Category Archives: Scholars

A Shariah scholar’s place on the board: Interview with top Shariah scholars

Gulf News: A Shariah scholar’s place on the board: Interview with top Shariah scholars

boardroom

Funds-at-Work, a research-based strategy consultancy focusing on the investment industry, recently released "Shariah Scholars – A Network Analytic Perspective," which links Sharia scholars to board positions. It is a more comprehensive study than previous Sharia scholar reports. Rushdi Siddiqui puts some challenging questions to four international Sharia scholars to get their view points:

  • Dr Hussain Hamid Hassan (HHH), eminent scholar and chairman of many Islamic financial institutions
  • Dr Mohammad Daud Bakar (MDB), international scholar and founder and managing director of Amanie Islamic Finance Consultancy and Education;
  • Yousuf Talal DeLorenzo (YTD), leading US scholar; and
  • Dr Mohammad Akram Laldin (MAL), Executive Director, ISRA, Malaysia.

Research is an important area in Islamic finance and you are well aware of the Funds-at-Work study, linking scholars to Sharia boards. What is your impression of the study?

HHH: The Islamic finance industry is young but growing. It needs specialists, not just in Sharia, but in law, accounting and feasibility studies.

There are very few scholars who combine the qualifications and experience needed for this field.

Therefore, it is only natural that they would carry a heavy load, for the industry is in need of development and the invention of new products which should be compliant with the Sharia, valid in civil law, and commercially viable.

There just aren’t a sufficient number of specialists in these areas in light of the rapid growth and remarkable development of this industry.

In time, the young will gain experience, and people will then seek them out, after the generation that preceded them has passed away; and they, in turn, will be succeeded by another generation of young practitioners. That’s the way of the world.

Furthermore, this study was lacking in precision, for it ignored a great number of up-and-coming scholars who are working as members of these same Sharia boards along with their teachers, in order to learn from them. Why didn’t the study focus on them?

It focused instead on the first generation, whose careers developed apace with the growth of the Islamic finance industry and the Islamic banking movement.

The number of these [young scholars] far exceeds the number of senior scholars, who are now well over 60 years of age.

How can the study demand that the new Islamic finance industry be led by the young to the exclusion of those with long experience, who are considered the fathers and theorists of the Islamic finance industry (IFI)?

MDB: What is lacking in this research is the clear hypothesis of the research and in what way the readers could actually benefit from the research, as the data presented is quite extensive (although not necessarily accurate), but the data analysis needs to be improved.

YTD: The goal of research is knowledge and its application. There are very likely a great deal of practical applications for the Funds-at-Work study and this is welcomed.

Networking aside, there are far more important considerations, or there should be, in evaluating Sharia scholars and their work: Published work? Academic background? Affiliation with one juristic school?

Experience and exposure to various financial products and instruments? Relationships with international legal firms? Ability to function effectively as team members and meet deadlines? Ability to represent, if necessary, IFIs in international or regional forums or even in informal situations?

All of these are factors that may have varying degrees of importance for IFIs.

MAL: I believe it is a good move to provide the market players with the information about their involvements.

It will definitely assist the market player to engage the suitable Sharia advisor so as not to hinder their progress. I also strongly believe that we are not in shortage of Sharia advisors in the market. We do have competent people but not many are given the chance to serve on Sharia boards as some market players prefer to have certain scholars on their board. As a result you can find that some scholars sit on many boards.

There is increasing conversation about scholars serving on multiple boards and how this might present a conflict of interest. Are you in agreement?

HHH: It has never happened in the history of the Islamic finance industry that the members of any Sharia board divulged secrets that damaged an Islamic bank or an Islamic financial institution.

They are the people most worthy of confidence and trust, for they are leaders and role models.

History has not conveyed to us a single report of a scholar who issued a fatwa that was a secret which only the mustafti (questioner) was privy to, such that the mufti could not issue the same fatwa to someone else.

This criticism is the result of ignorance about the nature of the duty of Sharia board members.

They explain the rule of Allah in the issues presented to them, and their fatwas are not considered the property of the mustafti who asks them, such that the rule of Allah cannot be given to someone else.

We would like to ask: How many times in the history of Islamic banking — which is more than 30 years old — has an Islamic bank complained about a member of a Sharia board that he gave the same fatwa to another bank which he had already given to the first bank?

Indeed, the rule of Allah does not change just because the person asking about it has changed.

It is a principle of the Sharia that a scholar is not allowed to conceal knowledge; rather, he has to bestow it upon whoever wants it, based on Allah’s statement: "You shall make it clear to people and not conceal it" (3:187).

MDB: Conflict of interest is a term, albeit a technical one, which should be used in specific cases is often misunderstood.

For all intents and purposes it disallows a person to be in a position whereby his decision (of doing or not doing) may be influenced by his own interest.

Could a scholar sitting in various Sharia boards be perceived to be in that position? If established, then this practice should be avoided.

What is the interest that is applicable to a scholar when issuing a fatwa?

Perhaps, many understand that Sharia advisors are equal, or should be treated similar to board of directors, hence, the perception of conflict of interest. Scholars are essentially not in the position of serving as the board of director of a bank, for example.

They are similar to other professionals such as lawyers, accountants, auditors, and actuaries.

YTD: The problem I see is not a conflict of interest but one of capacity, in terms of both quantity and quality.

A scholar who serves on multiple boards in addition to a fulltime teaching position at a university, for example, will have to be careful to balance his schedule so as to allot ample time for each of his responsibilities.

That’s a matter of quantity; and each individual will have to make up his own mind as to what constitutes a reasonable workload. Some people simply have more energy than others. We have examples in our industry of scholars at advanced ages who serve on many boards; and continue to contribute in a positive manner. We also have examples of scholars who have cut back their commitments, or who have limited them to no more than a certain number.

Insofar as quality is concerned, I think the industry is beginning to demand a greater degree of specialisation, even from its Sharia scholars.

Thus, the concerns of equity fund supervision, of bank supervision, of takaful, leasing, real estate, infrastructure, private equity, home finance, commodity trading… all of these are different and require more than an introductory understanding, hence, the future will be toward specialisation because greater attention to detail will be required of scholars.

MAL: Yes there are many who sit on multiple boards and I have no objection to this provided that the respected scholars are able to discharge their duties in efficient manner. As for the conflict of interest, I do not see any issue for individual scholars sitting on different boards.

However, at present we see a number of scholars are operating Sharia advisory companies and if the person operates the company and at the same time provide advisory services, there might be some question regarding serving the interest of the company and providing independent Sharia views.

This conflict of interest may rise to Sharia compliance risk as not enough time to review all documents, hence, a real risk management issue for IFIs. Are you in agreement?

HHH: The Sharia boards undertake their duties regarding the transactions presented to them, based on their belief that all this is a religious duty which cannot be approached on the basis of whims. Rather, it requires penetrating and rigorous academic research.

Their conscience and sense of duty prevent them from deliberately issuing a fatwa opposed to the Sharia; as for mistakes, they do occur.

If one of them happens to make a mistake, he will be corrected by the other members of his own Sharia board or by another board altogether. At any rate, the Prophet Mohammad (Peace Be Upon Him) said that if someone makes ijtihad and is wrong he gets a single reward, and if he’s right he gets a double reward.

And where are these risks that the Islamic banks have faced due to hasty or erroneous fatwas?

Are they issued by the senior members rather than the junior members?

The claim that Islamic banks are facing dangers due to the inability of the members of their Sharia boards to properly carry out their duties is a claim that is not based on reality or evidence.

MDB: If this perception is established, it must not be restated as conflict of interest term, as its misleading.

The issue of quality of works by advisors is the issue of the performance and not of the policy of having scholar on various boards.

This issue should be addressed administratively and not from a policy and regulation perspective, unless the bad performance is rather a phenomenon in modern Islamic finance industry.

YTD: If scholars do not have enough time to review documents, or if they require months to review documents and then need to schedule and reschedule before they can meet and take decisions, then something is clearly wrong.

But the fault is not necessarily that of the scholars. When establishing a Sharia board, an IFI must be cognizant of the scholars’ other responsibilities.

Even the matter of time zones should be taken into consideration. And the IFI will need to be diligent and proactive in its management of the Sharia board’s affairs so that meetings are scheduled well in advance of deadlines and time is managed effectively.

Many problems can be avoided by making a realistic and practical selection of scholars for the IFI’s Sharia board.

MAL: I agree that if a person sits on too many boards, he might not be able to scrutinise all the details of the transactions, documents etc and it will lead to what is termed as "Sharia compliant risk" for the market player. On this issue, I am not blaming the scholars solely. The market practitioners are equally responsible as they are the ones who approach the scholars and appoint them.

With only a handful of scholars on so many boards, is there a risk to IF, especially looking at issues of age, health, and the travel demands of scholars?

HHH: This is not correct, for at this time we have specialised leadership in the Islamic finance industry and we have hundreds of young people who are members of Sharia boards. Therefore, the task is not limited to a handful of scholars.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has a Sharia Council comprised of 18 members. There is also the Islamic Fiqh Academy that is part of the Muslim World League and the International Islamic Fiqh Academy of the Organization of the Islamic Conference (OIC).

Between them they have hundreds of scholars to whom issues of Islamic economics, Islamic finance and newly developed products are presented, and they issue fatwas and resolutions. So it is not true that those who undertake the issuing of fatwas in Islamic banks and institutions are a small handful of persons.

I totally disagree that those who are leading the Islamic finance industry and its institutions, including banks, takaful companies, and financing and investment institutions, are a small number.

MDB: The meaning of risk in this context is not clear. The risk is and should not be confined to the issues of age, health and travel commitments as these also apply to other sectors in life, be it financial or non-financial.

YTD: Key man risk is always a problem in business. It is no different in our industry. Yet, at the same time, we all know that we need to do more to develop scholars for service in the Islamic financial services industry.

MAL: This is a real issue and if we look at present there are gap between the senior and junior scholars. Many senior scholars are ageing and there are no replacements.

There is a need to put a governance process to regulate the Sharia advisory services. In Malaysia we have started this process since 2005 when the Central Bank issues the guideline on Sharia Advisory services.

One scholar is only allowed to sit on one board as to allow the grooming of new generation of scholars. As a result, we now have more than 100 scholars on our list and the number is increasing especially with many young graduates who are interested in pursuing this career.

Should this type of study in IF be expanded to include law firms? Accounting/management consulting firms?

HHH: Yes. It will soon become clear that specialised expertise in Islamic banking is less expensive than that of firms that offer diversified services to hundreds if not thousands of clients.

Nor should we forget that our Arab and Islamic educational institutions have yet to concentrate on turning out graduates with qualifications and specialisations for careers in Islamic finance.

MDB: On one hand, the research should not be extended to other sectors unless the hypothesis and the benefits of doing this research are made vividly clear. Otherwise, this research may lose [credibility and] respect. Other hand, for comparative purposes, the investigation and examination should also be conducted on other similar services such as law firms, auditing firms, and actuaries, for example, so the industry will be getting a more comprehensive view on this perceived conflict of interest issue.

YTD: Yes.

MAL: Yes it is needed so as to give the information to the market players.

To address shortage of scholars, should scholars be compelled to have a junior (local) scholar (not well known) on the board so as to encourage apprenticeship and expand the supply of scholars?

HHH: This is the actual situation. A large number of up-and-coming scholars work on the Sharia boards along with their teachers. This process is due to the initiative of the elder scholars, who search for those with outstanding abilities in the new generation and nominate them.

However, we must emphasise one point: the danger of nominating an unqualified candidate. It is not appropriate, in the name of expansion, to appoint unqualified persons, for that will cause harm to the industry itself.

Graduating from a Sharia college is not enough by itself, for there are thousands of graduates. It requires experience, personal ability and the combination of knowledge of the Sharia, civil law and accounting.

MDB: In any industry, the practice of compulsion is not a healthy one. It is always about being passionate.

As much as the junior scholars are encouraged to be part of the service, they must demonstrate the minimum capabilities and professionalism required to undertake this task. The task of the scholar and consultant is different from other tasks, such as being an academic as it requires a bit of everything: research, original thinking, understanding of the current market, and it is time consuming.

YTD: I don’t think that compulsion is the solution. But I do think that IFIs should be encouraged to do so. And I also think that the junior scholar solution is a good one.

I have also recommended a rotating scholar solution for SSBs such that one seat may given to a new scholar after the previous scholar has served a term of one or two years.

MAL: Actually, it is not the scholars who should be compelled to do so, but the market player.

This is because the market players determine who sits on the Sharia board and it is their responsibility to ensure that there is mixed of senior and junior scholars in their board.

We have done this in Malaysia and it works as pointed earlier.

In a recent event in Malaysia, Dr Mohammad Elgari presented a paper on Sharia governance. Is this the need of the hour?

HHH: Governance, in the perfect sense of that term, does not exist outside of the Islamic financial system which is based on divine revelation as expressed in the Book (the Quran) and the Sunnah.

No one in the industry can ignore that, or the [AAOIFI] Sharia standards. In addition, there is a further guaranteed level of governance and that is the presence of the Sharia supervisory board itself, made up of three, five or even seven scholars who perform their duties and opine collectively rather than as individuals.

Beyond that, Islamic financial institutions adhere to their own standards, the fatwas issued by fiqh academies, and the teachings and rulings of the classical jurists.

And then there is the academic community that monitors the work of our Islamic banks such that if ever a fatwa is issued which contradicts an Islamic teaching or principle, as a result of faulty reasoning or legal process, our academics will raise a hue and cry until the matter is corrected.

MDB: This is a welcomed paper to address the quality of Sharia advisory services, applicable to both the scholars and the stakeholders of Islamic finance.

The Sharia governance, as presented in the paper, argues for more transparency of the fatwa process and deliberations.

As a matter of fact, this (the detailed process of fatwa issuance and its argument) should be the focus of research of modern researchers instead of the perceived conflict of interest by multiple board membership.

The superiority of any Sharia board is the quality of arguments that lead to a strong and defendable fatwa by the board.

YTD: His was a very important paper and it addresses a pressing need.

As the industry matures, it becomes more and more important to have systems in place that ensure greater transparency and accountability.

Such systems will play an increasingly important role of the future development of this industry and they must be promoted.

MAL: I am one of the commentators on his paper and in many forums I have express my views that it is very important to have a comprehensive Sharia governance framework for Islamic finance.

This shall be spearheaded preferably by the regulator. In Malaysia, ISRA have initiated the establishment of Association of Sharia Advisors (ASA) in order to regulate the Sharia advisory services.

We are in the process of setting up this association and its function will be similar to other professional bodies such as the Bar Council and Medical Association that regulate the practices of its members.

ASA will be the body that regulates the conduct and lays down the ethical code of the Sharia advisors and we will get the body to be the sole body that accredits Sharia advisors for them to practise in the market.

ASA will also provide licence for the scholars to practise in the market.

Funds-at-Work research is welcomed as it shows the landscape of scholars and boards, but needs expansion to include scholars’ total activities and work. And the study should be enlarged to include other stakeholders in the Islamic finance consulting role. Finally, Islamic institutions have not knowingly contributed to over-reliance on name-brand scholars, but must now actively contribute to governance and involve junior scholars to manage Sharia compliance risk, for expansion beyond natural borders.

AAOIFI May Limit Shariah scholars’ role

Business Week: AAOIFI May Limit Shariah scholars’ role

regulation

A Bahrain-based agency is proposing new rules for religious scholars involved in the $1 trillion Islamic finance market, aiming to reduce the risk of conflicts of interest or improper disclosure.

The guidelines may address whether Shariah scholars can own shares in the institutions they serve and how many advisory boards they join, said Mohamad Nedal Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions, whose standards have been adopted in countries including the United Arab Emirates and Qatar.

“There’s a potential case for conflict of interest, and a case of information leakage or perhaps competition impact,” Alchaar said in an Aug. 5 telephone interview in Kuala Lumpur. “We wanted to address the concerns in an unbiased manner. When the guideline is published it will be a bold move and it may cause a stir.”

The proposals underline concern that Islamic financial products, designed to comply with Shariah law to be acceptable to devout Muslims, may be overseen by scholars who have a financial interest in their issuance. Global standards are still developing in the industry, whose assets are forecast by the Kuala Lumpur-based Islamic Financial Services Board to almost triple to $2.8 trillion by 2015.

AAOIFI, which has 200 members, sets accounting and auditing standards that are used in Bahrain, the Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria, according to its website. The agency said its guidelines have also been used to help frame policy in Australia, Indonesia, Malaysia, Pakistan, Saudi Arabia and South Africa.

Financial Fatwas

Fatwas, the judgment of a scholar based on his interpretation of Shariah law, are essential for products to be vetted and offered by financial institutions to Muslims. Islamic law restricts investors to transactions based on the exchange of assets rather than money alone because interest payments are banned.

Chicago-based Failaka Advisors LLC, an advisory company which monitors and publishes data on Islamic funds, lists 253 practicing scholars worldwide in its 2008 report. The top 10 include Sheikh Nizam Yaquby of Bahrain, Mohammad Daud Bakar of Malaysia, Pakistan’s Muhammad Taqi Usmani, Abdul Sattar Abu Ghuddah of Syria, and Saudi Arabia’s Mohammed Elgari, it said.

Yaquby serves on the Islamic boards of 52 institutions including New York-based Citigroup Inc. and London-based HSBC Holdings Plc. Bakar advises firms such as Paris-based BNP Paribas SA, according to the data. Credit Suisse Group AG of Zurich and Standard & Poor’s are among 31 firms that seek advice from Elgari, the report shows. Yaquby didn’t respond to an e- mail request for an interview and Mohammad Daud Bakar said he couldn’t respond to questions immediately.

Scholar Shortage

The Bahrain-based agency also plans to address concerns that scholars’ private companies receive preferential treatment from banks they advise, Alchaar said.

The Islamic finance industry is “increasingly scrutinizing the role of scholars, and questioning what the best practice should be,” Omar Shaikh, a board member of the Glasgow-based Islamic Finance Council U.K., said in May. “As the industry is beginning to work toward critical mass, scholars may need to tweak their roles at financial institutions.”

Financial institutions can’t find enough scholars to accommodate the demand for new Shariah-compliant products, Khalid Howladar, a Dubai-based senior analyst at Moody’s Investors Service, wrote in a report in May.

“The shortage of top Islamic finance scholars means that a small group of reputable individuals are a key factor in the Shariah compliance process,” he wrote. “This concentration creates a bottleneck when demand is high, and puts them and their offices under considerable pressure to deliver their approvals quickly.”

Read the rest …

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

The event featured five distinguished scholars and experts in the field of Islamic finance. They included Prof. Frank Vogel, senior fellow and head of Muslim World Law and Islamic Finance, Institution Quraysh for Law and Policy and Umar Moghul, Partner at Murtha Cullina LLP and co-chair of the firm’s Islamic Finance and Investments Group.

Yusuf Talal deLorenzo, chief Shariah officer at Shariah Capital, Aamir Rehman, managing director at Fajr Capital Limited and Ibrahim Warde, adjunct professor of International Business at the Fletcher School of Law and Diplomacy, Tufts University, were the others.

The panelists addressed a several hundred attendees on the various aspects of contemporary Islamic finance such as its historical legacy, the compatibility of Shariah-compliant institutions with US law, derivative instruments and the development of sukuk in the Gulf, Shariah financial regulation and practice in the GCC (Gulf Cooperation Council) and Islamic finance in the light of the recent financial crisis.

It also addressed Shariah financial regulation, how the rise of Gulf capital is affecting financial markets and how it should be regulated, as well as the compatibility of Shariah institutions with US law and regulation and the objections of Shariah scholars challenging the permissibility of derivatives under Islamic Law.

The discussions were moderated by Jean-Francois Seznec, visiting associate professor at Georgetown University’s Center for Contemporary Arab Studies.

Regarding the question of sukuk in the Gulf, DeLorenzo said ownership is an important issue for Shariah scholars to understand.

“Ownership is always a sticky subject and it is not always a failure of the Shariah advisers when ownership and sukuk is questioned,” he said.

DeLorenzo, wrote the introduction to Islamic bonds, a book that introduced sukuk to the world’s Islamic capital markets as well as a three volume Compendium of Legal Opinions on the operations of Islamic banks, the first English/Arabic reference on fatwas issued by Shariah boards.

One clear lesson, he said, “is the need for more and more diligence on the business side.”

Questioned on whether sukuk is a sound investment, he said there are serious Shariah issues that need to be addressed. “There are tensions between GCC investors and Malaysian investors who have different philosophies in the jurisprudence.”

He said that sukuk need to have a viable trading market.

“We need to confront these issues. The tensions need to be resolved before real trading can take place.

“Sukuk are hybrids, some look like equity, others like debt. They need to be traded and exchanged, and unless everyone understands the rules there will be a lot of confusion in the marketplace and people will leave. There is a need to deal with this sooner than later.”

DeLorenzo’s 30-year career as a scholar of Islamic Transactional Law was a front-page story in the Wall Street Journal in 2007.

“It’s a rules-based business; people need to understand that, whether they’re in Hong Kong or Chicago, and the way to do this is through an exchange of information,” he said.

“Many of the high profile sukuk defaults have taken place as the result of poor business decisions, not Shariah.”

He said the problem was that the “press picks up on a sukuk default and then blames it on Shariah. We need to explain it better.”

The expert said a new generation of sukuk coming to the market also needs to be closely examined.

“My feeling is that the issuers need to be more transparent to investors, and feel the same way about Shariah boards. We need to be careful about managing perceptions.”

Read the rest …

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.

Sukuk: Issues and the Way Forward

Sukuk: Issues and the Way Forward

sukuk

Sukuk represents a new development in global capital market. It is one of the
fastest growing sectors in Islamic finance and is considered by many as the most
innovative product of Islamic finance.

As a relatively young asset class in the global capital market, the sukuk market
inevitably faces problems typical of its early stage of development. In this relation, some Muslim scholars have questioned its level of compliance with the Shariah law, particularly on how they are structured. The main criticism was from Sheikh Muhammad Taqi Usmani1, a prominent scholar who has taken the view that 85% of the current structures of Gulf sukuk do not comply with Islamic law2, in particular Sukuk Al Musharaka, Sukuk Al Mudaraba and Sukuk Al Istithmar.

Following that, the Shariah Board of Accounting and Auditing Organization for
Islamic Financial Institutions (“AAOIFI”) had studied the subject of the issuance of sukuk in three sessions between 2007 and 2008. After considering the deliberations in these meetings and reviewing of the papers and studies presented therein, the Shariah Board of AAOIFI issued its resolutions in February 2008 to highlight the various areas in sukuk which were found to be non-Shariah compliant. Accordingly, Islamic financial institutions had been advised to adhere to the principles set out in the relevant AAOIFI Standards in sukuk issuance.

This paper attempts to explore the controversies or issues surrounding sukuk, in particular the observations and resolutions issued by the Shariah Board of AAOIFI.

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Sukuk: Issues and the Way Forward