Category Archives: Mufti Taqi Usmani

An Introduction to Islamic Finance – Mufti Taqi Usmani

An Introduction to Islamic Finance – Mufti Taqi Usmani


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.

AAOIFI Shariah Council’s proposals for amendments in contemporary Sukuk issues

AAOIFI Shariah Council’s proposals for amendments in contemporary Sukuk issues

The global Islamic capital market, of which the Sukuk sector is the most important, is still reverberating from the recommendations of the Shariah Committee of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) relating to current Sukuk structures and their issuance. One scholar reportedly said that 80% of current Sukuk structures are not Islamic, a statement which has unfortunately made the headlines the world over.

The developments stem from a meeting of the Shariah Committee of AAOIFI held in Bahrain in February 2008 which issued new recommendations regarding Sukuk structures and issuance especially relating to the ownership of underlying assets in a Sukuk transaction and the guarantee of the principal investment to Sukuk certificate holders. The immediate reaction of some bankers has been that the recommendations may put a dampener on the issuance of future Sukuk because of these extra ‘constraints’ and thus affect their future tradability.

The Sukuk market has been flourishing for the last decade or so, albeit it has gained momentum only in the last three or four years. The total outstanding issues in the global Islamic capital markets, including the Malaysian corporate and government issuances, is estimated at just under US$200 billion.

Sovereign issuances were spearheaded by the Malaysian Global Sukuk in 2002, the first sovereign issuance. Since then the sector has seen a number of sovereign issuances by Qatar, Bahrain and Pakistan; several from quasi-sovereign entities; some from international agencies including the Islamic Development Bank, the World Bank and its private sector funding arm, the International Finance Corporation; publicly-listed corporates; privately-owned corporates; and even the odd social Sukuk by religious councils such as the Singapore Islamic Religious Council (MUIS) securitising Waqf properties.

Thus far sukuk structures have comprised Sukuk Al-Salam; Sukuk Al-Ijara; Sukuk Al-Musharaka; Sukuk Al-Mudarabah; Sukuk Al-Intifa’a; Sukuk Al-Istisna and Sukuk Al-Murabaha. The majority of Sukuk structures are based on Sukuk Al-Ijara involving a sale-and-leaseback arrangement done through a special purpose vehicle (SPV). Musharaka Sukuk is also gaining in popularity although there has been some controversy relating to certain equity and risk-sharing arrangements.

The recommendations of AAOIFI’s Shariah Committee, headed by its President Sheikh Taqi Usmani, in a series of meetings in 2007 and the latest one in Bahrain on 13 and 14 February, 2008, are quite emphatic.
These are:

  • Tradable Sukuk must represent ownership for Sukuk holders, with all of the rights and obligations that accompany ownership, in real assets, whether tangible or usufructs or services, that may be possessed and disposed of legally and in accordance with the Shariah. The manager of a Sukuk issuance must establish the transfer of ownership of such assets in its books, and must not retain them as its own assets.
  • It is not permissible for tradable Sukuk to represent either revenue streams or debt except in the case of a trading or financial entity that is selling all of its assets, or a portfolio which includes a standing financial obligation such that debt was incurred indirectly, incidental to a physical asset or a usufruct.
  • It is not permissible for the manager of Sukuk, regardless of whether the manager acts as an investment manager, or a partner, or an investment agent, to undertake to offer loans to Sukuk holders when actual earnings fall short of expected earnings. It is permissible, however, to establish a reserve for the purpose of covering such shortfalls to the extent possible, on condition that the same be mentioned in the prospectus.
  • It is not permissible for the investment manager, partner, or investment agent to agree to purchase assets from Sukuk holders or from whoever represents them for a nominal value of those assets at the time the Sukuk are extinguished at the end of their tenors. It is permissible, however, to agree to purchase the assets for their net value, or market value, or fair market value, or for a price agreed to at the time of their purchase, in accordance with Shariah rules of Partnership and modern partnerships, and on the subject of Guarantees.
  • It is permissible for the lessee in a Sukuk Al-Ijarah to agree to purchase the leased assets when the Sukuk are extinguished for their nominal value, as long as the lessee is not also an investment partner, investment manager, or agent.
  • Shariah supervisory boards must not consider their responsibility to be over when they issue a fatwa on the structure of Sukuk. Rather, they must review all contracts and documentation related to the actual transaction, and then oversee the ways that these are implemented in order to be certain that the operation complies at every stage with Shariah guidelines.

Reports pointed out that there is an implicit rebuke to Shariah scholars in the AAOIFI recommendations that the Shariah governance process does not end with the issuing of a fatwa but must continue for the entire tenor of the transaction or the issuance, when the Sukuk issuances to date okayed for Shariah compliance were given the go-ahead by some of the very members of the AAOIFI Shariah Committee and wider membership.

The Sukuk debate once again raises questions about the very nature of Shariah governance in the Islamic finance sector. In too many markets, the Shariah advisory process is still ad hoc with hardly any control over who offers such advice. A registered and regulated Shariah advisory market as in Malaysia surely would lessen the propensity for such a free-for-all as we have seen in some markets.

On the other hand, some countries are following the Malaysian example of a National Shariah Council at the central bank, including Pakistan and more recently, the UAE.

AAOIFI Shariah Council meeting: Sharia scholars to review challenges

AAOIFI Shariah Council meeting: Sharia scholars to review challenges


Leading Sharia scholars will gather in Bahrain for the annual Sharia Conference. It is being organised by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

The conference is being held under the patronage of Central Bank of Bahrain and will take place on May 27 and 28 at the Bahrain Conference Centre, Crowne Plaza Hotel.

Discussion at the conference will be led by members of AAOIFI Sharia Board, which is acknowledged to be the foremost authority on Sharia for the international Islamic finance industry. Other imminent scholars as well as senior representatives of international Islamic finance industry, accounting and legal professions, and academics, will also attend.

“This conference, which is a premier event for the international Islamic finance industry, brings together the leading Sharia scholars and Islamic finance practitioners to discuss the challenges and opportunities for the industry,” said AAOIFI secretary general Dr Mohamad Nedal Alchaar.

AAOIFI has also launched a Contract Certification Programme to certify financial contracts between Islamic financial institutions and their customers comply to international Islamic finance standards and Sharia principles.

In addition, AAOIFI offers professional development programmes such as the Certified Sharia Adviser and Auditor and Certified Islamic Professional Accountant.

The major partner for the conference is National Commercial Bank. The conference is supported by Abu Dhabi Islamic Bank, Albaraka Banking Group, Albaraka Islamic Bank, Egyptian Saudi Finance Bank, and Jordan Islamic Bank, being members of the Group. It is also supported by Al Salam Bank, Arcapita, Bahrain Islamic Bank, Dar Al Maal Al Islami Group, Ernst & Young, Gulf Finance House, Gulf International Bank, Jadwa Investment, International Turnkey Solutions, Investment Dar, Kuwait Finance House, Path Solutions, Shamil Bank, Shiekan Insurance & Reinsurance, Unicorn Investment Bank and United International Bank.

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.

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.