Islamic Banking & Finance Page 22-03-2019


Islam on overall economy and in line with teachings of Hazrat Muhammad (PBUH)

 Muhammad Arif:
The property relationships define, to a large extent, the contours of an economic system. The two dominant systems of the present age differ from each other, largely, by the extent of freedom of an individual to own private property. Islam offers a third point of view: Everything in this universe belongs to God Almighty. He is the real Owner of everything and has the right to determine the mode of utilization of all forms of property. Man is His vicegerent (khalifah), who has been entrusted with certain responsibilities. To carry out his responsibilities, he has been endowed with requisite facilities. These facilities are only a trust with him and are strictly meant to be deployed for the purpose they have been granted. The purpose has been defined in elaborate details in the Shari’ah revealed to the Holy Prophet (PBU).

Ibn ‘Abbas reported that the Messenger of Allah (PBU) said: “Muslims share alike in three things: water, herbage and fire. Charging of a price for them is unlawful.” Explaining water Abu Saeed said: “It means running water.”

Wealth has been a subject of study and discussion since time immemorial. Some of the main differences in the social organizations have always stemmed from the concept and status assigned to wealth in the society. In Islam wealth does not hold a central position in the social matrix. Instead it has been visualized as an instrument to lead life in accordance with the Shari’ah. The resources of worldly life constitute necessary facilities and instruments for carrying out this mission. They are not desirable as an end in themselves; only as a means, even essential means. Therefore, there is little point in entering into a fanatic race for amassing riches of the world.

There are two modes of acquiring wealth: it may be earned, through land, labor; capital or it may be acquired through transfers institutionalized by the society. Abu Huraira RA reported that the Messenger of Allah (PBU) observed: The fornicator who fornicates is not a believer so long as he commits it and no thief who steals is a believer as long as he commits theft, and no drunkard who drinks wine is a believer as long as he drinks it.
‘Ibn Shahab said: “I was told by Abdul Malik so narrates from Abu Huraira RA who said adding: No plunderer who plunders a valuable thing that attracts the attention of people is a believer so long as he commits this act.”

Abdullah b. ‘Amr reported: Allah’s Messenger (PBU) cursed the one who offers bribe as well as one who accepts it.

Abu Umamah reported that the Holy Prophet (PBU) said: “He who makes for his brother a recommendation and then (the latter) offers him a gift for it and he accepts that, enters into a big gate of riba” (i.e. he commits an act involving riba).

The viability of a state depends on the ability of its government to collect necessary revenues and distribute them on the collective needs. The Holy Prophet (PBU), after establishing the tiny state of Medina, turned his attention to this vital necessity. Besides voluntary contributions to finance battles and other social obligations, zakah was levied on the wealth of the Muslims. This was the only tax which was prescribed in the Quran and implemented by the Prophet (PBU), although the state’s jurisdiction to levy more taxes was kept intact.

Hasan reported: ‘Ubaidullah b. Ziyad paid a visit to Ma’qil b. Yasar Muzani in his illness of which he (later on) died. (At this juncture) Ma’qil said: “I am going to narrate to you a hadith which I have heard from the Messenger of Allah (PBU) and which I would not have transmitted if I knew that I would survive. Verily, I have heard the Messenger of Allah (PBU) as saying: “There is none amongst the bondsmen who was entrusted with the affairs of his subjects and he dies in such a state that he was dishonest in his dealings with those over whom he ruled, but Allah has forbidden Paradise for him”.

It has been reported on the authority of ‘Adi b. ‘Amira al-Kindi who said: “I heard the Messenger of Allah (PBU) say: ‘Whoever of you is appointed by us to a position of authority and he conceals from us a needle or something smaller than that, it would be misappropriation (of public funds) and will (have to) produce it on the Day of Judgment.’ The narrator says: A dark-complexioned man from the Ansar stood up – I can visualize him still – and said: ‘Messenger of Allah (PBU), take back from me your assignment.’ He (PBU) said: ‘What has happened to you?’ The man said: ‘I have heard you say so and so.’ He (PBU) said: ‘I say that (even) now: whoever of you is appointed by us to a position of authority, he should bring everything, big or small, and whatever he is given there from he should take, and he should restrain himself from taking that which is forbidden’.”

Abu Huraira (RU) reported: “The Holy Prophet (PBU) stood among us and mentioned dishonesty regarding spoils of war treating it and everything connected with as a serious matter. He said: ‘let me not find any one of you (coming) on the Day of Resurrection with a sheep bleating on his neck and with a horse neighing on his neck.’ He would say: ‘Apostle of Allah, rescue me; but, I shall say: I can do nothing for you as I had delivered (the Divine Message) to you. And let me not find anyone of you with a camel growing on his neck and asking me; Apostle of Allah, rescue me for I shall say: I can do nothing for you as I had delivered to you (the Divine message); or with a mute beast on his neck and he would ask me: Apostle of Allah, rescue me, whereupon I shall say: I can do nothing for you as I had given you full instructions’.”

‘Abdullah b. ‘Umar reported: “There was a man who was in the charge of the household of the Holy Prophet (PBU). He was called Kirkira. He died and Allah’s Messenger (PBU) observed: ‘He is in the Hell-Fire.’ They (the companions) went off looking (something belonging) to him and found a stripped woolen garment which he had dishonestly appropriated from the spoils.'”

Abu Huraira reported: “We came out (to fight) along with the Messenger of Allah (PBU) on the day of Khaiber. We did not get any gold or silver as ghanimah (booty) except animals, garments and equipments. A person from Banu Dubaib, namely Rifa’a b. Zaid presented a slave, called Mid’am, to the Messenger of Allah (PBU). Then the Messenger of Allah (PBU) set forth to Wadi-ul-Qura’ until he reached there and while Mid’am was unsaddling a camel of the Messenger of Allah (PBU) he was struck by an arrow which killed him. The people said: ‘he would go to Paradise.’ On this the Messenger of Allah (PBU) said: ‘Not at all. By Allah in whose hand is my life, the cloak which he took from the spoils of Khaiber, which was not among the shares divided, will blaze fire on him.’ When people heard this, a person brought a sandal strap or two sandal straps to the Prophet (PBU). He said: ‘A sandal strap fire or two sandal straps of fire.’

By looking in to above sayings we can evaluate that where we and our rulers are standing. This applies to all including institutions to come above of using symbol of Falah for earning money one way or another and do something practically to bring Falah and real Islamic economy with its offshoots in form of real Islamic Banking and Finance for making our society a state like Medina.

Sukuk al-Wakala

Government can use this alternative to raise its borrowings since they are short of Tangible assets

Sukuk al-wakala structure stems from the concept of a wakala which, literally translated, means an arrangement whereby one party entrusts another party to act on its behalf. A wakala is thereby akin to an agency arrangement. A principal (the investor) appoints an agent (wakeel) to invest funds provided by the principal into a pool of investments or assets and the wakeel lends it expertise and manages those investments on behalf of the principal for a particular duration, in order to generate an agreed upon profit return. The principal and wakeel enter into a wakala agreement, which will govern the appointment, scope of services and fees payable to the wakeel, if any. The relationship between the principal and the wakeel must comply with certain basic conditions, which are described below in “Key Features of Sukuk al-Wakala”.

The wakala structure is particularly useful where the underlying assets available to the originator, and which can be used to support the issuance of the sukuk, comprise a pool or portfolio of assets or investments as opposed to a particular tangible asset or assets. The wakeel thereby uses its expertise to select and manage investments on behalf of the investor to ensure that the portfolio will generate the expected profit rate agreed by the principal. While the wakala structure has some similarities with the mudaraba structure, the main difference is that unlike a mudaraba, in which profit is divided between the parties according to certain ratios, an investor via a wakala structure will only receive the profit return agreed between the parties at the outset. Any profit in excess of the agreed upon profit return will be kept by the wakeel as a performance or an incentive fee. Some of the advantages of adopting the wakala structure are as follows:
Due to the structural issues relating to the wakala structure (which are highlighted below), it has not been a popular structure for sukuk issuances. As a result, there are very few recent examples of sukuk al-wakala in the market.
Set out below is an example of a sukuk al- wakala structure:
Wakala Agreement identifies Trustee (as principal) and wakeel. This document sets out the terms of the wakala, the fees payable to the wakeel, the duration of the wakala and the conditions for termination. It also sets out the eligibility criteria for the assets to be selected by the wakeel. Asset Buying Agreement: On behalf of Trustee, the wakeel will use the sukuk proceeds to purchase assets from the Seller that comply with the eligibility criteria.
Granted by Originator (as Obligor) in favor of Trustee Allows Trustee to sell the wakala assets back to Originator if an event of default occurs or at maturity, in return for which Originator is required to pay (through an Exercise Price) all outstanding amounts so the Trustee can pay the Investors.
Sale Undertaking (Wa’d) Granted by Trustee in favor of Originator (as Obligor) allows Originator to buy the wakala assets back from Trustee in limited circumstances (e.g., the occurrence of a tax event), in return for which the Originator is required to pay all outstanding amounts (through an Exercise Price) so that Trustee can pay the Investors.
Substitution Undertaking (Wa’d) – OPTIONAL-Granted by Originator in favor of Trustee. Trustee may exercise its option to require the Originator to purchase any of the wakala assets that cease to be Shari’a compliant in return for new Shari’a compliant assets or cash, which will then be used to purchase new Shari’a-compliant assets.
As mentioned above, the Periodic Distribution Amounts may be funded by the Obligor purchasing a portion of the wakala assets under the purchase undertaking (for an Exercise Price equal to the Periodic Distribution Amounts), provided that the Obligor and Seller are different entities. By utilizing this mechanism, the payment on the sukuk may be de-linked to the actual performance of the asset. This would also avoid certain other risks such as currency risks or the risk that the timing of payments on the investments will not match the periodic distribution dates, for which risk management mechanisms (similar to swaps) would need to be built into the structure. Instead these risks will be borne by the Obligor, which will be required to fund the Periodic Distribution Amounts (regardless of any shortfall in the income generated by the wakala assets or any currency or timing mismatches).
Once an asset is purchased by the wakeel and included in the pool of wakala assets, it cannot be utilized by the originator, i.e., it cannot be sold or traded but must be held in the pool, until it is purchased by the Originator, through the purchase or sale undertakings. This may be undesirable from a commercial perspective, as the assets will be “locked up” for a period of time. In order to allow for some flexibility, a Salam contract can be incorporated into the structure, whereby instead of the seller delivering all the Shari’a-compliant assets to the wakeel immediately upon purchase, some of the Shari’a-compliant assets can be delivered at certain specified dates in the future. Even though the purchase price is received up front, only a certain portion (which should be at least one- third of the total pool of assets) will be delivered immediately, thereby allowing the Originator to utilize its other assets, provided that it undertakes to deliver the required portion of Shari’a-compliant assets on the specified dates.



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