Challenges of Realizing Maqasid as-Shariah in Islamic Capital Market (FINAL)
Maqasid Al Shariah in Finance
Transcript of Maqasid Al Shariah in Finance
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INCEIF
The Global University in Islamic finance
Kuala Lumpur, Malaysia
CIFP
Maqasid al-Shariah is one of the very important Shariah aspects in
Islamic Finance
_________________________________________________________
SH 1002
Semester Jan 2012
Name: Kulsanofer Syed Thajudeen
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Abstract
_________
This article discusses the importance of Maqasid al-Shariahin structuring and developing Islamic Finance products.
The technical and literal meaning of Maqasid Al-Shariah
is examined. The important elements of Maqasid Al-Shariah is
defined and further explored to explain how it may contribute
solutions for the many Islamic Finance issues and challenges.
Key terms of the research
1. Maqasid Al-Shariah 2. Islamic Finance 3. Maslahah 4. Wealth
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Table of Contents
Introduction ................................................................................................................... 4
Maqasid al-Shariah..................................................................................................................4
Maslahah..................................................................................................................................6
Characteristics of Maqasid al-Shariah ............................................................................. 7
Classification of Maqasid al-Shariah .......................................................................................8
Maqasid al-Shariah and Islamic Finance.............................................................................. 10
Maqasid al-Shariah in the prohibition of interest (riba) ..................................................... 11
Promoting Maslahah in Economy........................................................................................ 12
Maqasid al-Shariah in Islamic Banking................................................................................ 13
Shariah Compliant : Legality vs Permissibility ...................................................................... 13
Hukum Qadai ....................................................................................................................... 14
Hukum Diani .......................................................................................................................... 14
Maslahah in Islamic Banking................................................................................................ 15
Maqasid al-Shariah in Islamic Capital Market (Sukuk)....................................................... 16
What is Sukuk ........................................................................................................................ 17
Mudharabah Sukuk ............................................................................................................... 17
Musharaka Sukuk .................................................................................................................. 18
Paradox in Structuring equity- based sukuk ......................................................................... 18
Maqasid al-Shariah in Takaful.............................................................................................. 20
The main difference between conventional insurance and takaful ..................................... 21
Conclusion and Findings....................................................................................................... 24
References............................................................................................................................ 25
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Introduction
Islamic Finance is finance following the Islamic law (or Shariah) principles.
The basic sources of Shariah are the Quran and the Sunna, which are followed by the
consensus of the jurists and interpreters of Islamic law. The central feature of the Islamic
finance system is the prohibition in the Quran of the payment and receipt of interest (or
riba). The strong disapproval of interest by Islam and the vital role of interest in modern
commercial banking systems led Muslim thinkers to explore ways and means by which
commercial banking could be organised on an interest-free basis.
The Islamic Finance industry has grown tremendously from its inception in 1975. The
Islamic finance industry is reported to be valued at over $1 trillion, with an estimated
annual growth rate of 10 percent . The industry is continuing to grow and some market
analysts project it will be valued at anywhere from $3 to $5 trillion by 2016.1
Since the Islamic Financial Institutions must ensure that all their transactions and
services must be Shariah compliant, it is vital that it follow the objectives of Shariah also
known as Maqasid al-Shariah. The principles advocated by the Shariah ensure that the
Islamic Finance transactions are just, transparent and prohibit involvement in illegal
activities that are detrimental to society.
This article will discuss the importance of Maqasid al-Shariah in structuring the
framework of Islamic Finance institutions (IFIs) to develop financial products and
services that are Shariah compliant.
Maqasid al-Shariah
Maqasid comes from an Arab plural word which is maqsad, the root word is qasd
which mean of intuition, aim or objective in an actions. Maqasid, The Arabic root word
of Shariah is the verb sharaa. The literal meaning of sharaa is to open upon a street,
like to open a door upon a street. In legal term sharaa means to make or establish1Humayon Dar, Global Islamic Finance Report 2011, 34
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laws. From sharaa also comes Shariah which in legal term means laws relating to all
aspects of human life established by Allah S.W.T for his servants. Maqasid al-shariah is
refered to as the goal or objective to be achieved in an Islamic law.2
Several renowned Muslim scholars have given their own definitions for Maqasid al-
Shariah:-
Abu Hamid al-Ghazali (d.1111 CE) as:
The very objective of the Shariah is to promote the well-being of the people,
which lies in safeguarding their faith (deen), their lives (nafs), their intellect
(aql), their posterity (nasl), and their wealth (mal). Whatever ensures the
safeguarding of these five serves public interest and is desirable, and whatever
hurts them is against public interest and its removal is desirable.
Imam al-Shatibi (d. 1388 CE), defined Maqasid al-Shariah as
The primary goal of the Shariah is to free man from the grip of his own
whims, so that he may be the servant of Allah by choice, just as he is His
slave [in matters about which he has] no choice.
Ibn Ashur (1973) defined Maqasid al-Shariah as
2Mohammad Hashim Kamili, Maqasid Al-Shariah Made Simple, IIIT 2009, 1
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The overall objective (Maqsad Amm) of Islamic legislation is to preserve
the social order of the community and insure its healthy progress by
promoting the well-being and virtue (Salah) of the human being. The
salah of human beings consists of the soundness of their intellects and the
righteousness of their deeds, as well as the goodness of the things of the
world in which they live that are put at their disposal.
The main objectives of Shariah is to advocate concepts of compassion and guidance
to establish justice, eliminate prejudice, and alleviate hardship in society.
This is manifested in the realisation of maslahah (public interest), which Islamic scholars
have generally considered to be the all-pervasive value and objective of the Shariah
which is to all intents and purposes synonymous with compassion.3
Maslahah (Concerns of Public Interest)
Maslahahis one of the juristic devices that have always been used in Islamic legal
theory to promote public benefit and prevent social evils or corruption. The plural of
the Arabic word maslahahis masalih which means welfare, interest or benefit.Literally, maslahahis defined as seeking the benefit and repelling harm. The words
maslahahand manfa`ahare treated as synonyms.Manfa`ah(benefit or utility),
however, is not technical meaning of maslahah. What Muslim jurists mean by
maslahahis the seeking of benefit and the repelling of harm as directed by the
Lawgiver or Shariah.4
Al-Ghazali has defined maslahah as :-
3
Dr. Asyraf Wajdi Dusuki & Dr.Nurdianawati Abdullah, Maqasid al-Shariah,, Maslahah and CorporateSocial Responsibility, 314Mirza Vejzagic and Edib Smolo, Maqasid al Shariah in Islamic Finance: An Overview, 4
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As for Maslahah, it is essentially an expression referring to the acquisition
of benefit or the repulsion of injury or harm, but that is not what we mean
by it because acquisition of benefits and the repulsion of harm represent
human goals, that is, the welfare of humans through the attainment of these
goals. What we mean by maslahah, however, is the preservation of the ends
of the Shariah.
The underlying theme in virtually the entire broad spectrum of the shariah is realisation
of benefit (maslahah) which is regarded as the summa of the maqasid. The masalih(pl.
of maslahah) thus become another name for the maqasidand the ulamahave used the
two terms almost interchangeably.5
Characteristics of Maqasid Al-Shariah
The Maqasid Al-Shariah has four main characteristics
1) Basis of legislation
Legislation has to serve the interest of all human beings and save them from
harm.
2) Universal
Aiming to serve the interests of mankind and requiring the adherence of all
human beings. This is because the Quran is the last revelation, applicable to the
all mankind till the end of time.
3) Inclusive
They encompass all human acts whether they are related to Ibadat
(responsibilities to God) or muamalat (responsibilities towards other human
beings).
4) Definitive
They have not been derived from a single text or item of evidence, but from a
multiplicity of texts and different aspects of evidence.6
5Mohammad Kamili, 2
6Dr.Mashhad Al-Allaf, The Objectives of the Islamic Divine Law,2003,2
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Classification of Maqasid Al-Shariah
In usul al-fiqh, on which Islamic jurisprudence is based, scholars such as al-
Shatibi further divide the general objectivessometimes denoted as maslahahinto
three sub-categories. Al-Shatibi calls these the essentials (Daruriyah), the
complementary (Hajiyyah) and the embellishments (Tahsiniyyah).
The categories are briefly discussed below:
1) Daruriyah (Essential)
It is known as the essential interests of life which people essentially depend
upon, comprising the five objectives of Shariah: religion(deen); life (nafs),
intellect (aql), procreation (nasl) and wealth (mal). These are essentials
serving as bases for the establishment of welfare in this world and the
hereafter. If they are ignored then coherence and order cannot be established,
fasad (chaos and disorder) shall prevail in this world, and there will be
obvious loss in the hereafter. Some scholars argued that though the five
daruriyat are essential for human welfare, necessities are not confined to
these five maqasid; hence, they proposed additional daruriyah such as
equality, freedom and protection of the environment.7
2) Hajiyyah(need or complimentary)
Complementary interests are defined as benefits which seek to remove
severity and hardship that do not pose a threat to the very survival of normal
order.The term refers to interests, the neglect of which will lead to hardship
but not to total disruption of the normal order of life. In other words, these
interests, which are a level below the five essentials, are needed in order to
alleviate hardship, so that life may be free from distress and predicament.
They are also reflected in provisions that aim to remove hardships and/or
facilitate life. An example is seen in the sphere of economic transactions; the
Shariah has validated certain contracts such as the salam sale and lease and
7Mohammad Hashim Kamili, 3
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hire contracts (Ijarah) because of peoples need for them, notwithstanding a
certain anomaly that is attendant in both.8
3)
Tahsiniyyah(embellishments)
The embellishments refer to interests whose realisation leads to refinement
and perfection in the customs and conduct of people at all levels of
achievement. For example, the Shariah encourages charity to those in need,
beyond the level of the obligatory zakah. In customary matters and relations
among people, the Shariah encourages gentleness, pleasant speech and
manner, and fair dealing. Other examples include permission to use beautiful,comfortable things; to eat delicious food; to wear fine clothing and so on.9
Fig 1 :The Maqasid Model10
8
Mohammad Hashim Kamili, 39Mohammad Hashim Kamili, 4
10Dr.Mashhad Al Allaf,3
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Maqasid Al-Shariah and Islamic Finance
The earlier sections have discussed on the fundamental principles on the objectives of
Shari`ah particularly in dealing with everyday life. The next focus is to apply evaluate
maqasid alshari`ah and maslahah in Islamic banking and finance. In fact, one of the
biggest challenges of Islamic banking and finance industry today is to come up with
products and services that is Shari`ah compliant or legitimate from Islamic point of view
without undermining the business aspects of being competitive, profitable and viable
in the long run.11
The major components of Islamic Financial Services are12
1)
Islamic Banking
a. Financing
b. Deposit
c.
Investment
2) Islamic Capital Market
a. Equity
b.
Islamic Securities
c. Funds and Unit Trusts
d.
I-REITS
e.
Venture Capital / Private Equity
f. Derivatives
3) Takaful/Islamic Insurance
a.
Takaful
b. Retakaful
According to Chapra (1985) the main objectives of the Islamic Financial Institution (IFI)
are abolition of interest, adherence to public interest, catalyst for development, promotion
of economic well-being, establishment of social and economic justice, and equitable
distribution of income.
The Quran has laid down several premises for economic justice. For example, people
are not allowed to devour their wealth unjustly except through mutual consent. All
11
Dr.Asyraf Dusuki, Challenges of Realizing Maqasid al Shariah in Islamic Capital Market: SpeacialFocus on Equity-Based Sukuk,612
Dr.Asyraf Dusuki, An overview of Islamic Finance:Funadamentals and Prospects,presentation slide, 4
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forms of elements that would create economic injustices such as bribery (al-Rishwa)
fraud or deception (al-Ghish), gambling (al-Maysir), dubious contracts (al-Gharar) and
riba are condemned in the highest term. Interest is considered as a major destabilizing
factor that contributes to cyclical fluctuations in the economy and it transfers resources
from the poor to the rich.13
Other forms of activities are encouraged by the Shari'ah to ensure economic
justice such as wealth circulation (al-Tadawul or al-Riwaj) that should not only
be confined to the rich, fair share of returns (al-Shirkah) among the contracting
parties and fair pricing (Tas'ir) while avoiding profiteering that burdens the public.14
Hassan (2003) observes that the Islamic Financial Institute (IFI) must seek to realize
economic justice through wealth circulation, elimination of absolute poverty and
efficiency in the utilization of resources available.15
The profit and loss sharing arrangements on the pattern of equity are more just than the
conventional contracts as closest to the Islamic ethos than the predetermined fixed
interest debt which is unjust and a taboo. IFIs must seek to realize economic justice
that would result in permanent contribution to economic efficiency, productivity,
growth and stability . To ensure social justice as enjoined in the Quran, Islamic banks
must strike effective balance between profitability and social justice.16
Maqasid Al-Shariah in the prohibition of interest (riba)
One of the most important objectives in Shariah from the financial point of view is
elimination of interest (riba) in all categories of business transactions. The two main
categories of interest (riba) which are sternly prohibited in Islamic law are riba al-nasiah,
which is interest on lent money, and riba al-fadl which is literally earnings or excess
13Minsky, H.P., 1982, Inflation, Recession and Economic Policy (London:Wheatsheaf Books), 10
14Mustapha Omar Muhammad, Objectives of Islamic Banking: Maqasid Approach, 253
15
Nik Hassan hj Nik Mustapha, An Evaluation of the Islamic Banking Development, 2003,5
16Ataul Huq Pramanik, Islamic Banking : How Far Have We Gone, KL 2009,
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acquired by exchanging or selling commodities of superior value over other commodities
given.17
It is stated in the Holy Quran: those who devour usury will not stand except as stand one
whom the evil one by His touch hath driven to madness. That is because they say: "Trade
is like usury," but Allah hath permitted trade and forbidden usury (riba) (Al-Quran, Al-
Baqarah: 275).
Riba is prohibited because it causes unfairness in business transaction. It makes it easy
for the rich to make easy money and oppress the poor. This makes only a small number
of the community powerful while weakening the rest of the community. The Shariah has
made this type of profit illegal and strongly prohibited it. Taking into consideration of
maslahah of society, riba makes a community unproductive as one can earn easy money
without working hard.
Promoting Maslahah in Economy
The Shariah encourages that the wealth from individuals, firms and governments are trust
from Allah and therefore be directed towards achieving the common social goals.(Al-
AnAm:165). Redistributing wealth is not a favour by the rich to the poor butit is the
right of the latter. In their wealth, there is a due right for the poor and the deprived (Al-
Marij:24-25).
All excessive wealth held beyond one's legitimate needs should be held as a trust
(Amanah) and surrendered to the members of the society. The Shari'ah has provided
several measures for spending wealth on the society. These include Zakah,
endowment (Waqf), voluntary charity (Sadaqat), inheritance (Faraid), Will
(Wasiyyah) , donations and grants (`ltiyyah), and social security (al- Takaful al-
Ijtima'i).18
17Anwar Iqbal Qureshi, Islam and the Theory of Interest,Kitab Bhavan, 1945, 68
18Mustafa Omar Mohammed, 257
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Investments can be carried out by individuals, firms and governments. In Islamic banks,
deposits are public money, thus must be directed towards the public interest.Islamic
banks in Sudan are required by law to contribute to community development
projects. Needless to say, in the Islamic economic system, the state plays a much
bigger and wider role towards public interest. Such roles include provision of basic
needs, arrange social include provision of basic needs, arrange social security and foster
equitable distribution of income, wealth and fulfillment of social obligation.19
Maqasid al-Shariah in Islamic Banking
The earlier sections have defined Maqasid al-Shariah, and discussed the prohibition of
riba. This section will discuss on the importance of Maqasid al-Shariah and maslahah in
Islamic Banking. It is of crucial importance to the Islamic banks to develop financial
products that are Shariah-compliant without jeopardizing their competitiveness and
profitability in the long run. The pressing question is how to determine whether a product
is Shariah compliant or otherwise? How to resolve the legality of a contract from
Shariah perspectives?
Shariah- Compliant : Legality vs Permissibility
The Fiqhi scholars have two different views on this matter .Some of them emphasize on
whether the structure of the product is permissible while the other group prefers to look
into the underlying objectives of the contracting parties. They do not want the products
cleverly disguised as a shariahcompliant product when in actual case it is not.
The difference in opinion is due to the hadith that mentions matters are determined by
intention.Based on this hadith, the legality of the contracts must be established by
intention (niyyah) not merely by its structure alone.20
19Khaleefa, Islamic Banking in Sudans Rural Sector, Jeddah: Islamic Economics Studies, Vol.1, No.1, 37 -
5520Dusuki Asyraf Wajdi and Abdulazeem Abozaid, The Challenges of Realizing Maqasid al-Shariah in
Islamic Banking and Finance, 2007, 15
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On the other hand, Imam Shafi stated that it is unreasonable to decide on the legality of
contracts by implication of intention, as it is complex and sometimes improbable to
categorize the intention of the contracting parties. In addition, they stated that some
Shariah textsindicate that evaluating things must be based on their structure and
manifestation.21
The scholars decided to reconcile the two conflicting opinions by introducing the two
types of hukm (ruling): Hukum Qadai and Hukm Diani.
1) Hukum Qadai
This hukm is to determine if the contract complies with all the Shariahconditions and requirements pertaining to its form and structure. If the contract
structure is Shariah-compliant then it is termed as valid contract (sahih).
2) Hukum Diani
This hukm is to determine whether the purpose of the contract is Shariah
compliant and if it is then the contract is permissible (halal).
Thus, a transaction is deemed to be halal when it serves the legal purpose and intention,
and sahih if the contract meets all contractual conditions and requirements.
Consequently, a sahih (valid) contract is not necessarily halal (permissible).22
It must be stated here that the scholars of Fiqh have different views with regard to the
validity of a contract only. However, they have no issue with the permissibility of a
contact on its matter or the contracting parties niyyah. Even Shafi scholars expressed
examples of cases when real intention does nullify a contract such as selling fruit
products to be used for alcohol making or furnishing arms to people who will use it
against the Muslims. This indicates that the importance on the structure or expressed
intention is more appropriate when the genuine intention is hard to establish.
For an Islamic product to be classified as Shariahcompliant by the jurists, the contract
must commonly be both valid and permissible. The pertinent question is, are
21Dusuki , 15
22Dusuki, 16
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contemporary Islamic banking following the same principles One of the most debatable
products of Islamic banking is buy-back sale (bay al-inah) which ismostly applied in
Malaysia. In bay al-inah approach the Islamic bank is theoretically actingas a trader
selling or buying as the word bay means sale, but in actual terms the Islamic bank
simply proceeds as a financier who provides capital without exposing itself to any risk
and without taking engagement in the venture procedure. Bay al-inah here is resorted to
as a legal device to avoid riba based loan. However, financing based on bay al-inah and
the conventional riba based loan are very similar; they satisfied closely the same
contractingparties purposes, and apply exactly the same economic matter and outcomes,
although their form may be different.23
Thus not all products offered by Islamic banks are enhancing maslahah or fully
embracing the objective of Shariah. If Islamic banks focus only on the structure or
validity of a contract instead of focusing also on the underlying purpose or the
permissibility then the bank is in opposition to the key principles of Maqasid al-Shariah.
In the case of Bay Al-Inah, Maqasid al-Shariah has been used as a rationalization for
application of rather questionable transaction, even though observing Maqasid al-Shariah
must be the first factor to determine their prohibition.24
Maslahah in Islamic Banking
Islamic banks must take into consideration the universal and dynamic conception of
Maqasid al-Shariah. Islamic banks must ensure that their policies and programs on
public interest take into consideration the preservation of the five essential elements.
For example, Islamic Banks should give priorities in their business activities to those
areas related to the basic needs of the public such the public such as investments in
vital sectors and financing of housing projects. The last priority should be those areas
whose activities involve luxury goods. However lucrative it may be, usually such
areas are related to the few rich at the expense of the general public. Such
resources should be relocated to benefit the general public.25
23
Dusuki and Abozaid, 200724Dusuki and Abozaid, 2007
25 Dusuki and Abozaid, 2007
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Thus, Islamic banks are expected to engage in endorsing social welfare. This view is
embraced by the various Muslim scholars who are stating that Islamic banking is much
more than providing Shariah-compliant products. It should be structured in such a way
that itsprimarily goal is to achieve an affirmative contribution to the realization of the
socio economic objectives of the society at large.26
In order to accomplish the social welfare of society or economic well-being model
supported by those Muslim scholars, Islamic banks should rely more on equity-based
financing. The equity financing is the way forward for realizing that stage of model as
preserved in Maqasid al-Shariah.27 (Haneef & Smolo, 2010; Rosly, 2010; Usmani,
2010).
As a result, equity financing is an aspiration of Shariah advisors as well as academicians
that has to be enhanced further in the Islamic banking. Furthermore, equity-based
financing is also not disguise of debt-based financing contracts commonly used in the
conventional banking. Therefore, it can be freely uttered that equity financing can
accomplish the objective of Shariah which is realization of justice in the society .
28(Kamal, et al., 2009).
Maqasid al-Shariah in Islamic Capital Markets (Sukuk)
Over the past decade or so Islamic financial sector has grown and gained strength by
the creation of various support and infrastructure institutions, and expanded from
being a banking-based industry to more wider areas incorporating capital market based
products and services. Indeed Islamic capital market like its conventional
counterpart is an important component of the overall Islamic financial system. It
facilitates the transfer of investible funds from economic agents in financial surplus to
those requiring funds . In other words, the Islamic capital market provides
an element of liquidity to the otherwise illiquid assets. This is achieved by selling a
26Mirza Vejzagic & Edib Smolo, Maqasid Al-Shariah in Islamic Finance : An Overview,
27Haneef & Smolo, 2010
28Kamal 2009
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wide array of products ranging from Shariah-compliant securities to bond-like
structures known as Sukuk.29
What is Sukuk?
Literally sukuk means certificates. Technically,sukukrefer to securities, notes, papers
or certificates, with features of liquidity and tradability. Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) defines
Investment sukuk are certificates of equal value representing undivided shares in
ownership of tangible assets, usufructs and services (in the ownership of) the assets of
particular projects or special investment activity, however, this is true after receipt of the
value of the sukuk, the closing of subscription and the employment of funds received for
the purpose for which the sukuk were issued.30(Accounting and Auditing Organization
for Islamic Financial Institutions, 2008b)
Sukuk can be structured in various forms. The types of Sukuk issued can take various
structures depending on the underlying Shariahprinciples such asBai Bithamin Ajil,
Murabaha,Salam,Istisna,Ijarah,Musharakah,Mudharabahand Wakalah (Kamil,
2008). These can be further grouped into three main clustersSale-based sukuk
(comprising of Bai Bithamin Ajil, Murabaha, Salam, Istisnaa), lease-based sukuk
(Ijarah) and equity based sukuk (Musharaka, Mudaraba and Wakala). 31(Dusuki,
challenges of realizing maq,pg10)
Mudharabah Sukuk
The issuer will first call for investors to participate in the mudharabahcontract. The
issuer acts as the manager or mudharib, and the investors is the capital provider or rabb
al-mal. The mudharabah sukukare issued by the issuer to evidence the proportionate
capital contribution by the investors (rabb al-mal) to the mudharabahand their
29
Dusuki, Challenges of realizing , 230AAOIFI, 2008
31Dusuki, Challenges of realizing , 10
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subsequent rights in the mudharabahproject or investment activities. The issuer as
mudharibwill then invest the mudharabahcapital into an agreed project. Normally, the
mudharabahproject has already identified projected cash flow, and this allows the issuer
to indicate an expected rate of profit to the investors upon initial issuance of the
mudharabah sukuk. The expected rate of profit should be calculated based on a pre-
agreed profit sharing ratio that is tentatively applied to the projected return of the project.
After the project starts to generate profit, the issuer will apply the profit sharing ratio and
pay the profit share of the investors as periodic coupon distribution, normally at the
expected profit rate. However, if the project suffers loss, it will be borne solely by the
investors except when the loss is caused by the negligence or mismanagement of the
mudharib.32
Musharaka Sukuk
In a musharakahsukuk transaction, both the issuer and investors will contribute to the
capital of the musharakahproject. The musharakahproject is normally managed by
either the issuer or a third party as the case may be. Alternatively, a musharakah
sukuk transaction can also be structured with all investors contribute capital in a
musharakahproject and then appoint the issuer as their agent to manage the
musharakah. This structure can also be classified as investment agency sukuk (sukuk
wakalah bi istithmar)33(Engku Rabiah, 2009).
Paradox in structuring equity-based sukuk
Based on the explanation above, it is clear that mudharabah and musharakahsukuk are
conceptually equity-based and are not debt instruments. The mudharabah and
musharakahsukuk represent the sukuk holders proportionate rights over the
investment project and revenue.
The fundamental characteristics of equity-based sukuk are based on two basic features;
1) The capital cannot be guaranteed
2) The periodic returns are also dependent on actual profits made and can be
32Engku Rabiah, The Islamic Securities (Sukuk) Market, 2009,10
33Engku Rabiah, 2009,11
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variable.
However, the firm Shariah directions related tothe equity-based sukuk structure are
usually not of great interest to conventional risk adverse investors. Particularly, the
incorporation of classical Islamic financial instruments like mudarabah and musharakah
with bond do not fulfil conventional investors requests. The investors demanded capital
protection and fixed incomes which are usual characteristics of conventional bond
instruments. In order to satisfy customers the structure of equity-based sukuk evolved
into debt-based instrument. 34
In mudarabah, the obligor does not need to participate with any asset while in
musharakah, the obligor will furnish capital. For all mentioned instruments there will be
promise by the obligor to repurchase the assets from sukuk holders, for its nominal value
at a specific agreed price. This would guarantee that the capital invested by the sukuk
holders remains integral. However, this may lead to the same economic results as
conventional bonds since sukuk holders shall be assured that their capital will be
guaranteed at maturity due to the purchase undertaking that allows sukuk assets to be
redeemed at par.35
Nevertheless, the credit enhancement approach embraces arrangements and
commitments, which, if taken on their own, are acceptable and permissible. The
innovative permissibility of such arrangements and commitments is the main reason
why these structures and arrangements had received concern by the Shariah jurists. If
looked carefully, the total procedure of sukuk issuance, these annual allocation payments
and claims of value upon maturity, these obvious promises and undertakings clearly
reflect capital protection and assured rate of return on investment, what is actually
conventional bond characteristic, and which would be impossible to achieve in pure
Shariah based instruments like themudarabah and musharakah contracts.36(Dusuki,
2010).
34Dusuki, Challenges of RealizingMaqasid al-Shariah (Objectives of Shariah) in IslamicCapital Market: Special Focus on Equity-Based Sukuk , 2010,15
35Dusuki, 2010, 16
36Dusuki, 2010, 16
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Nevertheless, these fixed-income embracing instruments entrenched into equity-based
sukuk had been the theme of strong condemnation by different parties in terms of their
compliance with the Shariah requirements. Above all, Shariah Board of Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI) printed a
testimonial in February 2008 signifying that musharakah and mudarabah sukuk with the
credit enhancementapproach instruments as applied by the market was not in
accordance with the Shariahprinciples.37
Looking into details, the AAOIFIs proclamation underlined two core matters observed
in equity-based sukuk: First, the practice of liquidity facility; and second, the purchase
undertaking at par to redeem the sukuk. In fact, AAOIFI restated its present regulation on
investment sukuk particularly on the practice of liquidity facility and the purchase
undertaking at par.38
The use of credit approach strategy like purchase undertaking in structuring sukuk to
enable guarantee-resemblance features of conventional bonds obviously have maintained
the legality of the form (sahih qadaan) but neglected the legality of the substance (sahih
diyanatan).39
In order to apply Maqasid al Shariah in the financial products, it is essential to embrace it
fully and not only part of it for then it is clearly not shariahcompliant.
Maqasid al-Shariah in Takaful
Takaful is derived from the Arabic root word Kafal meaning to take care of ones
needs. Takaful simply means mutual help among a group. The concept of takaful had
already existed during the time of Prophet Muhammad where the Muslims contributed to
a fund under the tribal system ofAaqilah for the purpose of helping members of
their own community who were liable to pay diyat (blood money).40
37AAOIFI, 2008
38
AAOIFI, 200839Dusuki, 2010, 20
40Zia Ahmed, Achieving Maqasid Al Shariah through Takaful, 2010, 9
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During 7thcentury Muslim traders were sailing to perform trade as far as India, China
and Malaya. It is during these voyages that the merchants felt the need for insurance to
cover their losses through the perils in the sea. Based on the principle of helping one
another in the Quran (Surah Al-Maidah 5: 3) they contributed to a fund prior to starting
their voyage and use it to compensate any of them who incur losses. This was the start of
the marine insurance which of course has been much modified today.41
The Main Difference between Conventional Insurance and Takaful
In conventional insurance, the company sells a policy to the insured that would pay a
premium for the risk he agrees to be indemnified by the company or insurer.
The principals of conventional insurance are as listed below, the policy will determine:
1)
the kind of risk that is covered.
2) the risks that are excluded
3) the period of coverage for the indemnity
4)
the limit of compensation that the insured will get
5) the limit of damage or loss the company will be responsible for
6)
payment to insurer if loss arises from an event defined by the policy, during the
period under cover
7) the company takes all the money or premium that has been paid up front , in case
nothing happens during the period under cover
Based on the above principles, the Muslim jurists concluded that insurance is not
Shariah- compliant. The first objection is the presence of the element of chance taken by
the company. There is no certainty in the outcome of the contract. Ambiguity is
something that is not acceptable in Islam mainly because any of the two parties will be
exposed to injustices. Ambiguity and uncertainty of this type is called al-Gharar which
when present in any contract will cause the contract to be void. 42(takaful, syed Othman
Alhabshi.
41
Zia Ahmed, 2010, 1142Syed Othman Al-Habshi, Takaful : concept, history, development and future challenges of its
industry,2009,17
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22
The second objection is the element of al-Maisir or gambling that arises out of the
chance phenomenon that exists in the contract. The insured takes a chance to protect
himself from the risk that he is facing. He is quite prepared to lose the premium if the
risk does not materialize. But if the risk materializes, he will get much more than the
premium he has paid. This situation of getting something more than what one pays for
that is based on chance is called gambling and is prohibited by Shariah. 43
The third element is riba or usury that is present in the form of returns from the
investment of the insurance fund. Obviously, most of the investments are placed in
interest-based instruments and hence is prohibited by the Shariah.
These are the three main objections raised by the Muslim jurists which make it necessary
for them to formulate models that will be Shariah-compliant.44
As for takaful the main principles are as below:
1) Policyholders co-operate among themselves for their common good.
2)
Every policyholder pays his subscription to help those that need assistance.
3) Losses are divided and liabilities spread according to the community pooling
system.
4)
Uncertainty is eliminated in respect of subscription and compensation.
5) It does not derive advantage at the cost of others.
The takaful is based on theprinciple of Taawun which is to help one another in
righteousness and piety; we then can invite people, especially those who face
the same danger or take the same risk to come together and form a group that will be
willing to help one another. In other words, if anyone among them incurs a loss caused
by an event that has been agreed upon, all the members of the group will contribute to
compensate this unfortunate individual. Based on this understanding, a fund can be
created from the contributions of each member on the basis of donation or tabarru
43
Syed Othman Al-Habshi, 2009,1544Syed Othman Al-Habshi, 2009, 15
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which comes from the same root word as albirr or righteousness.45(Takful, syed
Othman alhabshi)
This probably is the most important concept that has been applied in all takaful models.
Based on the above concept and the principles of Taawun and tabarru, the
company then is simply the operator who invites people who face the same risk to form
that group. The company is not selling a policy as such which will give rise to the
prohibited elements of al Gharar and al-Maisir. Rather the company is an operator who
makes arrangements for the group to come together and agrees not only to contribute to
the fund and at the same time agree to donate at least part of the fund to any member of
the group who has become victims of any peril or mishap that has been identified earlier.
In this sense, the company is not taking the risk, but it is the group of participants who
bear the risk and are mutually covering each other. The company is only a trustee acting
on behalf of the participants to manage the operation of the takaful business. As such, the
company does not have any right to the takaful benefits. However, as an operator or
manager of the takaful business, the company is the entrepreneur or mudharib whilst the
participants are the provider of capital or rabbul mal as in the case of the mudharabah
concept. In this sense, the profits made from the business can be shared by both parties at
a pre-agreed ratio.46
There are several models in takaful, as mentioned below47:
1) Mudarabah Model
2)
Wakala Model
3) Wakala-Wakf Model
The takaful is a shariah-compliant alternative to insurance. It allows Muslims to plan for
misfortune in case it happens to protect family and property from destitution, which is
one of the objectives of Maqasid al-Shariah.
45Syed Othman Al-Habshi, 2009, 17
46
Syed Othman Al-Habshi, 2009, 1847Syed Othman Al-Habshi, 2009, 20
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Conclusion and finding
Banking and finance are important elements in our lives. Unfortunately the world
banking and finance system is based primarily on riba which is strictly prohibited in
Islam. In order to cater for Muslim needs and also introduce a fairer and just banking
system , Islamic finance was introduced. Providing financial products that are shariah
compliant is the biggest challenge for the Islamic Finance Institution. The Financial
Institutions have responsibility to fulfil the objectives of the Shariah; the Maqasid al-
Shariah and serve the public interest. The financial product must be shariah-compliant
not only in structure but also in purpose; the contract must be valid and also permissible.
If emphasis is not given into providing products that comply with the Maqasid al-Shariah
then it defeats the purpose of having Islamic Financial Institutions in the first place.
Islamic Financial products will eventually just be foreign sounding products that are
actually a copy of the conventional banking products with shariah-compliant stamp on it.
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