Category Archives: Introductory material

An Introduction to Islamic Finance – Mufti Taqi Usmani

An Introduction to Islamic Finance – Mufti Taqi Usmani

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An Introduction to Islamic Finance, by Mufti Taqi Usmani. Read online HERE. Topics covered:

  1. Musharakah.
  2. Mudarabah.
  3. Combination of Musharakah and Mudarabah.
  4. Some objection on Musharakah Financing.
  5. Diminishing Musharakah.
  6. Murabahah.
  7. Some Issues involved in Murabahah.
  8. Ijarah.
  9. Salam and Istina.
  10. Principles of Shari’ah, Governing Islamic Investment Funds.
  11. The principle of Limited Liability.

SunniPath Q&A on Islamic Finance

SunniPath Q&A on Islamic Finance

An extensive list of answers on various issues concerning Islamic Finance can be found here:

SunniPath Reader on Islamic Finance

Shariah Council of AAOIFI and Islamic Fiqh Academy — Mufti Taqi Usmani

Shariah Council of AAOIFI and Islamic Fiqh Academy — Mufti Taqi Usmani

Mufti Taqi Usmani explains the constitution and working of the Islamic Fiqh Academy–of which he is vice-chairman–and the Shariah Council of AAOIFI–of which he is chairman.

He explains the method of issuing fatwas and of drafting Shariah standards on auditing and accounting.

Mufti Taqi goes on to name the leading scholars in the field of Islamic Finance today.

Recorded at a training course on Islamic Finance conducted at the Centre for Islamic Economics, Bait al-Mukarram Masjid, Karachi, in conjunction with 1st Ethical.

A principle of family dealings: Be close, but transact as strangers

A principle of family dealings: Be close, but transact as strangers.

By Sheikh Faraz Rabbani

Allah Most High says in the Qur’an

“And obey Allah and His messenger, and dispute not one with another lest you
falter and your strength depart from you; but be steadfast! Lo! Allah is with the
steadfast.” [Qur’an, 8.46]

The scholars tell us that the most damaging money-related disputes occur between close family and close friends. The reason for this is because close relationships, trust, and understanding often lead to undefined and unclear dealings.

The problem with this is that when something happens that leads to differing interests, then these unclear dealings lead to disputes that break family relationships and destroy friendships.

An example would be a student going to college: her father says, “Take our downtown flat.” Then, two years down the line, the father and daughter disagree about some major life matters. The father tells her she can no longer stay in the downtown flat. The daughter refuses, saying, “You gave it to me. It is mine.” The father says, “No, I just let you stay in it.” This aggravates their disagreement, and leads to a long and harmful break in relations…
Similarly, when the father dies, families often break up over ownership and inheritance issues: the wife claims that her husband gave her the main house, while the three children (struggling to get established in life and in need of funds) argue that the house always belonged to the father (thus entering in the inheritance). They fight…

The solution

The solution, the scholars tell us, is: Be close, but transact as strangers.

Deal with family and friends with love, trust, and understanding, but make sure your transactions are clearly defined and properly recorded when significant. This is, in fact, the Qur’anic recommendation in transactions, and clear from the radiant example of the Prophet Muhammad (peace and blessings be upon him).

If this is done, countless disputes are avoided, and the love, trust, and understanding that meaningful relationships and strong communities are built on is ensured.

Abu Hurayra relates that the Beloved Messenger of Allah (peace and blessings be upon him, his family, companions, and followers) said,

“Do not envy one another, do not bid against on another, bidding in order to raise the price, do not hate one another, do not turn your backs on one another, and none of you should sell against the sale of another. Be slaves of Allah, brothers. A Muslim is the brother of another Muslim: he should not wrong him nor scorn him nor disappoint him. Godfearing is here,” and he pointed to his breast three times. “It is enough evil for man to scorn his Muslim brother. The blood, property and honour of a Muslim is unlawful to another Muslim.” [Muslim, from Ustadha Ayesha Bewley’s translation of Riyad al-Salihin]

And Allah alone gives success.

Principles of Shariah governing investment in shares and equity funds: Mufti Taqi Usmani

Principles of Shariah governing investment in shares and equity funds: Mufti Taqi Usmani

Dealing in equity shares can be acceptable in Shariah subject to the following conditions:

1. The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.

2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in a interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par.

What should be the exact proportion of non-liquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle: The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the non-liquid asset of a company or 33%, its shares can be treated as negotiable.

The third view is based on the Hanafi jurisprudence. The principle of the Hanafi school is that whenever an asset is a mixture of a liquid and non-liquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions:

First, the non-liquid part of the mixture must not be in a negligible quantity. It means that it should be in a considerable proportion. Second, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of “riba” and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for the price of 75 dollars. For this reason the transaction will not be valid.

However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where a price of the share goes lower than its liquid assets.

Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners “inter se.” All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as “purification.”

The Shariah scholars have different views about whether the “purification” is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of “purification” is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only.

Although this second view is not without force, yet the first view is more cautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price compared to the first person.

On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.

The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits.

The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year.

However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers.