Islamic finance body IILM sells debut $490 million sukuk

DUBAI, Aug 26 (Reuters) - A consortium of central banks from Asia, the Middle East and Africa has taken a first step towards developing a cross-border market in Islamic financial instruments by issuing a $490 million sukuk.

The three-month Islamic bonds, denominated in U.S. dollars, were issued by the Malaysia-based International Islamic Liquidity Management Corp (IILM). Its debut issue was fully subscribed, the IILM said in a statement on Monday.

Islamic finance, which obeys religious principles such as a ban on interest payments, has grown rapidly since the global financial crisis and is now estimated to have well over $1 trillion of assets around the world.

PRACTICE OF BAI AL INAH AND TAWARRUQ

Bai’ al Inah can be defined as a type of business(Sale and Buy-back agreement) where the financier sells his/her assets to a buyer at a fixed price which is payable by the buyer in future. Subsequently, the buyer will sell the same asset back to the seller (financier) at a cash value lower than the price it was originally sold to the buyer for.

It involves the sales of a commodity on credit and repurchasing it for a lesser amount in cash.

Proponents of validity of Bai-al-Inah argue that a person is free to sell what belongs to him to anybody he wishes, therefore, a sale to the person from whom it was bought originally would be permissible. It is also argued that the 2 contracts are separate, valid and not conditional on each other.

RATIONALE FOR SALE OF NON-EXISTENT GOODS

In general, the sale of non-existent objects/goods is prohibited due to Gharar(Uncertainty). However, to facilitate certain types of business transactions, exceptions were given through Salam and Istisna.  Many jurists have also contended that for a lawful sale transaction, it is important that the item of sale must be fully known leaving no room for ambiguity but that the physical possession by the seller is not a necessary condition of valid sale. Evidence of permissibility can be found in the Hadith narrated on the authority of ‘Ibn ‘Abbas:

The Messenger of Allah (PBUH) came to Madinah and found its inhabitants entering salam contracts (with the price paid in advance) in fruits for one, two and three years. He (pbuh) said: “whoever enters into a salam contract, let him specify a known volume or weight, and a known term of deferment”

RATIONALE FOR PERMITTING BAI' AND PROHIBITION OF RIBA

Riba in simple terms means increase or growth. It is the income earned by the borrowed financial capital regardless of whether it is in the production process or not. Interest is the allocation, to the capital owner, of an unearned, undeserved, unborn, unavailable and imaginary income that might be attained without producing anything and without contributing any value to the revenue of the society. It imposes all the risks on the debtor directly and on the society indirectly but not on the lender although it is directly related to him/her

As an exchangeable term with riba, interest is defined by Ismail Ozsoy, professor of economics in Fatih University, Istanbul, as "an unearned or unequally distributed income.

Surah Al-baqarah verse no.275

"Those who devour usury will not stand except as stands one whom the Satan by his touch has driven to madness. That is because they say, "trade is like usury", but Allah has permitted trade and has forbidden usury",

verse 276 in the same place he says,

"Allah will deprive usury of all blessing, and will give increase for deeds of charity, for he does not love any ungrateful sinner."

Different Modes That Islamic Banks May Use To Provide Interest-Free Banking - A Critical Review

1.    MURABAHA

This refers to the sales of goods at a price which includes the actual cost of the good and a profit margin agreed to by both parties. It involves acquiring goods upon the customer’s request and selling them at a profit. The bank purchases and takes title to the goods and then sells the equipment to its customer at a cost plus a profit. The purchases are undertaken upon request of the customer. Deferred payment terms are agreed by both parties and bank is allowed to secure the arrangement.

Murabaha can be said to be a form of loan arrangement as the transaction dynamics is the same as the conventional banking financing method. The bank appoints the customer has an agent to purchase the goods at a mark-up.

ROLES OF ISLAMIC BANKS AS FINANCIAL INTERMEDIARIES IN ECONOMIC DEVELOPMENT

The roles of Islamic banks include but are not limited to the following:

1.      It reduces the dichotomy between financing and the use of funds leading to integration of real and financial sectors of the economy.

2.      The direct linkage between financing and application of funds under Islamic banking means an end to untied cash as found in interest based economies. Thus an important cause of the mismatch between aggregate demand and supply in the economy will be removed.

EVOLUTION OF ISLAMIC INTEREST-FREE BANKING

Commercial banking came into existence out of the desire of traders, entrepreneurs and manufacturers to expand their business beyond what their financial resources can cater for. Hence, a system has to be devised to channel money from those who have in excess but have no immediate need for it to those who needs money but do not have enough to carry on trading acivities.

Borne out of the need to access funds due to their growing business and the need shun interest based transactions in its entirety, muslim traders went into partnerships (mudarabah) and this dominated the muslim business world for centuries.

BASIS FOR PROHIBITION OF MAYSIR AND GHARAR

GHARAR

In simple terms, gharar means uncertainty, risk, threat, deceit, doubt, e.t.c. It is described as a risky or hazardous sale, where details concerning the item on sale are unknown or uncertain. Professor Mustafa Al Zarqa' defined Gharar as the sale of probable items whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling. While some degree of Gharar may be unavoidable in some situations, excessive uncertainty must be avoided.

'Ahmad and 'Ibn Majah narrated on the authority of 'Abu Said Al Khudriy :

The Prophet (pbuh) has forbidden the purchase of the unborn animal in its mother's womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.

CONCEPT OF RIBA

Since the early years, Riba has been regarded as any extra amount demanded by a borrower above the capital given. Definition of Riba is not expressly spelt out in the Qur’an but the term as used in the Qur’an denotes “increase”, “swelling”, “growth”.  Islamic scholars have defined Riba has the doubling or quadrupling of the sum lent. Abu al A’la al Mawdudi defined riba as “a predetermined excess or surplus over and above the loan received by the creditor conditionally in relation to a specified period”. The question that arises is “Is every increase over principal riba?” The only acceptable form of growth (increase in capital) is that which is tied to productive engagement in lawful trade and activities involving tangible assets.

  "...whereas Allah has permitted trading and forbidden Riba...  (2:275)

THE BELIEFS THAT UNDERPIN ISLAMIC ECONOMICS

Islam is hinged on the belief in one true God, the Sustainer of the universe. It has its belief deeply rooted in the Hadith which is the life and teachings of the Prophet (Sunnah) recorded by the Companions and handed down to later generations, and the Qur’an revealed to Prophet Mohammed.

In the same vein, Islamic economics is in accordance with the Islamic law which is based on divine revelations and inculcates all aspects of human life with accountability, and the resourceful and equitable use of resources.

The beliefs that underpin Islamic economics are treated under the following headings:

Trusteeship

Islam reiterates that all things are owned solely by Allah. All wealth is entrusted to human being by God and account will be given on how the wealth is spent. And because man is a Khalifa (trustee), he is not expected to hoard and deny others who are in need of the surplus wealth but rather share amongst the poor and the needy.

Quran says:

“Lo! We offered the trust unto the heavens and the earth and the hills, but they shrank from bearing it and were afraid of it. And man assumed it. Lo! he hath proved a tyrant and a fool.”

(33:72)

WELFARE IN ISLAM AND THE RESPONSIBILITIES OF INDIVIDUALS IN AN ISLAMIC ECONOMIC FRAMEWORK

Islam is a universal religion of compassion which believes in the welfare of mankind. It not only aims at the spiritual wellbeing of man but also at its economic and material interests. Its economic and material function includes providing the basic necessities for people and creating social fairness while its spiritual function include establishing Islamic way of life for Muslim and absolute religious liberty for non-Muslims.

In as much as Islam accepts the fundamental principle of market economy, such as ownership right, business freedom and competition, their effort in lessening the anguish and exploitation of people have been futile.

SALIENT FEATURES OF ISLAMIC ECONOMICS IN CONTRAST TO CONVENTIONAL ECONOMICS

The salient features of Islamic Economics in Contrast to Conventional Economics has been highlighted under the following headings.

INTEREST (RIBA)

The institution of banking and interest is the main principle of conventional economics. Trade, business and economic ventures require huge sum of money which no individual may be willing or able to single handedly give. This leads to the institution of banking and interest where the bank acts as intermediary collecting money from individual on low interest rates, adding its own margin and lending out to businesses that needs the fund at a higher rate of interest. This is the fundamental on which conventional economics is premised. There is the belief that man is not motivated to give his money or resources without any material gain associated with such lending in the form of interest.

Conversely, Islam considers interest as the most unfair institution for humanity and has abolished it in its entirety. Wealth can only be generated through lawful deal and investment. Any profits relating to these deals are shared between the person providing the resources and the person providing the skill. According to the Qur’an, taking interest is compared to war against God and the Prophet. This can be found in the following verse of the Qur’an:

O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent, then ye have your principal (without interest). Wrong not and ye shall not be wronged.

(2:278-279)