Islamic Finance gif


ing and their compliance with the Shari’ah norms. In Malaysia, both the Governor of Bank Ne chairperson of the Security Com- mission have recently voiced this concern. The Governor, Zeti Akhtar Aziz, made a sig- nificant observation when drawing attention to the ongoing development of mechanisms for risk mitigation and liquidity management: “The solutions needed to converge market requirements and Shari’ah compliance are of great importance.”


Zarina Anwar, the SC Chief, says candidly that Islamic finance products must be strict- ly Shari’ah compliant, but she believes that convergence to law could have spatial differ- ences to internationalise Islamic finance. I feel that a more significant observation of hers is her statement that “There is always the need to explore how Islamic finance can help the Muslim commu- nity (the Ummah)” – a point to which I referred in the Introduction above. This brings us to our next section, discussing the issue of the Shari’ah compliance of Islamic financial instruments.


Divergent views on compliance In recent years, Islamic finance has seen the surfacing of some serious differ- ences of opinion on the Shari’ah compli- ance of financial instruments and. Most of the controversy has centred on the ac- tivities of the banks which hold the bulk of Islamic assets, followed by the issues of sukuk issues, investment funds and takaful. The modes of business which these banks use mostly involve murabahah transactions and the issuance of sukuk, and both of these methods have run into difficulties with Shari’ah compliance in recent years. So far, commodity murabaha has been the most widely used financing instruments in Islamic banking. But recently, some court decisions against Islamic banks in Malaysia, focussing on murahabah contracts, have put people in a quandary.


The question is increasingly asked: does commodity murabaha defy Islamic require- ments? It’s evident that in principle it does not; commodity murabaha falls in the gener- ic category of ‘uqud al-mu’awadhat,’ or ex- change contracts, which covers all types of transactions allowed under Islamic law. Ex- change contracts involve the trade of a given quantity of one commodity for a given quan- tity of another commodity, which can include money. The money value of a commodity is referred to as its “price”. The delivery of a commodity and the payment of its price may be simultaneous, i.e. on the spot; alternative- ly the obligation of one of the parties may be deferred to a future date. Contracts involving commodity murabaha belong to the defer- ence of obligations group. A client may, for example, ask a bank to purchase a car for


him on a “cost plus” basis, and the arrange- ment per se will not contain any element of interest. Mark-up pricing is allowed on the grounds that “time has a share in price” (lil zamani zun fil thaman). Indeed, this is the ju- ristic pronouncement used as a justification for allowing the deferral of obligations in Is- lamic contracts. It was not the principle, but the structuring of contracts, which deviated from Shari’ah in the cases mentioned. The reasons for the current disquiet are to be sought elsewhere.Commodity murabahah contracts may conform with the Shari’ah norms if viewed on a case by case basis, i.e. in a micro frame of analysis, but their over- whelming use at the aggregative or macro level is working against the spirit of Shari’ah


I I C C I I C


of murabaha contracts per se, but their de- fective structuring and indiscreet use, which fuels the perception that Islamic bankers are covering up “back door” deals in inter- est. Debt sales, inah and tawarruq have pal- pably divided juristic. Opinions on the struc- turing of contracts also differ considerably. A significant example is seen in the commonly upheld prohibition of multiple contracts in a single sale transaction. Yqubi argues that the prohibition refers to specific instances where the combination of contracts is used as a legal device to permit or facilitate riba, or where the combination leads to any other textual prohibition (e.g., gharar). He supports the view that the strict rules of combining contracts can be relaxed in certain cases to facilitate Islamic finance contracts: Ijara, muraaha and musharaka, are, to him, the clear examples.


The respective perspectives on their per- missibility of Malaysia and the Middle East, for instance, are poles apart. It’s worth pointing out these two observa- tion share.


Bidirectional Unidirectional Convergence


Figure 1: Convergence types between Islamic (I) and conventional (C) financial systems


Total deposit $475m.= Cash $50m.+ credit $425m.


Cash deposit $50m.


Figure 2: Inverted credit pyramid with F=1/10 and R= 1/20 (Multiplier M=9.5)


principles. Debt transactions dominate the scene, at a cost to the real economy. The use of deferred contracts seems already to have been carried too far. Of late, even Zeti, the governor of Bank Negara Malaysia, has had to advise Islamic banks to curb the use of fixed return transactions. Presumably it is time to apply the principle of saad-al-dharai, which that closes potential avenues for cir- cumvention of Shari’ah law: more so its ob- jectives and spirit. It’s not the permissibility


• The Islamic economic system has social implications related to economic development, especially for the fulfil- ment of basic needs and the achieve- ment of distributional equity. Islamic banking operations are not currently contributing to these goals; they are essentially guided by profit considera- tions. Admittedly, profit is an important imperative for Islamic banks, as for any other business, but it cannot be the sole criterion in evaluating their performance. Econometric models on the performance of Islamic banks in- variably consider profit, cost, or size as determinants of efficiency. Their struc- turing blemishes apart, no social wel- fare measure appears in such models, presumably because quantification of this factor is not possible on a uniform basis. • Islamic banks - like their convectional cousins - are diverting the savings of those at the lower rungs of society to the upper classes, thereby aggravating inequalities of income. In addition, the distribution of earnings between the owners of banks, on the one hand, and their depositors on the other is much skewed in favour of the former group. The combined GDP of the 57 Muslim countries is estimated at more than one trillion USD, but the man in the street is still likely to be questioning how Shari’ah compliant Islamic finance actually benefits. Workshops can hardly be meaningful if they evade this type of question.


Islamic sukuk (bonds) is mostly based on commodity murabahah, and has recently


2011 February Global Islamic Finance 25


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