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.
Tuesday, November 15, 2011
Thursday, August 25, 2011
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.
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.
Tuesday, August 9, 2011
"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.
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.
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