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Home arrow Business & Finance arrow The art of RF (riba-free) Islamic banking and finance

NOTES

1. Steve Forbes, “China Is Dependent on Our Fiscal Health.” Forbes Asia (February 2014), 11.

2. Samuel L. Hayes III and Philip M. Hubbard, Investment Banking: A Tale of Three Cities (Boston, MA: Harvard Business School Press, 1989).

3. Ibid.

4. Note that after the January 25,2011, revolution and the election of President Morsy, the government tried to introduce a law that regulates RF bonds or sukuk. The major objections voiced by Al-Azhar scholars had to do with pledging national sovereign assets as collateral to these sukuk.

5. Hayes and Hubbard, Investment Banking: A Tale of Three Cities.

6. Ibid.

7. Ibid.

8. For a good overview on rating agencies, please visit investopedia. com/terms/b/bond-rating-agencies.asp.

9. RAM Holdings (formerly known as Rating Agency Malaysia Berhad) was established in November 1990 as Malaysia's first credit-rating agency. RAM's shareholders comprise both local and foreign financial institutions.

10. Securities Commission Malaysia (Suruhanjaya Sekuriti), Islamic Securities Guidelines (Sukuk Guidelines, revised July 12, 2011, effective August 12, 2011).

Basic RF finance models, definitions, and concepts:

■ Deferred-payment sale (BBA — bai' bithaminin aajil in Malaysia and cost-plus or murabaha in the Arabic-speaking countries and South Asia): A contract that refers to the sale and purchase back of an asset on a deferred and installment basis with a preagreed payment period.

■ Cost-plus sale (murabaha): A contract that refers to the sale and purchase of assets whereby the cost and profit margin (markup) are made known.

■ Sale with immediate repurchase at a preagreed price (bai ul einah): A contract that involves a sale and buyback transaction of an asset by a seller. A seller will sell the asset to a buyer on a cash basis. The seller will immediately buy back the same asset on a deferred payment basis at a price that is higher than the cash purchase price. It could also be applied when a seller sells the asset to a buyer on a deferred basis. This type of transaction is not accepted by many RF scholars because the repurchase price should be at the prevailing market price at that time.

■ Supply sale (bai ul istijrar in Arabic): A contract between a client and a supplier, whereby the supplier agrees to supply a particular product on an ongoing basis, for example monthly, at an agreed upon price and on the basis of an agreed mode of payment.

■ Advance purchase (bai ul salam in Arabic): A sale and purchase contract whereby the payment is made in cash at the point of contract but the delivery of the purchased asset will be deferred to a predetermined date.

■ Sale and repurchase (bai ul wafa in Arabic): A contract with the condition that when the seller pays back the price of goods sold, the buyer returns the goods to the seller.

■ Leasing (ijarah in Arabic): A contract whereby a lessor (owner) leases out an asset to a lease at an agreed leasing rate for a predetermined lease period. The ownership of the leased asset shall always remain with the lessor.

■ Lease to purchase (ijarah montahiyah bil tamaluk in Arabic): A contract that begins with an ijarah contract for the purpose of renting out a lessor's asset to a lessee. Consequently, at the end of the leased period, the lessee will purchase the asset at an agreed price from the lessor by executing a purchase contract.

■ Declining participation in usufruct — DPU (al-musharaka fi haqul manfaa, also known as the LARIBA RF finance model): The ultimate buyer buys back the share of the finance entity immediately at same price of its purchase and proceeds to register title in his name. A lien is perfected by the finance company to participate in the usufruct and protect its return of the original capital by the customer.

■ Finance future production — purchase order (istisnaa): A purchase order contract where a buyer contracts with a seller or a contractor to deliver or construct the asset completed in the future according to the specifications given in the sale and purchase contract. The payment term can be agreed by both parties in the contract.

■ Capital management and profit sharing (mudaraba): A contract between two parties to enter into an RF investment business venture. The parties consist of the capital owner (rabbul maal in Arabic) who shall contribute capital to finance the venture, and the money manager (mudarib) who will manage the venture. If the venture is profitable, the profit will be distributed between the capital owner and the money manager based on a preagreed formula. In the case of a business loss, the loss shall be borne solely by the provider of capital.

■ Joint venture profit and loss sharing (musharakah): A partnership agreement between two or more parties to finance a business venture whereby all parties contribute capital either in the form of cash or in kind for the purpose of financing the said venture. Any profit derived from the venture will be distributed based on preagreed profit sharing ratio, but a loss will be shared on the basis of capital contribution.

■ Benevolent loan (qard hassan): A loan contract between two parties on the basis of social welfare or to fulfill a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is however legitimate for a borrower to voluntarily pay more than the amount borrowed as long as it is not stated or agreed at the point of the contract. However, when the qard hassan loan is made the giver of the loan gives it with the expectation that it may not be paid back and then it will be a loan for the sake of God. The conditions of this loan are detailed in Chapter 2.

■ Tripartite sale (tawarruq): Purchasing a commodity on a deferred price and then selling it to a third party for cash. Many RF scholars have objections and serious reservations about this type of financing.

■ Agency (wakalah): A contract where a party authorizes another party to act on behalf of the former based on agreed terms and conditions as long as he is alive.

11. Please visit AAOIFI website for information and updates on RF banking and finance: aaoifi.com/en/about-aaoifi/about-aaoifi.html.

12. Saleh Jameel Malaikah, presentation at the LARIBA 2000 Seventh Annual Symposium on LARIBA (Islamic) Banking & Finance and Awards Dinner, Pasadena, California, April 29, 2000.

13. The original opinion was to minimize the debt so that it would be as close to zero as possible. With the resulting small number of companies in which one can invest, the scholars and financial experts agreed to use analogy, with the conclusions used to limit the change in inheritance distribution to be a maximum of one-third. The scholars used this as a foundation to limit the debt of a company that can be invested in to one-third of the capital at first, then relaxed the ruling to be the company's market value on the market. Another major issue erupted with the minimum debt. The issue had to do with the dot-com and technology companies that were sizzling in the market in the late 1990s and early 2000s. These companies had essentially no debt and were included in the Islamic indexes. With the bursting of the dot.com bubble in 2000, many of these indexes lost a major percentage of their value. Islamic mutual funds that started in the late 1990s ended up losing more than 50 percent of their value.

14. See Note 13.

15. The Dow Jones Islamic Market Indexes (DJIMI) were introduced in 1999 as the first benchmarks to represent Islamic-compliant portfolios. Today, the series encompasses more than 70 indexes and remains the most comprehensive family of Islamic market measures. The indexes are maintained based on a stringent and published methodology. See the website for more information: djindexes.com/mdsidx/index. cfm?event=showIslamic.

16. The S&P Shari'aa Index series is designed to offer investors a set of indices that are Shari'aa compliant. The S&P 500, the leading measure of the U.S. equity market, was one of the first S&P indices to offer a Shari'aa-compliant version. Modeled after its U.S. counterpart, the S&P Europe 350 and the S&P Japan 500 indices also offer their respective compliant versions. See the website for more information: www2.stan- dardandpoors.com/spf/pdf/index/ Shariah_factsheet.pdf.

17. Amana Mutual Funds Trust is designed to provide investment alternatives that are consistent with Islamic principles. Generally, Islamic principles require that investors share in profit and loss, that they receive no usury or interest, and that they do not invest in a business that is not permitted by Islamic principles. Some of the businesses not permitted are liquor, wine, casinos, pornography, insurance, gambling, pork processing, and interest-based banks or finance associations. The funds do not make any investments that pay interest. In accordance with Islamic principles, the funds shall not purchase bonds, debentures, or other interest paying obligations of indebtedness. See the website for further information: amanafunds.com/amanx.html.

 
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