Islamic Banking Products and Trickery

Asharq Al-Awsat- Today, many Islamic banking products are based on jurisprudential trickery and crafty methods. When the jurisprudence of trickery flourishes and when jurists master these methods; it stands as evidence of their failure to adhere to Shariah’s provisions and rulings.

In this scenario, jurisprudence and its objectives are replaced by a jurisprudence of appearances and methodology [to achieve ends]. This manifests in many products, most notably credit cards, which can entail much deviousness – from obligatory card fees to be paid by holders to credit cards that combine between loans and sales.

Such practices have been addressed by many researchers and I have previously written an article about this subject. However, the most heinous form of deception is the reverse murabaha* that some banks practice. Reverse murabaha is when a customer wants to invest capital surplus in a bank by buying a commodity from the international market for its actual price then resells it to the bank on a deferred payment basis in accordance with the set time. The bank then sells the commodity in the international market to obtain the capital it will use to finance its clients.

While many clients seek to benefit from fluctuations of the profit margin, mostly using the interest margin as an indicator, they want to make short-term investments like three months, for example. This, in turn, means that murabaha measures need to be repeated for every case when the maturity date is due. Since the bank is the acting agent on the clients behalf when buying a given commodity on credit from the international market, Shariah committees have prohibited banks from selling the commodities to themselves so as to prevent both parties from fabricating claims in the contract and to avoid the overlap of guarantees.

Given the fact that the process of investment is a renewable one and in the interest of facilitating procedures for clients and fulfilling a given bank’s interest in maintaining clients, banks and their affiliated Shariah committees have found a way to get themselves out of this predicament which they have brought upon themselves. This is achieved by stating that clients are capable of authorizing bank employees (in their personal not professional capacity) to sell the commodity to the bank on the client’s behalf.

It is a low ploy that has made the unjust mock the people of Shariah, what idiot would be deceived by such a trick! It is common knowledge that the bank acts as an underwriter for the client and the client submits to the bank’s request to authorize one of its employees whom he/she appoints as an agent based on the client’s trust in the bank, not in the aforesaid employee.

In fact, if the client has the slightest doubt about the bank’s trustworthiness, he/she would not accept this arrangement and the best indicator of that is that clients are not concerned about the agents. There is no doubt that relying on such agency is wrong and it involves a conflict of interests, which is something that is prohibited by the set law. So, do Shariah committees adopt a position that allows for an agent to represent both parties in the contract in the process of trying to facilitate matters instead of resorting to tricky methods?

Such trickery and other deceptive methods have shaken the image of Shariah among the Muslim communities and made it easier to fall for what God has prohibited. Today, Shariah scholars are mocked by their enemies.

What prompts Shariah committees to adopt such vague methods of deception is the outcome of their inflexibility in the face of what God has facilitated and the fact that they place their own constructed restraints on Shariah when there are none. Unfortunately, such practices are a result of fabrications and straying away from ijtihad (interpretation).

* MURABAHA: a financer, such as a bank, buys a commodity and sells it to the purchaser at a higher price.

* Lahem al Nasser is an Islamic banking adviser.

Investors opt for 'safer' Islamic banking products

By Shuchita Kapur
Investors are increasingly turning to Shariah-compliant finance as they perceive it to be safer in turbulent economic times, and as a result demand in the sector is quickly outpacing supply.

Experts Emirates Business spoke to were unanimous in their opinion that Islamic finance as an asset class is growing at a rapid pace.

"In many categories, the demand for Islamic investment vehicles currently exceeds supply. The global sukuk market, for instance, is increasing at an astonishing average of 40 per cent per annum, fuelled by record investor numbers turning to Islamic banking," Vince Cook, CFO of Islamic Bank of Asia (IB Asia), said.

The global sukuk market reached a record market value of $51.5 billion (Dh189bn) in 2007, according to the Islamic Finance Information Service. "The sukuk allows investors to participate actively and bear the risks – which can be minimised but never eliminated, being inherent in all investments – alongside the rewards," said Cook.

There have been varying estimates of the growth of the global sukuk market, with Ernst & Young saying Islamic assets have been growing at more than 20 per cent a year to reach $900bn in 2007. And they predicted the assets would hit $2 trillion by 2010.

However, according to Malaysia's central bank, growth has averaged 40 per cent a year, thanks to high levels of surplus savings and reserves in the Gulf and Asia.

"There is no doubt that more Muslims now want to manage their financial affairs with consideration to their faith. This has been enhanced by the presence of Islamic financial institutions and the availability of Shariah-compliant products and services," said Taha Eltayeb Ahmed, vice-president, Shariah Structuring and Documentation, Badr Al Islami, the Islamic finance division of Mashreq. "Theological shifts particularly in the younger generation have been seen in the last two decades," he told Emirates Business.

And analysts pointed out some companies that put plans to sell sukuk on hold owing to worries that the US sub-prime crisis could make borrowing more expensive, could now be revisiting their plans. "While market sentiment remains cautious, we still see a growing interest from global parties in tapping into the increasing flows of liquidity from the Middle East," said Cook.

"Also, the robust levels of transparency and risk management inherent in Islamic finance make it less susceptible to the ongoing market turmoil, and hence a more attractive investment option," he explained.

R Lakshmanan, CEO of Bahrain-based Islamic mortgage company Sakana Holistic Housing Solutions, agreed with Cook. "Islamic banks and institutions have not been affected by the sub-prime crisis because of the way they operate, that is, based on assets and Shariah principles, which is quite different from the way conventional banks operate." Sakana is a finance company regulated by the Central Bank of Bahrain and is a 50:50 joint venture between the Bank of Bahrain and Kuwait and Shamil Bank.

"Nobody has a definite figure of the size of the Islamic finance industry as a whole. However, best estimates quote assets under management well beyond $200bn," reckoned Badr Al Islami's Ahmed. "Dubai is now seeing noticeable growth in many business sectors and asset classes. Islamic banking is a sector witnessing noticeable attention and growth in the UAE."

Analysts said while changes in the global investment climate are driving demand for Islamic banking, it is the development of innovative Shariah-compliant products that will help grow the industry.

"Islamic Shariah scholars have led the way in innovation. Investors now demand more than just debt finance (lending and borrowing) in their products. They participate in the assets and this creates real economic value," according to Shaikh Nizam Yaqouby, an internationally acclaimed Islamic scholar based in Bahrain.

"More investors – whether affected directly or indirectly by the sub-prime situation – are attracted to investment vehicles, which are underpinned by an inherent immunity from risk.

"As Shariah-compliant banking forbids the purchase of debts, it is therefore one of the favourite options that investors are turning to," added Shaikh Yaqouby.

While Sakana's Lakshmanan maintained it was "difficult to establish if customers have turned to Islamic finance because of the sub-prime crisis," he said, "customers are increasingly looking at the option of Islamic finance for their requirements with the range of products and services now available and the increased choice of institutions offering them."

Cook added IB Asia's ability to generate innovative Islamic financing structures that help Gulf investors gain access to Asia's opportunities puts it in good stead to cater to the growing demand for Islamic finance: "With a long-term view toward broadening our product base, we are currently in detailed discussions with government organisations, regulators and other stakeholders in Asia and the Middle East to prepare for a sukuk issuance later this year, market conditions allowing."

The Islamic finance industry's growth has largely been driven by a flood of petrodollars from the Middle East, fuelled by record energy prices, and capital repatriation from the West after the September 11, 2001 attacks.