Conversion of a Conventional Bank to an Islamic Bank - Appendix B (The Shariah Basis for the Standard)

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1. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank Appendix (B) The Shari’ah Basis for the Standard Gradual Clearance of Non-Permissible Previous Transactions The basis for the permissibility of gradual clearance of non-permissible previous transactions due to necessity or need and in accordance with the rules of Shari’ah is because it is not feasible for the converting bank to clear all non-permissible transactions immediately. Therefore, the bank must dispose of the effects of impermissible transactions because this is feasible. Necessary Procedures and Mechanisms for Conversion Since the realisation of the conversion is dependent on the procedures and mechanisms mentioned in this standard, these procedures and mechanisms thus become permissible or in certain circumstances their use becomes obligatory when the conversion will not be realised without applying these procedures and mechanisms. This is because conversion is obligatory, and if an obligation can be realised only by means of a particular way or tool, then the use of such a tool also becomes an obligation. Providing Banking Services The basis for the permissibility of providing banking services that are not related to giving loans on an interest-bearing basis is that such an operation is a practical application of Ijarah and an agency contract with remuneration. If providing these services involves Riba then the operation becomes impermissible as it is a Riba-based transaction that is prohibited by Shari’ah. Attracting Investments The conversion necessitates doing away with the conventional methods of attracting investment funds such as interest-bearing deposits, which should be replaced by the application of Mudarabah and Musharakah contracts or acting as an investment agent. The basis for the impermissibility of using conventional methods of attracting investments is the Saying of Allah, 164
2. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank the Exalted: {“But Allah has permitted trade and forbidden usury”}.(2) The basis for terminating all previous impermissible transactions is the Saying of Allah, the Exalted: {“Give up what remains of your demand for usury”}.(3) Also, a number of Shari’ah boards have issued resolutions for the treatment of pre-conversion liabilities that involve payment of interest by using Shari’ah acceptable instruments and the conversion of interest-based bonds to Islamic certificates and shares.(4) The Fiqh Academy under the auspices of the Muslim World League has issued a resolution confirming the permissibility of Tawarruq (which is one of the instruments that can be used to acquire liquidity).(5) Investment of Funds ■ The basis for the rule that the bank must cease investing through making loans and receiving interest is that this is Riba and paying or receiving Riba is prohibited. ■ The basis for the alternatives to interest-based transactions provided in this standard is the authorities that are mentioned for each investment instrument in details in the Fiqh books(6) and the Shari’ah Standards. Treatment of Impermissible Rights of the Bank before the Decision to Convert ■ The basis for not obliging the bank to dispose of impermissible intangible assets from the previous financial period, i.e. before the year of conversion, is because the management of the bank cannot change rights originating in the previous financial period, as the responsibility and authority for doing so ends at the end of the previous financial period. As for the shareholders (the owners), they are obliged person(2) [Al-Baqarah (The Cow): 275]. (3) [Al-Baqarah (The Cow): 278]. (4) “Qararat Al-Hay`ah Al-Shar’iyyah Li Sharikat Al Rajhi”: Rajhi”: Fatwa No. (106 and 200); “Fatawa Nadwat Al Baraka” [11: 6]; “Fatwa Hay`at Al-Fatwa Wa Al-Raqabah AlShar’iyyah li Bayt Al-Tamwil Al-Kuwayti” No. (415). (5) “Qararat Majma’ Al-Fiqh Al-Islami Al-Tabi’ Li Rabitat Al-’Alam Al-Islami” Al-Islami”,, the session held in 1419 A.H. (6) See: Chapters on Mudarabah, partnerships, agency contract, sales, Ijarah, etc. in different Fiqh books and also the Shari’ah rules for investment and financing instrument issued by Accounting and Auditing Organisation for Islamic Financial Institutions. 165
3. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank ally to dispose of any dividends from non-permissible earnings that were distributed to them, because the responsibility of shareholders remains even after termination of the responsibility of the management at the end of the financial period, i.e. the end of financial period does exonerate shareholders from responsibility. ■ The basis for allowing the bank to keep impermissible earnings and income of doubtful permissibility earned on the basis of an interpretation of a person who is qualified to perform Ijtihad on issues that are subject to personal juristic interpretation and the juristic position of an authoritaauthoritative School of Shari’ah, etc., is that the Shari’ah validates actions that occur on the basis of an interpretation that one believes to be valid until such an interpretation is proved incorrect. The scholars are unanimous that in times of social unrest due to the actions of insurgents who believe in their cause by interpretation or Ijtihad to the effect that they have a right to do so, the insurgents are entitled to items of property they acquire during this time, even if they realise later that they were wrong and end their act of insurgence.(7) ■ The basis for destroying the bank’s non-permissible tangible assets in the possession of others before the year of conversion is that these assets are worthless by Shari’ah Standards since they are impermissible. This is because disposing of a prohibited thing is an obligation as in the case when the verse that prohibited liquor was revealed people discharged the wine that was in their possession. Treatment of Non-Permissible Liabilities of the Bank before the Decision to Convert ■ The basis for the rule that the bank should refrain from paying interest after the conversion is because such interest is not, by the Shari’ah Standard, a valid debt that should be honoured. Again, repentance through conversion necessitates refraining from prohibited acts including payment of interest. The principle of necessity is the basis for allowing payment of interest if the bank could not refrain from doing (7) See Ibn Qudamah, “Al-Mughni” [12: 250-251], Hajr publication, 2nd edition 1413 A.H., edited by Abdullah Al-Turki and Abdul-Fattah Al-Hulw. 166
4. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank so because of lack of legal protection and the possibility that the bank may be subject to punishment that may prevent the avoidance of paying interest. The payment of interest due to necessity is supported by saying of Allah, the Exalted: {“Whoever disbelieved in Allah after his belief, except him who is forced thereto and whose heart is at rest with Faith...”}(8) and the saying of the Prophet (peace be upon him): “Verily, Allah, the Exalted, Has forgiven my ummah those act done by mistake, forgetfulness and compulsion” compulsion”.(9) ■ The basis for making a distinction between the principal loan and interest is because the loan contracts per se are valid. It is the interest associated with the loan that is forbidden. This is the view of the Hanafi jurists who say that the loan contract itself is valid and the condition to pay interest is void.(10) Again, the basis for this ruling is the legal maxim that says acts of Muslims must be deemed valid as far as possible even if their acts are based on a non-preferable juristic view.(11) ■ The basis for the requirement that the outside buyer interested in converting the conventional bank should exert all possible effort to exclude impermissible rights is that the payment of interest is the responsibility of the seller. Such interest would have no bearing on the buyer of the bank as the seller’s right to receive such interest can be taken into account in computing the price to be paid for the bank. If the buyer is unable to convince the seller in this respect, the principle of necessity becomes applicable with regard to payment of interest. The basis for extinguishing Riba-based loans as soon as possible even if such an act will impose on the buyer the need to suggest to the creditor/s early payment of these loans for a discount is the principle of Da’ Wa Ta’jjal (discount for acceleration of payment) that was endorsed by the resolution of International Islamic Fiqh Academy provided the discount was not agreed upon earlier.(12) (8) [Al-Nahl (The Bees): 106]. (9) The Hadith is related by Ibn Majah, “Sunan Ibn Majah” [1: 695]. (10) See Al-Sarakhsi, “Al-Mabsut” [12: 25-26], Dar Al-Ma’rifah. (11) See Ibn Al-Humam, “Fath Al-Qadir” [9: 114], Dar Al-Fikr; Al-Sarakhsi, “Al-Mabsut” [7: 86]; Al-Kasani, “Bada`i’ Al-Sana`i’”, Al-Sana`i’”, [3: 79], [4: 5], [7: 149 and 177], (Dar AlKutub Al-’Ilmiyyah). (12) International Islamic Fiqh Academy Resolution No. 64 (2/7). 167
5. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank ■ The basis for requiring that the purchaser accelerate the redemption of all impermissible mortgages attached to the assets of the bank is because Riba is prohibited; hence, securing payment of Riba by personal guarantees or mortgages is also prohibited. It must be noted that the graveness of securing Riba by personal guarantee is greater than graveness of securing Riba by writing and attestation, which were mentioned in the saying of the Prophet (peace be upon him): “Allah curses the one who take (earn) Riba, the one who gives it, the one who scribe it and the two witnesses”.(13) Treatment of Impermissible Tangible Assets Acquired by the Bank Before the Decision to Convert ■ The basis for destroying the existing tangible assets of the bank after conversion has already been explained. The basis for donating to charity receivables earned from trading in such assets has also been explained earlier. The basis for transforming the locations that were used for impermissible services to locations for permissible services is that the prohibition does not concern the location itself, rather the prohibition relates to the use of the location. Disposal of Impermissible Rights ■ The basis for the requirement that impermissible earnings be donated to charity is that these revenues are not permissible for the person who earns them. This is evidenced by the order of the Prophet (peace be upon him) that the usurped goat be given to war prisoners.(14) ■ The basis for indicating charity as a way of disposing of impermissible earnings is that by transferring the ownership of these earnings, the characterisation of prohibition in respect to these earnings is changed and they become permissible for the beneficiary. Again, a thing which is prohibited for one person is not necessarily prohibited for another person, i.e. when it is prohibited for one, it may be permissible for other. (13) The Hadith has been related by Muslim in his “Sahih” [3: 1219], verified by Muhammad Fu`ad Abdul-Baqi, Dar Ihya Al-Turath Al-’Arabi. (14) The Hadith has been related by Al-Daraqutni, “Sunan Al-Daraqutni” [4: 285]; and “Nayl Al-Awtar” [9: 18]. 168
6. Shari ’ah Standard No. (6): Conversion of a Conventional Bank to an Islamic Bank The International Islamic Fiqh Academy has issued a resolution in support of this ruling.(15) ■ The basis for allowing delay in disposal of non-permissible earnings if such disposal will lead a total breakdown of the activities of the bank or its bankruptcy is that the Fuqaha were of the view that a repentant may use impermissible earnings to cover his unavoidable needs. However, the Institution is not entitled to benefit whatsoever, i.e. directly or indirectly, from the earnings that must be disposed of. This is because such benefit adds value to the asset of the Institution. ■ The channels for disposing of impermissible earnings include, as well as those mentioned in this standard, all other channels of disposal that the Shari’ah Supervisory Board of each Institution will regard as appropriate channels for disposal of impermissible earnings. (15) International Islamic Fiqh Academy Resolution No. 13 (1/3). 169