Category Archives: Q&A

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“Ethica’s Handbook of Islamic Finance (2013 Edition)”…700 Pages of Practical, Usable Knowledge!

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“Ethica’s Handbook of Islamic Finance (2013 Edition)” is the industry’s first practical, user’s guide for implementing change. It may also be the only e-book in Islamic finance with a detailed and expansive subject index for your convenience. An indispensable desktop reference for practitioners and students alike, this book puts everything you need in one place.

TABLE OF CONTENTS
* We Believe: Ethica’s manifesto.
* Speech: Use this speech or the accompanying video at your conference, training session, bank or university.
* Petitions: Use these sample petitions to bring standardized Islamic finance into your community.
* Articles: Use these articles to inform yourself and others about the basics of Islamic finance.
* Meezan Bank’s Guide to Islamic Banking by Dr. Imran Usmani: Use this section for a more detailed understanding of the industry’s core products from one of its leading scholars.
* Islamic Finance Contracts: Use these sample contracts to educate yourself and your bank about various Islamic finance instruments.
* CIFE™ Study Notes: Use these study notes to help you prepare for Ethica’s Certified Islamic Finance Executive™ (CIFE™) program.
* Recommended Reading for Practitioners: Use this reading list to help develop your worldview on finance.
* Recommended Reading for Entrepreneurs: Use this reading list to help you jump start your Islamic finance idea.
* Islamic Finance Q&As: Use this database of 1,000+ scholar-approved answers to guide your commercial dealings.
* Glossary of Commonly Used Terminology: Use this section to understand the industry’s most commonly used terminology.
* About Ethica Institute of Islamic Finance
* About the Certified Islamic Finance Executive™ (CIFE™)
* Press Releases
* Contact Ethica
* Subject Index: Use this detailed index to quickly search the entire e-book.

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About Ethica Institute of Islamic Finance (www.EthicaInstitute.com)

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Winner of “Best Islamic Finance Qualification” at the Global Islamic Finance Awards, Ethica is chosen by more professionals and students for Islamic finance certification than any other organization in the world. With over 20,000 paying users in 44 countries, the Dubai-based institute serves banks, universities, and professionals across over 100 organizations with its 4-month Certified Islamic Finance Executive™ (CIFE™) program delivered 100% online. The CIFE™ is the only globally recognized certificate accredited by scholars to fully comply with AAOIFI, the world’s leading Islamic finance standard. To watch an Ethica training video click here.

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StraightWay Ethical Q&A: Dealing with Pawn Shops

StraightWay Ethical Q&A: Dealing with Pawn Shops

pawn

Q: As-salamu `alaykum. If I were to pawn an item in order to get $200 and then, a month later, go back to buy it back at $225, would that be usury (riba)?

A:Wa-`alaykum as-salamu wa-rahmatullah.

There are several likely scenarios:


Scenario One

1) If the first transaction were actually a sale (as opposed to a loan), (as indicated by the contract that you entered into with the pawnbroker) and

   2) If, at the time of the first sale, you did not agree (or promise) to repurchase the item at a higher price (but rather, for example, came back later, happened to find that the pawnbroker had not sold the item yet and decided to buy it back from him/her at that time) then the two sales (i.e. both the first and second) are valid (sahih), the transaction would not be usury (riba) and the transaction would be permitted (ja’iz).

Basis (mustanad): Allah says <<wa-ahalla llahu l-bay`a wa-harrama r-riba>> i.e.  "Allah has permitted buying (and selling) but prohibited usury [riba]". (Baqara)

Scenario Two

However, if the first transaction were not a sale–but were rather a loan (of, say, $200) that the pawnbroker advanced to you and, as part of the loan transaction, you pledged your item as collateral (e.g. on the basis that if you did not pay the pawnbroker $200 plus interest [i.e. finance charge, service charge, etc] within 30 days, the item would become the  pawnbroker’s)–and then you returned within 30 days and paid a higher amount (e.g. $225= $200 plus finance charges of $25) as repayment of the loan (not as the sales price in an actual repurchase of the item) then this would be usury (riba) and would be impermissible.

Basis (mustanad): It is transmitted from the Prophet (salla llahu `alayhu wa sallam) that he said <<Kullu qard jarra manfa` fa-huwa riba>> i.e. "Every loan that draws a benefit is usury."  Note: The transmission chain (isnad) of this hadith is defective according to several hadith specialists (muhaddithin), but the text has been adopted as a fiqh principle (qa`idah) by our legists (fuqaha’).

Scenario Three

If the first transaction were a loan (of, say, $200) (as in Scenario Two above) but you were to return after the item had already become the pawnbroker’s (e.g. you were unable to repay the loan principal in 30 days but returned to the pawn shop after 40 days had elapsed) and then were to pay a higher amount (e.g. $225) as the actual repurchase price of the item (not in repayment of the loan), then the final repurchase here would not be usury (riba) and would be permitted (ja’iz) provided that 1) you did not agree or promise to repurchase the item at the higher price at the time of the first sale and 2) you did not intend to let the default period expire when you took out the loan.

Note: The first lending transaction itself may be invalid in this case, depending on specifics of the loan contract/pawn agreement. [See "Advice" below].

Advice (nasihah): I strongly counsel you (and any other Muslim, for that matter) against dealing with pawnbrokers (even according to Scenario One) since 1) pawnbrokers are known usurers (i.e. dealers in riba) and 2) the technical differences between the scenarios that I describe above may be difficult for many to discern, because of the duplicity of pawnbrokers, a lack of clarity in the contract or other reasons.

Wa llahu a`lam

The Needy Slave of Allah at Harvard
Taha bin Hasan Abdul-Basser

Permissibility of and Zakât on 401k Plans & Other Securities

Permissibility of and Zakât on 401k Plans & Other Securities

The 401K Plan

401k refers to an IRS Code that allows employers to set up retirement plans for their employees. This company-sponsored benefit allows employees to invest money from their paychecks into an investment vehicle on a pre-tax basis, meaning no taxes will be charged for investing until the employee decides to make a withdrawal from his or her plan at the age of 59 1/2. The employer can encourage the employee by also contributing to the plan by matching or partially matching the investment of each employee. All of money invested (up to a certain predefined limit), along with any investment or matching from the employer, is put into an account that is invested into funds (i.e. money market, fixed income, or equity), as chosen by the employee from a list of funds offered by the company.

To understand the Islamic ruling regarding of permissibility or impermissibility of a 401K plan, we first need to understand the different rulings regarding the various types of investment instruments that may be associated with a 401K Plan.

Individual Retirement Account (IRA)

An Individual Retirement Account is a retirement plan where individuals can deposit funds into an account that will earn interest with the goal of augmenting an individual’s retirement savings. An IRA is different than a 401k because an IRA earns a fixed-rate of interest. It is not an investment so it does not have the ability to earn a higher rate of return in a lucrative market. Conversely, it is safe during periods of market correction.

It is very clear that investing in such an IRA is impermissible since it is not considered an investment (hence no chance of loss on invested capital). It is similar to an interest bearing deposit such as a saving account. However, an IRA in many cases can also be set up with an institution like a broker (called brokerage IRAs) to invest in lawful stocks at one’s own discretion. This could be a good lawful investment option if the stocks one invests in meet the criteria highlighted below.

Mutual Funds

A Mutual Fund is an investment entity, usually a corporation that sells shares to investors, usually individuals, in exchange for a portion of the Fund’s investment portfolio. Different funds are designed to meet the requirements of various types of investors. For example, fixed income / bond funds are available for investors seeking moderate returns and low risk and equity / stock funds are accessible for those who are willing to accept more risk exchange for potentially higher returns.

Investing in Mutual Funds is permissible if one restricts his or herself to investing only in equity / stock funds whose portfolios consist of lawful companies. Investing into fixed income / bond funds is impermissible since the returns are derived from interest-bearing securities.

Money Market Fund

A Money Market Fund is a mutual fund that invests in short-term interest bearing securities and sometimes allows its investors to have a debit card associated with it and write checks against their accounts. Since the investments are made into short-term securities (which typically mature within one year), these funds are very low-risk. Investing in Money Market Funds is impermissible since the pool of investments consists of interest-bearing assets.

Bonds, Bills and Notes

These are debt obligations under which the borrower, typically a corporation of governmental entity, agrees to make specified payments of interest for the money it borrows (the “face value” or principal). For example, a corporation may issue a bond which will mature in 5 years with a face value of $1,000 and promise to make annual interest payments of 10% per year. In this case, the bondholder will earn $100 a year for five years and after the fifth year will be given back his or her initial investment of $1,000 as long as the corporation does not default. The interest / expected return of each of a bond depends on the degree of risk, which determined by independent ratings agencies. Bonds issued by governmental entities typically have a lower expected return than those issued by corporations since the chances of governmental entities defaulting are smaller.

Investing in Bonds is also impermissible since they are essentially loans that promise to pay back the face value plus interest.

Certificate of Deposit (CD)

A Certificate of Deposit is a savings certificate at various denominations issued primarily by commercial banks where the holder receives interest at a specified rate upon maturity. Investing in Certificates of Deposition is impermissible because the gains of the investment are earned from interest.

Stocks

A Stock, Share, or Equity, is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred.

Common stock usually gives the shareholder voting rights and allows them to receive dividends declared by the company. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock are given priority over owners of common stock in the event of bankruptcy

It is permissible to invest in common stocks as long as the company one is investing is in compliance with the following conditions (as highlighted below by Justice Mufti Taqi Uthmani, a renowned and respected scholar in the field of finance and economics):

1. The main business of the company is not in violation of Shari’a. 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 Sharî’a, such as the companies manufacturing, selling or offering liquors, pork, harâm meat, or involved in gambling, night club activities, pornography etc.

2. If the main business of the companies is halâl, 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. [Please visit http://albalagh.net/Islamic_economics/finance.shtml for complete fatwa and explanations]

Now that we understand the independent rulings of the securities mentioned above, we are given a better picture of what types of 401k plans would be lawful and unlawful to invest in. Based on what we have examined it is therefore permissible to invest in a 401K plan as long as the mutual fund selected is in compliance with the Sharî’a.

The problem that arises at this point is that the majority of the funds offered by companies for this plan do not include Islamic funds (such as the Dow Jones Islamic Fund) or even ethical funds, (which are not necessarily lawful since they may not meet all the requirements to be in compliance with the Sharî’a). Nevertheless, if a Sharî’a compliant fund is offered then it would be permissible to invest in it as part of one’s 401k plan. In this regard any amount matched or contributed by one’s employer toward the 401K plan is also permissible.

Existing Investments in non-lawful 401k plans

As for 401K investments already held in an unlawful mutual fund, one should opt to switch his or her holdings out of the existing fund and reallocate the money into a Shari’a compliant Fund . In the case where one’s company does not include any lawful mutual funds then one may be able to make such a request, like including the Dow Jones Islamic Funds as an option. If this is not a possibility then it would be necessary to withdraw the funds from one’s plan and either transfer over (roll over) to another lawful plan (such as a brokerage IRA consisting of lawful stocks) or consider other investing venues, even though there will be a penalty for an early withdrawal. Whatever money is received by the person in this case, only the original capital amount invested by the person and that which has been added by one’s company will be permissible for one to retain. All excess will have to be disposed off to the poor without intention for reward.

Zakât on 401k plans

Given that one cannot withdraw from 401K plans until one is 59.5 years old without facing a penalty, the question comes up as to how and when zakât needs to be paid on this.

Since lawful 401K plans are considered business investments, the money invested does not come under the definition of being a debt and thus zakât is necessary each year as long as the total amount (along with any other savings a person has, minus any debts) meets the zakât quantum [nisâb] which is approximately $140. One is obliged to pay 2.5 percent on the total value of one’s investments (which includes one’s own investment, along with any amount added by one’s employer that has vested [i.e. the money is now considered the employees since some companies release the amounts contributed by themselves in installments so the employees cannot take the whole amount at once], and any gain or profits that have since been accumulated. In other words the zakâtable amount will be the amount a person would consider his or hers at that time even if he was to leave his employment.

For instance, if a person’s total personal investments in his or her 401K plan are $5,000.00 along with $2,500.00 matched by the employer, then the zakât will be 2.5% of $7,500.00 which is $187.50 for that year.

If he or she has an additional $2,500.00 in other zakâtable assets like cash in hand or inventory, etc. then the total zakâtable income is $10,000.00, hence, his zakât will be $250.00 for that year.

Any penalty amount or taxes that one would have to pay if they did a premature withdrawal of their investment are not exempted from the total zakâtable income each year, unless a person makes such a withdrawal or cancels his or her plan. In this case he or she would only pay zakât on the amount left on the day the zakât becomes due after deducting any penalties or taxes.

And Allah knows best.

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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

Sheikh Nizam Yaquby answers common questions relating to Shariah-compliant halal mortgages

Sheikh Nizam Yaquby answers common questions relating to Shariah-compliant halal mortgages

To what extent do contemporary Islamic mortgages comply with Shariah Law: http://www.bbc.co.uk/religion/realmedia/islam/nizam_shariacomp.ram

How important is it for Muslims that their money comes from permissible (halal) sources:  http://www.bbc.co.uk/religion/realmedia/islam/nizam_halal.ram

Do Sharia mortgages really address the ethical concerns of Muslims about what is happening to their money: http://www.bbc.co.uk/religion/realmedia/islam/nizam_ethical.ram

Will Islamic mortgages lead to greater social inclusion: http://www.bbc.co.uk/religion/realmedia/islam/nizam_social.ram

Rationale for the Prohibition of Riba: Answered by Sheikh Yusuf Talal DeLorenzo

Rationale for the Prohibition of Riba: Answered by Sheikh Yusuf Talal DeLorenzo

Question: While I understand that the shariah is strongly opposed to riba in all its forms, I was considering what the rationale for this is. The Quranic text and prophetic tradition are clear in prohibiting it but I haven’t yet seen a clear explanation of why it is problematic. I also fail to see WHY asset-backed ownership is the only permissible type in Islam and exactly what the problem is with other purely financial instruments. Are there any other readings you could recommend to help answer these questions?

Answer: Please keep in mind that the prohibition is very much a moral issue, and that it is closely related to the concept of khilafah or stewardship. The Islamic concept of monotheism views the Almighty as the Fashioner and Possessor of all creation.

His is all that is in the heavens and on earth. Everything submits to Him (2:116).

When the earth and everything in it belong to the Almighty, the role of humankind is no more thanthat of caretakers. Even so, humankind has been granted an awesome responsibility, one which, in the poetic language of the Qur’an, even the mountains dared not accept.

The terms of this stewardship are that the Almighty allows humankind the use of the physical universe, hopefully for good (though possibly for evil, because humans have the ability to choose), and in return humankind agrees to be accountable for how the physical universe is used.

This agreement is the foundation of all worldly justice, and this leads to the Shariah orreligious law which includes guidelines for using the Almighty’s property for profit and acceptable gain. Unjust enrichment, according to the Shariah, may take many forms; but the most iniquitous of all is enrichment at the expense of others, and this includes lending for profit.

Money lending and financing belong to two entirely different spheres; one is charity, pure and simple, and the other is business. The repercussions of this bifurcation range far and wide, and shape much of what is unique about Islamic notions concerning economy and society.

Equity investing offers Muslims the opportunity to profit, not by lending at a guaranteed rate of return, but by sharing in ownership, and thus commiting to share in the risks associated with ownership. Such a commitment is clearly in consonance with the concept of stewardship, and this, more than anything else, explains how the Islamic prohibition against interest is as much a moral matter as it is a legal one.