5:40 PM
Mohd. Ma'sum Billah
Abstract
Modern investment activities under Shari’ah
(Islamic law) principles had promisingly been attracting both Muslim and
non-Muslim across the world ever since 1963 with a greater appreciation.
Despite such an achievement status quo there are situations when the
spirit of true Shari’ah (Islamic law) guidelines are not accurately
observed in an Islamic investment culture. This shortcoming might be due to
lack of understanding, socio-political or eco-cultural influences or less
priority to the spirit of divine principles. It is an essential factor for a true Islamic
investment to observe Shari’ah (Islamic law) standard and divine ethical
principles accurately in all aspects of the investment activities. Thus, in
this paper an attempt is made to analyze the Shari’ah (Islamic law)
standard affecting modern investment activities. The study has been conducted by
applying a possible ‘meta analysis approach’ for a common benefit in the modern
Islamic investment environment.
Essence of Islamic Investment
“He (Yusuf) said:
You shall sow for seven years continuously, then what you reap leave it in its ear except a
little of which you eat. Then there shall come after that seven years of
hardship which shall eat away all that you have beforehand laid up in store for
the, except a little of what you shall have preserved. Then there will come after
that a year in which people shall have rain and in which they shall press (grapes)”.[3]
“Take advantage of five before
five: your youth, before old age; your health, before sickness; your wealth,
before poverty; your free time before becoming busy; and your life, before your
death”."[4]
“Allah blesses
those who acquire wealth in good manner, then the wealth is spent accordingly
and the remaining is saved for future use when hardship occurs.”[5]
- How did one spend own young life;
- How were the sources of one’s income;
- How did one spend own wealth;
- How much did one practices knowledge,
which one acquired?”[6]
“Oh Allah, I seek
refuge in thee from sin and debt. He was asked why do you so often seek the
protection of Allah (swt) from debt. He replied: One who is in debt tells lies
and breaks promises.”[8]
“I seek refuge in
thee from unbelief and debt.” A man asked him, do you equate debt with
unbelief? He replied: “Yes” [9]
An investment does not
merely aim at a micro-benefit (self), but it also simultaneously gives an
opportunity with encouragement to care about and share with others be one from
own family or an outsider. From investment profit, one may have the chance to
help others by giving away Sadaqah (charity). One pays Zakat (alms)
from the profit generated from the investment, thus it would bring benefits to
others.
“the most excellent of men is the
believer who strives hard in the way of Allah with his person and property.”[12]
Subject Matter of Investment
There are basically two categories
of assets one can invest in, namely:
- Financial assets: stocks, mutual funds and unit
trust among others.
Essence of Shari’ah (Islamic law) Compliance
- The original rational for having an alternative Islamic system that meets the religious requirements of Muslims in line with their belief and faith
- The factor which distinguishes Islamic banking and finance from its conventional counterpart
- Fulfils
the goal and objectives of Islamic financial system, i.e., to achieve
justice and fairness in the distribution of resources
- In
Islamic legal method, the main source of law is the Shari’ah (Islamic
law) or Islamic law as contained in the al-Qur’an & Sunnah
(tradition).
“Al Asl Fi Al ‘Uqud Al Ibahah”
“the original rule in
contracts is permissibility”.
Investment shall only be in Halal (lawful) Products, assets and services:
“If the main business of a company
is not Halal (lawful) (lawful) in terms of Shari’ah (Islamic law), it is not Halal
(lawful) (lawful) for one to purchase, hold, or sell its shares, because, it
will entail the direct involvement of the shareholders in that Haram (prohibited)
business”.[14]
“Holy Prophet (saw) said: When Allah
(swt) prohibits a thing, He prohibits (giving and receiving) the price of it as
well.”[15]
Investment
shall be free from Riba (usury) (usury):
The interest earned is without any
risk of loss. By removal of the risks altogether, the transaction is no longer
one of business and trade, but one of usury.
Another wisdom as evident in the holy
Qur’an is call for corporation, charity and Qard al-Hassan (benevolent
loan). Here the concept of brotherhood prevails, as Riba (usury) would
bring harm to the society. The collection of wealth through Riba (usury)
is associated with selfishness, greed, impatience and cruelty.
The third wisdom involved in Riba
(usury) is the illegitimacy of charging an extra amount on lent money or
commodities because of deferred repayment. Time is not a commercial commodity.
“When usury and
fornication appear in a community the people of that community render
themselves deserving the sanction of Allah (swt).”[21]
Investment shall be free from Gharar (Uncertainty or Speculation)
(Al-Muwatta)
Investment shall be free from Maisir (Gambling):
“O you who believe! Intoxicants (all
kinds of alcoholic drinks), gambling, al-Ansâb, and al-Azlâm (arrows for
seeking luck or decision) are an abomination of Shaitân's (Satan) handiwork. So
avoid (strictly all) that (abomination) in order that you may be
successful.” [23]
Investment shall be free from Rishwah (corruption):
Contractual
Promises (‘Uqud) shall be honored by all Contractual Parties:
Good
Faith and Mutual Goodwill shall be among the essences of the Contract:
“And when they have to give by
measure or weight to men, give less than due.”[33]
“The Prophet (saw) said, “Validity
of the acts depends on (doers) intentions.” [34]
The investment should be concluded
in sincerity between the parties and no one should cause harm to one another.
“O you who believe!
Why do you say that which you do not do? Most hateful it is with Allâh that you
say that which you do not do.”[35]
Legal
maxim to the effect:
لا ضرر ولا
ضرار
“There should be neither be any harm (caused
to someone) nor causing any harm (to someone)’
Guidelines
of Islamic InvestmentMaking Money by Money is Unlawful:
One of the wrong presumptions on
which all theories of interest is based that money is a commodity. It is
therefore, argued that just as a merchant can sell his commodity for a higher
price than his cost, he can also sell his money for a higher price than its
face value, or just as he can lease his property and can charge a rent against
it, he can also lend his money and can claim interest thereupon. Islamic
principles, however, do not subscribe to this presumption. Money and commodity have
different characteristics and, therefore, they are treated differently.
|
Money
|
Commodity
|
|
No intrinsic utility – cannot be
utilized directly
|
Have intrinsic utility - can be
utilized directly
|
|
No quality except that it is a
measure of value or a medium of exchange
|
Can be of different qualities
|
Profit
& Loss Sharing:
The basic and foremost
characteristic in Islamic investing is, instead of a fixed rate of interest, it
is based on profit & loss sharing. Islam encourages Muslims to invest their
money and to become partners in business instead of becoming creditors. This
would in turn encourage entrepreneurship.
Segregation of Funds:
Shari’ah
(Islamic law) Supervisory Board:
Commitment
of the Management:
The investment’s fund manager should
be fully convinced of the Islamic investment concept and fully committed and
dedicated to it. It should be anxious to implement and comply with the
teachings governing it. Unless the entire management is committed and
convinced, the business activities and the enterprise will not be foul free or
will not escape irregularities and deviation. Regardless of how strict and
stringent fatwa and contracts are, this will not ensure sound practices if
there is no one sufficiently sincere and committed to implement the principles.
Compliance
with the Global Shari’ah (Islamic law) Standards:
Islamic
Investment in Unit Trust
Introduction
to Islamic Unit Trust:
The Malaysian capital market offers
an array of investment products in form of shares, loan stock, bonds, warrants
and unit trust. Furthermore, rapid growth of the Islamic banking and financial
products and services has provided the opportunity for Muslims to actively
invest and for Malaysia to play a more significant role in broadening and
deepening Islamic financial services.
Recently, demand for the Islamic
products and instruments that meet the risk return profile of market
participants for various purposes such as liquidity, investment and financing
activities necessitate the further expansion of the market in term of product
and services.
A Corporate Understanding of Unit Trust:
The
primary objective of Islamic Unit Trust is parallel with the Islamic objective
of doing business or investment by participating in “Halal (lawful)” Shari`ah-based
investment portfolio, which complies with the principles of the Shari`ah.
Such “Halal (lawful)” investments will exclude companies involved in
activities, products or services related to conventional banking, insurance and
financial services, gambling, alcoholic beverages and non-Halal (lawful)
food products.
The holy Prophet
(saw) said to the effect:
The
main objective of the fund is to provide a balanced mix of income and potential
for capital growth by investing in stocks listed on the KLSE or on any other
stock exchanges, unlisted stocks and Islamic Debt Securities and other
non-interest bearing assets acceptable under principles of Shari`ah. The
Fund's activities shall be conducted strictly in accordance with the
requirement of the Shari`ah principles and shall be monitored by the Shari`ah
Panel of the Fund[38].
Islamic Bond Fund (Income Fund) – as an example:
The main objective of the Fund is to
provide regular income to investors through investments in Islamic debt
securities and bonds which are acceptable investment
under the principles of Shari`ah[39].
under the principles of Shari`ah[39].
Mechanisms
of Investment in Unit Trust:
Lump Sum Purchases
This
is where an investor has a single amount of funds, which they want to invest
into a unit trust. This may be the only investment the investor wishes to make.
Over a period of time (3-20 years), the initial investment will increase as
dividends and other income is earned by the fund. When redemption or sale of
the unit takes place, the unit-selling price will reflect the accumulation and
compounding of capital over the relevant number of periods. It is this
compounding effect over time, which makes accumulation type investments, such
as unit trusts, so attractive to the investor[40].
For
example, someone who has recently inherited a sum of money may wish to invest
the funds into a unit trust and hold it for an extended period to save for some
specific purpose. E.g. children's education. At the end of the required period,
the proceeds of the sale of the units will be the initial investment plus the
returns on that amount, accumulated over the relevant period.
Regular Savings
Some
people invest in unit trusts by making regular (e.g. monthly) contributions to
their fund. This is an ideal, disciplined and useful way to accumulate capital
for a future need. By making regular contributions over a period of time, the
sum accumulated at the end of the period will increase at a much quicker pace
compared to if one simply makes a single investment at the beginning of the
period.
At
the end of the required period, the redemption (or sale) price of the units
held will represent the accumulation of all contributions, plus returns
generated from the total contributions since the first purchase was made. The
effect is more noticeable the longer the holding and contribution period. This
form of saving is the basis of most pension fund accumulation e.g. the Employees
Provident Fund[41].
Divine
Understanding of an Islamic Unit Trust Fund: [42]
“Allah
does command you to render back your trusts to those whom they are due; and
judge between man and man that you judge with justice. Verily, how excellent is
the teaching, which he gives you. For Allah is He who hears and sees all
things.”[43]
A Unit Trust scheme can be
illustrated as a tripartite relationship between the managers, the trustee and
the Unit holders.
Investment in Islamic Bond (Sukuk)
For the time being, Islamic Private
Debt Securities involves only bond market. It is regulated by the Securities
commission of Malaysia(SC) through the framework provide under the guidelines
on the offering of Private Debt Securities. Hence, as stipulated in the
guidelines, the structure of Islamic PDS must be confirmed and approved by Shari`ah
advisors who are appointed by the issuer. A Shari`ah advisor can be an
independent Shari`ah advisor who has been approved by the SC or a Shari`ah
committee attached to the financial institutions that carry out Islamic banking
activities approved by the central bank[45].
Step
2: Issuance of Islamic Debt Certificate (Shahdah al-Dayn):
As the consequence of the above
transaction, the bond issuer will sell bond pictured in debt certificate to
financier or investors. Debt certificates issues are valid when it is backed by
an asset. In other word it should be securitized. In this case the underlying
security is the BBA asset (for long term issues) or al-Murabahah asset
(for short to medium term issues).
In Malaysia, there are two
categories of Islamic bond available in the market;
(i)
Islamic
Coupon Bond; and
(ii)
Islamic
Zero Coupon Bond.
Secondary market is crucial in order
to liquidate bonds. As object of trade, the bonds can be sold by investors to
the issuer or third party if the secondary market for Islamic bond exists. Let
say Ahmad, an investor bought a zero coupon bond at a discount RM 950. The bond
par value is RM 1000 upon maturity. During the maturity, he sells back the bond
(debt certificate) to the issuer or third party. Here, we can figure out that
Ahmad receives RM 50 as a profit from the bond. That is how Bay’ al-Dayn (debt
selling)applied in the contract.
“A
time is certainty coming to mankind when they legalize (yastahillun) the Riba
(usury) under the name of Bay”[50]
(trade
concerning that intending usury by words of a sale)
Bay’
al-Dayn (debt selling) for
Immediate Payment and Deferred Payment: Are They Allowed?
All schools of scholars agree that Bay’
al-Dayn (debt selling), sale of debt either to debtor himself or to any
third party, for immediate payment is allowed provided that, it is paid in full
and no benefit is given to the purchaser. Financial transaction involving debts
should never be allowed for a payment relative to the period of loans because
it can be regarded as Riba (usury). The prophet in one Hadith
(tradition) rules out to the effect:
“Do
not sell a debt for a debt”
So, here we can conclude that
selling debts for deferred payment is not allowed.
Otherwise the remaining scholars
allow the above selling provided that the following conditions are observed[52]:
- The
debtor must be financially capable, must accept and recognize the sale in
order that he will not deny the sale.
Today the Shari’ah
(Islamic law) compliant investment opportunity among the OIC member
countries, which focus mainly on fast growing consumer driven sector clusters of
the $6.7 trillion GDP economies namely: energy, food & agriculture, electronics, tourism,
transportation, metals, chemical & allied, plastics, rubber, IT, science
& technology, education & culture, media, financial, trade,
manufacturing, textiles, infrastructure and health-care. The investment opportunity in those sectors aim
at expanding their market opportunities across global environment both among
Muslim and non-Muslim consumers.[53]
Achievement track-records:
- The OIC member
countries representing a GDP in 2013 of $6.7 trillion are projected to
grow in next 4 years (2015-2019) at a higher rate (5.4%) than rest of the
world (3.6%) or BRIC nations (3.9%.).[54]
- Some developing
Muslim countries like Malaysia, Indonesia, and UAE lead the inaugural 2015
Islamic Growth Markets Investment Index™, which ranks countries investment
potential relatively within the OIC member country grouping.[55]
- Among the major
sector clusters identified in the OIC are: energy, food & agriculture,
electronics, travel & transportation, metals, chemical & allied,
plastics/rubber, textiles & related, infrastructure &
construction, and health products & services.[56]
Hence, to resolve the above
conflict, the following alternatives may be suggested for Malaysia, which may ultimately
contribute to the key players in the regional Islamic capital market.
i.
Implementation of Muqarada bond[58] as
an alternative to the Islamic debt based bonds.[59] Muqarada
bond is a financial instrument for raising equity capital. It is a conclusion of
lawful Muqarada (the Mudharaba) in which one party contributes in
term of capital and entrepreneurship for the other, and profits are shared
according to predetermined ratio. Its maturity is determined by the tenure or
project completion date.
The holy Qur’an rules out a
universal guideline as follows:
“Then we have put you (O Muhammad
SAW) on a plain way of (Our)
commandment [like the one which we commanded Our Messengers before you (i.e.
legal ways and laws of the Islâmic Monotheism)]. So follow you that (Islâmic
Monotheism and its laws), and follow not the desires of those who know not.”[61]
[1] Mukhtar Zaman, Banking and Finance Islamic Concept, International
Association of Islamic Banks, Karachi
[2] Section 2(1), Islamic Financial
Services Act 2013 [Act 759],
Malaysia.
[4] Sunan Ahmad
[5] Reported by Sahih al-Bokhari & Muslim, as cited in Mohd. Ma’sum
Billah, Modern Financial Transactions Under Shari’ah (Islamic law),Ilmiah
Publishers, Malaysia
[6] Reported by Sunan al-Tirmizi, as cited by Mohd. Ma’sum
Billah, Modern Financial Transactions Under Shari’ah (Islamic law),Ilmiah
Publishers, Malaysia
[7] al-Qur’an, 31:34
[8] Reported by Sahih al-Bukhari, as cited by Mohd. Ma’sum Billah, Modern
Financial Transactions Under Shari’ah (Islamic law),Ilmiah Publishers, Malaysia
[9] Reported by Sunan al-Nasai and al-Hakim, as cited by Mohd. Ma’sum
Billah, Modern Financial Transactions Under Shari’ah (Islamic law),Ilmiah
Publishers, Malaysia
[10] al-Qur’an, 17:27
[11] al-Qur’an, 6:141
[12] Y.Mansoor Marican, Sayings of the Prophet, Four Bass Prints,
Kuala Lumpur
[13] Ibid at 71.
[14] Mohd. Ma’sum Billah, Modern Financial Transactions Under
Shari’ah (Islamic law), Ilmiah Publishers, Malaysia
[15] Reported by Ahmad and Abu Daud, as cited by Mohd. Ma’sum Billah, Modern
Financial Transactions Under Shari’ah (Islamic law),Ilmiah Publishers, Malaysia
[16] al-Qur’an, 2:279
[17] Al-Qur’an, 2:278
[18] Al-Qur’an, 2:275
[19] Al-Qur’an, 4:160-161
[20] Al-Qur’an, 3:130
[21] Reported by Al-Hakim, as cited by Mohd. Ma’sum Billah, Modern
Financial Transactions Under Shari’ah (Islamic law), Ilmiah Publishers, Malaysia
[22] Al-Qur’an, 5: 90
[23] Al-Qur’an, 5: 90
[24] Al-Qur’an, 5:93
[25] Al-Qur’an, 2:188
[26] Y.Mansoor Marican, Sayings of the Prophet, Four Bass Prints,
Kuala Lumpur
[27] Al-Qur’an, 5:1
[28] Al-Qur’an, 4:58
[29] Al-Qur’an, 17:34
[30] Al-Qur’an, 4:29
[31] Al-Qur’an, 83:1
[32] Al-Qur’an, 83:2
[33] Al-Qur’an, 83:3
[34] Reported by Sahih al-Bukhari, Kitab al-Iman, as cited by Mohd.
Ma’sum Billah, Modern Financial Transactions Under Shari’ah (Islamic law),
Ilmiah Publishers, Malaysia
[35] Al-Qur’an, 61:2-3
[36] Economic Report “Malaysia
2003.
[37] Unit Trusts: An Investors Guide. Securities Industry Development
Centre Education Series.
(August 2000)
[38] RHB Mudharabah Fund. http://www.rhb.com.my
[39] RHB Islamic Bond Fund. http://www.rhb.com.my
[40] The Malaysian Unit Trust Industry. Permodalan Nasional Berhad 2001.
[41] Ibid.
[42] Unit Trusts: An Investors Guide. Securities Industry Development
Centre Education Series.
(August 2000)
[43] (Surah Al-Nisa: Verse 58)
[44] (Surah Al-Baqarah: Verse 283)
[45] Security Commission Resolution
of the Security Commission Shari `ah Advisory
Council.
[46] Rosli Saiful Azhar and Mahmood M. Sanusi. “The Application of Bay’ al-`Inah and Bay’ al-Dayn in
Malaysian Islamic Bond: An
Islamic Analysis” International Journal of Islamic
Financial Services
Vol.No.2 http://islamic-finance.net/journals
[47] ibid.
[48] Schact Introduction to
Islamic Law, p.79.
[49] Rosli Saiful Azhar and Mahmood M. Sanusi. “The Application of Bay’ al-`Inah and Bay’ al-Dayn in Malaysian Islamic
Bond: An Islamic Analysis” International Journal of Islamic Financial
Services Vol.No.2 http://islamic-finance.net/journals
[50] Ighatha al-Lahfan, vol.1, p.352.
[51] Al-Zuhili, Bay’ al-Dayn in
the Shari `ah, pp.35/6
[52] Ibid.
[53] Dinar Standard, ‘Islamic
Growth Markets Investment Report‘, March 3rd, 2015
[54] Ibid.
[55] Ibid.
[56] Ibid.
[57] Al-Qaradawi, Islam and Current Issues, Pp. 40-42
[58] A type of
bond (sukuk) under
Shari’ah principles, in which bondholders are entitled to cash flow from the
project that the bond (sukuk)
intends to finance.
[59]Rosli Saiful Azhar and Mahmood M. Sanusi. “The Application of Bay’ al-`Inah and Bay’ al-Dayn in
Malaysian Islamic Bond: An
Islamic Analysis” International Journal of Islamic
Financial Services,
Vol.No.2 http://islamic-finance.net/journals
[60] Ibid.
[61] Al-Qur’an 45:18
