Islamic Bank of Britain’s first ‘Islamic Finance Question Time’

Islamic Bank of Britain plc (IBB) has held an exclusive event, entitled Islamic Finance Question Time – an open, public Q&A session hosted by the Bank’s Shar’ah Scholars.  Islamic Finance Question Time is the first event of its kind, and the only time a UK Islamic bank has given public access to the Scholars that form its Shari’ah Supervisory Committee (SSC).

IBB, a wholly-owned subsidiary of Qatar International Islamic Bank, is the UK’s only wholly Shari’ah-compliant retail bank in the UK.  It was originally established in 2004 and has attracted over 50, 000 customers. 

IBB’s SSC consist of Sheikh Dr Abdul Sattar Abu Ghuddah, Sheikh Nizam Muhammed Saleh Yaqoobi, and Mufti Abdul Qadir Barkatulla. The SSC welcomed questions from the public about Islamic Finance in order to facilitate a lively debate.  The aim of the event was to demystify Islamic finance and provide an insight into how it offers a faith-based alternative to conventional finance and banking. 

Chairman of the IBB SSC, Sheikh Dr Abdul Sattar Abu Ghuddah said, “Islamic finance is as old as the religion of Islam itself.  However, there is still a lot of misunderstanding around how it works and the need for Muslims to manage their finances in Shari’ah-compliant manner.  The IBB SSC hopes the Islamic Finance Question Time event has shed some light on the matter and gone some way to encouraging the further take-up of Shari’ah Finance amongst the Muslim community.”

Samir Alamad, Senior Manager, Shari’ah Compliance at IBB who works closely with the IBB SSC on a day to day basis, said, “The feedback from attendees of Islamic Finance Question Time has been very positive.  The public welcomed the opportunity to engage with the IBB SSC so openly.  The event is the first time a UK Islamic bank has given open access to its SSC, and this reflects the open and transparent way the bank works with its customers.”

Over 150 guests attended the event, held at the Bloomsbury Hotel in London.  Over 10 questions were put to the panel leading to a debate lasting over 1.5 hours. Among these questions, the following generated a lively and informed discussion amongst the panel and their guests:

Why don’t you use the rental market rate for your Home Purchase Plan product?

Islamic banks use BBR or LIBOR to price their products as these are the most accurate, widely accepted and consistent benchmarks for financing. This allows Islamic banks to meet the important Shari’ah criteria of avoiding uncertainty.  If rental rates were to be used as a benchmark instead, there would be too much variation.  Not only would this go against the Shari’ah it would also be more costly for the customer.  Rental rates fluctuate across a wide spectrum depending  on location, condition of the property and other aspects, e.g. rent charged for a property in London would be three or four times more expensive than a similar property in the North. Hence, the Islamic bank would end up offering many various rental rates which would not be practical.  The customer would also be disadvantaged by having to pay more if the rental rate was to be used as a benchmark.

Importantly, basing the rental rates of HPPs on benchmarks such as LIBOR or BBR does not affect the actual contracts that the product is based on.  The rent or lease agreement are not rendered Haram, or not compliant with Shari’ah.  Established benchmarks such as BBR and LIBOR therefore play an important role.  They allow the bank to meet the Shari’ah requirements for a benchmark that is widely accepted, consistent, transparent and reliable which in turns eliminates any uncertainty around pricing. 

An Islamic benchmark is currently being developed and this is a great step forward for the industry.  Once established it will eliminate the confusion that exists over the use of BBR or LIBOR, as explained above. 

Is it permissible under the Shari’ah to quote a profit rate for Fixed Term Deposit savings accounts?

It is important to clarify that this Shari’ah compliant savings product(s) is called ‘Fixed Term’ and not ‘fixed return’. It is usually offered under the Islamic principle of Wakala (an agency agreement).  With this product, the Islamic bank provides an expected profit rate over a set period of time as a ‘target’ based on the investment activity it will undertake with the deposits.  The ‘Fixed’ element relates to the length of time the bank will undertake the investment activity for the customer. For example, two years for the Two Year Fixed Term Deposit Account.

These savings products do not offer a fixed return, in the same way that conventional banks that pay interest, do.  Under Shari’ah, the bank cannot guarantee a rate of return, because with investment there is always an element of risk. 

However, Islamic banks mitigate this risk for the customer in many ways, so that the customer’s deposits and return do not suffer.  Essentially, the bank monitors the investment activity, and its performance, very closely.  If, at any time, it looks likely that the customer’s return may be less than the expected profit rate the bank will contact the client and offer them the option to close the account and take back the full deposit amount and the profit accrued up to that date.  Alternatively, the customer can choose to carry on till the end of the term on the lower expected profit rate from that point.

This process is all in accordance with Shari’ah which encourages trade, and forbids Riba.  Shari’ah also mandates that risk is part of all transactions and that these risks are managed responsibly to ensure the best possible outcome for all parties.

http://www.cpifinancial.net/

Q+A - Structural risks - how safe are sukuk?

Financial crisis-related restructurings
and bankruptcy are putting the $1 trillion Islamic finance
industry's financial instruments to their first major test.
Here are some questions and answers about the structural risks
analysts say are inherent in common 'sukuk', which are usually
referred to as Islamic bonds.

 WHAT ARE SUKUK'S MAIN STRUCTURAL RISKS?

 Islamic finance has five 'pillars':

 1. The ban on interest.

 2. The ban on uncertainty or speculation.

 3. The ban on financing sectors deemed haram, or forbidden
-- such as weapons, pork or gambling.

 4. The profit and loss sharing principle -- parties share
risks and rewards.

 5. The asset-backing principle -- each transaction must
include an identifiable underlying asset.

 Current risks are focused on 'pillar number five' -- asset
securitisation -- and vary according to which of two general
types an investor chooses: 'asset-based' or 'asset-backed'
sukuk.

 ASSET-BASED, ASSET-BACKED: WHAT'S THE DIFFERENCE?

 The difference lies in ownership and sale of assets.

 Asset-based sukuk allow the inclusion of assets that may
not be legally recognised as being owned by the investors.

 The assets fulfil sharia compliance in form. But they may
not ensure that investors can recover capital, through sale of
the asset, for example, in the case of originator bankruptcy.

 Asset-backed sukuk stick more closely to the ideal of
granting the investor a share of a concrete asset or business
venture, and a share of the risk commensurate with such
ownership.

 In this case, sukuk securitisation is structured around
investors' rights, or legal ownership, of a plot of land,
building, or other asset.

 WHY ARE THESE RISKS SHOWING UP NOW?

 The widespread loss of liquidity and lack of investor
confidence wrought by the post-September 2008 global financial
crisis sent ripples through the world of Islamic banking, due
to originator insolvency, defaults and debt restructurings.

 WHO HAS BEEN CAUGHT OUT?

 A court case is still proceeding over whether investors in
sukuk issued by U.S. energy firm East Cameron own the assets
that underpinned the issue, reflecting the risks that sukuk
holders face.

 The sukuk, an asset-backed musharaka securitised by ties to
two Gulf of Mexico gas fields, crashed into uncharted legal
territory with the bankruptcy of its originating company East
Cameron Partners in October 2008.

 East Cameron argued sukuk investors have no rights to the
oil and gas assets as they were not part of a 'true sale' but
rather a 'secured loan'.

 WILL SUKUK BE RESHAPED TO SAFEGUARD INVESTORS?

 Perhaps. New, hybrid structures may evolve to attempt to
minimise risks. But as with most Islamic finance issues, there
is a diversity of opinion about the best development path to
take.

 Differing legal systems, levels of institutional
transparency and sharia interpretations in centres from Dubai
to Jakarta will likely complicate moves to establish legal
precedents and to set and enforce new standards.

 The influence of global industry bodies, such as AAOIFI,
and the likelihood of banks enforcing their standards is also a
matter for debate.

 Source: Reuters, Moody's Investor Services 'The Future of
Sukuk: Substance over Form?', May 2009
(here
20Finance), Standard & Poor 'Islamic Finance Outlook 2009'
(here
ance_Outlook_2009.pdf)

Link: http://www.reuters.com/article/bankruptcyNews/idUSKLR28939220091105

Wisdom behind Prohibition of Riba

Question: Could you please furnish me with the wisdom behind the prohibition of Riba?

In the Name of Allah, Most Gracious, Most Merciful.

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

Dear questioner, we commend your pursuit of knowledge and your keenness to seek what is lawful and avoid what is not. We earnestly implore Allah to bless your efforts in this honorable way.

In an attempt to furnish you with a Fatwa regarding the wisdom behind the prohibition of Riba, we would like to cite for you what the eminent Muslim scholar Sheikh Yusuf Al-Qaradawi, stated in his well-known book The Lawful and the Prohibited in Islam, regarding the issue:

“Islam permits increase in capital through trade. Referring to this, Allah Almighty says, “O you who believe, do not consume your property among yourselves wrongfully, but let there be trade by mutual consent…” (An-Nisa’: 29)

At the same time, Islam blocks the way for anyone who tries to increase his capital through lending on usury or interest (Rriba), whether it is at a low or a high rate, reprimanding the Jews for taking usury, even though they had been prohibited to do so.

Among the last revelations are the following verses of Surat al-Baqarah: “O you who believe, fear Allah and give up what remains due to you of interest if you are indeed believers. And if you do not, then be warned of war (against you) by Allah and His Messenger, while if you repent you shall have your capital. Do not do wrong and you shall not be wronged.” (Al-Baqarah: 278-279)

The Prophet (peace and blessings be upon him) declared war on usury and those who deal in it; he pointed out its dangers to society, saying, “When usury and fornication appear in a community, the people of that community render themselves deserving of the punishment of Allah.” (Reported by Al-Hakim; Abu Y’ala has reported something similar on good authority)

Judaism, prior to Islam, had also prohibited interest. In the Old Testament we read, “If you lend money to any of my people with you who is poor, you shall not be to him as a creditor, neither shall you require interest from him.” (Ex. 22:25)

As for Christianity, the Gospel according to Luke reads, Give away to every one who begs of you, and of him who takes away from your goods, do not demand them back again. (Luke 6:30)

It is, therefore, sad to see that the Old Testament has been subjected to such distortions that the meaning of “my people,” which originally had a broader application, later became restricted to the Jews alone, as we read in Deuteronomy, You may lend on interest to a foreigner, but to your brother you shall not lend on inters”. (Deut. 23:20)

The wisdom behind the prohibition of interest

The strict prohibition of interest in Islam is a result of its deep concern for the moral, social, and economic welfare of mankind. Muslim scholars have sound arguments explaining the wisdom of this prohibition, and recent studies have confirmed their opinions, with some additions and extensions of their arguments.

We confine ourselves to what Imam al-Razi says in his tafsir of the Qur’an:

First: The taking of interest implies appropriating another person’s property without giving him anything in exchange, because one who lends one dirham for two dirhams gets the extra dirham for nothing. Now, a man’s property is for (the purpose of) fulfilling his needs and it has great sanctity, according to the hadith, “A man’s property is as sacred as his blood.” (Reported by Abu Na’eem) This means that taking it from him without giving him something in exchange is haram.

Second: Dependence on interest prevents people from working to earn money, since the person with dirhams can earn an extra dirham through interest, either in advance or at a later date, without working for it. The value of work will consequently be reduced in his estimation, and he will not bother to take the trouble of running a business or risking his money in trade or industry. This will lead to depriving people of benefits, and the business of the world cannot go on without industries, trade and commerce, building and construction, all of which need capital at risk. This, from an economic point of view, is unquestionably a weighty argument.

Third: Permitting the taking of interest discourages people from doing good to one another, as is required by Islam. If interest is prohibited in a society, people will lend to each other with good will, expecting back no more than what they have loaned, while if interest is made permissible the needy person will be required to pay back more on loans (than he has borrowed), weakening his feelings of good will and friendliness toward the lender. (This is the moral aspect of the prohibition of interest.)

Fourth: The lender is very likely to be wealthy and the borrower poor. If interest is allowed, the rich will exploit the poor, and this is against the spirit of mercy and charity. (This is the social aspect of the prohibition of interest.) (Tafsir by al-Fakhr al-Deen al-Razi, vol. 7, p. 4.)

Thus, in a society in which interest is lawful, the strong benefit from the suffering of the weak. As a result, the rich become richer and the poor poorer, creating socio-economic classes in the society separated by wide gulfs. Naturally, this generates envy and hatred among the poor toward the rich, and contempt and callousness among the rich toward the poor. Conflicts arise, the socio-economic fabric is rent, revolutions are born, and social order is threatened. Recent history amply illustrates the dangers to the peace and stability of nations inherent in interest-based economies.”

You can also read:

Refuting Claims on the Permissibility of Bank Interest

If you have any further questions, please don’t hesitate to write back!

May Allah guide you to the straight path, and guide you to that which pleases Him, Amen.

Allah Almighty knows best.

Source: Islam On-line Fatwa Bank

Link: http://gifc.blogspot.com/2009/07/wisdom-behind-prohibition-of-riba.html

Q&A with Muhammad Taqi Usmani: Exchange Of Currencies And Discounting OF Bills

I got your comments on our group's evaluation of Islamic banks and Mudarabah companies. The MBA project we are doing is in the second week of June, 1997. Your guidance would help us in presenting the true picture of an Islamic Financial Institition (IFI) at LUMS. It would be quite helpful if you answer following questions : 

Q. (1) Why cannot currencies be sold at rates different than the market or spot rate? How are currencies of different countries different than ordinary goods which can be sold at prices different than the market? 

(2) Why is discounting of bils of exchange in different currencies permitted when currency itself cannot be traded below the spot rate? 

(3) Can one party in a 'promise to sell/purchase' agreement ask for a security, whether cash or any kind of collateral, from the other party? 

(4) How can an agent's (agent being the bank) fee be determined if he is made responsibile to collect the amount written on bill of exchange on behalf of it's client? Wouldn't such kind of agency fee or service charge become an excuse for charging interest? How can one prevent it? 

(5) Is it injustice if two or more partners agree on a ratio of profit, not the loss, which is different than the ratio of capital contributed by each partner? 

(6) Are the following rules correct according to Shariah: a. It is permissibile for the lessee to let to a third party during the lease period whether for the same rental or more, as long as the asset is not affected by the change of user. b. It is permissible to stipulate in a contract of Istisna that price would be reduced by a specific amount per day upon delay in delivery by the seller.

(7) What steps can an Islamic Financial Institution take to prevent the concentration of wealth among the rich individual of a Muslim society? 

A. Here are the answers to your recent questions:

(1) If the currencies are of the same country, they cannot be sold at a rate different from their face value. However, if the currencies are of different countries, they can be sold on spot at whatever rate agreed upon between the parties which can be different from the market rate. However, if the payment is deferred on either side, it must be in accordance with the market rate. This condition is put to restrict the use of this transaction to the genuine needs, otherwise it may be taken as a device to effect riba transaction. The details of the rules regarding the transaction of currencies are available my Arabic book Ahkam Al-Auraq Al-Naqdia which has also been translated.

(2) The discounting of bills of exchange even in different currencies is not permitted in Shariah. The reason is that a Bill of exchange stands for the amount of the bill which is a debt payable by a a seller. If it is sold or purchased for cash, it means that two currencies are being exchanged where the payment at one side is deferred and I have already mentioned in answer to question no. 1 that if the payment is deferred on either side, the price should not be different from the market spot rate.

(3) The promise to sell/purchase is merely a promise. It does not effect the contract of sale itself, therefore, no rights or obligations of a sale can arise out of a promise only. Hence no party can ask for security or a collateral for the fulfillment of a promise. Because the security or collateral is justified only where a liability or a debt has actually come into existence while in the case of promise no debt or liability is created. It is only an undertaking to sale/purchase a commodity in future. When the actual sale occurs on a deferred payment basis the debt will be created and at that time it will be justified to ask for a security.

(4) If the bank has been made an agent to collect the amount of a Bill of Exchange on behalf of its client it is permissible for the bank to charge a fee for this service. The fee may be determined by the parties on whatever basis they agree upon. However, it should not be tied up with the period of the maturity of the bill. With this condition this transaction will not, hopefully, be instrumental to charge interest.

(5) In a Musharakah contract the parties may agree on a ratio of profit different from the ratio of their investment with the only condition that a partner who in expressed terms, relieves himself from the liability to work for the partnership can- not claim a ratio of profit higher than the ratio of his investment, for example, if 'A' has invested 60% of the Capital while 'B' has invested 40% the parties can agree that 'B' will get 60% of the profit and 'A' will get 40% of the profit. However, if 'B' has, in expressed terms, put a condition in the contract of Musharakah that he will never work for the enterprise, he cannot claim more than 40% of the profit.

(6.a) A lesses can sub-lease the property to a third party with the permission of the lessor, if the rent charged by him from the sub-lessee is equal to the rent payable by him to the original lessor. This sub-lease is permitted with the consen- sus of all Muslim jurists. However, if the lessee charges from his sub-lessee a rent more than the rent payable by him to the original lessor, it is not permissible according to Imam Abu Hanifah, but it is permissible according to other Imams.

(6.b) It is permissible to stipulate in a contract of Istisna that price would be reduced by a specific amount per day upon delay in delivery by the seller. The contemporary scholars of Islamic Jurisprudence have allowed this type of contract on the basis of the following ruling given by the classic Fuqaha:

(7) In fact the answer to this question requires a detailed treatise, but without going into details the following steps may be taken by the Islamic financial Institutions to prevent the concentrationof wealth among the rich of its society :

Firstly they should maximise the use of Musharakah and Mudarabah instead of Murabaha or Leasing, because the real alternative to interest in a true Islamic economy is Musharakah and Mudarabah which paves the way for equal distribution of income among the members of the society and they are very competent and strong instrument diverting the flow of wealth from a few rich people to the common lot. Secondly, they should find out ways and means to finance the small scale trade and industry. For this purpose an Islamic financial institution should rise above the level of pure commercial and material benefits and should set their priorities in wider interests of society of which they, themselves, are an inseparable part.

(Darululoom, Karachi)