Protection of Capital and Investments - Appendix B (The Shariah Basis for the Standard)

Transcription

1. Shari ’ah Standard No. (45): Protection of Capital and Investments Appendix (B) The Shari’ah Basis for the Standard ■ The basis for capital protection being a desirable objective is the Divine Command to adopt ways and means to protect wealth like having witnesses and documentation of the financial contracts and securing debt with mortgages and the like. Protection of wealth is one of the essential objectives that the Shari’ah has taken care of. ■ The basis for the obligation of the manager to take due diligence to protect the investment is that his role regarding the investment is that of a fiduciary. This means that he should manage the investment in a way that serves the interest of the capital provider in his capacity of his fiduciary representative. He should thus use prudent means consistent with accepted standard practice to increase the funds. ■ The basis for using permissible means to protect the investment is that all (financial) contracts are permissible by default unless proved otherwise. Furthermore, these instruments achieve the intent of the Shari’ah to safeguard wealth. ■ The basis for the investment manager not being liable for the loss of the capital, except in cases of his wilful misconduct and negligence is the consensus of Muslim jurists.(2) That is because he takes the capital with the owner’s permission and deals with it in the interest of the capital provider. He is thus the capital provider’s representative in terms of possessing and managing the capital. This means that the loss or destruction of the capital in his possession is just like its loss or destruction while in the possession of its owner because he took it with his permission. Moreover, no person, including the manager is liable to anything without a specific command by Shari’ah. (2) “Al-Bahr Al-Ra’iq” [6: 313]; “Al-Bahjah Sharh Al-Tuhfah” [2: 217]; “Mayyarah ’Ala Al’Asimiyyah” [2: 131]; and “Al-Mughni” [7: 76]. 1110
2. Shari ’ah Standard No. (45): Protection of Capital and Investments ■ The basis for the impermissibility to stipulate an absolute guarantee to be provided by the manager, is that this condition strips partnership (Mudarabah and Musharakah) and agency contracts of their essential content, and turns them into a guaranteed loan contract. Moreover, these contracts are based upon trusteeship, and this condition violates their nature and implications; hence, it is void. Ibn Qudamah said, “The third type (i.e., of invalid conditions) is to stipulate what is not in the interest of the contract nor consistent with its nature and implications; e.g., stipulating that the partner is liable for the capital or for a share of the loss.”(3) There is no disagreement among the jurists that this condition is void.(4) ■ The basis for the opportunity cost not being compensated in the events of wilful misconduct or negligence is that it is non-existent wealth which has not been realised yet. However, realized profit after actual or constructive liquidation is treated like capital. Shari’ah-Compliant Means for Protecting Capital ■ The basis for stipulating equality among the partners in bearing loss is that partnership is based on equality between the partners. Stipulating that some partners should bear the loss more than others should violates the nature and implications of a partnership contract. Bearing the portion of loss that is supposed to be borne by another partner causes the latter partner to gain profit from that for which he has assumed no liability. The jurists agree that loss sharing in the partnership contract should be proportional to capital (contribution).(5) ■ The basis for the permissibility to protect the capital with Takaful against any type of investment risks is that Takaful is an undertaking to make donations between the participants. It is not a contract to exchange counter-values (Mu’awadah). Its purpose is to achieve cooperation and solidarity among the participants. Hence, the Shari’ah prohibitions that apply to (conventional) commercial insurance do not apply to it. ■ The basis for the permissibility of a third party’s undertaking to bear the loss without the right of recourse to the manager is that, according to the (3) “Al-Mughni” [5: 41]. (4) “Al-Mabsut” [15: 84]; “Al-Bahjah Sharh Al-Tuhfah” [2: 217]; “Al-Hawi Al-Kabir” [9: 113]; and “Al-Mughni” [7: 179]. (5) “Bada’i’ Al-Sana’i’” [7: 517]; “Hashiyat Al-Dusuqi” [3: 353]; “Tuhfat Al-Muhtaj” [5: 292]; and “A-Furu’” [4: 403]. 1111
3. Shari ’ah Standard No. (45): Protection of Capital and Investments Shari’ah, this is an undertaking to make a voluntary donation. Therefore, it is permissible by the Shari’ah provided that the third party is independent from the manager so that his undertaking does not result in the manager becoming the guarantor. ■ The basis for permissibility of deducting reserve amounts (from the profits) is that it is done with the consent of the relevant parties and is in the investors’ interest as it strengthens the investment’s financial situation. No deduction should be made from the manager’s share because the liability for loss is borne by the capital providers, not by the manager. ■ The basis for the permissibility of diversifying investment assets is that diversification achieves the interest of the investors. It does not fall under the prohibition of combining contracts in one contract because each contract is conducted independently of the other, whereby the manager divides the capital into parts and each part is invested independently in one type of contract or investment asset that differs from what the other portion of the capital is invested in. This is for the purpose of mitigating risks and diversifying returns. The parameters for each of these contracts may be sought by referring to the relevant Shari’ah Standard. ■ The basis for the permissibility of obtaining securities and guarantees for deferred payment contracts is the Quranic Verse: {“And if you are on a journey and cannot find a scribe, then (you may resort to holding something as) mortgage, taken into possession”}, possession”} (6) and {“…who produces it is (the reward of) a camel load; I guarantee it”} it”}.(7) ■ The basis for the liability of the manager to bear the loss if he violates the Shari’ah-compliant conditions stipulated by the capital provider is the Quranic Verse: {“O you who believe! Fulfil (your) obligations”}. obligations”} (8) ■ Fulfilling contractual obligations requires the fulfilment of the conditions stipulated in them. The Prophet (peace be upon him) said, “Muslims are (6) [Al-Baqarah (The Cow): 283]. (7) [Yusuf (The Prophet Joseph): 72]. (8) [Al-Ma`idah (The Table): 1]. 1112
4. Shari ’ah Standard No. (45): Protection of Capital and Investments bound by their conditions (stipulated in contracts and undertakings)” undertakings)”.(9) Breaching these conditions amounts to negligence from the manager. Hence, it is compulsory upon him to bear any loss arising from this breach. Shari’ah Non-Compliant Means for Protecting Capital ■ The basis for the prohibition of a third party’s undertaking to bear the loss with the right of recourse to the manager is that this condition results in making the manager liable for the loss, which is prohibited by the Shari’ah. ■ The basis for prohibiting the manager from undertaking to buy the investment assets at their face value or at a value initially agreed upon is that this condition results in the manager undertaking to bear the partial or complete loss of the assets’ value, which is a forbidden condition as aforementioned. ■ The basis for the prohibition of a third party’s guarantee for a fee received in exchange for the guarantee is that it firstly entails excessive ambiguity because the extent of the loss is unknown at the inception of the contract, and because giving a guarantee in exchange for a fee, is prohibited by the Shari’ah. ■ See Shari’ah Standard No. (20) on Sale of Commodities in Organized Markets for the basis of the prohibition of trading in options, futures and swaps.(10) (9) Related by Al-Tirmidhi from the Hadith of Amr Ibn ’Awf, may Allah be pleased with him, in “Kitab Al-Ahkam”, Al-Ahkam”, Chapter on “Ma Dhukira ’An Rasuli Allah, peace be upon him, Fi Al-Sulh”, Al-Sulh”, No. (1272); it is related also by Abu Dawud from the Hadith of Abu Hurayrah, may Allah be pleased with him, in “Kitab Al-Aqdiyah”, Al-Aqdiyah”, Chapter on “Bab Fi Al-Sulh”,, No. (3120); also it is related by Al-Darqutni from the Hadith of ’A`ishah, may Al-Sulh” Allah be pleased with her, with the addition of “…that which is consistent with the truth”, [2: 3]. It is an authentic Hadith when all its chains of transmission are taken into consideration; “Taghliq Al-Ta’liq” [3: 280]; and “Fath Al-Bari” [4: 451]. (10) See Resolution No. (63) 1/7 of the International Islamic Fiqh Academy regarding Financial Markets. 1113