Protection of Capital and Investments - Scope of Standard

Transcription

1. Shari ’ah Standard No. (45): Protection of Capital and Investments Statement of the Standard 1. Scope of the Standard This Standard covers the instruments and methods used to protect capital and investments from loss, decrease and destruction. 2. Definition of Capital and Investment Protection and the Difference Between Protection and Guarantee Protection of capital and investments means using available methods to prevent loss, decrease or destruction. It is wider than a guarantee of invested capital, as a guarantee is an undertaking by a particular party to bear any loss, decrease or destruction of the capital. On the other hand, protection refers to the safeguarding of capital. 3. Shari’ah Ruling 3/1 Protecting capital by permissible means is desirable in Shari’ah as it serves the objectives of Shari’ah with regard to wealth. 3/2 It is compulsory for an investment manager, whether he is a Mudarib, an investment agent or a managing partner, in his fiduciary capacity, to exercise due diligence to protect the funds from loss, decrease or destruction. If he fails to do so using usual means of protection, he is liable (for loss), taking into consideration items 4/1 and 7/1. 3/3 It is permissible to use Shari’ah-compliant instruments and processes to protect investment from risks that it may be exposed to whether they are risks relating to a loss of capital, depreciation in value, inflation, or the fluctuation of exchange rates, etc. 3/4 The investment manager acts in a fiduciary capacity with regard to the funds. He is not liable for loss of capital except in case of his wilful misconduct, negligence or breach of contractual terms and conditions. 1102
2. Shari ’ah Standard No. (45): Protection of Capital and Investments 3/5 The efforts exerted by the investment manager to grow the capital must be suitable for the nature of the relevant investment. It is also incumbent on him to take professional measures that normally provide suitable protection for the funds. Otherwise, he will be deemed negligent. 3/6 It is not permissible to stipulate in an investment agreement that the investment manager is unconditionally liable for any loss of capital in cases other than willful misconduct, negligence and breach of contractual terms and conditions. 3/7 If a loss occurs caused by the Mudarib’s wilful misconduct, negligence or breach of contract, the capital provider may hold the Mudarib liable for the loss of capital but not the loss of profit. However, if it is determined through actual or constructive liquidation that the investment accrued profit which was added to the capital and then suffered a loss due to the Mudarib’s wilful misconduct, negligence or breach of contract, the Mudarib is liable to idemnify for loss of that profit as it has become a part of the capital. If destruction of the whole or a part of the capital is caused by the Mudarib’s wilfil misconduct, negligence or breach of contract, the Mudarib is liable for the value of the capital. 4. Shari’ah Compliant Means for Protecting Capital 4/1 Instruments and processes used to protect capital and investments must fulfill the following conditions: 4/1/1 The investment partners should bear the risks and losses according to their respective shares in the capital. 4/1/2 The objective should not be to hold the investment manager liable in cases other than willful misconduct, negligence or breach of contract. 4/1/3 The means adopted for capital protection must not be a nonShari’ah compliant contract and should not be a pretext to achieve an objective violating Shari’ah. 1103
3. Shari ’ah Standard No. (45): Protection of Capital and Investments 4/2 Some permissible methods of protecting capital include: 4/2/1 Takaful (Islamic insurance) for the investment to protect the capital or cover the risks of willful misconduct, negligence, breach of contract, procrastination, death or bankruptcy. Takaful coverage may be obtained either by the investors themselves or through the investment manager on their behalf. 4/2/2 Obtaining Takaful cover for the leased assets underlying the Sukuk or other instruments against the risk of destruction and for major maintenance. 4/2/3 An undertaking provided by Takaful institutions to guarantee exports and investments. 4/2/4 A voluntary undertaking by a third party acting in the public interest, such as the state, or relevant public interest authorities, such as a guardian, executor or father, to indemnify against a loss of capital without any right of recourse to the investment manager, such as a government pledge in respect of an investment project. In order for this undertaking to be valid, the third party should be administratively independent of the investment manager and there should be no direct or indirect ownership relationship of more than a half between the investment manager and the third party. 4/2/5 An undertaking by a third party to indemnify against a loss of capital resulting from the investment manager’s wilful misconduct or negligence without receiving consideration for providing such a guarantee. However, the guarantor has the right of recourse to the investment manager. 4/2/6 Creating reserves to protect the capital through deductions from the investors’ share of profits but not from the investment manager’s share of profits due to him in his capacity as the Mudarib. 4/2/7 Diversifying the investment assets to achieve an appropriate return and minimize risks. This may include: 1104
4. Shari ’ah Standard No. (45): Protection of Capital and Investments a) Combining real assets, such as real estate and commodities with financial assets (such as stocks and Sukuk) or combining assets denominated in two different currencies. b) Dividing the capital into two parts by deploying the capital in Murabahah and Musharakah contracts, respectively. The first part is used in Murabahah contracts with parties that have strong credit ratings in a way that the combination of the principal amount and the profit of Murabahah protect the initial capital and the second part is invested in Musharakah contracts. c) Dividing the capital into two parts by deploying the capital in Ijarah and Musharakah contracts respectively. The first part is used in Ijarah contracts with parties that have strong credit ratings in a way that the combination of the principal amount and the rental amount protect the initial capital and the second part is invested in Musharakah contracts. d) Dividing the capital into two parts and deploying them in Murabahah and ’Arboun contracts respectively. The first part is used in Murabahah contracts with parties that have strong credit ratings in a way that the combination of the principal amount and the profit of Murabahah protect the initial capital. The second part is used in ’Arboun contracts to purchase assets. If the value of the assets rises, the purchase contracts are completed and the assets are sold for a profit. If the value of the assets declines, the purchase contracts are not completed and the loss is limited to the amount of the ’Arboun, while the capital is protected by the Murabahah contracts. It is compulsory in this method to observe the Shari’ah rules relating to ’Arboun. This includes the requirement to reserve the assets sold under the ’Arboun contract from the time of contract conclusion until the settlement date and the impermissibility of trading in ’Arboun contracts. [see Shari’ah Standard No. (53) on ’Arboun] rboun 1105
5. Shari ’ah Standard No. (45): Protection of Capital and Investments 4/2/8 Taking security and guarantees in Murabahah, Salam or Istisna’a contracts to ensure that debts are paid. 4/2/9 A sale with an option to terminate due to non-payment (Khiyar Khiyar al-Naqd al-Naqd). ). 4/2/10 It is permissible to use other permissible instruments and processes with the consent of the investor to protect the capital from risks, whether those risks are related to the destruction of the original investment capital, depreciation in value, inflation or the fluctuation of exchange rates, etc. 4/2/11 If the investor has required the investment manager to adopt certain Shari’ah-compliant ways to protect the capital, the manager is obligated to do so. If he does not do so, he is liable for any resulting loss of capital, in accordance with item 4/4. 5. Shari’ah Non-Compliant Means for Protecting Capital It is not permissible to protect the capital by Shari’ah-non-compliant means or means that result in violations of the Shari’ah, such as: 5/1 Stipulating that the investment manager is liable for loss of capital. 5/2 An undertaking by a third party to indemnify for loss of capital in the cases other than wilful misconduct or negligence of the investment manager with a right (of the third party) to have recourse to the investment manager. 5/3 A commitment by or obligating the investment manager to purchase the investment assets at their nominal price or at a price that was initially agreed upon. 5/4 An undertaking by a third party to guarantee the capital for a fee. This is a form of conventional insurance. 5/5 Protecting the capital by use of conventional hedging contracts such as futures, options and swaps. 6. Date of Issuance of the Standard This Standard was issued on 24 Dhul-Qa’dah 1431 A.H., corresponding to 30 November 2010 A.D. 1106