Syndicated Financing - Appendix B (The Shariah Basis for the Standard)

Transcription

1. Shari ’ah Standard No. (24): Syndicated Financing Appendix (B) The Shari’ah Basis for the Standard Permissibility of Syndicated Financing ■ Permissibility of syndicated financing is derived from Musharakah, which encounters no Shari’ah restriction. Projects Financed Through Syndication ■ The ruling that syndicated financing should be directed only towards activities that do not entail dealing in a Shari’ah-impermissible commodity or service, is dictated by the need to abide by the directives outlined in the Holy Qur`an verses and the noble Hadith of the Prophet (peace be upon him). These divine sources prohibit usury, alcoholic drinks, drugs, gambling, pork, illegitimate carcasses, prostitution, nightclubs, statues, etc, as well as impermissible acts like deception, bribe, cheating in weight and measurement, and all types of prohibited sales, etc.(2) Participation of Institutions with Conventional Banks in Syndicated Financing, and Permissibility of Assigning the Role of the Lead Manager to a Conventional Bank ■ Partnership between a Muslim and a Non-Muslim is not prohibited or cannot be judged right away as invalid, except in case of Shari’ah-banned dealings. This is so because what really matters is the conformity of the deal in question to the rulings of Shari’ah, rather than whether the deal has been made by a Muslim or a Non-Muslim. This viewpoint has been adopted by the Al Baraka Seminar,(3) as well as the Fourth Fiqhi (2) For a detailed account of prohibited dealings, their various modern forms, and the Shari’ah bases of their prohibition. See: Dr. Ahmad Muhiddin Ahmad: Operations of Islamic Investment Companies in the International Market, (pp. 27–43). (3) The text of the Fiqhi opinion is “There is no Shari’ah restriction on participation of conventional banks with Islamic banks in a syndicated financing that observes Shari’ah rulings in its operations, on condition that conventional banks should not assume the entire task of managing the operations, or making decisions on Shari’ah related issues.”, Resolution No. (9/1), The Fatawa of the Al Baraka Seminars (P. 151). 642
2. Shari ’ah Standard No. (24): Syndicated Financing Seminar of the Kuwait Finance House (1995). This case also does not come under the Hadith stating that the Prophet (peace be upon him) prohibited involiving in partnership with a Jew or a Christian unless purchase and sale take place by the hands of the Muslim.(4) It is clear that the emphasis of prohibition here relates to avoidance of Riba and invalid contracts, and therefore, no justification for prohibition will remain if due preventive measures against prohibited practices are well catered for. Also, the viewpoint of the Shafi’i, Maliki, Hanbali and Hanafi Schools(5) who advocate Karahah (disinclination towards the deal) does not include this case. The reason is that the Musharakah can avoid Shari’ah-banned practices by explicit reference to the firm commitment of the conventional Institution that leads the syndication to Shari’ah rulings in transactions, besides tightening the control and supervision of the Shari’ah boards of the participating Institutions throughout the various stages of the syndicated financing operation. Preparatory Tasks and Commissions ■ Permissibility of receiving commissions for performing preparatory tasks, originates from the fact that such tasks are beneficial to the partners and do not embark on any Shari’ah-impermissible practice. As regards the justification for the ruling that the commission can be equal to, less or more than the actual cost of providing the tasks, it is because the two parties are free to make what is known as a permissible condition, or resort to mutual consent. This same viewpoint was the Fiqhi opinion of the Al Baraka Seminar as well as the Fiqhi Seminar of the Kuwait Finance House (1995).(6) (4) See: “Al-Majmu’ Sharh Al-Muhadhdhab” [14: 93]. (5) Ibn Qudamah, “Al-Mughni” (Part 4); Al Nawawi, “Al-Majmu’” [13: 504]; Al-Buhuti, “Sharh Muntaha Al-Iradat” [2: 319]; “Al-Mudawwanah” [5: 70]; and Al-Kasani, “Bada`i’ Al-Sana`i’” [6: 61]. (6) The text of the Fiqhi opinion of the Al Baraka Seminar is “The preparatory tasks performed by the bank that creates the operation entitles it to a remuneration which could be equal to, less or more than the actual cost of performing the tasks”. The Fiqhi opinion of the Fourth Seminar of the Kuwait Finance House is “The preparatory tasks performed by the bank that initiates the operation entitles it to remuneration to be determined through mutual consent, whether the bank has been assigned the role of management or not.” 643
3. Shari ’ah Standard No. (24): Syndicated Financing ■ Receiving commitment commission is prohibited because such commission is paid for exercising the right of contracting, which is a matter of will and desire, rather than a subject matter of compensatory deals.(7) Provision of Guarantee and Suretyship by the Lead bank ■ A lead bank should not provide guarantee except in case of misconduct and negligence. Being a partner in the operation, it is supposed to be holding the assets as a trustee, and hence, it should not provide any guarantee. Stating such guarantee in the contract constitutes a violation of the Shari’ah rulings on trusteeship. When the managing bank commits misconduct or negligence, or resort to fraud and trickery in the studies it prepares, it should then indemnify the partners for the injury it has deliberately caused to them. ■ A bank that manages the syndication through Mudarabah or Musharakah should not provide a warranty cover against default of the debtors of its partners, or guarantee the contributions of these partners against exchange rate fluctuations, because provision of guarantee by a partner or a Mudarib to his other partners/owners of the capital is prohibited by Shari’ah. ■ When the bank manages the syndication as an agent, it may provide a warranty cover for the debtors of his partners in a separate contract and without referring to warranty in the agency contract. The justification here is that the bank does not provide such warranty in its capacity as an agent of the partners, and the warranty thus provided against default of the debtors will remain valid even if the agency contract is revoked. Exchange Rates ■ Permissibility for the parties of the syndication to make their contributions in currencies other than that of the syndication on condition that such contributions be revaluated according to the prevailing exchange rates is derived from a Hadith narrated by Ibn Umar (may Allah be pleased with him). Ibn Umar said: “When I told the Messenger of Allah (peace be upon him) that I used to sell camels at Al-Baqi’ in dinars and receive the value in dirhams, he (peace be upon him) said: ‘No harm if you apply the exchange rate of the same day and finalize the deal with your partner before leaving (7) Shari’ah Standards, AAOIFI, Shari’ah Standard on Murabahah. 644
4. Shari ’ah Standard No. (24): Syndicated Financing each other’.”(8) This case also implies combining currency exchange and Hawalah (transfer of money), which has been approved by a resolution of the Islamic Fiqh Academy.(9) ■ The Hadith narrated by Ibn Umar also justifies the fiqhi opinion that the participating Institutions can stipulate receiving their profits and other entitlements in a currency other than that of the syndication, and according to the prevailing exchange rate on the day of receiving such profits and entitlements. ■ Prohibition of commitment of one party of the Musharakah or Mudarabah to safeguard the other party against exchange rate fluctuations is because such commitment leads to the impermissible case of a partner or a Mudarib provides to the other partner guarantee against loss of capital. Controls on Disassociation ■ Participating Institutions can agree on a closed syndicated financing operation where premature exit is not allowed. Such a condition is regarded as a proper condition in Shari’ah, and it does not contradict with the aim of the contract. Moreover, imposing a condition against premature exit does not lead to permitting what Shari’ah has prohibited or prohibiting what it has permitted, nor does it seem to be a probable cause of future dispute.(10) Therefore such condition should be honored in abidance to the divine order of Allah, Exalted be He, in the holy Qur`an: {“O you who believe! Fulfill (all) obligations...”}(11) ■ Agreement beforehand on exit at nominal value or on guaranteeing a certain amount of profit is prohibited because such condition entails exact Riba, or a suspicion of it. Moreover, it involves other Shari’ah(8) Related by Abu Dawud, Al-Nasa`i, Ibn Majah and Al-Hakim who deemed it authentic. AlZahabi agreed with Al-Hakim. The Hadith has been narrated both as Marfu’ (Traceable) Hadith to the Prophet, and Mawquf (Discontinued) Hadith to Ibn Umar, Umar,“Al-Talkhis “Al-Talkhis AlHabir” [3: 29]. (9) International Islamic Fiqh Academy Resolution No. 184/9. (10) Regarding contractual conditions see: “Tabyin Al-Haqa`iq” [4: 43]; Ibn Al-Humam, “Sharh Sharh Fath Al-Qadir” [5 :215]; Al-Buhuti, “Kashshaf Al-Qina’” [3: 192–193]; Al Nawawi, “Al-Majmu’ Sharh Al-Muhadhdhab” [9: 364–368]; and “Al-Khurashi “Al-Khurashi ’Ala Mukhtasar Khalil” [5: 80–81]. (11) [Al-Ma`idah (The Table): 1]. 645
5. Shari ’ah Standard No. (24): Syndicated Financing impermissible practices like the case of one party providing a guarantee against the loss of the share of the other party in the capital, or guarantees a predetermined rate of profit for him. 646