from the Securities Commission in Malaysia. This is only a small segment of information that is available on their website (which is itself an excellent resource with a very comprehensive archive of documents and information), we compile it here for easy reference:

Issues for 2009:
March

Issues for 2008
November
July
April
January

Issues for 2007
September
June
March

Issues for 2006
May
August
November

Malaysian Islamic Capital Market - Quarterly Bulletins

Islamic Banks Also to Blame for Meltdown

Islamic Banks Also Responsible for Global Financial Crisis: Experts. (Khaleej Times, 6 March 2009) ABU DHABI — Islamic banks must share equal responsibility with conventional commercial banks and financial institutions for the current global financial crisis, a professor specialising in Islamic economics said on Thursday....

From one of our most prolific naysayers in Islamic Finance, Prof Md el-Gamal (who generally has a point!). Also checkout the parallel commentary within our LinkedIn discussion forum.

Islamic Banks Also to Blame for Meltdown

Shariah Compliant Short-Selling: Mechanism 2

Short-Sale through Mutual Wa'ad (Muwa'adah)


Amiri Capital, as part of their effort to set up Shariah-Compliant Hedge Funds and Prime Brokerage services, introduced a short-selling mechanism which has had the sign-off of a number of internationally prominent muftis, while they also have some prominent advisors on their panel including Dr Daud Bakar and Sh Hussein Hasan among others.

Their short-selling method involves offsetting wa'ad (plurual: wu'ud) between the Islamic Investor (noted as their fund AEAS in the illustration below) and the bank/prime-broker.

The text in the boxes in the illustration above reads:
(upper box, Wa'ad 1) At some time t, on or before an agreed future date, if Pt us greater than P0, AEAS [Islamic Investor] promises to sell N Shares of Stock X to Counterparty at an adjusted price P1.
(lower box, Wa'ad 2) At some time t, on or before an agreed future date, if Pt is less than P0, Counterparty promises to buy N Shares of Stock X from AEAS [Islamic Investor] at an adjusted price P2. (which is different to the adjusted price in Wa'ad 1 above)



Key steps in the transaction
1) At t=0 two independent, unilateral promises concerning an equity are entered into with the conditions as set out above;
2) At close of transaction at t, due to the conditions in the promises concerning the market price of the equity only one of the two promises is in effect, that promise is exercised with the transaction price of P2 (assuming Pt < P0 ) and the stock is delivered from AEAS [Islamic Investor] to the Prime Broker and in return the Prime Broker makes a payment of P2.

Definitions
P0, is price of equity in the market at time of entering into promises (t=0);
P1, is the initial price P0, adjusted for various fees;
P2, is the initial price P0, adjusted for various fees.

P1 and P2 are "adjusted strike prices".

Short Comment:
This is an interesting use of wa'ad or unilateral promise, especially because the transaction involves two wa'ad for counterparties facing one another. This muwa'adah or mu'ahidah (bilateral promise) is, I thought, disallowed, especially if it is in place of 'aqd (contract, always bilateral) where a contract would be disallowed.

The example I have heard to showcase exactly when muwa'adah is prohibited is using muwa'adah to synthesize a forward (Party I promises to buy from Party II for $P at time t=T. Party II promises to sell to Party I for $P at time t=T). The synthetic forward is explicitly mentioned as disallowed (see e.g., Md Ayub, Understanding Islamic Finance, p 115) since it is a bilateral exchange which manages to circumvent similar restrictions which would be in place in the case of contract.

Does the conditional wa'ad (i.e., only if Pt > P0, etc) make this structure different? Maybe yes, maybe no. How is it different from the forward transaction? Is it specifically point 2 above, that only one of the two promises is in effect at t=T due to their conditional nature. Note: not only are the two wa'ad conditional so that only one is in effect at one time, but the transaction prices are different. I suspect these isues are key to the Shariah-board's approval. We will look at Wa'ad in much more detail in future posts, insh'Allah.

I wanted to thank Richard Ellis and Bindesh Shah from Amiri Capital for generously allowing us to showcase their structure and for their efforts (irrespective of any constructive criticism which I or others may give!).

Please feel free to comment.

Shariah Compliant Short-Selling: Mechanism 2

A Muslim’s Guide to Investing & Personal Finance

Virginia B Morris in Collaboration with Monem A. Salam
Introduction by Shaykh Yusuf Talal DeLorenzo

This newly updated and greatly expanded guide gives Muslims the knowledge and confidence they need to make informed investment decisions while conducting their personal finances in accordance with the principles of Shariah.

Exploring the intersection of traditional and modern Islamic finance, this 100-page guide explains:

• Halal vs. Haram investments


• Riba


• Zakah


• Purification


• Shariah contracts


• (ijara, murabaha, musharaka)


• Sukuk


• Stocks


• Mutual funds


• Home ownership


• Takaful (insurance)


• Retirement


• Estate planning

A preview of the guide: A Muslim's Guide to Investing & Personal Finance

A Muslim’s Guide to Investing & Personal Finance

Vatican says Islamic Finance May Help

No comments needed.

Vatican says Islamic Finance May Help

CW: Does Ethical Investment Pay?

Does Ethical Investment Pay?
Ross Havemann, Peter Webster
September 1999

CW: Does Ethical Investment Pay?

Shariah Compliant Call Option: Mechanism 1

Call Option using Set-Off


Calls through debt set-off (muqaddasah). AAIOFI shariah standard number 3 states that setoffs are possible as long as they involve the same counterparties (e.g., I owe you and you owe me) and the notional is the same and the maturity is the same. These can even be made contractual. There is also some leeway if notionals are different and maturities are different. Here we stick with the basic set-off.

In the diagram above we see the cashflows for a call-option. This structure was used for Principal Protected Commodity Notes (just adding on a separate SPV with murabaha to synthesize the zero-coupon bond) by some large commercial Saudi banks and super-large continental European banks.

• Investors puts up $C (call premium) at t=0, which is supplemented with the Murabaha (effectively borrowing $(K-C) strike price less call premium-worth of a commodity at time t=0).
  
• The commodity is sold on the open market to raise $(K-C).
  
• The premium and proceeds of commodity sale with total value of $K are invested in a Bay-al-Salaam contract.
• This Salaam contract is used as collateral (through a "pledge") for the Murabaha and recourse to the SPV is limited to this Salaam contract.
• At maturity, the commodity is delivered and will be sold (on the open market) under a separate wakala arrangement.
  

Now there are two possible scenarios at maturity t=T

1. Commodity price P>K the strike. Commodity is delivered into salaam, sold, proceeds used to cover the monies owed in murabaha, and remainder $(P-K) is paid to investor.
2. Commodity price P the strike. In this case, the commodity is delivered and sold, but proceeds cannot cover the murabaha and the bank will exercise its recourse to receive the value from the proceeds of the salaam sale. SPV is wound down with no further recourse.
   

Effectively, investor receives max(P-K,0) at time t=T, the payoff of a call option.

IMHO, I see no loopholes in this. Debt set-off is allowed and it can be contractual. Here, the salaam and the murabaha have the same maturity and same notional, so what is owed on one can be used to offset the other by contract with no further recourse or implications. The SPV and pledge allow is to take place from an English Legal perspective.

Comments please!

Shariah Compliant Call Option: Mechanism 1

Islamic Finance Networking & Events

Here are some introductory Islamic Finance events (either free or require a registration fee to cover expenses) which are right around the corner (in Singapore and Hong Kong). Will be loooking out for other cities and will keep updating the list - as always appreciate any comments/feedback.

RIBA: WHY, WHY, NOT?
February 28 2009, Hong Kong
Islamic Banking & Finance Network - Hong Kong (IBFN)
Fee & Registration required

IFN Roadshow
Global locations and year-round
Islamic Finance News (IFN)
Free - Registration required

Islamic Finance Networking & Events

Shariah-Compliant Short-Selling: Mechanism 1

Short Sale via Wa'ad.
General description: Short seller sells security to exchange. Exchange promises to repurchase security. Exchange faces short-term long buyer who buys security from exchange and promises to resell to exchange at a later date.

Like a conventional (covered) short, the security which is shorted is identified by the short-seller (identified as "supplier" below). The long, ("user" below) is long a conventional security with one catch--he must sell (at market price) at some point in the future. The fact that this his purchase has a condition means he must be compensated for it, much as in the conventional framework.

Is this two transactions in one? Can we actually sell with a condition that we can repurchase the same back again? Wouldn't there be shariah-specific objections to this? Or is it a viable approach? The Shariah scholars at the SC and BNM believe so (see link). Note the necessity of the intermediary to make this work. (This would be VERY good in western finance--to track the shorts). What do you think?

SC's Islamic Capital Markets Quarterly Nov 2008, pp 2-4

Shariah-Compliant Short-Selling: Mechanism 1

Shariah Compliant Derivatives: Yes or No?

FT Alphaville highlights ongoing debate on Islamic Derivatives. While some would question how halal they truly are, it is clear they do exist and are traded. (see the Alphaville blog for some examples).

In fact there are so many ways for structuring certain (but not necessarily all) types of derivatives, that we will spend some time discussing these, together with different means for short-sales, different means for leverage, etc?

Aslo, checkout the Linkedin discussion on "Why Islamic Finance Prohibits Short Selling"

Shariah Compliant Derivatives: Yes or No?

Islamic Finance - Third Party Reports

Have come across several third party papers as well, these three reports in particular might provide a useful overview and past statistics on Islamic banking and finance.

It is also interesting to compare figures as they refer to various sources of information and are authored from rather different perspectives:


Ernst & Young - Islamic Funds & Investment Report

Moody's - Islamic Finance 2007 Review and 2008 Outlook

S&P - Islamic Finance Outlook 2008

Islamic Finance - Third Party Reports

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department, ISRA
ISRA Research Paper (No. 5/2009)

"One of the most popular instruments used today in the Islamic Capital Market is sukuk. Various sukuk structures based on ijarah, musharakah, mudharabah and hybrid forms have evolved. However, these innovations have raised many Shari‘ah issues and controversies. This paper argues that some innovations which try to achieve the same economic outcome as conventional instruments distort the vision of Islamic economics based on justice and equitability. This vision is deeply inscribed in the objectives of the Shari‘ah (Maqasid al-Shari‘ah). The distortion stems from a restricted understanding of the Shari‘ah that focuses on the legal forms of contracts rather than their substance, especially when structuring financial products. The overemphasis on form over substance may lead to abuse of Shari‘ah principles in justifying certain contracts that are, in fact, contradictory to one or more Shari‘ah texts and that ultimately undermine the higher objectives of the Shari‘ah. The paper concludes that the substance of a contract, which has greater implications for the realisation of Maqasid al-Shari‘ah should be equally looked into."

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures

Dubai Shariah Hedge Fund Index Up 1.53% In January

Thursday, Feb 05, 2009 LONDON (Dow Jones) -- The Dubai Shariah Hedge Fund Index, which shows the performance of the DSAM Kauthar Commodity Funds, was up 1.53% since its start on Jan. 1, the hedge funds' first public performance numbers showed Thursday. The index is comprised exclusively of shariah-compliant hedge funds and was launched by The Dubai Multi Commodities Center Authority, or DMCCA, and Shariah Capital, Inc.

The DKCF is an equally weighted fund-of-funds comprised initially of four single-strategy, commodity-focused funds that invest exclusively in shariah compliant long/short equity hedge funds on the Al Safi Trust platform. The best performing fund in the group during January was the DSAM Kauthar Gold Fund, up 4.42% followed by the DSAM Kauthar Energy Fund, up 1.61%. The DSAM Kauthar Natural Resources Fund was up 0.21% and the DSAM Kauthar Global Resources & Mining Fund was down 0.14%. The DSAM Kauthar Commodities Fund, an equally weighted basket of the four funds, was up 1.53%.

By publishing the figures, the group hopes to set a transparent precedence, Eric Meyer, chief executive of Shariah Capital, told Dow Jones Newswires, and to attract both Islamic investors and conventional investors. "We let the investor have a transparent choice so the investor can see every month how the funds are doing and choose how they want to invest on a monthly basis," Meyer said. It will post performance figures monthly, calculated and reported by Thomson Reuters. The funds were each given $50 million from the DMCC. The individual fund portfolios are run by BlackRock Inc.'s Global Resources & Mining Fund, Tocqueville Asset Management, Zweig-DiMenna International Managers and Lucas Capital Management.
-- By Devon Maylie, Dow Jones Newswires

Dubai Shariah Hedge Fund Index Up 1.53% In January

The End of Wall Streets Boom--Michael Lewis Article

The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong. (Conde Nast Portfolio)

This is now two months old but absolutely relevant. A long article but definitely worth the read.

A few points of relevance for Islamic Finance: in general, leverage is more limited, and there is none of this endless creation of synthetic products--real assets back transactions.

Nowadays, synthetics are larger than real CDOs. This is now a repeated story, much like what happened at the end of LTCM when they owned more options than stocks outstanding (or in 1987 when rehedging portfolio insurance could make the equity market gap) and pricing models like Black-Scholes are guaranteed to not work.

Can it happen to Shariah-compliant finance? Not like this...no

The End of Wall Streets Boom--Michael Lewis Article

Islamic Finance Training Programs & Certifications

Here is a summary list (in pdf format) of Islamic finance study programs which we have compiled, hope it might be helpful to those seeking professional advancement and wishing to gain better understanding of the industry. At the same time appreciate anyone contributing to this list to make it more comprehensive, pretty sure there are a few missing. The full list (so far):




AAOIFI: Certified Islamic Professional Accountant (CIPA)
http://www.aaoifi.com/cipa2.html

Academy UK: MBA Islamic Banking and Finance
http://www.academyuk.org/courses/course.aspx?id=11

AIMS: MBA in Islamic Banking and Finance
http://www.learnislamicfinance.com/MBA-Islamic-Banking-and-Finance.htm

Al Jamia Al Islamiya: Post Graduate Diploma in Islamic Economics and Finance
http://www.aljamia.net/english/pgdief2.html

BIBF: Masters of Science-Islamic Finance (MSIF)
http://www.bibf.com/cfif/islamicfinance-msifprogram.htm

CASS: Executive MBA - Islamic Finance stream
http://www.cass.city.ac.uk/mba/dubai/course/electives/islamic-finance/index.html

CIFA: Certified Islamic Financial Analyst Program (CIPA)
http://www.shapefinancial.com/cifa/index.asp

CIMA: Certificate in Islamic Finance
http://www.cimaglobal.com/Study-with-us/Certificate-in-Islamic-Finance/

Durham Islamic Finance Program (DIFP); Islamic Finance Summer School
http://www.dur.ac.uk/sgia/difp/

Ecole de Management Strasbourg – University Degree in Islamic Finance
http://www.em-strasbourg.eu/docs/confdufi.pdf

ESA & CISI (formerly SII): Islamic Finance Qualification (IFQ)
http://www.esa.edu.lb/en/IFQ_Qualification.shtml

GARP - Certificate in Risk Management for Islamic Financial Institutions
http://www.garp.com/certifications/Islamic_finance/about.aspx?ekmensel=c580fa7b_42_48_78_1

IBFIM: i-Series Programme, CCP Islamic (CCP-i), Islamic Financial Planner (IFP)

http://www.ibfim.com/index.php?option=com_content&task=view&id=1386&Itemid=201

ICMA: MSc Investment Banking and Islamic Finance
http://www.icmacentre.ac.uk/study_and_research/msc_investment_banking_and_islamic_finance

IIBF: Post Graduate Diploma in Islamic banking and Insurance
http://www.islamic-banking.com/diploma/index.php

IIIBF: Certified Islamic Banker and Others
http://www.iiibf.org/

IIUM: MBA with concentrations in Islamic Banking & Finance
http://managementcentre.com.my/page.php?34

INCEIF: Chartered Islamic Finance Professional (CIFP)
http://www.inceif.org/

IslamicAdvisory.com: Online Courses
http://www.islamicadvisory.com/

Islamic Finance Training: Various Courses
http://www.islamicfinancetraining.com/

Islamic Online University: Various Islamic Courses
http://www.islamiconlineuniversity.com/
http://www.islaamicstudiesacademy.com/

Markfield - Certificate in Islamic Finance
http://www.mihe.org.uk/mihe/detail.php?page=104&s=13

Straightway Ethical: Islamic Financial Ethics
http://www.straightwayethical.com/courses.php

Sunni Path Online Islamic Academy: Modern Finanical Transactions
http://www.sunnipath.com/Academy/OnlineCourses/Law/Modern-Financial-Transactions.aspx

Tazkia - Islamic Undergraduate degree in Indonesia
http://tazkia.ac.id/

Trisakti University - Islamic Economics and Finance degree in Indonesia
http://ief-trisakti.ac.id/

Universitas Indonesia - Islamic Economics and Finance degree in Indonesia
http://www.psktti-ui.com/

University College of Bahrain: MBA in Islamic Finance
http://www.ucb.edu.bh/gande/Islamic.html

Islamic Finance Training Programs & Certifications

Key Trends in Islamic Funds

Most recent report from Eurekahedge on the growth and distribution of Shariah-Compliant Funds. Very comprehensive state of the industry (with nice charts).

Please use the link to their site to view/download the report (requires a one-time free registration).

Key Trends in Islamic Funds

Can there be an Islamic Hedge Fund?

First we have to define what a Hedge Fund truly is.

This interesting article from Fortune Magazine speaks of the demise of the HF in... 1969. Warren Buffet was planning on winding his down, the SEC was thinking of regulating further, leverage was disappearing and returns were dismal.

The article is exceptionally well documented, interview managers, investors, etc. Fascinating reading and worth the length.

And defines what makes a HF different:

1. Leverage
2. Short-selling
3. Compensation Scheme

We will explore each of these aspects and shariah-compliant means of achieving them (or not!).

As one of my friends put it, HFs are described as an asset class. They're not an asset class--they're a compensation scheme.

Can there be an Islamic Hedge Fund?

Experimenting with New Feeds

We are experimenting with new feeds (as you might see at the bottom of the page). Please be patient as we try to increase the coverage of our news feeds, group feeds, etc. Comments and suggestions are always welcome.

Experimenting with New Feeds

Key Trends in Islamic Funds

Most recent report from EurekaHedge on the growth and distribution of Shariah-Compliant Funds. Very comprehensive state of the industry (with nice charts).

Please scroll up for new link from EurekaHedge website (courtesy Bernardo).

Key Trends in Islamic Funds

The Concept of Promise and Bilateral Promise in Financial Contracts : A Fiqhi Perspective

The Concept of Promise and Bilateral Promise in Financial Contracts : A Fiqhi Perspective
Assoc. Prof. Dr. Mohamad Akram Laldin, Executive Director, ISRA
ISRA Research Paper (No. 4/2009)

"The topic of promises needs clarification and precise determination. It is vitally important because promises are relevant to a great number of contemporary issues. The paper thus reviews the types of promises in the Shari’ah and juristic opinion as to whether promises are legally binding. It concludes by highlighting nine (9) Shariah parameters that must be applied in allowing promises. It argues that if fulfilling promises is a binding obligation, then promises should be not be used indiscriminately; rather, parameters must be laid down to govern their use. Among the suggested parameters are that promises should not displace and impede the objectives of contracts. For example, partnership contracts are intended to make the contracting parties share in the profit and loss; therefore, promises should not be used to negate this essential feature. For the remaining 8 parameters, download the paper!"

The Concept of Promise and Bilateral Promise in Financial Contracts : A Fiqhi Perspective

The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience

Bacha, Obiyathulla (2008): The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience. Published in: International Journal of Islamic and Middle Eastern Finance and Management 3 1 (2008): pp. 210-226.

Although this paper works on correlation and causation, it is not clear that whether unit root tests have been performed and whether this analysis should be in terms of differences rather than levels. Also, large discrepancies between the Islamic Interbank rate and the Conventional rate are definitely worth some further discussion.

The Islamic Inter bank Money Market and a Dual Banking System : The Malaysian Experience

CW: Cleaning a Passive Index: How to Use Portfolio Optimization to Satisfy CSR Constraints

Cleaning a Passive Index: How to Use Portfolio Optimization to Satisfy CSR Constraints
Moshe A. Milevsky, Andrew R. Aziz, Allen Goss, Jane Thomson, David Wheeler
December 2004

CW: Cleaning a Passive Index: How to Use Portfolio Optimization to Satisfy CSR Constraints

IFSB - Capital Adequacy Standards

GN-1: Guidance Note In Connection with the Capital Adequacy Standard: Recognition of Ratings by External Credit Assessment Institutions (ECAIs) on Shari`ah-Compliant Financial Instruments
March 2008

"The objective of this Guidance Note is to outline criteria which the Islamic Financial Services Board (IFSB) recommends national supervisors should take into account when determining which external credit assessment institutions may have their ratings used to calculate capital adequacy ratios under the IFSB’s December 2005 Capital Adequacy Standard. The IFSB also hopes that the Guidance Note will promote a wider debate on key points of rating methodology for Shari`ahcompliant instruments."

IFSB - Capital Adequacy Standards

Insurable Interest in Takaful Pracitices: An Analysis

Insurable Interest in Takaful Pracitices: An Analysis
Nusaibah Mohd Parid, Researcher, ISRA
ISRA Research Paper (No. 3/2009)

"This paper seeks to examine the application of insurable interest to takaful practices in general, with special reference to section 152 of the Insurance Act 1996. It is found that the unique features of takaful do allow for the application of insurable interest, but section 152 should be adopted in the Takaful Act only with certain modifications and guidelines, as have been discussed in the paper. However, it was found that there are still some unresolved issues in current takaful practice that require significant attention, issues related to the fundamental principles underlying takaful practices, such as the contract itself. It must be stressed, once again, that this paper only intends to bring forward a perspective or view on insurable interest in takaful practice, especially from the perspective of the Shari’ah, which can be further discussed, examined and modified, if necessary."

Insurable Interest in Takaful Pracitices: An Analysis

Risk Management For Islamic Financial Institutions: A Rating Perspective

Risk Management For Islamic Financial Institutions: A Rating Perspective

Standard & Poor's

January 2008

Risk Management For Islamic Financial Institutions: A Rating Perspective

Is the Ban on "Organised Tawarruq" The Tip of The Iceberg?

Is the Ban on "Organised Tawarruq" The Tip of The Iceberg?
Rafe Haneef, Research Fellow, ISRA
ISRA Research Paper (No. 2/2009)

"The paper discusses and analyses the perspectives of both opponents and proponents of tawarruq with the view of ascertaining the soundness of the Fiqh Academy ruling. Interestingly, the tawarruq ruling epitomizes the growing divide between proponents and opponents of the contemporary Islamic finance industry as a whole. Generally, those who oppose tawarruq also abhor murabahah lil amir bi shira’, Ijarah muntahiah bittamlik, contemporary sukuk al-mudharabah, musharakah and wakalah and many other contemporary Islamic finance products. The critics view the ban on tawarruq as the tip of the iceberg. The critics want the whole iceberg, the contemporary Islamic finance industry itself, to be exposed and transformed in its totality. Many of the critics believe that the transformation can only be realized by banning all the contemporary contracts mentioned above and rejuvenating the classical mudharabah and musharakah contract. Hence, it is important to discuss the tawarruq ban within the overall Islamic Finance context."

Is the Ban on "Organised Tawarruq" The Tip of The Iceberg?