Parties in a contract involving Islamic finance are free to structure their dealing to take into account Shariah requirements governing transactions, and have their terms documented in the relevant contractual documents. They can insert whatever clauses of their choice in so far as these clauses are not in any way repugnant to any established Shariah rules and principles. In many jurisdictions it is the requirement of regulatory laws that these parties need to ensure that their transactions are free from any element inconsistent with Islamic teachings. However it is very sad indeed to find out that some parties may sometimes indicate through their agreements that in case any dispute should arise in future between them, they would like to settle the possible dispute not in accordance with any Shariah compliant mechanism of dispute settlement.
What may happen is that the parties would instead prefer to settle such a future dispute through trials conducted by courts that are very clear from the very way they are constituted are far from being a suitable forum to dispose of the case in a Shariah compliant manner. Given that these courts are conventional courts in various jurisdictions that as a matter of judicial process are not from the outset suppose to decide cases brought before them in line with Shariah requirements. Hence the big question is how can it be said that the relevant dispute is to be disposed of in an Islamic way?
It is important that dispute related to Islamic financial transactions is settled in a Shariah compliant manner for two major reasons. Firstly when the parties hold out that they are conducting their affairs in Shariah compliant ways, they thereby make a representation to the general public that they are going to abide by the Shariah requirements in all their dealings. So when it turns out to be that they prefer to settle their future disputes in the above described manner, and to turn a blind eye on Islamic alternatives, the general public has all the reasons to ask why it remains so when other Shariah compliant alternatives are available. Secondly, assuming that an award may have been made by the non-Shariah compliant courts, does it mean that the amount so awarded in the judgment cannot be treated as halal/legitimate incomes for the relevant parties, or at least be described as questionable incomes that need to be purified.
What happened in Malaysia recently in the context of the latest amendment to the Malaysian Central Bank law is very interesting development to note. The amendment made it clear that the Malaysian civil courts and arbitrators must consider the published Shariah resolution passed by the Shariah Advisory Council of the Central Bank in deciding Islamic banking cases brought before them. The amendment also made it mandatory for the Court and the Arbitrator to refer any Shariah issue raised in the dispute which is not yet addressed by any published resolution mentioned above, and they must abide by any decision that the SAC may provide.
It remains to be seen whether this approach will solve the dilemma faced by Islamic finance in this respect. Strictly speaking, from an Islamic classical perspective, a Muslim judge is always reminded to consult learned parties before issuing any judgment, and it is held that this approach, although is not mandatory to be taken, is accepted to be a highly recommended thing to be done by any presiding judge. But to put it in the manner that it is mandatory to be undertaken is something new, firstly because at the end of the day it will be the judge himself who is going to be responsible for the issued judgment.
Secondly, with respect to any opinion that may be possibly given by the consulted learned party the most that can be said is that it is a form of fatwa or shariah opinion that is basically not binding. Any court judgment on the contrary is binding on the disputing parties as a matter of authoritative expediency. Perhaps the reason that may have been relied upon by the Malaysian Parliament when the house passed the amendment is based on the fact that civil court judges were not trained in Islamic law, hence they need to abide by the SAC resolutions. But then, judgments are normally not given solely based on rules or law but they are based also on facts of the cases in question for which only the trial judges have the opportunity to establish. Furthermore trials in the civil court do not involve the same procedural process as normally employed in the Shariah court especially in the context of the role that can be played by oaths in establishing civil claims. The fact is that to dispose any given Islamic finance case is not just limited to the law aspect alone, but also the evidential and procedural aspects as well. Unless the relevant additional issues are properly addressed taking into consideration all that need to be considered in terms of Shariah requirements, the hope to achieve full settlement based on Islamic principle will remain something to be very genuine.
Monday, November 30, 2009
Tuesday, July 14, 2009
BOOK ON ISLAMIC VIEW ON DERIVATIVES
There is a near consensus about derivatives (structured products included)being one of the culprits to blame for causing the financial meltdown that no one know for sure how the world can get out. Bailouts, tightening regulations, rescue plans, extra deposit guarantee schemes: all have being pursued but still there has been no clear sign that things are actually better. The last we heard was about a number of banks and brokerage firms thathad been banned by the Singaporean authority from further marketing structured financial products that have caused investors there millions in losses due to the toxic investment schemes. Luckily some have been partly compensated. But still we are not able to understand why there are many proponents of derivatives among the growing number of Islamic finance practitioners as if they have turned a blind eye on the devastating effects of such products that even the conventional players and regulators themselves have admitted. The main reason given in support of the so-called Islamic derivative products is that they are needed for risk management purpose i.e for hedging. Everyone knows that in the world of modern financial markets the distinction between hedging and speculation is not easy to be made. After all, once a door is opened, there is no assurance that only good guys will come in. The truth is that risk management is embedded in the Islamic law of contract and financial transactions such that if they are truly implemented as provided, there is actually no real need to address the issue of risk the way it is pursued in the conventional sense. Hence the biggest question to answer here is whether all that need to be followed in term of Shariah rules are actually implemented. Some concerned observers have expressed their serious dismay at the ways and manners Islamic finance has been practiced of late... Coming back to Islamic view on derivative: for those who want to read more on this please get a copy of a very well-researched book (in Arabic) on Islamic view on derivatives written originally based on a request of OIC Fiqh Academy. ( Al-Mushtaqqat al- Maliyyah: dirasah muqaranah bayna al-nuzum al-wadi'yyah wa ahkam al-shariah al-islamiyyah,-by Dr. Samir Abdel Hamid Radwan, 2005, Dar al-Nashr li'l Jamiaat, Cairo.). Notes: The author at the end of the book swear in God's name that to the best of his knowledge, based on the research conducted to prepare for the book, his finding is that derivatives, as they are, are far from being shariah compliant. It is worth-noting also that the OIC Fiqh Academy had issued similar resolution several years ago.
Friday, July 3, 2009
TAWARRUQ, COMMODITY MURABAHAH AND MONEY LENDING IN DISGUISE
TAWAARUQ, COMMODITY MURABAHAH AND MONEY-LENDING IN DISGUISE
International commodity murabahah and tawarruq are the two topics that have being raised quite prominently these days especially after the Islamic Fiqh Academy of OIC issued its resolution on tawarruq in April. The use of murabahah concept in transactions involving sales of goods and assets, when used in its correct form is not a controversial topic in itself because murabahah in its classical form is recognised as valid by the majority of Muslim jurists right from the earliest days of Islamic law.
Conceptually in order to have a valid Murabahah there must be two sales involved: the first being between a supplier of goods and a seller in murabahah while the second leg is between the murabahah seller ( who is himself a buyer in the transaction with the supplier) and the murabahah buyer. In order for the second contract of sale to be valid, the murabahah seller must have obtained full title and ownership of the goods sold in the first contract with the supplier in a full Shariah compliant manner: meaning that the goods and its economic/ ownership risk has been fully transferred to the murabahah seller. This will only happens when the goods has been actually or constructively delivered to the possession of the murabahah seller such that if anything should happen to the goods after that possession, loss is to be borne by the murabahan seller as a new owner. When this requirement is fulfilled, there is no question as to the right of the murabahah seller to sell the same goods to the murabahah buyer in the subsequent sale. This is obvious due to the Shariah rule that provides only an owner or his agent can affect a valid sale contract.
The issue as far as the current confusion as to the validity or otherwise of transactions involving either commodity murabahah or tawarruq is not so much of the conceptual aspect of the sales but more of whether the current practices adhere or not to rule as explained. In practice, most financial institutions that utilises both of the above concepts have been dealing with international commodity exchanges that are in fact, more often than not, parties involved in future commodity markets rather than normal physical markets. One such metal exchange that the present writer has access to some published information, states clearly that in practice as far as this metal exchange is concerned, only 1 % of their commodity (future) contracts ends up with physical delivery of the relevant metals. This is not surprising given the fact that such an exchange is known to be one of the many similar exchanges that are involved in commodity future market. So the big issues here is how come the Islamic financial institutions did not realise this fact as many of them are likely to be aware of several earlier resolutions by the OIC Fiqh Council that had disallowed involvement in future markets which was declared as non-shariah compliant in its current format.
The recent resolution by IFA does not mention this point directly but the concern can be understood by implication when the resolution mentions about the absence of genuine sales in tawarruq as currently practiced. Buy right the resolution should have reiterated its earlier resolutions concerning future market to support its present resolution on tawarruq. Perhap it is worth noting also that in the past few years or so there have been calls by concerned parties including Shariah scholars for Islamic financial institutions to use local commodities in their murabahah or tawarruq transactions. The reason given was that in the case of local commodity markets, there should be no difficulty in ensuring the existence of the relevant commodities and the truthfulness of the sales. So in short the major concern that underlines the Fiqh Academy resolution is so directly tied up to the way the relevant transactions are carried out, and not their conceptual acceptance from Shariah perspective. This is understandable considering what the Shariah says about sales as allowed in Islam where they must mean true sales and not money lending in disguise: hence when sale are intended it must be clear that transfer of ownership together with economic risk has taken place as between the parties in the first transaction before the second sale can take place. After all, in Shariah it is sale and only true sale that can be taken as justification for profit. So when the existence of true sale is doubtful, then there is no reason for the relevant transaction to be considered valid or Shariah compliant. Hence the biggest question posed indirectly by the resolution is how many of those so-called Islamic finance practitioners are sincerely willing to wear the title of genuine traders in their activities, and not as money-lenders in disguise.
International commodity murabahah and tawarruq are the two topics that have being raised quite prominently these days especially after the Islamic Fiqh Academy of OIC issued its resolution on tawarruq in April. The use of murabahah concept in transactions involving sales of goods and assets, when used in its correct form is not a controversial topic in itself because murabahah in its classical form is recognised as valid by the majority of Muslim jurists right from the earliest days of Islamic law.
Conceptually in order to have a valid Murabahah there must be two sales involved: the first being between a supplier of goods and a seller in murabahah while the second leg is between the murabahah seller ( who is himself a buyer in the transaction with the supplier) and the murabahah buyer. In order for the second contract of sale to be valid, the murabahah seller must have obtained full title and ownership of the goods sold in the first contract with the supplier in a full Shariah compliant manner: meaning that the goods and its economic/ ownership risk has been fully transferred to the murabahah seller. This will only happens when the goods has been actually or constructively delivered to the possession of the murabahah seller such that if anything should happen to the goods after that possession, loss is to be borne by the murabahan seller as a new owner. When this requirement is fulfilled, there is no question as to the right of the murabahah seller to sell the same goods to the murabahah buyer in the subsequent sale. This is obvious due to the Shariah rule that provides only an owner or his agent can affect a valid sale contract.
The issue as far as the current confusion as to the validity or otherwise of transactions involving either commodity murabahah or tawarruq is not so much of the conceptual aspect of the sales but more of whether the current practices adhere or not to rule as explained. In practice, most financial institutions that utilises both of the above concepts have been dealing with international commodity exchanges that are in fact, more often than not, parties involved in future commodity markets rather than normal physical markets. One such metal exchange that the present writer has access to some published information, states clearly that in practice as far as this metal exchange is concerned, only 1 % of their commodity (future) contracts ends up with physical delivery of the relevant metals. This is not surprising given the fact that such an exchange is known to be one of the many similar exchanges that are involved in commodity future market. So the big issues here is how come the Islamic financial institutions did not realise this fact as many of them are likely to be aware of several earlier resolutions by the OIC Fiqh Council that had disallowed involvement in future markets which was declared as non-shariah compliant in its current format.
The recent resolution by IFA does not mention this point directly but the concern can be understood by implication when the resolution mentions about the absence of genuine sales in tawarruq as currently practiced. Buy right the resolution should have reiterated its earlier resolutions concerning future market to support its present resolution on tawarruq. Perhap it is worth noting also that in the past few years or so there have been calls by concerned parties including Shariah scholars for Islamic financial institutions to use local commodities in their murabahah or tawarruq transactions. The reason given was that in the case of local commodity markets, there should be no difficulty in ensuring the existence of the relevant commodities and the truthfulness of the sales. So in short the major concern that underlines the Fiqh Academy resolution is so directly tied up to the way the relevant transactions are carried out, and not their conceptual acceptance from Shariah perspective. This is understandable considering what the Shariah says about sales as allowed in Islam where they must mean true sales and not money lending in disguise: hence when sale are intended it must be clear that transfer of ownership together with economic risk has taken place as between the parties in the first transaction before the second sale can take place. After all, in Shariah it is sale and only true sale that can be taken as justification for profit. So when the existence of true sale is doubtful, then there is no reason for the relevant transaction to be considered valid or Shariah compliant. Hence the biggest question posed indirectly by the resolution is how many of those so-called Islamic finance practitioners are sincerely willing to wear the title of genuine traders in their activities, and not as money-lenders in disguise.
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