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.