Tag Archives: Taqi Usmani

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.

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.

Mufti Taqi Usmani’s critique of contemporary Sukuk issues

The following paper was presented by Mufti Taqi Usmani at the AAOIFI Shariah Council meeting. It has been translated from the original Arabic by Sheikh Yusuf Talal DeLorenzo:

Sukuk and Their Contemporary Applications

Mufti Taqi Usmani: Lecture and Q&A session on Riba

Lecture on Riba:

Q&A session:

Islamic Finance – The scholars at the heart of the market

Islamic Finance – The scholars at the heart of the market

Shaikh Nizam Yaquby is a Shari’ah scholar, a holy man – and one of the most important people in the fledgling industry of Islamic banking. Why? Because he is one of a handful of people who can judge the Shari’ah compliance of financial instruments.

It is a decent enough store, nestled in the middle of Manama’s souq, the largest market in Bahrain. It has a steady flow of customers looking at the diverse products on offer: the cufflinks and the sunglasses, the curling wands and the less than half-price periscope. And at the back, behind a desk completely swamped by papers and textbooks, sits one of most influential people in the Islamic financial world.

Shaikh Nizam Yaquby is a Shari’ah scholar: one of a small number of men (they are always men) whose standing as an academic and whose knowledge of the financial world makes him trusted to pass judgment on whether financial instruments are permitted under Shari’ah law. An educated man with perfect English honed during studies in Canada, among other places, he is one of the most respected and well-known of his kind, not just in Bahrain but internationally. As a consequence he serves on a huge range of Shari’ah advisory councils at banks and industry bodies: the Dow Jones Islamic index; HSBC Amanah, including the seal of approval on the landmark US$600 million bond it recently led for Malaysia; the International Islamic Financial Market; Bahrain Islamic Bank; the Accounting and Auditing Organization for Islamic Financial Institutions (Aaoifi); and others.

Yaquby claims there are dozens of respected scholars whose opinions can be called upon on shari’ah matters, but when languages and financial knowledge are thrown into the mix, the truth is there are very few. The three who advised on the Malaysia bond – Justice Muhammed Taqi Usmani, a Karachi-based lawyer who is chairman of the Centre for Islamic Economics, and Mohamed Ali Elgari, an economist and director of the Centre for Research in Islamic Economics at King Abdulaziz University in Jeddah, are the other two – are particularly respected and between them appear on numerous advisory boards. These men advise on what securities are permitted, which companies can be invested in, and precisely where strict Muslims can and can’t put their money. And in a growing market, they are powerful men.

But they don’t like that description. “No, it is not a matter of power,” says Yaquby. “These deals have to be done in a particular way and if Islamic banks are claiming they are doing so, they have to verify it to the public and their shareholders. It is a not a matter of power, it is a matter of technicality. For example, in every deal you have lawyers, but you cannot say that lawyers have power – rather that every transaction has to go through an acceptable law firm. This is exactly the same thing.”

The legal analogy is used widely. “Like any other advisor they are paid on a time basis, in line with industry standards, like you pay lawyers or accountants,” says Iqbal Khan, head of HSBC Amanah. “When you need expert advice you pay for that, and they are not on the payroll of any institution, but time-based like lawyers.” But it seems the number of options is lower among scholars. It is a question people don’t like being asked in Bahrain – the most earnest, but unapologetic, response we get from an Islamic financier is that the scholars represent “a very well informed cartel” – and bankers give particularly short shrift to any suggestion that such a small and influential group of people could be influenced in their decisions by the commercial aspirations of the banks they advise.