International Finance
Islamic Banking

Role of Shariah in Equity Based Financing

The issue of how Shariah can support the development of equity-based financing is one that affects the growth of the industry. The issue of how Shariah can support the development of equity-based financing is one that affects the growth of the industry, said a much sought-after Shariah scholar of Islamic finance. “Since the inception of the industry, we have been very much biased towards debt-...

The issue of how Shariah can support the development of equity-based financing is one that affects the growth of the industry.

The issue of how Shariah can support the development of equity-based financing is one that affects the growth of the industry, said a much sought-after Shariah scholar of Islamic finance.

“Since the inception of the industry, we have been very much biased towards debt- based financing, which is compliant by any standard.

“But moving forward, we should couple it with equity- based financing, because debt and equity are complementary to each other,” said Dr Mohammed Daud Bakar in an interview in the latest bulletin published by International Shariah Research Academy for Islamic Finance (Isra). Mohd Daud runs Amanie Business Solution Sdn. Bhd. and chairs the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM). He is also chairman of Isra’s council of scholars.

On some of the pressing Shariah issues that the industry is currently facing, Mohd Daud said when looking at a wider perspective, there are some issues that are related to the growth of the industry, protection of the industry and issues that could affect the industry negatively. He noted that there are many Shariah issues related to equity.

“For instance, the issue of how debt can be converted into equity, the issue of quasi- equity, how to make equity- based financing more attractive to the issuer and investor, issues of the valuation of equities and so on. So, Shariah should come in and try to solve the equity-related issues, to push the growth of the industry,” he said.

Risk management is one of the issues pertaining to the protection of the industry, Mohd Daud said.
“Somehow, we tend to take for granted that the conventional risk management system tends to be compliant because it does not contain any interest. But perhaps the background of this system does not suit the Islamic financial system.

“Shariah must come in and see how the scholars and jurists in the past were able to provide risk management tools, which are very much pertinent to our industry, rather than just following the conventional system,” he said.

According to Mohd Daud, also of importance are concerns related to issues that may negatively affect the industry.

“For example, there is the issue of differences of opinion that could negatively affect the whole industry. So, this issue needs to be resolved amicably.

“If possible, we must provide solutions that can jive well with the products and acceptability by the market. So, we have to resolve this issue, by providing solutions that are not only Shariah compliant, but also commercially viable,” he said.

Mohd Daud also shared his thoughts on the issue of tawarruq. It should be noted, however, that the interview took place before the International Council of Fiqh Academy, in a meeting in end-April, issued a ruling banning organised tawarruq.

On why commodity murabahah (tawarruq) is tolerated by the scholars, Mohd Daud said this was another contention that some segments of people were saying, i.e. commodity murabahah is tolerated, whereby scholars transforms it to be compliant.

“For me, this is wrong from the economic perspective. If you were to refer to the books of past scholars, in most schools of thought, they endorse Murabahah without any issue.

“Murabahah or tawarruq in our case, has been used in the past and accepted in the past. There were no contentions and objections to the practice.

“However, some modern scholars, practitioners and economists object to the principle of organised tawarruq, where we have three or four parties coming together to facilitate the murabahah transaction, to be able to get cash at the end of the day.

“So, murabahah has been seen to be as a cash financing methodology, rather than (used for) the acquisition of assets for the real use of the asset,” he explained.

“As such, this has been seen by some as bad because you are using murabahah to raise money. If that is the basis of the argument, then you would also have to disallow or discourage sale and lease back.

“Sale and lease back is also another structure that allows the owner of the asset to get credit or cash financing by selling his asset and taking it back on lease.

“But these are Shariah compliant instrument that can be used to raise financing, for the purpose of getting the cash for the owner or customer. So, this statement is a bit out of context because we have to put some conditions,” Mohd Daud said.

“For example, murabahah cannot be used to finance conventional banks, i.e. for them to get cash, as the money will be used for riba-based activities.

“There are some conditions under the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) Shariah standard. We are bound by those conditions.

“It is not a jacket kind of a product that can be used by any party in the market. It should be used Islamically, to support Islamic products, which are Shariah-compliant,” he said.

Source: www.aibim.com

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