CSS Forums
Thursday, April 25, 2024
07:36 PM (GMT +5)
07:36 PM (GMT +5)
|
|||||||
 |
Share Thread:
Facebook
Twitter
Google+
|
|
|
LinkBack | Thread Tools | Search this Thread |
|
#21
Sunday, September 28, 2008
|
|||
|
|||
Section V
Banking in Islam Chapter 22
1. Deposit creationWe now would like to make a comparison of these activities with Islamic concept of banking: Deposits (The liability side) Deposit - qard (loan) not amanah (Trust) The common misconception regarding "deposit" is that it is a form of amanah (security/trust). However, according to Shariah definition, deposit has more resemblance to qard (loan) than amanah. This conclusion is based on the fact that in Islam an item is termed as amanah, if it bears all the features of amanah. Deposits cannot be termed amanah, as they do not have two of its special features, i.e. Ÿ Amanah cannot be used by the bank for its business or benefit. Ÿ The bank cannot be liable in case of any damage or loss to the amanah resulting from circumstances beyond its control. Whereas in banks, deposits are primarily placed to earn profit, which is only possible when the bank uses these deposits to invest in other business. Hence deposits do not fulfill the first condition of amanah, which says that it should not be used by the caretaker for his own business or benefit. Secondly, the bank is held 100% responsible for these deposits in all circumstances even in case of loss or damage to the bank. This feature releases deposits from the ruling of amanah where the assets will not be returned in case of any damage to the asset resulting from circumstances beyond caretaker's control. According to this justification, all three kinds of deposit namely current accounts, fixed deposits and saving accounts are not amanah. They are all governed by qard. One school of thought says that only fixed deposit and saving accounts fall under the laws of qard but current account is governed by amanah. However, this is also not correct because the bank is as much liable to current account holders as its PLS account holders and is called the “guarantor” in fiqh terminology. Due to this feature, current account is also governed by qard. The depositors are not interested in terminology but the end-result of holding an account. Therefore if a bank does not offer security to the assets, the depositors under normal circumstance will never keep their assets at such a bank. Similarly if the depositors are told that the status of their account will that be of amanah and in case of any loss to the assets, without any negligence of the bank, will not be returned to them, not a single person would put his asset in the bank. Therefore the bank provides the security to the assets, which the depositors themselves want. We therefore conclude that the main intention of the depositors is not to put the assets in banks as amanah; rather as qard by having collateral security by appointing the bank as guarantor. Example of Syedna Zubair bin Awwam (RA) Hazrat Zubair bin Awwam (RA) was famous for his honesty and trustworthiness. Prominent people used to leave with him their properties in trust. Based on their needs they would also withdraw all or part of their properties. It has been reported in Al Bukhari and Tabaqaat-e-Ibn-e-Saad in respect of Hazrat Zubair bin Awwam (RA) that he would decline to accept such property as amanah (trust) but rather accepted them as qard (loan). The reason for this action on his part was his fear that the property may be lost and it may be suspected that he was neglectful in its safekeeping. As such, he decided to consider it a loan so that the depositor felt more comfortable and his reputation remained intact. Another reason for it was that it could become possible for him to employ these funds for trading and earn profit out of them. The loan amount calculated at 2.2 million at the time of his death by his son Syedna Abdullah bin Zubair was specified as qard not amanah. He also used the term loan while instructing his son before his death “Son, dispose off my property to settle the loans”. Conclusion From the above discussion, we come to the conclusion that all three forms of bank deposits are governed by the law of qard as a consequence of which the account holder may withdraw only the assets deposited. Any increase on it will be interest. It has already been discussed in the chapter of commercial interest that if the purpose of the lender is business or security and not providing financial assistance, then to get an excess amount is also interest, which is prohibited in Islam just like usury. It is also clear that there is a consensus of Muslim scholars on the point that the transactions in Fixed Deposit and Savings Account is prohibited because the bank pays excess to their account holders over their actual capital, which is interest. The Islamic Fiqh Academy Jeddah in their 2nd session has further endorsed such transactions as interest based transaction. Therefore it is illegal for a Muslim to keep their deposits in such accounts. As far as the current account is concerned, the bank does not pay any excess (interest) over the actual capital, therefore holding such an account is allowed. To sum up, profit given on fixed deposit and savings accounts is interest and therefore prohibited. However if the banking system is based on Islamic principles, Musharakah can play a very important role. Therefore we will now discuss how the banks can operate on Musharakah basis. As we already know a bank has two sides, one where it receives deposits from customers which is called the liability side and the other where it advances finance to investors and businessmen which is called the asset side. Both sides can operate on Musharakah basis. As far as deposits are concerned, Musharakah is the only instrument in which money can be received from customers meaning that every depositor will become a partner in bank’s business through their deposited money. However, for the asset or finance side, there are other instruments apart from Musharakah but since those instruments are not covered in our subject, we will stick to the operation of Musharakah. We will begin by the role of Musharakah in the deposits and its relevant laws and will then discuss the procedure of Musharakah in the finance side. Role of the Bank as Agent : A bank under Islamic Shariah can act as an agent (on Al-Wakalah basis) of the customer and can carry out the transaction on his behalf. Moreover it can charge agency fee for the services. The agency fee can be charged in the following cases:
The bank or financial institute gives a guarantee on behalf of its customer but according to Shariah, guarantee fee cannot be charged. Normally conventional banks charge fee for following guarantees:
Most of the advisory services provided by the financial institutes can be carried out easily in compliance with Shariah as long as the nature of business is halal:
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~ 
|
|
#22
Sunday, September 28, 2008
|
|||
|
|||
|
Chapter 23
1. Participation in setting up the bank like any other company by joint investment and tfhe participants will be called the "shareholders". They will have a partnership (Shirkah) effected by a mutual contract since they have used their capital and deed on the bank; and 2. Participation by opening their account in fixed deposit and savings account and participants will be called the "account holders". These will not be the actual owner or shareholders of the bank - rather partners in profit only, meaning that they will have a contract of Mudarabah The status of the bank or the shareholders will be that of a Mudarib and the account holders will be Rubb-ul-mal. The contract known as Musharakah will be a combination of Shirkah and Mudarabah. This is the reason why the profit ratio of depositors is less than the actual shareholders and the depositors will not have any voting power or the right of management because they are not involved in the deed but has only supplied the capital. This kind of dual relationship is not uncommon in Islamic Fiqh. Therefore if the Mudarib (Bank or the shareholders) wants to merge his assets with the assets of depositor, it is allowed in which case he will be regarded as owner of half the assets and Mudarib of the other half. This has already been discussed at length in chapter 13 on Musharakah. In the previous chapter, following facts have been established:
The distribution of profit will be done according to the rules of Musharakah. Before we begin the summary of the distribution of profit, it is found appropriate to mention here that the conventional banks do not pay interest to current account holders. Therefore there is no need to convert the operation of current account into any Islamic mode of financing. However the distribution of profit to the rest of the partners and account holders will be made on the following rules governing Musharakah: It is not a condition for the final distribution of profit that all assets are liquid – rather the profit and loss is calculated on the basis of evaluation of assets. In case of loss, each partner shall suffer the loss exactly according to the ratio of his investment and in case of profit; the profit will be distributed according to the agreed ratio between the partners. It should be taken into account that both parties are free to determine any ratio of profit of the bank as the manager (Mudarib), therefore it can be agreed mutually that Rubb-ul-mal will have a higher profit margin and Mudarib lower. However as a shareholding partner, the share of profit of the Mudarib cannot be less than the ratio of his investment since he is the sole provider of labor. Same rule will apply on the operation of Islamic Banks on the basis of Musharakah. The actual shareholders apart from being the manager are also shareholding partners; their ratio of profit cannot be less than their ratio of investment. However their ratio of profit as Mudarib can be determined at whatever rate they please. The above may be explained in the following illustration: Suppose the total investment of the bank is Rs.15 million in which the depositors have invested Rs.10 million on Mudarabah basis and the shareholders as Mudarib have invested Rs.5 million. This means that one third share of the total capital belongs to the shareholders and two third to the depositors. The role of Mudarib in the 2/3rd capital raised by depositors is played by the shareholders, therefore their ratio of profit as manager (Mudarib) can be agreed between themselves through mutual consent but their ratio of profit, as shareholders cannot be less than 1/3rd. If their share is agreed at less than 1/3rd, it would mean that the depositors’ share has exceeded 2/3rd although it has been established that they will not be managing the bank and their share of profit will not exceed their ratio of investment. If it has been agreed in the above example that the shareholders as managing partners will get 1/3rd of the profit and the rest 2/3rd will be distributed equally between depositors and shareholders as per the Mudarabah contract between them, then if for eg. the profit amount is Rs.15 lacs then the shareholders will get its 1/3rd i.e. Rs.5 lacs as the investor (Rubb-ul-mal) and half of the 2/3rd profit i.e. Rs.5 lacs as the manager (Mudarib) whereas the other half of the 2/3rd profit will go to the depositor as Rubb-ul-mal. \To sum up, the above procedure can be adopted to run the bank on the principles of Musharakah. RUNNING MUSHARAKAH ACCOUNT ON THE BASIS OF DAILY PRODUCTS: Many financial institutions finance the working capital of an enterprise by opening a running account for them from where the clients draw different amounts at different intervals, but at the same time, they keep returning their surplus amounts. Thus the process of debit and credit goes on upto the date of maturity, and the interest is calculated on the basis of daily products. Can such an arrangement be possible under the Musharakah or Mudarabah modes of financing? Obviously, being a new phenomenon, no express answer to this question can be found in the classical works of Islamic Fiqh. However, keeping in view the basic principles of Musharakah the following procedure may be suggested for this purpose:
Some contemporary scholars do not allow this method of calculating profits on the ground that it is just a conjectural method, which does not reflect the actual profits really earned by a partner of the Musharakah. Because the business may have earned huge profits during a period when a particular investor had no money invested in the business at all, or had a very insignificant amount invested, still, he will be treated at par with other investors who had huge amounts invested in the business during that period. Conversely, the business may have suffered a great loss during a period when a particular investor had huge amounts invested in it. Still, he will pass on some of his loss to other investors who had no investment in that period or their size of investment was insignificant. This argument can be refuted on the ground that it is not necessary in a Musharakah that a partner should earn profit on his own money only. Once a Musharakah pool comes into existence, all the participants, regardless of whether their money is or is not utilized in a particular transaction earn the profits accruing to the joint pool. This is particularly true of the Hanafi School, which does not deem it necessary for a valid Musharakah that the monetary contributions of the partners are mixed up together. It means that if ‘A’ has entered into a Musharakah contract with ‘B’, but has not yet disbursed his money into the joint pool, he will be still entitled to a share in the profit of the transactions effected by ‘B’ for the Musharakah through his own money. Although his entitlement to a share in the profit will be subject to the disbursement of money undertaken by him, yet the fact remains that the profit of this particular transaction did not accrue to his money, because the money disbursed by him at a later stage may be used for another transaction. Suppose ‘A’ and ‘B’ entered into a Musharakah to conduct a business of Rs. 100,000/- They agreed that each one of them shall contribute Rs. 50,000/- and the profits will be distributed by them equally. ‘A’ did not yet invest his Rs. 50,000/- into the joint pool. ‘B’ found a profitable deal and purchased two air conditioners for the Musharakah for Rs. 50,000/- contributed by himself and sold them for Rs. 60,000/-, thus earning a profit of Rs. 10,000/-. ‘A’ contributed his share of Rs. 50,000/- after this deal. The partners purchased two refrigerators through this contribution which could not be sold at a greater price than Rs. 48000/- meaning thereby that this deal resulted in a loss of Rs. 2000/- Although the transaction effected by ‘A's money brought loss of Rs. 2000/- while the profitable deal of air conditioners was financed entirely by ‘B’s money in which ‘A’ had no contribution, yet ‘A’ will be entitled to a share in the profit of the first deal. The loss of Rs. 2000/- in the second deal will be set off from the profit of the first deal reducing the aggregate profit to Rs. 8000/-. This profit of Rs. 8000/- will be shared by both partners equally. It means that ‘A’ will get Rs. 4000/-, even though the transaction effected by his money has suffered a loss. The reason is that once the parties enter into a Musharakah contract, all the subsequent transactions effected for Musharakah belong to the joint pool, regardless of whose individual money is utilized in them. Each partner is a party to each transaction by virtue of his entering into the contract of Musharakah. A possible objection to the above explanation may be that in the above example, ‘A’ had undertaken to pay Rs. 50,000/- and it was known before hand that he would contribute a specified amount to the Musharakah. But in the proposed running account of Musharakah where the partners are coming in and going out every day, nobody has undertaken to contribute any specific amount. Therefore, the capital contributed by each partner is unknown at the time of entering into Musharakah, which should render the Musharakah invalid. The answer to the above objection is that the classical scholars of Islamic Fiqh have different views about whether it is necessary for a valid Musharakah that the capital is pre-known to the partners. The Hanafi scholars are unanimous on the point that it is not a pre-condition. Al-Kasani, the famous Hanafi jurist, writes: According to our Hanafi School, it is not a condition for the validity of Musharakah that the amount of capital is known, while it is a condition according to Imam Shafi’i. Our argument is that Jahalah (uncertainty) in itself does not render a contract invalid, unless it leads to disputes. And the uncertainty in the capital at the time of Musharakah does not lead to disputes, because it is generally known when the commodities are purchased for the Musharakah, therefore it does not lead to uncertainty in the profit at the time of distribution." (Badai-us-sanai v.6 p.63) It is, therefore, clear from the above that even if the amount of the capital is not known at the time of Musharakah, the contract is valid. The only condition is that it should not lead to the uncertainty in the profit at the time of distribution. Distribution of profit on daily product basis fulfills this condition. It is true that the concept of a running Musharakah where the partners at times draw some amounts and at other times inject new money and the profits are calculated on daily products basis is not found in the classical books of Islamic Fiqh. But merely this fact cannot render a new arrangement invalid in Shariah, so far as it does not violate any basic principle of Musharakah. In the proposed system, all the partners are treated at par. The profit of each partner is calculated on the basis of the period for which his money remained in the joint pool. There is no doubt in the fact that the aggregate profits accrued to the pool is generated by the joint utilization of different amounts contributed by the participants at different times. Therefore, if all of them agree with mutual consent to distribute the profits on daily products basis, there is no injunction of Shari’ah which makes it impermissible; rather, it is covered under the general guidelines given by the Holy Prophet  in his famous hadith, as follows:“Muslims are bound by their mutual agreements unless they hold a permissible thing as prohibited or a prohibited thing as permissible.” If distribution on daily products basis is not accepted, it will mean that no partner can draw any amount nor can he inject new amounts to the joint pool. Similarly, nobody will be able to subscribe to the joint pool except at the particular dates of the commencement of a new term. This arrangement is totally impracticable on the deposit side of the banks and financial institutions where the accounts are debited and credited by the depositors many times a day. The rejection of the concept of the daily products will compel them to wait for months before they deposit their surplus money in a profitable account. This will hinder the utilization of savings for development of industry and trade, and will keep the wheel of financial activities jammed for long periods. There is no other solution for this problem except to apply the method of daily products for the calculation of profits, and since there is no specific injunction of Shari’ah against it, there is no reason why this method should not be adopted.
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
#23
Sunday, September 28, 2008
|
|||
|
|||
|
Section VI
Applications of Islamic Financing Chapter 24
In the case of project financing, the traditional method of Musharakah or Mudarabah can be easily adopted. If the financier wants to finance the whole project, the form of Mudarabah can come into operation. If investment comes from both sides, the form of Musharakah can be adopted. In this case, if the management is the sole responsibility of one party, while the investment comes from both, a combination of Musharakah and Mudarabah can be brought into play according to the rules already discussed. Since Musharakah or Mudarabah would have been effected from the very inception of the project, no problem with regard to the valuation of capital should arise. Similarly, the distribution of profits according to the normal accounting standards should not be difficult. However, if the financier wants to withdraw from the Musharakah, while the other party wants to continue the business, the latter can purchase the share of the former at an agreed price. In this way the financier may get back the amount he has invested along with a profit, if the business has earned a profit. The basis for determining the price of his share shall be discussed in detail later on (while discussing the financing of working capital). On the other hand, the businessman can continue with his project, either on his own or by selling the first financier's share to some other person who can substitute the financier. Since financial institutions do not normally want to remain partner of a specific project for good, they can sell their share to other partners of the project as aforesaid. If the sale of the share on one time basis is not feasible for the lack of liquidity in the project, the share of the financier can be divided into smaller units and each unit can be sold after a suitable interval. Whenever a unit is sold, the share of the financier in the project is reduced to that extent, and when all the units are sold, the financier totally comes out of the project. Financing of a single transaction Musharakah and Mudarabah can be used more easily for financing a single transaction. Apart from fulfilling the day to day needs of small traders, these instruments can be employed for financing imports and exports. An importer can approach a financier to finance him for that single transaction of import alone on the basis of Musharakah or Mudarabah. The banks can also use these instruments for import financing. If the letter of credit has been opened without any margin, the form of Mudarabah can be adopted, and if the L/C is opened with some margin, the form of Musharakah or a combination of both will be relevant. After the imported goods are cleared from the port, their sale proceeds may be shared by the importer and the financier according to a pre-agreed ratio. In this case, the ownership of the imported goods shall remain with the financier to the extent of the ratio of his investment. This Musharakah can be restricted to an agreed term, and if the imported goods are not sold in the market up to the expiry of the term, the importer may himself purchase the share of the financier, making himself the sole owner of the goods. However, the sale in this case should take place at the market rate or at a price agreed between the parties on the date of sale, and not at pre-agreed price at the time of entering into Musharakah. If the price is pre-agreed, the financier cannot compel the client / importer to purchase it. Similarly, Musharakah will be even easier in the case of export financing. The exporter has a specific order from abroad. The price on which the goods will be exported is well known before hand, and the financier can easily calculate the expected profit. He may finance him on the basis of Musharakah or Mudarabah, and may share the amount of export bill on a pre-agreed percentage. In order to secure himself from any negligence on the part of the exporter, the financier may put a condition that it will be the responsibility of the exporter to export the goods in full conformity with the conditions of the L/C. In this case, if some discrepancies are found, the exporter alone shall be responsible, and the financier shall be immune from any loss due to such discrepancies, because it is caused by the negligence of the exporter. However, being a partner of the exporter, the financier will be liable to bear any loss, which may be caused due to any reason other than the negligence or misconduct of the exporter.
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
#24
Sunday, September 28, 2008
|
|||
|
|||
|
Chapter 25
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
#25
Sunday, September 28, 2008
|
|||
|
|||
|
Chapter 26
This is the best substitute for opening the LC. The bank and the importer can make an agreement of Mudarabah or Musharakah before opening the LC. If the LC is being opened at zero margin then an agreement of Mudarabah can be made, in which the bank will become Rqb-ul-Maal and the importer Mudarib. The bank will own the goods that are being imported and the profit will be distributed according to the agreement. If the LC is being opened with a margin then a Musharakah agreement can be made. The bank will pay the remaining amount and the goods that are being imported will be owned by both of them according to their share of investment. The bank and the importer, with their mutual consent can also include a condition in the agreement, whereby; Musharakah or Mudarabah will end after a certain time period even if the goods are not sold. In such a case, the importer will purchase the bank's share at the market price. Murabahah: At present Islamic banks are using Murabahah, to finance LC. These banks themselves import the required goods and then sell these goods to the importer on Murabahah agreement. Murabahah financing requires the bank and the importer to sign at least two agreements separately; one for the purchase of the goods, and the other for appointing the importer as the agent of the bank (agency agreement). Once these two agreements are signed, the importer can negotiate and finalize all terms and conditions with the exporter on behalf of the bank.
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
#26
Sunday, September 28, 2008
|
|||
|
|||
|
Chapter 27
Pre Shipment Financing: Pre shipment financing needs can be fulfilled by two methods
The most appropriate method for financing exports is Musharakah or Mudarbah. Bank and exporter can make an agreement of Mudarabah provided that the exporter is not investing; other wise Musharakah agreement can be made. Agreement in such case will be easy, as cost and expected profit is known. The exporter will manufacture or purchase goods and the profit obtained by exporting it will be distributed between them according to the predefined ratio. A problem that can be encountered by the bank is that if the exporter is not able to deliver the goods according to the terms and conditions of the importer, then the importer can refuse to accept the goods, and in this case exporter's bank will ultimately suffer. This problem can be rectified by including a condition in Mudarabah or Musharakah agreement that, if exporter violates the terms and conditions of import agreement then the Bank will not be responsible for any loss which arises due to this negligence. This condition is allowed in Shariah as the Rabb-ul-mal is not responsible for any loss that arises due to the negligence of Mudarib. Murabahah Murabahah is being used in many Islamic Banks for export financing. Banks purchases goods that are to be exported at price that is less than the price agreed between the exporter and the importer. It then exports goods at the original price and thus earns profit. Murabahah financing requires bank and exporter to sign at least two agreements separately, one for the purchase of goods and the other for appointing the exporter as the agent of the bank (that is agency agreement). Once these two agreements are signed, the exporter can negotiate and finalize all the terms and conditions with the importer on behalf of the bank. Post Shipment Financing: Post shipment finance is similar to the discounting of the bill of exchange. Its alternate Shariah compliant procedure is discussed below: The exporter with the bill of exchange can appoint the bank as his agent to collect receivable on his behalf. The bank can charge a fee for this service and can provide interest free loan to the exporter, which is equal to the amount of the bill, and the exporter will give his consent to the bank that it can keep the amount received from the bill as a payment of the loan. Here two processes are separated, and thus two agreements will be made. One will authorize the bank to collect the loan on his behalf as an agent, for which he will charge a particular fee. The second agreement will provide interest free loan to the exporter, and authorize the bank for keeping the amount received through bill as a payment for loan. These agreements are correct and allowed according to Shariah because collecting fee for service and giving interest free loan is permissible.
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
#27
Sunday, September 28, 2008
|
|||
|
|||
|
Section VII
Applications of Islamic Financing Chapter 28
Securitization of Musharakah Musharakah is a mode of financing which can be securitized easily, especially, in the case of big projects where huge amounts are required which a limited number of people cannot afford to subscribe. Every subscriber can be given a Musharakah certificate, which represents his proportionate ownership in the assets of the Musharakah, and after the project is started by acquiring substantial non-liquid assets, these Musharakah certificates can be treated as negotiable instruments and can be bought and sold in the secondary market. However, trading in these certificates is not allowed when all the assets of the Musharakah are still in liquid form (i.e. in the shape of cash or receivables or advances due from others). For proper understanding of this point, it must be noted that subscribing to a Musharakah is different from advancing a loan. A bond issued to evidence a loan has nothing to do with the actual business undertaken with the borrowed money. The bond stands for a loan repayable to the holder in any case, and mostly with interest. The Musharakah certificate, on the contrary, represents the direct pro rata ownership of the holder in the assets of the project. If all the assets of the joint project are in liquid form, the certificate will represent a certain proportion of money owned by the project. For example, one hundred certificates, having a value of Rs. one million each, have been issued. It means that the total worth of the project is Rs. 100 million. If nothing has been purchased by this money, every certificate will represent Rs. one million. In this case, this certificate cannot be sold in the market except at par value, because if one certificate is sold for more than Rs.one million, it will mean that Rs. one million are being sold in exchange for more than Rs. one million, which is not allowed in Shariah, because where money is exchanged for money, both must be equal. Any excess at either side is Riba. However, when the subscribed money is employed in purchasing non-liquid assets like land, building, machinery, raw material, furniture etc. the Musharakah certificates will represent the holders' proportionate ownership in these assets. Thus, in the above example, one certificate will stand for one hundredth share in these assets. In this case it will be allowed by the Shariah to sell these certificates in the secondary market for any price agreed upon between the parties which may be more than the face value of the certificate. Since the subject matter of the sale is a share in the tangible assets and not in money alone, therefore the certificate may be taken as any other commodity which can be sold with profit or at a loss. In most cases, the assets of the project are a mixture of liquid and non-liquid assets. This comes to happen when the working partner has converted a part of the subscribed money into fixed assets or raw material, while rest of the money is still liquid. Or, the project, after converting all its money into non-liquid assets may have sold some of them and has acquired their sale proceeds in the form of money. In some cases the price of its sales may have become due on its customers but may have not yet been received. These receivable amounts, being a debt, are also treated as liquid money. The question arises about the rule of Shariah in a situation where the assets of the project are a mixture of liquid and non-liquid assets, whether the Musharakah certificates of such a project can be traded in? The opinions of the contemporary Muslim jurists are different on this point. According to the traditional Shafi school, this type of certificate cannot be sold. Their classic view is that whenever there is a combination of liquid and non-liquid assets, it cannot be sold unless the non-liquid part of the business is separated and sold independently. The Hanafi school, however, is of the opinion that whenever there is a combination of liquid and non-liquid assets, it can be sold and purchased for an amount greater than the amount of liquid assets in combination, in which case money will be taken as sold at an equal amount and the excess will be taken as the price of the non-liquid assets owned by the business. Suppose, the Musharakah project contains 40% non-liquid assets i.e. machinery, fixtures etc. and 60% liquid assets, i.e. cash and receivables. Now, each Musharakah certificate having the face value of Rs.100/- represents Rs. 60/- worth of liquid assets, and Rs.40/- worth of non-liquid assets. This certificate may be sold at any price more than Rs.60. If it is sold at Rs. 110/- it will mean that Rs. 60 of the price are against Rs. 60/- contained in the certificate and Rs.50/- is against the proportionate share in the non-liquid assets. But it will never be allowed to sell the certificate for a price of Rs.60/- or less, because in the case of Rs. 60/- it will not set off the amount of Rs. 60, let alone the other assets. According to the Hanafi view, no specific proportion of non-liquid assets in the whole is prescribed. Therefore, even if the non-liquid assets represent less than 50% in the whole, its trading according to the above formula is allowed. However, most of the contemporary scholars, including those of Shafi school, have allowed trading in the units of the whole only if the non-liquid assets of the business are more than 50%. Therefore, for a valid trading of the Musharakah certificates acceptable to all schools, it is necessary that the portfolio of Musharakah consists of non-liquid assets valuing more than 50% of its total worth. However, if Hanafi view is adopted, trading will be allowed even if the non-liquid assets are less than 50% but the size of the non-liquid assets should not be negligible. Securitization of Murabahah Murabahah is a transaction, which cannot be securitized for creating a negotiable instrument to be sold and purchased in secondary market. The reason is obvious. If the purchaser/client in a Murabahah transaction signs a paper to evidence his indebtedness towards the seller/financier, the paper will represent a monetary debt receivable from him. In other words, it represents money payable by him. Therefore transfer of this paper to a third party will mean transfer of money. It has already been explained that where money is exchanged for money (in the same currency) the transfer must be at par value. It cannot be sold or purchased at a lower or a higher price. Therefore, the paper representing a monetary obligation arising out of a Murabahah transaction cannot create a negotiable instrument. If the paper is transferred, it must be at par value. However, if there is a mixed portfolio consisting of a number of transactions like Musharakah, leasing and Murabahah, then this portfolio may issue negotiable certificates subject to certain conditions. Securitization of Ijarah The arrangement of Ijarah has a good potential of securitization, which may help create a secondary market for the financiers on the basis of Ijarah. Since the lessor in Ijarah owns the leased assets, he can sell the asset, in whole or in part, to a third party who may purchase it and may replace the seller in the rights and obligations of the lessor with regard to the purchased part of the asset. Therefore, if the lessor, after entering into Ijarah, wishes to recover his cost of purchase of the asset with a profit thereon, he can sell the leased asset wholly or partly either to one party or to a number of individuals. In the latter case, the purchase of a proportion of the asset by each individual may be evidenced by a certificate, which may be called 'Ijarah certificate'. This certificate will represent the holder's proportionate ownership in the leased asset and he will assume the rights and obligations of the owner/lessor to that extent. Since the assets is already leased to the lessee, lease will continue with the new owners, each one of the holders of this certificate will have the right to enjoy a part of the rent according to his proportion of ownership in the asset. Similarly he will also assume the obligations of the lessor to the extent of his ownership. Therefore, in the case of total destruction of the asset, he will suffer the loss to the extent of his ownership. These certificates, being an evidence of proportionate ownership in a tangible asset, can be negotiated and traded freely in the market and can serve as an instrument easily convertible into cash. Thus they may help in solving the problems of liquidity management faced by the Islamic banks and financial institutions. It should be remembered, however, that the certificate must represent ownership of an undivided part of the asset with all its rights and obligations. Misunderstanding this basic concept, some quarters tried to issue Ijarah certificates representing the holder's right to claim certain amount of the rental only without assigning to him any kind of ownership in the asset. It means that the holder of such a certificate has no relation with the leased asset at all. His only right is to share the rentals received from the lessee. This type of securitization is not allowed in Shariah. As explained earlier in this chapter, the rent after being due is a debt payable by the lessee. The debt or any security representing debt only is not a negotiable instrument in Shariah, because trading in such an instrument amounts to trade in money or in monetary obligation which is not allowed, except on the basis of equality, and if the equality of value is observed while trading in such instruments, the very purpose of securitization is defeated. Therefore, this type of Ijarah certificates cannot serve the purpose of creating a secondary market. It is, therefore, necessary that the Ijarah certificates are designed to represent real ownership of the leased assets, and not only a right to receive rent.
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
#28
Sunday, September 28, 2008
|
|||
|
|||
|
Chapter 29
1. Instead of a fixed return tied up with their face value, they must carry a pro-rata profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The subscribers must enter into the fund with a clear understanding that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund. If the Fund earns huge profits, the return on their subscription will increase to that proportion. However, in case the Fund suffers loss, they will have to share it also, unless the loss is caused by the negligence or mismanagement, in which case the management, and not the Fund, will be liable to compensate it. 2. The amounts so pooled together must be invested in a business acceptable to Shariah. It means that not only the channels of investment, but also the terms agreed with them must conform to the Islamic principles. Keeping these basic requisites in view, the Islamic Investment Funds may accommodate a variety of modes of investment, which are discussed here briefly. Equity Fund In an equity or mutual fund (unit trust) the amounts are invested in the shares of joint stock companies. The profits are mainly derived through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also earned through dividends distributed by the relevant companies. From this angle, dealing in equity shares can be acceptable in Shari'ah subject to the following conditions:
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
#29
Sunday, September 28, 2008
|
|||
|
|||
|
Chapter 30
The concept of 'limited liability' has now become an inseparable ingredient of the large-scale enterprises of trade and industry throughout the modern world, including the Muslim countries. The present chapter aims to explain this concept and evaluate it from the Shariah point of view in order to know whether or not this principle is acceptable in a pure Islamic economy. The limited liability in the modern economic and legal terminologyf is a condition under which a partner or a shareholder of a business secures himself from bearing a loss greater than the amount he has invested in a company or partnership with limited liability. If the business incurs a loss, the maximum a shareholder can suffer is that he may lose his entire original investment. But the loss cannot extend to his personal assets, and if the assets of the company are not sufficient to discharge all its liabilities, the creditors cannot claim the remaining part of their receivables from the personal assets of the shareholders. Although the concept of 'limited liability' was, in some countries applied to the partnership also, yet, it was most commonly applied to the companies and corporate bodies. Rather, it will be truer, perhaps, to say that the concept of 'limited liability' originally emerged with the emergence of the corporate bodies and joint stock companies. The basic purpose of the introduction of this principle was to attract the maximum number of investors to the large-scale joint ventures and to assure them that their personal fortunes will not be at stake if they wish to invest their savings in such a joint enterprise. In the practice of modern trade, the concept proved itself to be a vital force to mobilize large amounts of capital from a wide range of investors. No doubt, the concept of 'limited liability' is beneficial to the shareholders of a company. But, at the same time, it may be injurious to its creditors. If the liabilities of a limited company exceed its assets, the company becomes insolvent and is consequently liquidated, the creditors may lose a considerable amount of their claims, because they can only receive the liquidated value of the assets of the company, and have no recourse to its shareholders for the rest of their claims. Even the directors of the company who may be responsible for such an unfortunate situation cannot be held responsible for satisfying the claims of the creditors. It is this aspect of the concept of 'limited liability' which requires consideration and research from the Shariah viewpoint. Although the concept of 'limited liability' in the context of the modern commercial practice is a new concept and finds no express mention as such in the original sources of Islamic Fiqh, yet the Shariah viewpoint about it can be sought in the principles laid down by the Holy Quran, the Sunnah of the Holy Prophet and the Islamic jurisprudence. This exercise requires some sort of ijtihad carried out by the persons qualified for it. This ijtihad should preferably be undertaken by the Shariah scholars at a collective level, yet, as a pre-requisite, there should be some individual effort, which may serve as a basis for the collective exercise.As a humble student of Shariah, this author have been considering the issue since long, and what is going to be presented in this article should not be treated as a final verdict on this subject, nor an absolute opinion on the point. It is the outcome of initial thinking on the subject, and the purpose of this article is to provide a foundation for further research. The question of 'limited liability' it can be said, is closely related to the concept of juridical personality of the modern corporate bodies. According to this concept, a joint-stock company in itself enjoys the status of a separate entity as distinguished from the individual entities of its shareholders. The separate entity as a fictive person has legal personality and may thus sue and be sued, may make contracts, may hold property in its name, and has the legal status of a natural person in all its transactions entered into in the capacity of a juridical person. The basic question, it is believed, is whether the concept of a 'juridical person' is acceptable in Shariah or not. Once the concept of 'juridical person' is accepted and it is admitted that, despite its fictive nature, a juridical person can be treated as a natural person in respect of the legal consequences of the transactions made in its name, we will have to accept the concept of 'limited liability' which will follow as a logical result of the former concept. The reason is obvious. If a real person i.e. a human being dies insolvent, his creditors have no claim except to the extent of the assets he has left behind. If his liabilities exceed his assets, the creditors will certainly suffer, no remedy being left for them after the death of the indebted person. Now, if we accept that a company, in its capacity of a juridical person, has the rights and obligations similar to those of a natural person, the same principle will apply to an insolvent company. A company, after becoming insolvent, is bound to be liquidated: and the liquidation of a company corresponds to the death of a person, because a company after its liquidation cannot exist any more. If the creditors of a real person can suffer, when he dies insolvent, the creditors of a juridical person may suffer too, when its legal life comes to an end by its liquidation. Therefore, the basic question is whether or not the concept of 'juridical person' is acceptable to Shariah. Although the idea of a juridical person, as envisaged by the modern economic and legal systems has not been dealt with in the Islamic Fiqh, yet there are certain precedents wherefrom the basic concept of a juridical person may be derived by inference. 1. Waqf The first precedent is that of a Waqf. A Waqf is a legal and religious institution wherein a person dedicates some of his properties for a religious or a charitable purpose. The properties, after being declared as Waqf, no longer remain in the ownership of the donor. The beneficiaries of a Waqf can benefit from the corpus or the proceeds of the dedicated property, but they are not its owners. Its ownership vests in Allah Almighty alone. It seems that the Muslim jurists have treated the Waqf as a separate legal entity and have ascribed to it some characteristics similar to those of a natural person. This will be clear from two rulings given by the fuqaha (Muslim jurists) in respect of Waqf. Firstly, if a property is purchased with the income of a Waqf, the purchased property cannot become a part of the Waqf automatically. Rather, the jurists say, the property so purchased shall be treated, as a property owned by the Waqf. It clearly means that a Waqf, like a natural person, can own a property. Secondly, the jurists have clearly mentioned that the money given to a mosque as donation does not form part of the Waqf, but it passes to the ownership of the mosque. Here again the mosque is accepted to be an owner of money. Some jurists of the Maliki School have expressly mentioned this principle also. They have stated that a mosque is capable of being the owner of something. This capability of the mosque, according to them, is constructive, while the capability enjoyed by a human being is physical. Another renowned Maliki jurist, namely, Ahmad Al-Dardir, validates a bequest made in favor of a mosque, and gives the reason that a mosque can own properties. Not only this, he extends the principle to an inn and a bridge also, provided that they are Waqf. It is clear from these examples that the Muslim jurists have accepted that a Waqf can own properties. Obviously, a Waqf is not a human being, yet they have treated it as a human being in the matter of ownership. Once its ownership is established, it will logically follow that it can sell and purchase, may become a debtor and a creditor and can sue and be sued, and thus all the characteristics of a 'juridical person' can be attributed to it. 2. Baitul-Mal Another example of 'juridical person' found in our classic literature of Fiqh is that of the Baitul-mal (the exchequer of an Islamic state). Being public property, all the citizens of an Islamic state have some beneficial right over the Baitul-mal, yet, nobody can claim to be its owner. Still, the Baitul-mal has some rights and obligations. Imam Al-Sarakhsi, the well-known Hanafi jurist, says in his work "Al-Mabsut": "The Baitul-mal has some rights and obligations, which may possibly be undetermined." At another place the same author says: "If the head of an Islamic state needs money to give salaries to his army, but he finds no money in the Kharaj department of the Baitul-mal (wherefrom the salaries are generally given) he can give salaries from the sadaqah (Zakah) department, but the amount so taken from the sadaqah department shall be deemed to be a debt on the Kharaj department". It follows from this that not only the Baitul-mal, but also the different departments therein can borrow and advance loans to each other. The liability of these loans does not lie on the head of state, but on the concerned department of Baitul-mal. It means that each department of Baitul-mal is a separate entity and in that capacity it can advance and borrow money, may be treated a debtor or a creditor, and thus can sue and be sued in the same manner as a juridical person does. It means that the Fuqaha of Islam have accepted the concept of juridical person in respect of Baitul-mal. 3. Joint Stock Another example very much close to the concept of 'juridical person' in a joint stock company is found in the Fiqh of Imam Shafai. According to a settled principle of Shafai School, if more than one person run their business in partner-ship, where their assets are mixed with each other, the Zakah will be levied on each of them individually, but it will be payable on their joint-stock as a whole, so much so that even if one of them does not own the amount of the nisab, but the combined value of the total assets exceeds the prescribed limit of the nisab, zakah will be payable on the whole joint-stock including the share of the former, and thus the person whose share is less than the nisab shall also contribute to the levy in proportion to his ownership in the total assets, whereas he was not subject to the levy of zakah, had it been levied on each person in his individual capacity. The same principle, which is called the principle of 'Khultah-al-Shuyu' is more forcefully applied to the levy of Zakah on the livestock. Consequently, a person sometimes has to pay more Zakah than he was liable to in his individual capacity, and sometimes he has to pay less than that. That is why the Holy Prophet has said: 'The separate assets should not be joined together nor the joint assets should be separated in order to reduce the amount of Zakah levied on them’. This principle of 'Khultah-al-Shuyu' which is also accepted to some extent by the Maliki and Hanbali schools with some variance in details, has a basic concept of a juridical person underlying it. It is not the individual, according to this principle, who is liable to Zakah. It is the 'joint-stock’ that has been made subject to the levy. It means that the 'joint-stock' has been treated a separate entity, and the obligation of Zakah has been diverted towards this entity which is very close to the concept of a 'juridical person', though it is not exactly the same. 4. Inheritance under debt The fourth example is the property left by a deceased person whose liabilities exceed the value of all the property left by him. For the purpose of brevity we can refer to it as 'inheritance under debt'. According to the jurists, this property is neither owned by the deceased, because he is no more alive, nor is it owned by his heirs, for the debts on the deceased have a preferential right over the property as compared to the rights of the heirs. It is not even owned by the creditors, because the settlement has not yet taken place. They have their claims over it, but it is not their property unless it is actually divided between them. Being property of nobody, it has its own existence and it can be termed a legal entity. The heirs of the deceased or his nominated executor will look after the property as managers, but they are not the owners. If the process of the settlement of debt requires some expenses, the same will be met by the property itself. Looked at from this angle, this 'inheritance under debt' has its own entity which may sell and purchase, becomes debtor and creditor, and has the characteristics very much similar to those of a 'juridical person.' Not only this, the liability of this 'juridical person' is certainly limited to its existing assets. If the assets do not suffice to settle all the debts, there is no remedy left with its creditors to sue anybody, including the heirs of the deceased, for the rest of their claims. These are some instances where the Muslim jurists have affirmed a legal entity, similar to that of a juridical person. These examples would show that the concept of 'juridical person' is not totally foreign to the Islamic jurisprudence, and if the juridical entity of a joint-stock company is accepted on the basis of these precedents, no serious objection is likely to be raised against it. As mentioned earlier, the question of limited liability of a company is closely related to the concept of a 'juridical person'. If a 'juridical person' can be treated a natural person in its rights and obligations, then, every person is liable only to the limit of the assets he owns, and in case he dies insolvent no other person can bear the burden of his remaining liabilities, however closely related to him he may be. On this analogy the limited liability of a joint-stock company may be justified. The limited liability of the master of a slave Here I would like to cite another example with advantage, which is the closest example to the limited liability of a joint-stock company. The example relates to a period of our past history when slavery was in vogue, and the slaves were treated as the property of their masters and were freely traded in. Although the institution of slavery with reference to our age is something past and closed, yet the legal principles laid down by our jurists while dealing with various questions pertaining to the trade of slaves are still beneficial to a student of Islamic jurisprudence, and we can avail of those principles while seeking solutions to our modern problems and in this respect, it is believed that this example is the most relevant to the question at issue. The slaves in those days were of two kinds. The first kind was of those who were not permitted by their masters to enter into any commercial transaction. A slave of this kind was called 'Qinn'. But there was another kind of slaves who were allowed by their masters to trade. A slave of this kind was called Abde Mazoon in Arabic. The initial capital for the purpose of trade was given to such a slave by his master, but he was free to enter into all the commercial transactions. The capital invested by him totally belonged to his master. The income would also vest in him, and whatever the slave earned would go to the master as his exclusive property. If in the course of trade, the slave incurred debts, the same would be set off by the cash and the stock present in the hands of the slave. But if the amount of such cash and stock would not be sufficient to set off the debts, the creditors had a right to sell the slave and settle their claims out of his price. However, if their claims would not be satisfied even after selling the slave, and the slave would die in that state of indebtedness, the creditors could not approach his master for the rest of their claims. Here, the master was actually the owner of the whole business, the slave being merely an intermediary tool to carry out the business transactions. The slave owned nothing from the business. Still, the liability of the master was limited to the capital he invested including the value of the slave. After the death of the slave, the creditors could not have a claim over the personal assets of the master. This is the nearest example found in the Islamic Fiqh, which is very much similar to the limited liability of the share holders of a company, which can be justified on the same analogy. On the basis of these five precedents, it seems that the concepts of a juridical person and that of limited liability do not contravene any injunction of Islam. But at the same time, it should be emphasized, that the concept of 'limited liability' should not be allowed to work for cheating people and escaping the natural liabilities consequent to a profitable trade. So, the concept could be restricted, to the public companies only who issue their shares to the general public and the number of whose shareholders is so large that each one of them cannot be held responsible for the day-to-day affairs of the business and for the debts exceeding the assets. As for the private companies or the partnerships, the concept of limited liability should not be applied to them, because, practically, each one of their shareholders and partners can easily acquire knowledge of the day-to-day affairs of the business and should be held responsible for all its liabilities. There may be an exception for the sleeping partners or the shareholders of a private company who do not take part in the business practically and their liability may be limited as per agreement between the partners. If the sleeping partners have a limited liability under this agreement, it means, in terms of Islamic jurisprudence, that they have not allowed the working partners to incur debts exceeding the value of the assets of the business. In this case, if the debts of the business increase from the specified limit, it will be the sole responsibility of the working partners who have exceeded the limit. The upshot of the foregoing discussion is that the concept of limited liability can be justified, from the Shariah viewpoint, in the public joint-stock companies and those corporate bodies only who issues their shares to general public. The concept may also be applied to the sleeping partners of a firm and to the shareholders of a private company who take no active part in the business management. But the liability of the active partners in a partnership and active shareholders of a private company should always be unlimited. At the end, we should again recall what has been pointed out at the outset. The issue of limited liability, being a modern issue, which requires a collective effort to find out its solution in the light of Shariah, the above discussion should not be deemed to be a final verdict on the subject. This is only the outcome of an initial thinking, which always remains subject to further study and research. Source: Guide to Islamic Banking
__________________
~Time owns each and everything~ ~Useless youth if not useful for Pakistan~
|
|
«
Previous Thread
|
Next Thread
»
|
|
Similar Threads
|
||||
| Thread | Thread Starter | Forum | Replies | Last Post |
| The Religion Of Islam | MUKHTIAR ALI | Islamiat | 3 | Friday, April 03, 2020 10:31 AM |
| Islamic Information | safdarmehmood | Islamiat | 4 | Thursday, June 28, 2018 08:09 AM |
| Islamic Doc | Predator | Islam | 43 | Thursday, June 28, 2018 08:07 AM |
| The Islamic Economic System | Astute Accountant | Economics | 5 | Saturday, June 13, 2009 01:25 PM |
| Islam ( AN essay of islamic basics) | Ahmad Bilal | Essays | 0 | Friday, April 14, 2006 05:44 PM |
