STANDARDIZATION OF SHARIAH OPINIONS

STANDARDISATION OF SHARIAH OPINIONS/LAW IN ISLAMIC FINANCE: WHAT ARE THE ISSUES?

We often hear people involved in Islamic finance talk (in seminars and conferences) about the need to standardize shariah laws/opinions related to the practice as they claim that without such a move the sector cannot grow. They say that the impediment to the so called growth lies with the conflicting views coming from jurists of Islamic law. But the same persons when confronted with facts about the conflicting and multiplicity of the legal systems of the world and the various judicial decisions made in various jurisdictions that are also appealable at various stages of trials in civil or conventional courts, they don’t dare to say even a word about it.

As for the Shariah, sometimes their statements in this context seem to be a form of mockery of the Shariah itself. Ironically these same people are there out in the open to take advantage of the Shariah but they do even seem to give a little respect to the same system. Observers may tend to describe them giving more respect to the other systems of law, when they readily accept the relevant pronouncement from that side without a word being said about its wisdom and appropriateness. For them what are decided are the truth and the whole truth beyond any question whatsoever. But when it comes to Shariah, due to their lack of understanding or even less respect of the system, they do not have any reservation to spare.

Are they not mindful of the fact that in today’s world there are many legal systems in operation in different parts of the globe with salient feature. Even within the boundary of a legal system based on English Common Law itself there are many variations; British law and American law originated from the same source i.e. the English common law, but the two are different in some respects. What about socialist legal systems of China and Russia? Are they not different from the so called Western law?. Even in Europe itself, everyone knows the distinctive features of the Continental legal system of mainland Europe as opposed to the system followed in England.

So when it comes to the different mazhabs in Islamic law (operating in different parts of Muslim lands with varying degree of application) like the Hanbali, Shafie, Maliki and Hanafi for instance, why do these people feel sometimes that they are at liberty to say negative words about the Islamic Shariah system without proper comprehension? Do they know that the mazhab system is a form of standardization effort tested over long period of time in Islamic history just like the multiplicity of the world legal system we have today?.

Partly the answer for the above lack of understanding comes from the fact that the Shariah system is not implemented in many parts of the world in a comprehensive manner for too long where people can see its beauty. In fact what happens is that in many cases even though the transactions may have been structured based on Shariah principles and rules but they lack proper supports from the legal system within which they are being practiced as in many cases, Islamic finance has been pursued within and subject to conventional legal framework. The second possible reason could be that in conventional finance the anchor contract employed is one of lending and borrowing (with interest); the central concept in conventional finance. But when it comes to Islamic transactions, there are a lot of other contracts to apply given the essence of Islamic transactions that is based on sale with its various structures. Practitioners/players (many join from conventional experience/practice) are normally at lost to appreciate the underlying distinction between Islamic and conventional transactions, so the easiest thing to say if you are in these circumstances is the phrase like “Shariah law is very confusing; it has so many views and opinions”.

Paradoxically why they did not say the same thing about the various legal systems and rules or decisions coming out the conventional legal system?. Perhaps some may have apprehension of the law of contempt in conventional courts to say so. Since there is no Shariah judge with a full power in sight, (the one that may even send them to jail for contempt), we have a free ride, they may say…

CREDIT RISK IN ISLAMIC DEPOSIT

CREDIT RISK IN ISLAMIC DEPOSIT

Islamic financial institutions mostly Islamic banks take in deposit in various forms, and employ such deposits in ways they deem fit as part of their so called Islamic banking business. In some jurisdictions the term Wadi’ah is normally used to refer to such deposits for convenience sake and for a purpose seemingly to impress upon the fact it is more of safekeeping arrangement undertaken by depositors with the banks concerned, as the term wadiah in its original sense connotes safe-keeping contract between owners of assets and safe-keepers or trustees-custodians.

But then when it come to banking business as commonly understood, such concept of custodianship is a misplaced term in the real application since in most cases the banks that accept the fund would as a matter of practical application use or employ the fund for their business operation. On this score alone it may be safely said that the use of such term as wadiah in the above context is not accurate to describe truthfully what actually happened in the context of the banking practice as described.

In Shariah parlance, when wadiah is created the basic objective is for safe-custody and not for usage by the custodian; if usage is intended it will depend on whether the deposited item or object is durable or perishable by usage or consumable in nature in which case the transaction is known as qard. If however the item is durable such that any intended usage will not diminish it, (meaning it may be returned safely after usage) then the arrangement is known as I’arah or borrowing or lending of durable item. From the foregoing discussion it has become clear that to be considered wadiah the purpose must be for safe-keeping rather than usage or borrowing as is in the case of either qard or iarah as explained.

The problem started to emerge when Islamic banking deposit was referred to as wadiah when it was clear right from the very beginning that the banks’ intention was to make use of such deposit as it deemed fit for their business purpose. If classical Shariah framework is to be applied such an arrangement with that purpose needs to be viewed as a form of qard considering the fact that the money collected and used/spent is not returnable as it moves from one hand to another in transactions. However when the term wadiah is used to refer to such deposit, misunderstanding is bound to arise just because wadiah from its very concept only connotes safe-keeping. To address this issue some banks added another term to the original wadiah thus the concept was said or described as wadiah yadd damanah ( wadiah/safe-keeping with guarantee); such combined term is in itself more confusing given that by conceptual definition wadiah is not supposed to be guaranteed in all circumstances the way qard/loan is.

According to Shariah, a custodian in the contact of wadiah is only liable in case of negligence or fault and not like a borrower who is under a duty to repay back what is borrowed in whatever circumstances. Wadiah custodian however will not be held liable if the reason for such inability to return back the deposit when demanded has nothing to do with any element of negligence or fault on the part of the custodian.

Deposit Guarantee and Mudarabah

Islamic banks also collect funds in the form of mudarabah investment deposits which are either general or specific investment account where the idea is to differentiate these deposits from those collected as wadiah as previously described. Up to this level such deposits that are said to be for investment on the basis of mudarabah pose no big problem, but if we move a layer below, it will become clear that in practice not all basic rules governing mudarabah are followed. This is apparent when we take into consideration that the bulk of the monies so collected by the banks (as mudarabah deposit or placement) is later employed mostly in either murabahah credit sales or BBA (deferred payment sale) in providing financing to their so-called customers. The issue is, when the banks collect such deposit, they thus become a mudarib/enterprenuer and as such are to be bound by the rule of mudarabah.

In the law of mudarabah, it is a settled principle that the mudarib shall have no right to be involved in granting facility in the form of deferred payment sale as a matter of right as a mudarib because such an act is viewed to expose the mudarabah fund to risk of non- payment by buyers i.e credit risk. which will eventually create a loss at the detriment of the investor/rabbulmal. The generally accepted opinion in Shariah jurisprudence is that if a mudarib performs such an act, he will be held strictly liable for any non-payment arising there from since such an action is considered not to be part of a role of a mudarib by default. Additionally it is also a generally accepted rule in Shariah that it is not permissible for a mudarabah contract to be made embedded with a capital protection clause as this is not in line with the very nature of mudarabah concept and application. There are however two general opinions regarding the mudarabah contract that is embedded with such a clause; one opinion goes on to state that the whole contract will become invalid by such a provision while the other one only regards the clause as not valid and of no practical implication due to such impermissibility. Thus the mudarabah contract as per this second opinion can still be operative but without such a clause.

From the above discussion it has become clear that had banks truthfully followed the correct rule of mudarabah by not involving in credit sales as widely practiced, there would have been no need to talk about credit risk from Islamic perspective the way it is understood in the conventional contact. Conventional banking institutions lend money to their customers so they have no alternative but to address the issue of credit risk as understood. Islamic mudarib banks, not only that they are not supposed to lend money to do business, but also they have to refrain from any involvement in deferred/credit sale as a matter of requirement of mudarabah rule. But when such a rule is not followed, whether they like it or not the issue of credit risk is there to be addressed as a matter of self-induced problem that should not emerge in the first place had the true concept and rule of mudarabah were correctly followed. Sadly as is always the case, it is much easier to replicate the conventional practice than sticking truthfully to the original concept; as originality has a price not everyone is willing to pay.

SUKUK DEFAULT

SUKUK DEFAULT: IS IT TRULY A DEFAULT?
As indicated in a previous posting, sukuk if properly understood means certificates proving ownership of underlying assets that back up the issuance of such certificates which are for all intent and purpose issued to testify that a certain sum of money has been invested and handed over to the issuer/manager. Sukuk as per the generally accepted global definition means investment certificates of equal value issued to investors as documentary proofs of their investment. They are not debt certificates as wrongfully described by some uninformed writers unless they talk about certificates as issued in Malaysia as part of what is known as IPDS (Islamic Private Debt Securities) backed by BBA debts in which case such certificates are truly debt certificates. This IPDS cannot be considered as sukuk according to the global definition especially in the context of a relevant resolution on Sukuk Muqaradah (Mudarabah) passed by the OIC Fiqh Academy in 1988 .

True sukuks must confer true right of ownership to sukuk holders in the manner recognized by the Shariah, the same to be made available to them as true owners of the underlying assets that back up the sukuk which initially means the money capital handed over to the issuer as part of the investment. The issuer then is expected to utilize the fund to purchase productive or trade assets to be dealt with accordingly in the ensuing business to be carried out to garner profit for the investment. In this context the issuer cum manager is to act as an agent for the sukuk holders or investors in conducting the trading business or in managing the project for which purpose the sukuk have been issued.

Provided the agent/issuer/manager has conducted himself as expected ( on best effort basis) and without negligence or be in breach of the terms of the investment contract/sukuk deeds, if loss should occur then as a general rule he is not to be held liable precisely because he has been acting as an agent whose liability is fault-based. If ever he is to be held liable for the loss, the sukuk holders must come with acceptable evidence to prove it. Juristic opinion however differ in terms of how the manager’s statement as to the cause of the loss is to be relied upon: whether it is to be taken at its face value or he needs to be asked to take an oath of assertion that such loss is not due to his negligence or wrong doing.

Given this Shariah position, hardly that one can compare this position with that of a default in the context of debt securitization (bond) as understood in the conventional sense where default there would means inability of the issuer to pay coupon as agreed or to be unable to redeem the principle at its face value upon maturity. In the case of the sukuks however, there will be no default if non-payment of profit is not caused by any negligence or wrongful act on the part of the issuer/manager as profit is only payable if there has been actual profit realized by the investment. Even if the issuer is unable to redeem the sukuk at the end of the period as agreed, if such inability/loss is occasioned by no fault on his part, such loss is to be borne by the investors or sukuk holders who are in fact entitled to get back the remaining portion of any assets that belong to the fund at the material time meaning; that they must have a right of recourse to the remaining asset of the sukuk. This is only possible if the sukuk are aseet-backed sukuk and not the asset-based ones. In order for sukuk to be valid from Shariah perspective, the issuance must be in the form of asset-backed that should confer true right of ownership to the sukuk holders of all the underlying assets that backed up the issuance.

RULE OF LAW AND ISLAMIC FINANCE

STANDARDISATION, JUSTICE AND THE RULE OF LAW: WHERE IS DISPUTE SETTLEMENT IN ISLAMIC FINANCE?
As Ibn Khaldun, the outstanding Muslim social scientist put it many centuries ago, a man cannot live except in a civil society because he cannot survive in isolation. Demands of life could not be fulfilled unless he co-operates with others, and the others need him to fulfill their basic needs too. The gathering of people in a particular place or locality leads to urbanization which is the essence of hadharah or civilization. Civilized people need systems to conduct their daily activities and to settle disputes arising as between them. Life without dispute settlement mechanisms is a form of anarchy by definition.

In the contemporary world however, multiplicity in legal systems is a fact of life that no informed observers and students of law can ignore. The numerous systems and rules applied and followed worldwide testify to the fact that everywhere justice is sought after at whatever price. Nevertheless, the biggest question to answer is not related to what particular system that is followed but what justice it brings to real lives of the people. In the end, it is justice in itself that is sought after by nearly all irrespective of race, colour or place of abode. The quest for justice is a never-ending endeavor of the human race of all ages. Islam as a religion is very vocal about the need to uphold justice. In the Quran Allah Almighty says:

“ O ye who believe! Stand out firmly for justice, as witness to God, even against yourselves, or your parents, or your kin, and whether it is (against) rich or poor: for God best protects both. Follow not the lusts ( of your hearts), lest ye swerve, and if ye distort (justice) or decline to do justice, verily God is well-acquainted with all that ye do.”
(Al-Quran 4: 135)

It is of interest to compare the above Islamic notion of justice with the so-called distributive and remedial justice of Aristotle, the natural justice of Anglo-American Common Law and the formal justice of the Roman Law. Whatever description that may be attributed to all of the above notions, one certain thing is that each system seeks to define justice and provide solutions to human problems which involve rights and obligations and the associated phenomena related therein.
One of the most important elements needed for justice to be done is the existence of an independent judiciary that seeks to settle disputes arising in the society. No law can be effective in rendering justice unless the means through which it is delivered and made applicable is supported by just process and procedure. Granted all of that, the rule of law is thus established where law reigns supreme; nothing is done or rendered except in accordance with clear provisions of law as interpreted and explained by competent and independent judges.

In the context of judicial independence the most pertinent aspect is to see whether the establishment of the judiciary itself reflects sincere regard for principles of justice. One legitimate question to ask is: to what extent, the established court system or judiciary is subject to constraint and limitations that would seek to influence its task in administering and upholding justice or whether there are constitutional provisions that guarantee its independence?. If there are in fact such constraint and limitations, whether they are justified in the context of an overall effort to establish harmony in society founded upon the noble concept of justice that is supposed to maintain workable balance with regard to competing interests and rights?.

It has been said time and again that, the judiciary is the true guardian of justice in any society such that any weakness in its roles and functions vis-a-vis other organs of the state will adversely affect the whole system of value and justice. Likewise, any deterioration in people's confidence about the independence of the judiciary will in most cases lead to instability and chaos that will sometimes be difficult to control. Therefore it is very important to realize that the duty to maintain an independent judiciary is vital to the survival and progress of any nation. Efforts must always be made to strengthen the image and dignity of the judicial system and its functionaries.

In a wider context, apart from perception held by local masses about their judiciary, international public opinion is sometimes very active in shaping the kind of image a judiciary of a certain country has. Undoubtedly, these days no country stands in isolation and immune from the scrutiny of interest groups, lobbyists and international media in particular. However there are several dangerous elements present in the current debate about democracy and the rule of law and with it the notion of independence of the judiciary.

With the ensuing move towards globalization, there seems to be efforts by some quarters to impose certain values as "universal" forgetting the facts that in reality, people are different, their habitats and upbringing are different and the levels of their civilizations are also different. If certain universal values are to be accepted by the entire world, these values must be universal enough to be accepted by all. Certainly there are values that we universally have no argument about them like:
1. one is presumed to be innocent unless proven guilty
2 . Everyone has the right to be heard,
3. the notion of right to fair hearing,

4. the right to provide defense of oneself upon accusation.


However, there are values that people may disagree about, in the context of prevailing local customs and religious belief. International conventions thus for instance recognize freedom of religion as one of the basic fundamental rights of each and every individual. Hence to force someone to abandon the creeds or rules as found in and taught by his religion is actually a denial of the right to religious freedom granted to him in the first place.

Islam for one, is a religion that is very clear about law and order as it comes with a well-embracing concept of shariah or divine law supplemented with what is known as jurist law or fiqh jurisprudence. Therefore, for Muslims, justice is both the question of religion and temporal necessity. As such the duty to administer justice is considered part of religious observance of the believers not less valuable than their worldly affairs for that matter.

Although Islam propagates sacred values as dictated by the Shariah or the divine law, yet in actual fact the Shariah itself contains both the elements of rigidity and flexibility at the same time. It is rigid when it deals with fundamental values like justice, tolerance, equity, respect for the elderly, fair distribution of property, prohibition of certain major criminal acts, just to mention a few, but still it is very flexible with respect to the way in which these principles or values are to be implemented. That flexible part of the Shariah (fiqh jurisprudence) may change with the change in time and place thereby allowing accommodation to take place for the sake of justice and equity.

Universal values, if they were to be respected, must be flexible enough that they can accommodate local circumstances, yet still relevant in a wider context. The irony is that sometimes in the pursuit of universal principles and values we forgot about the need to adjust ourselves to local circumstances and needs, thereby compromising our true quest for justice.

Independence of the judiciary is also related to the need to maintain freedom for judges to act within their powers as established by law. In order to curb unwarranted monopoly of power in a state, the doctrine of separation of powers was propounded whereby the three organs of the state ( legislative, executive and judiciary) are supposedly segregated such that each will act as a check on the others, culminating in the appearance of the notion of check and balance in constitutional thinking.

Additionally the judiciary is also empowered with judicial review over actions by executive agents to ensure that discretion is properly exercised. In practice however, such noble aim has been the most difficult task to achieve given the dominance of the executive branch in a day to day running of the state, not to mention the fact that in most cases, judges, especially at the highest level, are normally appointed by the head of the executive.

Apart from issues relating to appointment of judges, what we mean by the term independence of the judiciary is that judges who are so appointed should be able to exercise their unfettered discretion in the interpretation of laws and administration of justice, and that they are not influenced by anyone in discharging their duties as adjudicators for disputes. Only when this aim is achieved that the major condition of rule of law is fulfilled thus ensuring that justice is done and liberty established. The process that leads to the above noble aim is related, among others, to issues surrounding modes of appointment of judges, judicial tenure, removal of judges, judges’ salaries and also qualifications of judges.

"WAAD" (PROMISE) or CONTRACT?

In the last post, we raised up an issue pertaining to “waad” or promise in Islamic finance and how it seems that this concept has been employed to achieve some objectives aimed at helping one party but denying justice to the other side in a transaction. Islamic law right from the outset has recognized a distinction between a promise and a contract where a contract has been viewed more important than a promise at least in the context of external binding effect. However even in the case of contracts, Islamic law does look at the nature of the contracts concerned when it comes to the question of their external binding effect that will define whether the court will enforce the ensuing obligations or not. In this connection there are at least three major contracts to talk about in terms of the binding effect of a contract. Firstly there are contracts held to be binding on both contracting parties upon their formation where none of the parties are allowed to unilaterally terminate the relevant contract, and among others this includes sale and purchase and leasing or contract of/for service known as ijarah. The second type comprises contracts that are held to be not binding on both of the parties such that at any time any one of them can unilaterally put an end to the relationship without any need to get approval from the other side like in the case of the contract of wakalah (agency), mudarabah, sharikah (partnership) and the likes. And lastly there are contracts that are viewed to be of special category when one of the party is allowed to terminate while the other is to stick to them with no right to terminate unless with the consent of the first party. One example is the contract of surety or guaranty, where the creditor can always free the guarantor from the contract at any time, but the guarantor has no such a right as he is to stick to it as per the term agreed.
It is interesting to note, even in the case of the contracts that are supposed to be binding on both of the parties like sale and ijarah, both parties if they wish, can insert the right to terminate the contract in their agreement based on a concept known as khiyar al-shart provided in the contract according to which the party who asks for it will have the right to terminate such a contract within a specific time period. This concept is very similar to the modern notion of right of cooling off (cooling off period) where the parties can provide for its as part of the contractual terms, in which case they have right to set aside the duly formed contract within specific period of time.
Coming back to the issue of binding promise as previously discussed (refer to previous post), now it has become clear that if the concept is relied upon, it (binding promise) will take away the flexibility of the law of contracts itself by not allowing the relevant parties to have equal bargaining power in their dealings. The binding effect of a contract of exchange like sale and purchase derives its sanctity from the fact that if one of the parties unilaterally backs off from his contractual duty without agreement from the other side ( who is ever willing to provide his part of the bargain), then the one who is ready to continue can pursue the first party in the court of law for enforcement (for specific performance). Therefore in the case of a contract that is binding on both of the parties, there is an element of consideration where there are bargains on both sides which are not the case in a one-sided promise. How come a party (promisee) who himself has not made any commitment to provide any bargain/return/consideration to the other side is allowed to pursue the first party (promisor) for an enforcement of a promise. Promise itself is said to be not more than a statement by a person that he intends to carry out some good deeds in future, such that it is up to the promisor to fulfil it or not even though in a religious/moral term he is commanded to fulfil it unless there is any justified reason not to fulfil it. Given that the promisee has not made similar commitment, he cannot enforce the unilateral declaration of promise made by the promisor, as there is no equal bargaining in the equation. Apart from that there is always a general Shariah prohibition on taking away anything from an owner save on the owner’s consent either premised on a sale or gift contract. In short, if the notion of binding promise is to be widely applied, it will defeat the purpose of the law of contract in accordance to which people generally bargain their positions in a level playing field. Although the approach that allows for a promise to be made binding seems to address the issue of a customer not wanting to conclude a promised sale contract in limited scope, the danger of putting aside the general theory/rule of Islamic contract is far more serious than the anticipated benefit as it will defeat the very contractual framework that has been there for the general benefit/protection of all, not to mention the flexibility of the law of contract itself when it recognizes the different categories of contracts from their binding effect perspective.

THE PROBLEM OF "WAAD" OR PROMISE

Promise or “Waad” has been featured so prominently for quite sometime in Islamic finance circles such that it has been given more importance than Islamic contract itself. In what is frequently referred to as an effort aimed at helping Islamic finance to grow and be competitive in the world of finance, waad has been employed in structuring many Islamic financial instruments including Murabahah sale, swap and option where in most cases it is the customer who is made to be legally bound by any promise that he may be asked to make in favour of Islamic financial institutions.

The concept invoked in this connection is what is known as the notion of binding promise premised on views as adopted by some mazahibs or Islamic schools of Jurisprudence. Although a great majority of Muslim jurists right from the earliest period of Islamic law have held the view that a promise is undeniably morally binding upon the promisor, but they accepted the view that in a law or judicial term it is not binding in the sense that if the promisor should break his promise he could not be sued in any Shariah court for such a breach.

But the modern approach to Islamic banking and finance has always preferred the view of a small minority of the jurists who hold the opposite opinion when they opine that a promise is also judicially binding on the promisor. Not only that this approach sanctions such a view, if one were to look at many contracts/agreement used by Islamic financial institutions, it will become clear that any breach of promise by the promisor (client) will render him liable for any loss that may have been suffered by the other party (promisee/banks) and be required to fully indemnify the promisee. In many cases, part of the duty to compensate revolves around the need to pay the difference in price of the underlaying asset, to be purchased by the promisee from the bank, and the realized price if the same asset is to be sold to any other party after the breach of the promise by the promisor, i.e., when the promisor negates his promise to purchase the asset from the promisee/bank.

Interestingly, although it seems that the promisee/bank generally accepts the notion of binding promise on the promisor as described, that concept is however not made applicable to the promisee/bank in most of the circumstances where normally the promisee/banks always reserves an absolute discreation whether to conclude the promised contract or not, as the promisee/bank right from the very beginning of the arrangement will not make any similar promise to sell the asset to the client/promisor. It is always claimed that to make this arrangement valid from Shariah perspective, there will always be only a unilateral promise from one of the parties that in most cases as previously said is the customer/client. The rationale for this approach as propounded by the practitioners/and their Shariah advisors is that if the promise to buy and sell was to be made on mutual basis, that will trigger Shariah compliance issue as far as the intended sale is concerned. Take the case of Murabahah for example, if it is allowed for both parties (the bank and the customer) to make mutual promise to buy and to sell at the same time then this arrangement will, as claimed, constitute a sale contract at a time when the asset of the murabahah has yet to be the property of the bank because at the time of the mutual promise the bank has yet to buy it from the distant supplier. This arrangement (mutual promise) if allowed will lead to selling something not in one’s possession or ownership that runs counter to a basic rule of sale.

However, one big question remains to be answered: if it is true that any promise made by a client in favour of a bank is mandatory to be fulfilled by the client in any circumstances in line with the concept of binding promise as decribed, how come the promisee/bank at his absolute discreation reserves a right to himself not to agree to the performance of the promise by the promisor? Because if such a discreation is exercised by the bank/promisee it means that he prevents the promisor from performing his promise as dictated by the concept of binding promise. Hence the big question is, can it be possible for the promisee/bank to resort to such an act while insisting at the same time that the promisor must perform his promise under all circumstances?

The tendency to rely on the concept of binding promise as explained above seems to be motivated by a desire on the part of the strong party/financier to take advantage of the needs of the weaker one/the client more than
a true adherence to the spirit of justice as envisaged by Islam or Shariah.

This analysis shows that what had been accepted by the majority of Muslim jurists on the nature of a promise which is not legally or judicially enforceable is more appropriate to be considered. Imam al- Shafi as one of the earliest jurist to talk about Murabahah for example, opined that should the two parties (in the context of Murabahah) enter into a mutual promise to do murabahah sale, such mutual promise is valid if both parties have option whether to subsequently enter into the murabahah sale or not to enter into it, otherwise the arrangement is not valid in his opinion because if such a promise is binding on them, that effectively will constitute a sale at a time where the seller has yet to own the asset. For him a promise or even a mutual one will have no binding effect on the parties from the judicial perspective.
Hence when the bank/promisee subscribes to the idea of a promise binding only on the promisor but the promisee/bank is free to accept the performance of the promisor or to reject it just because he has not made a similar promise is very absurd indeed.

ISLAMIC BANKING VIA CONVENTIONAL FRAMEWORK

ISLAMIC BANKING VIA CONVENTIONAL FRAMEWORK
Banking if it is to be understood conventionally as the business of collecting deposit and provision of loan is truly out of context as far as Islamic perspective is concerned, basically because Islam prohibits any act of commercialization of credit and loan. Loan is supposed to be at all times viewed as an act of benevolence the motivation of which is to help people in needs free of charge.
However problems arise when 30-40 years ago some Muslims wanted to have their own banks albeit based on their own version where there was no loan given on interest as this would constitute commercialization of debt and credit. But they had to face the reality of that time where they found out that in many parts of the Muslim land, nearly all laws governing banking and provision of credit were (and still in many jurisdictions) based on a framework that authorized financial intermediation by banks and credit institutions where interest was paid and charged. So in the beginning Islamic banks were allowed to operate within such a framework in a way that they were said to be different from their conventional counterparts because they did not manifestly charge interest. This was generally known then as Interest-free Banking Scheme/System.
Up to a certain level it was later realized however that to be banks within the conventional framework they were allowed to operate in, the Islamic banks had to face stiff competition from the interest based banking institutions. Given that they were business entities whose objective was to make profit for their shareholders this position in the market was not viewed lightly by the players. To ensure their survival they had to continue to be in business in a profitable manner, facing all the competition from their conventional peers. Whether they liked it or not it was a matter of life and death for them that profit must be made otherwise they had to close their doors.
The problem is that profit as it is understood in Islam can only be created out of real trading activities where real (as opposed to financial ones) assets are traded for profit. In banking, real assets are of no relevance because bankers by definition are supposed to deal with financial assets rather than real physical ones such that in the majority of cases, in line with regulatory laws in many jurisdictions including the Muslim one, banks were not allowed to hold real assets except in a very small proportion. The catch here is that how come an Islamic bank be said to have made certain amount of profit where there has been no clear proof that it had conducted real trading of (physical) assets during the relevant period. On the other side of the river, they could see very clearly their conventional counterparts were freely making profit out of their so called business of selling loan/credit based on interest which is in real fact selling money/debt for money/debt at a differential rate for profit. Such profit if viewed from Islamic perspective is no other than Riba’; the unlawful profit from Islamic point of view.
Hence the dilemma faced by the early Islamic banks was centered upon the question of how they can continue operating as banks but at the same time would not be involved in the same practice as undertaken by the conventional ones. Soon it was discovered that the Islamic concept of Murabahah (including sale on credit-BBA) sale was very close to the conventional act of provision of credit and loan although it did not involve money lending as such given the fact that Murabahah is a sale contract be it on cash or deferred payment basis. So the early Islamic banks moved to adopt this transaction as the backbone for their business activities. The end result was that more and more transactions were done on the basis of Murabahah with deferred payment as a standard practice, the manner of which was gradually heavily criticized by the early proponents of the Islamic banking movement like Dr. Al-Qardawi and the late Dr. al-Najjar and some other concerned ulama like Dr. Al-Salus. Dr. Qardawi for example, although initially had forcefully defended the legality of Murabahah as a transaction, however after seeing that Islamic banks had over indulged in it, had called on them to minimize their reliance on this transaction. The criticism by many was centered around the issue of Islamic bank’s over indulgence in Murabahah such that they had neglected other modes of trading allowable in Islam, and that by creating debts out of Murabahah transactions in a massive scale they had behaved more like conventional banks as far as provision of credit was concerned. (This is not however in any way related to the controversy pertaining to commodity murabahah which is more serious in nature.)
Another associated problem faced was related to the fact than once these banks were involved in Murabahah debt creation in a massive scale as described above, they had to address the issue of owning too much assets (in their balance sheets) in the form of financial assets i.e debt owed to them by customers as a result of murabahah transactions that were in the majority given on deferred payment basis. With this situation they were said to be starved for not knowing how to liquidate the non liquid assets (debts). At that time many Islamic bankers were heard saying that there were not enough instruments in the market for them to manage this liquidity problem. Meanwhile their conventional peers had all the freedom to liquidate their debts in various debt/interest –based instruments available in the money or capital market. For them this was quite natural and well within the framework within which they were regulated; a framework that allow for financial asset or debts to be sold and purchased freely on prices that are known as interest rate.
Islamic banks could not do just that given the interest factor in trading financial assets not at par value that without doubt would gave rise to riba’. Conceptually what Islamic banks should do was to use the debts to purchase real assets for the purpose of trading with a view to creating profit for themselves and their customers. But the reality was that, not many were willing to become real traders and be involved in real treading of physical assets. One common reason given was that as bankers they were not supposed to do that because bankers had no concern with assets except the financial ones. The problem is that profit cannot be made out of trading in financial assets that naturally gives rise to riba.
Because of the above predicament, it was claimed that the Islamic banks had behaved in a manner similar to any other bank where they wanted to remain as mere financial intermediaries truthful of course to the framework within which they were allowed to operate. Even though they may claim that they were actually involved in trading of real assets, they were said to be doing all they could to free themselves from all risks associated with owning the assets they were supposed to be trading with. All risks were shifted to their customers such that hardly that any form risk was left with the bank although like even in the case of ijarah for instance, the bank was said to be the owner of the leased asset, but the customer needs to bear all the risk.

The issue here is that if they had only functioned as mere financial intermediaries and not like real traders who assumed ownership risk associated with the assets under possession, then it was doubtful as to whether they had conducted real or actual trading of physical assets in the manner prescribed by the Shariah to justify their profit. The basic rule of sale is that a trader can only trade with assets that are truly in their ownership and possessions, the premise that is out of context as far as banking is concerned given the framework that asks of them to be merely holders of financial assets (money/debts) only.

Even today where in some jurisdictions with the introduction of specific legislation that does not prohibit Islamic banks from holding real assets, it seems the same conventional framework is still being followed in practice,, where Islamic bankers are still skeptical to take on the role of real traders of physical assets with all the necessary risks that they cannot free themselves from. Thus it is doubtful according to some observers whether the so called Islamic banks have properly managed to conduct themselves within the necessary trading framework as explained above.

Additionally, the indication is that more and more Islamic banking products are introduced where the practice points toward the widespread trading of financial assets rather than the real ones although in many circumstances real assets were brought in to give the cloak of legitimacy to many practices said to be doubtful. In many occasions some Islamic banks without reservation involved themselves in sale and purchase of debt at discount via many financial instruments invented for financing purposes. Some other even were actively involved in Private Debt Securities where debts were sold and purchased at discount, not to mention other forms of debt-based securitization and the so called Islamic derivative contracts that are said to be badly needed for risk management. The truth is that by operating within the conventional framework where market instability is self-induced by allowing financial assets to be freely traded, Islamic banks have created trouble for themselves. Those so called derivative instruments are actually meant to address the problems created by interest-based system that has caused so much trouble to the world financial stability. It is a pity indeed to find out that some Islamic institutions being enticed into the black hole without proper comprehension on their parts.

In the same context, if one were to look at any financial statement issued by Islamic financial institutions currently in operation hardly that one could find any statement related to the number or unit of real assets recorded in the statement (the balance sheets) as if throughout the period under reporting the institutions concerned had taken in no real asset whatsoever into their ownership. If this situation is true, from where did they generate profits as reported in the financial statement as profit must have come from trading of real assets in the of ownership the trader. This fact shows either that truly the institutions did not effectively own any asset or the financial statement was prepared in the conventional manner when the institutions were viewed as traders of financial assets rather (just like their conventional peers) than the real ones as required by the Shariah. Either way the issue begs more questions than answers as to why the reporting had failed to reflect the true state of affairs of the relevant parties.
Perhaps Islamic banks need to be taught a lesson by a massive financial crisis like the ones faced by their conventional peers to make them pay attention to the true teaching of Islam that profit shall only be created out clear real trading of real assets and not the financial ones. By then hopefully the financial statement would have undergone changes!