ISLAMIC BANKING SERIES

ESSAYS ON
ISLAMIC BANKING &
FINANCE
Being collection of articles, research papers and short essays released
over two decades

Dr. Yousuf Azim SIDDIQI

 ISLAMIC BANKING SERIES

ESSAYS ON
ISLAMIC BANKING &
FINANCE
Being collection of articles, research papers and short essays released
over two decades

By:
Dr. Yousuf Azim SIDDIQI
Essays on Islamic Banking & Finance
Dr. Yousuf Azim Siddiqi
Kanz Publishers

First Edition: 2026

e-launch via Islamic Economics Forum (IEF)
Dr. Yousuf Azim Siddiqi worked for over a decade as Shari'a personnel in various
Islamic banks. He was associated with ADIB, Arcapita, Dubai Bank and Emirates
Islamic. He actively participated in developing some of the most innovative Shari’a
compliant products, like Nasdaq Murabaha Certificates, Repo of Murabaha Debt,
Hybrid Ijarah, etc. He was part of the core team of EIB’s USD 2 Billion Sukuk
Programme (2016). In 2021, joined ADIB (UAE) as the Head of the Shari’a Training
Department. He has an interest in writing on Islamic jurisprudence and history in
English, Arabic and Urdu. He co-translated the Book of Sale (The Second Book of
Majallah), published by the IIiBF (Malaysia). His book on Indian scholars’
pronouncements related to unprecedented financial matters was published in
Beirut.

B.Com. from Ness Wadia College of Commerce (Pune), an MBA (Finance) from
the University of Wales (UK) and a PhD. (Islamic Banking & Finance) from IIUM
Institute of Islamic Banking & Finance.

Lives in Abu Dhabi (UAE) with his mother, wife, and little Khadija.
 Dedicated to
Dr. Osaid Kailani
Dr. Abdulsalam Kilani
 CONTENT

Foreword ................................................................................................................ 7
Acknowledgement ................................................................................................. 9
Basic Concepts ..................................................................................................... 10
An Intro to An Islamic Bank .................................................................................... 11
Differentiating features of Islamic vs. conventional banks .................................. 13
Governance & Management ................................................................................ 16
UAE’s Shariah governance standard: new horizons to open ............................... 17
UAE’s Islamic Banking Laws .................................................................................... 21
Majallah: An Introduction ........................................................................................ 24
Shari’ah heterogeneity of Indian Islamic Waqf Law and AAOIFI Standard: A
comparative Study in light of classical rulings?...................................................... 33
Criteria for Acceptable Financing ............................................................................ 58
Shari’a Guidelines on Dealing with Entities based on their Activities................ 61
Specific Risks Facing Islamic Banks & Financial Institutions .............................. 65
Price Regulation in Islamic Economic Law ............................................................ 73
Shari’a Training in Islamic Financial Institutions: An Extra-curricular Activity
or an Independent Function? ................................................................................... 82
Importance of AAOIFI Shari’ah Standards ............................................................ 86
An Introduction to AAOIFI SS. (55): Competition & Prizes ............................... 88
An Introduction to AAOIFI SS. (56): Liability of the Investment Manager ...... 90
An Introduction to AAOIFI SS. (58): Buyback ...................................................... 92
An Introduction to AAOIFI SS. (59): Sale of Debt ................................................ 95
Importance of AAOIFI Shari’ah Standard No. (62): Sukuk, in light of Financial
Times Article ............................................................................................................... 99
Shariah resolution as determining factors in treasury products ........................ 113
Shari’a Review of Non-standardized Deals (Sukuk & Syndication) ................. 117
Structures and Products .................................................................................... 137
Daunting Issues in the History of Shari’a Structuring ........................................ 138
Auto Murabaha: Applied Shari’a ........................................................................... 156
Restructuring Auto Finance: Applied Shari’a ...................................................... 166
International Commodity Trading through DD&Co. Limited ......................... 172
Trading in Common Stocks of Companies with Mixed Activities ................... 179
 CONTENT
Interest-bearing Student Loans in the USA .......................................................... 185
Shari’a Compliant Solutions for Service Financing ............................................. 192
A solution proposed for Murabaha Roll-over ...................................................... 197
Buy Now Pay Later (BNPL): A Shari’a Perspective ............................................. 201
Rent-Now-Pay-Later (RNPL): A Shari’a Perspective & Alternatives ............... 211
Dynamism of Wakala investment in Islamic treasury ........................................ 217
Wakala-based Nasdaq Certificates: Shari’a Compliant Liquidity Solution...... 220
The Islamic Mortgage Options in the USA: Revisiting the Concerns .............. 229
Subordinating Tier-I Sukuks against Standard Deposits: juristic assessment of
current offerings ....................................................................................................... 238
Great Minds ....................................................................................................... 249
Mufti Taqi Usmani: An Introduction.................................................................... 250
Alternative Commercial and Operational Solutions in Islamic Banking: The
Contribution of Mufti Taqi Usmani ...................................................................... 257
A Mentor of the Industry ........................................................................................ 269
Foreword
Throughout centuries, writing remained as one of the most
powerful means of communication, sharing information and
preserving knowledge. Some of the great ideas and grand
civilizations are forgotten because its people ignored writing. On the
other hand, some of the tiny and basic concepts are intact till today
because people preserved them through writing. In some cases,
writing does not become an act of generosity by its creator, rather it
becomes a duty towards the coming generations.
This year, i.e., 2025, Islamic banking has completed half a century
of its formal and regulated existence. A lot of innovation and
development were experienced by its professionals as well as the
customers. However, knowledge sharing through writing about its
tiny technical aspects remained largely ignored. Many times, Shari’a
personnel relied on advanced references of Islamic jurisprudence
and law, but new joiners were puzzled to find a basic text or reference
that matches their position in the long journey.
The author of this collection faced the same dilemma (2) decades
back when he joined Islamic banking industry as junior Shari’a
researcher. Despite his limited knowledge and lack of writing skills,
the author made an endeavour to contribute as much as he can. The
result was more than two dozen of essays, in the form of journal
paper, LinkedIn write ups, advisory notes and magazine articles. It is
worth mentioning that when the author moved to Malaysia in
February 2018 to purse his full-time PhD, he was appointed as an
external independent Shari’a advisor with some Islamic financial
institutions in Africa and Central Asia. Advisory notes shared with
them were represented in this collection and ensuring no breach of
privacy and confidentiality occurs.
More than (250)-page book was divided into four parts. The first
part shares a glimpse of an introduction to Islamic banking. This
could be a stepping stone for more advanced and complex topics.
The second part presents essays on Governance & Management
where the reader will find some food for thought on Islamic banking
7
law, Shari’a governance, importance of AAOIFI Shari’ah standards
and how to conduct Shari’a review. The third part deals with
Structures & Products that were proposed by the author over a period
of two decades either in public platforms or were part of journal
writings. The fourth party is Great Minds which highlights
contributions of some of the Shari’a scholars in the Islamic banking.
Besides self-writing, the author contributed to the knowledge of
Islamic banking by translating from Arabic to English. Readers may
find English abridgements of articles written by two stalwarts of the
industry: Dr. Abdulbari Mashal (In-Charge of Islamic Economics
Forum) and Dr. Osaid Kailani (Global Head of Shari’a at ADIB).
Although, the author was fortunate to co-translate four statements
of Islamic Economics Forum, but those translations can be found in
a separate book published via Kanz Publishers.
All these essays and writes up were written over different times.
Hence, the style, perspective and approach of the author may vary
and does not remain homogenous throughout the book. It can be
said that it’s a slow-cooked meal which carries different flavours but
tries to remain reliable and worth tasting.
I assume that this tiny book would serve as knowledge bites for
students in the Islamic banking faculties as well as new joiners who
try to find out simple answers to the issues facing the industry.

Happy reading

Dr. Yousuf Azim Siddiqi

Abu Dhabi (UAE) | [email protected]
3rd Shawwal 1446 H.
1st April 2025

8
Acknowledgement
No matter how small and humble is the effort, but sincere support
and help of many persons are instrumental in shaping the end
product.
I would like to thank my two mentors in Islamic banking, Dr.
Osaid Kailani (Global Head of Shari’a at ADIB) and Dr. Abdulsalam
Kilani (Head of Internal Sharia Control Group at Emirates Islamic),
for their continued mentorship and guidance that helped me get a
better understanding of the importance of Shari’a provisions in a
complex financial transaction.
Also, thanks to Dr. Humayon Dar (Editor in Chief of Islamic
Finance Reivew ISFIRE) and Ms. Sasikala Thiagaraja (from Islamic
Finance News IFN) for encouraging me to write my initial articles on
Islamic banking.
My PhD Mentors, Dr. Rusni Hassan and Dr. Aznan Hasan were
kind to supervise my writings for journal publications.
Ms. Ginwa Hajjar (Beirut) from Kanz Publishers remains a pillar
of support in her sincere spirit of spreading the knowledge of Islamic
banking.
On a personal note, I extend my gratitude to my mother Ms.
Naheed Siddiqi, my brothers (Eng. Ahmad Viquar and Eng.
Muhammad Abdullah) and my wife (Ms. Huma Siddiqui).
May Allah the Exalted reward them all with the best here and
thereafter, Aameen..

9
Basic Concepts

10
An Intro to An Islamic Bank
Dr. Yousuf Azim Siddiqi
===============================================
On the request of an Islamic bank, the author was requested to provide a short letter
introducing functionality of an Islamic bank which can assist its Board of Directors to
know the nature of business and governance peculiarities.
===============================================
Dear M/s Shareholders/ Customers/ Regulators/ Students,
It was brought to our notice that you are interested to know about
[•] (the “Bank”) which is an Islamic bank/Islamic window. I would
like to highlight some of the points which may assist you in making
an informed decision considering the particular nature and identity
of the Bank as a Shari’a compliant financial institution. These points
should not be considered as ultimate and exclusive. In case any point
rises in the future then you will be informed accordingly.
Business of the Bank
The Bank has a core business of extending financing and
receiving deposits. It should be ensured that all such products are in
compliance with the financial principles of Shari’a which are, mainly,
a) avoiding ribā (interest income or interest expense), b) avoid
dealing in the prohibited items such as liquor, pork etc., c) avoid all
forms of vitiated and void contracts.
Shari’a Governance
The Bank is supposed to seek guidance from the Shari’a advising
bodies or its members (“Shari’a Bodies”) prior to entering into a
transaction and arrange for Shari’a audit for executed transactions.
Further, the Shari’a Bodies should not misuse their authority and
should not compromise on the ethics of confidentiality and
professionalism. The Bank should have a full-time internal employee
who will ensure fulfilment of communicating the Shari’a guidelines
to the Bank and updating the Shari’a Bodies about execution of the
11
transaction and highlighting any issues during the regular Shari’a
audit.
Marketing Communication
The Bank should maintain and observe its Shari’a identity by
avoiding using images or texts which are not in line with Shari’a,
local customs or laws.
Product Offering
The Bank may explore the opportunities to offer Shari’a
compliant alternatives products and services which are offered by
local or international conventional banks and financial institutions
provided Shari’a guidance is sought after from the respective Shari’a
Bodies of the Bank.
Accounting Practices
The Bank may follow accounting standards of AAOIFI, IFRS or
regional accounting bodies provided the statements should not refer
to conventional terminology of interest, borrowing, loans etc. The
accounting reporting should reflect the contractual essence of the
financings. No late payment should be charged on the defaulting
customers. Any amount collected as charity amount or prohibited
income should be disbursed to charitable purposes before the year
ends.
Laws & Regulations
The Bank is subjected to the rulings of the court of law and
guidelines of the regulators (e.g. AML and Statutory Reserves etc.)
provided they do not contradict with Shari’a principles (as
highlighted in Point (1).
Money Market Arrangement
The Bank may arrange financing or make placements in the
money market with Islamic or conventional banks provided it was in
compliance with Shari’a principles, like Int’l Murabaha or short-
term Investment Wakala.
These might be the broad points which should be in mind while
running the Shari’a compliant banking organizations.

ZZZ

12
Differentiating features of Islamic vs.
conventional banks
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 2nd February 2016.
===============================================
Islamic banking today is more than 4 decades old, and it is
surprising to see that a simple initiative of providing alternatives to
prevailing (i.e. conventional) banking products has become a major
competitor to conventional banking. Though its presence is wider in
Muslim-majority countries, Islamic banking is fast becoming
popular across the globe.
Having said that, many users remain reluctant to avail Islamic
banking products and are unaware about the actual differences
between Islamic and conventional banks. Some even claim that
Islamic banks merely change the terminology in order to label the
products as Shari’a compliant. No doubt this assumption is largely
based on ignorance and lack of knowledge which this article will try
to clarify.
• What is the basic purpose of establishing a
conventional bank vs. creating an Islamic bank?
A conventional bank is a financial body which receives money
from depositors against fixed/variable rate of interest and offers
liquidity to borrowers against repayment of interest plus principal
amount. The banks must function within the existing banking laws
and regulatory frameworks. However, as per Shari’a (i.e. Islamic
law), borrowing or lending money against interest is not permissible.
This implies that the basic function of any conventional bank is not
compliant to Shari’a principles. Although some functions (like
13
custody services or FX exchange) might be Shari’a compliant, these
cannot be considered as the core function of any conventional bank.
Alternatively, an Islamic bank is a financial body which is permitted
(by customized Islamic banking laws or amendments to existing
conventional laws) to execute commercial contracts likes sale,
leasing, construction. As per Shari’a, it is permitted to borrow or lend
money but clearly, against no payment of interest.
• Islamic banks charge profit over the principal amount of
financing which is usually equal to the interest amount from
a conventional bank. So where is the difference?
Since Islamic banks enter into various commercial contracts (as
given above) so any amount generated on the principal investment
is clearly a profit which is an additional revenue generated through
various trade activities like sale and lease. The nature of the
underlying contract differentiates the additional revenue from being
an interest or a profit. All profits claimed by Islamic banks on its
financings are based on the concept of risk bearing where the Bank
as seller or lessor must bear the risk of the underlying asset at the
time of executing the financing contract with the customer.
• Are risk factors faced by Islamic banks exactly the same as
conventional banks?
Not exactly! It is natural that Islamic banks, being a financial
entity, must face risk factors which are like other financial
institutions such as liquidity risk or market risk. However, to
consider profits earned on the principal investment, Islamic banks
are supposed to bear risk of the underlying assets even for a very
small period. Hence, Islamic banks purchase vehicles and then sell
them to the customer on Murabaha (cost-plus basis). If anything
goes wrong with the vehicle, then the Islamic bank (being the
supposed seller which couldn’t sell) must bear risk of the asset. On
the other hand, a conventional bank never assumes any risk of the
financed amount. However, after the execution of Murabaha sale (by
Islamic banks) or post disbursement of loan (by conventional banks),
the risk of instalment settlement by the customer/borrower remains
largely similar.

14
• Is it true that Islamic banks impose a penalty for delay in
settlement which is no different from late payment interest
imposed by a conventional bank?
Not true. Conventional banks look at delay in instalments as an
opportunity to earn extra income. Any interest earned on the delayed
instalments goes to the P&L of a conventional bank.
However, Islamic banks are not allowed, as per Shari’a, to earn
extra income on the already agreed upon profit amounts. This will
constitute as interest on debt. On the other hand, we do not have to
overlook the fact that an Islamic bank funds its financing from
shareholders’ capital as well as depositors’ money where it must
assume a fiduciary job of actively managing the funds. To avoid
misuse of Shari’a principles, Islamic banks state a condition in the
Murabaha contracts that in case the customer defaults, then a fixed
amount is paid by the customer over and above the Murabaha
instalments. This amount does not benefit the Islamic banks but goes
to charitable causes. Through this condition, it is ensured that
customers of Islamic banks do not misuse Shari’a principles and
Islamic banks as financiers are protected from delay in payments.
These are just some of the major features which can easily
differentiate Islamic banking products from conventional banking
offerings.

ZZZ

15
Governance & Management

16
UAE’s Shariah governance standard:
new horizons to open
Dr. Yousuf Azim Siddiqi
===============================================
Published in Islamic Finance News (IFN) on 12th July 2023.
===============================================
In May 2020, the Central Bank of the UAE issued the Shariah Governance Standard
(the Standard) for Islamic financial institutions. The Standard was the first of its kind
by the regulator in the country. However, it does not imply that there was a complete
absence of good practices of Shariah governance. Rather, the Standard elevated the
industry from self-governance to regulated governance. In this short article, DR
YOUSUF AZIM SIDDIQI tries to highlight key features of the Standard.
Complementing laws and regulations
Many times, Shariah governance regulations are issued as a
stand-alone guiding document. Despite their issuance from
sovereign or official bodies, their utilization remains confined to the
articles and provisions of the issued regulations. This was not the
case in the UAE. In 1985, the Law of Islamic Banks, Financial
Institutions and Investment Companies was enacted as the world’s
first Islamic banking law.
In 2015, the Commercial Companies Law was enacted which
addressed particularly matters related to Shariah governance for
those companies that function in compliance with Shariah. In 2018,
the Law of the Central Bank and Organization of Financial
Institutions and Activities was enacted that overwrote the previous
law of 1985 and even addressed Shariah governance matters in detail.
In 2022, a revised version of the Law of Commercial Transactions
was enacted which was the world’s first law that addresses Shariah
provisions related to carrying out transactions and financing by
organizations that comply with Shariah.
17
Scope and responsibilities
Article (3.1) of the Standard made it clear that the requirements
of Shariah governance as laid out in the Standard will apply not only
to Islamic financial institution, as the first addressee of the Standard,
but rather to all their subsidiaries, associates and international
branches. Hence, for example, ‘XYZ Bank’ incorporated in the UAE
cannot make an excuse that there is no need for Shariah audit in its
international branches or investments abroad. Moreover, the
objective of the Standard is to achieve compliance with Shariah not
only on the transactional side but also to include operations,
objectives, codes of conduct and all activities carried by the subject
organization. Further, Article (5.2) of the Standard made it clear that
compliance with Shariah will be outlined through structure,
responsibilities, reporting line, accountabilities, communication
channels and roles of compliance with Shariah.
Top-down and collective responsibility
Article (5.4.) of the Standard highlighted that the Shariah
governance mechanism should be in place so that compliance with
Shariah with the organization should be the prime responsibility of
the board of directors. This means it is a top-down duty assimilation,
rather than a one-unit job. Further, the board of directors is given
the responsibility to have a Shariah governance framework in place.
Further, in this regard, the Standard highlighted the roles and duties
of other-than-Shariah units and committees, such as the risk
committee, the audit committee and the senior management.
One of the distinguishing points is the supervision of Shariah
non-compliance (SNC) risk by the risk committee. Islamic financial
institutions usually address liquidity risk, credit risk, market risk and
legal risk. However, very often the probability of financial loss or
reputational risk due to non-compliance with Shariah (represented
via resolutions of the internal Shariah supervision committee (ISSC)
or the Higher Shari'ah Authority (has)) is overlooked by Islamic
financial institutions. The Standard made supervision of SNC risk as
one of the responsibilities of the risk committee.

18
In past decades, audit committees used to function in isolation from
the internal Shariah audit. The Standard made it clear that the audit
committee in an Islamic financial institution has a few additional
responsibilities related to reviewing reports prepared by the internal
Shariah audit and conducting periodic meetings with the head of the
internal audit division at least twice a year.
Shariah bodies and divisions
The HSA was formed pursuant to the UAE Cabinet of Ministers’
Decision in 2016. The HSA plays an important role in providing
Shariah supervision to the central bank. Further, it sets out the
eligibility criteria for the selection of members to the Shariah
committees of organizations that are subject to Shariah governance.
The HSA includes highly qualified Shariah scholars who are well-
versed with Islamic financial sciences besides long exposure to
Shariah guidance in Islamic financial institutions in different parts
of the world.
The HSA is supposed to perform a vital role of resolving any
dispute arising between an Islamic financial institution and its ISSC.
The HSA is supposed to adopt the latest standards that are accepted
internationally and raise efficiency and effectiveness of the industry.
In 2018, the HSA resolved that all Islamic financial institutions in the
country are supposed to comply by AAOIFI’s Shariah standards.
Articles (7.1) to (7.9) of the Standard highlighted the roles and
responsibilities of the ISSCs that were referred in the past as the
Fatwa and Shariah supervisory board. The Standard made some
requirements very clear. For example, there should be a minimum of
five members in any ISSC, out of which one-third should be UAE
nationals. There is a cap on membership in the ISSCs of other
organizations, so that a scholar cannot sit in more than three
organizations within the country and not more than 15 globally.
Upon selection, a Shariah member is supposed to attend at least
75% of the meetings held during the year. Also, the chairman of the
ISSC should assess all the other members and raise a report to the
HSA. An ISSC can select an executive member and form an executive
committee.

19
 However, no structures or documentation should be approved by
the executive member/committee if such requests were never
reviewed and approved by the ISSC. Similarly, annual plans of
Shariah audit cannot be approved by the executive
member/committee.
Articles (10.3)–(10-6) of the Standard highlighted the scope of
work of the Shariah control division that is an internal department
of an Islamic financial institution. It was stated clearly that matters
related to promotions, rewards, termination and performance
evaluation of Shariah control should be looked after by the board of
directors (or its committees) and not by human resources or the
senior management committee. The division is further given five
functions to look after: ISSC secretariat (for matters of ISSC
meetings), Shariah consultations, Shariah research, Shariah
compliance (for HSA resolutions and central bank regulations) and
Shariah training.
Articles (11.1), (11.3) to (11.7) of the Standard highlighted the
role of internal Shariah audit and made it clear that it is a division
that is separate and independent from internal Shariah control, and
its job cannot be outsourced unless the request for outsourcing some
tasks was made by the internal Shariah audit itself subject to approval
from the central bank.
Conclusion
The Shariah Governance Standard of the UAE is significant
development in the industry of Islamic banking because it has made
the responsibility of compliance with Shariah a matter of utmost
importance that is shared with all stakeholders. Further, it proves to
be fresh in its approach via reference to SNC risk, assessment of
Shariah scholars by the chairman, higher involvement of the HSA in
constituting the Shariah committees, separating the internal Shariah
audit from Shariah control, and not allowing outsourcing of the
Shariah audit.

ZZZ

20
UAE’s Islamic Banking Laws
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as introduction to Author’s book: Islamic Banking Laws in the United Arab
Emirates, published by Kanz Publishers in 2022.
===============================================
Over the past four decades, the Islamic banking industry has
evolved rapidly and moved from a far-reaching dream to a
worldwide reality in the form of a financial industry with assets
worth more than multi-billion dollars. Undoubtedly, the industry's
huge growth was driven by strong customer demand. Still, there is
no denying that regulatory frameworks played a vital role in
stabilising the industry and allowing it to experience progress
maturely and sustainably.
On the front of the regulatory framework, a lot has been achieved.
Central Banks issued guidelines and policies which addressed the
needs and challenges of Islamic banks. Similarly, standard issuing
bodies, especially AAOIFI (Bahrain) and IFSB (Malaysia), played a
vital role in providing Shari'ah supervision for the entire industry.
Besides regulatory assistance and customer demand, the Islamic
banking industry faced a significant challenge on the legal side. Due
to the absence of specific laws addressing the peculiar nature of
Islamic banking products, myths and misunderstandings were often
nurtured misleadingly. Over the years, some law firms and legal
experts undermined the distinguishable legal identity of Shari’ah
compliant transactions.
Despite these challenges, it is a cherishing historical fact that the
United Arab Emirates was the world’s first country to issue a stand-
alone Islamic Banking Law, Federal Law No. (6) of 1985. Since then,
21
the country has continued developing different laws and regulations
addressing some aspects of Islamic banking. In 2018, the UAE issued
Federal Law No. (16): Central Bank, which can be described as a
landmark in the Shari’ah governance of the Islamic banking
industry. For the first time, specific articles in the law were crafted
that highlighted significant aspects of Shari'ah governance. Roles and
responsibilities were marked, leaving no room for ambiguity or
organisational choice. The industry was moving from regulatory
assistance to legal recognition.
In December 2022, the biggest leap was experienced in the history
of Islamic banking law when the UAE issued Commercial
Transactions Law, Federal Decree Law No. (50) of 2022. This Law
was a sign of continuing development in the Islamic banking
industry. The Higher Shari'ah Authority of the Central Bank of the
UAE played a vital role in crafting this law. By the issuance of the
law, UAE became the world’s first country that has ever addressed
provisions specific to Islamic financial institutions in federal law and
not via a regulatory standard or guidance note.
Book VI of the Commercial Transactions Law, Federal Law No.
(50) of 2022, discusses commercial transactions of Islamic financial
institutions (IFIs). The author felt that its annotated English
translation should be presented to the public. The notes shared
examples of how these articles of law will reflect on the practices of
the Islamic banking industry.
As a disclaimer, the author is neither a legal expert nor a certified
translator. However, the author was involved in several translation
projects, especially the translation of Majallah’s Book of Sale. I relied
extensively on the English translation of the Civil Code of the UAE
(1985), which was done by James Whelan. Also, I looked at another
English translation of the same code done by Legal Advice Middle
East (LAME). In case of differences, James Whelan’s translation was
given preference since it was the translation adopted by the Ministry
of Justice (UAE).
Further, the English translation of the Commercial Transactions
Law (1993) was referred to ensure consistency of the terminology
reused in the new version. Legal dictionaries were referred to find the

22
legal definitions of the suggested translations. Some of these
dictionaries were: Black's Law Dictionary, P R Aiyar’s Legal Lexicon,
Oxford Law Dictionary and Unwin Hyman’s Law Dictionary. Also,
the English translation of Ibn Rushd’s Bidāyat al-Mujtahid, titled
Distinguished Jurist’s Primer, was relied on to find the most
appropriate legal expressions of some Shari’ah concepts. While
discussing the concepts of muꜤayyan and muṣūfa fī dhimma, I
referred to some references in the law, such as Commercial Law by
Roy Goode, Sale of Goods Law in Malaysia by Abdul Majid Baksh
and Krishan Arjunan. These humble efforts were made to serve a
landmark law in the most appropriate manner.
While the recent law carries significant importance in the field of
Islamic banking law, there is no denying that earlier laws addressed
some matters particular to Islamic banking. Hence, the author
decided to include select articles of law to benefit the reader and give
him an overview of the legal development in the country. The
omnibus of these articles can be referred to as Islamic Banking Law
in the UAE.
It is worth mentioning that the commendable efforts of the
Higher Shari’ah Authority were instrumental in drafting the well-
placed articles of Book VI of the Commercial Transactions Law
(2022). I would like to express my gratitude to the Chairman of the
Higher Shari'ah Authority, Sheikh Ahmed al Haddad (the Grand
Mufti of Dubai), Dr. Osaid Kailani (Member of the HSA), and Dr.
Saad Bakkali (Secretary to the HSA).
ZZZ

23
Majallah: An Introduction
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as introduction to Author’s book: Majallah’s Book of Sale (jointly written
with Dr. Aznan Hasan and Rusni Hassan), published by Kanz Publishers in 2023.
===============================================
Introduction
Majallah Al-Aḥkām Al-ꜤAdliyyah, or as simply Majallah, was one
of the earliest efforts of codification by official authorities in the
Islamic history. Juristic works produced in the form of Fatāwā Al
Hindiya and Murshid Al Ḥayrān fī MaꜤrifat Aḥwāl Al Nās (by Qadrī
Bāshā d. 1886) were efforts of organizing the Islamic jurisprudence
rulings but have not reached the scholarly level where they would be
called codified set of rules.
History of Majallah
Majallah was a result of widespread moment of codification in the
European world. Also, there were national and economic factors for
unifying the stand scattered in various books of Fatwa. In this regard,
there was a project called Al-Matan al-Matīn which remained
incomplete. Also, there were calls to adopt the French Civil Code by
the Ottoman empire. The Grand Vizier Muḥammad Amīn ꜤĀlī
Pāshā (d. 1871) formed a committee to translate the French law to
Turkish language. During the working, another idea evolved to
establish an Ottoman civil code which will be based on the view of
Islamic jurisprudence. Hence, in 1861, it was suggested to form a
committee to work on drafting the laws of Majallah. The word
Majallah means, literally, a sheet which contains wisdom. benefit
from the contemporary efforts of codification and streamlining
complex rulings for the judges, petitioners and most importantly the
24
contracting parities, a need was felt for an official codification in the
commercial and financial transactions which should abide by Islamic
fiqh principles.
The Majallah Committee was headed by Aḥmad Jawdat Pāshā (d.
1895), who was a renowned Islamic jurist and Turkish statesman.
The committee included 7 jurists, wherein the most prominent
names were ꜤAlā Al Dīn Ibn ꜤĀbidīn (d. 1889) and Amīn Al Jundī (d.
1878). The work of drafting the Majallah took 7 years and 8 months
from 15th September 1876 to 12th April 1869. The original drafts of
Majallah can be visited at Al-Mashyakat Al-Islam wing in Dār Al Iftā
in Istanbul.
Methodology of Majallah
There were 16 books which were published dealing on laws
related to sale, lease, guarantee, assignment, pledge, trust, gift,
usurpation, interdiction, partnership, agency, settlement, claim, oath
and judicial system.
Majallah relied mainly on the Ḥanafī jurisprudence with focus on
the most preferred opinion in the school. The Majallah relied on the
base references which are books which are written by the early jurists
of Ḥanafī school like Muḥammad bin Ḥasan al-Shībānī. Also, it
referred on the most trusted texts of Ḥanafī jurisprudence such as:
- Mukhtaṣar al-Qadūrī by Aḥmad al-Qadūrī;
- Kanz al-Daqā’iq by Abū Barakāt Nasafī;
- Al Wiqāya by Tāj al-SharīꜤah Maḥmūd;
- Al-Mukhtār lil Fatwā by Abū al-Faḍal al-Mawṣilī;
- MajmaꜤ al-Baḥrayn by Muḍaffar Al Dīn al-SāꜤātī.
Despite depending the Majallah on the most apparent view of the
Ḥanafī school, but in some sections of the law different approach was
adopted. Hence, in some rulings, view of Abū Yūsuf and
Muḥammad Al Shaybānī were adopted for the sale of heap (see s.
220) and the period of condition option (see s. 300).
In one instance, view of Abū Yūsuf regarding bindingness of the
contract of IstiṣnāꜤ (see s. 392) was adopted by Majallah. Views of
Muḥammad al-Shibānī were adopted by Majallah in two instances
which are non-payment condition (see s. 313) and sale of non-

25
existent fruits (see s. 207). Further, Majallah took the view of Mālikī
school in allowing sale with proviso.
Translations of Majallah
Majallah was originally drafted in Turkish language. Three
different editions of its Arabic translation appeared. Firstly, a
translation by Yūsuf Al Asīr (d. 1889) published by Al Jawā’ib
printing house. Secondly, a translation by Aḥmad ꜤAbbās Al Azharī
(d. 1927). Thirdly, a translation endorsed by the Majallah committee
which was released by the Egyptian calligrapher Najīb Bak Hawāwīnī
(d. 1956). The later edition was edited by Bassām ꜤAbd Al Wahhāb
and published by Dār Ibn Ḥazam (Beirut).
It was translated to Malay and was adopted in Johor and released
as Undang–undang Sivil Islam and published in 1990.
It was translated to Bosnian language by the Austrian government
in 1956 and released as Medzell-I Akhjami Serije.
It was translated to Greek language in 1873.
The Arabic commentary by Muḥammad Khālid Atāsī (d. 1908)
on the first part of Majallah of 100 sections, which is related to
Islamic legal maxims, was translated to Urdu by Muftī Amjad ꜤAlī
from Pakistan.1
It was translated to English by CR Tyser, DG Demetraiates from
Cyprus. It was reprinted with a foreword by Justice S. A. Rahman and
Dr. Daud Bakar.2
Commentaries on Majallah
Majallah, being an enacted law, received huge academic acclaim
for more than half a century. Various scholars, jurists and legal
experts wrote detailed or short commentaries on Majallah. Some of
the famous commentaries are as follows:
1. Sharḥ Al Majallah by Salīm Rustam Bāz (d. 1920). One of the
earliest Arabic commentaries. It was forwarded by Aḥmad Jawdat
Pāshā.3

1
Amjad al-ꜤAlī, Sharḥ-e-Majallah, (Islamabad: Idārah Taḥqīqāt Islāmī, 1986).
2
The Mejelle, translated by C. R. Tyser, D. G. Demetriades and Ismail Haqqi Effendi,
(Kuala Lumpur: The Other Press, 2007).
3
Salīm Rustum Bāz, Sharḥ al-Majallah, (Beirut: Dār al-ꜤIlm lil JamīꜤ, 1998).
26
2. Durar Al Ḥukkām Sharḥ Majallat Al Aḥkām by Ḥayddar Mulla
which was written originally in the Turkish language but
translated by the lawyer Fahmī Al Ḥusaynī. This is considered one
of the biggest commentaries on Majallah.1
3. Sharḥ Al Majallah by Khālid Al Atāsī (d. 1837) and his son
Muḥammad Ṭāhir Al Atāsī (d. 1940). It is one of the most
comprehensive commentaries in Arabic which comes in 6
volumes. In the available edition, Khālid Al Atāsī’s commentary
can be seen in Sections (101-387) and (398-1728). On the other
hand, Muḥammad Al Atāsī’s commentary can be seen on
Sections (1-100), (388-397) and (1729-1851).2
4. Sharḥ Majallat Aḥkām Al ꜤAdliyyah by Muḥammad SaꜤīd Al
Maḥāsnī (d. 1954).3
Subjects of Sale in the Illustrations
Majallah presented various illustrations to make the rulings
closer to the mind of the reader. Hence, in the Book of Sale, there
were 146 illustrations.
In regard to the subject of sale, there were different types and
kinds referred in Majallah.
Illustrations of selling animals made references to fish, horses,
meat, sheep, eggs, cow, bridle of the animal, halt of the draught.
Illustration of selling merchandise made reference to cloth,
kirbās, jukh, chair, bread, diamond, bricks, cooper brazier, locks,
books, box, ruby, coifs, guns, footgear.
Illustration of selling agricultural products made reference to
general fruits, spelt, hay, lemon pots, flowerpots, small trees, planted
trees, watermelon, grape, ghee, oil, barely, walnut, rice, date.
Illustration also included selling of corporeal properties like plot
of land, houses, olive grove, orchard, real estate, house, inn.

1
ꜤAlī Ḥayddar, Durar al-Ḥukkām Sharḥ Majallat al-Aḥkām, (Beirut: Dār al-Kutub
al-ꜤIlmiyyah, 1991).
2
Muḥammad Khālid al-Atāsī and Muḥammad al-Atāsī, Sharḥ al-Majallah, (Beirut:
Dār al-Kutub al-ꜤIlmiyyah, 2016).
3
Muḥammad SaꜤīd al-Maḥāsinī, Sharḥ Majallat al-Aḥkām al-ꜤAdliyyah,
(Damascus: MaṭbaꜤat Taraqqī, 1927).
27
 Illustration also included selling of transport vehicles like ship,
boat.
While referring to currencies and coins, Majallah made reference
to Majīdī gold, English gold, French gold, Majīdī Riyāl and ꜤAmūdī.
On many occasions, reference was given to Kuruş which was referred
in Arabic as qurūsh.
Majallah Afterwards
Majallah remained as an enforceable law in Turkey from 1869 to
1926 when it was replaced by Swiss Civil Code. Further, it remained
enforceable in Lebanon up to 1932, in Syria up to 1949 and Iraq up
to 1953. The new civil law enacted in Kuwait, Jordan, Palestine relied
extensively on Majallah.1
Approach followed in this Translation
While carrying the task of English translation in the present book,
the translation committee made an endeavour to stick to the original
words mentioned in the Arabic translation. However, in some
instances, some additional words were added within square brackets
[ ]. Further, some footnotes were given to clarify those sections which
would be difficult to understand for English reader. On various
occasions reliance was made on Durar al-Ḥukkām by ꜤAlī Ḥayddar
and Sharḥ al-Majallah by Khālid al-Atāsī.
This translation could be the first one in any language where view
of contemporary collective ijtihād is presented in parallel lines with
sections of Majallah. SharīꜤah resolutions adopted by fiqh academies
and Shari’ah boards were presented in brief. Also, short notes were
provided to illustrate how the given ruling in a particular section
could applied in modern-day Islamic banking and finance and it was
preceded by “In the context of IBF”. Hopefully, this will help young

1
For further details on Majallah’s enactment and introduction to commentaries,
refer to:
- Al-Majallah, edited by Bassām ꜤAbd al-Wahhāb al-Jābī, (Beirut: Dār Ibn Ḥazm,
2011).
- Sāmir Māzin al-Qubbaj, Majallat al-Aḥkām al-ꜤAdliyyah Maṣādiruhā wa
Atharahā fī Qawānīn al-Sharq al-Islāmī, (Amman: Dar al-Fatḥ, 2007).
- Yūnus Wahbī Yāwwūz al-Āqṭūghābī, Ḥarakat al-Tajdīd fī Taqnīn al-Fiqh al-
Islāmī, (Beirut: Dār al-Kutub al-ꜤIlmiyyah, 2015).
28
students and professional to contextualize Majallah’s text based on
modern practices.
The translation committee referred to English translations of
Civil Laws in the Arab world and especially the Code of Civil
Transactions for the United Arab Emirates (1985). Two translations
were handy: a) English translation by James Whelan, and b) Legal
Advice Middle East. Further, the committee referred to The
Distinguished Jurist’s Primer which is the English translation of Ibn
Rushd’s Bidayat al-Mujtahid done by Dr. Imran Ahsan Khan
Nyazee. Despite that, the committee does not bound itself with any
particular approach while making its own choice of words and
terminologies.
Translation of Common Words
Some of the words and terminologies were repeated quite often.
Highlighting the choice made by the translation committee would be
avoid the reader any further confusion.
Ꜥaqd lāzim refers to a contract where none of the contracting
parties can rescind the contract.1 This was translated as binding
contract.
Ꜥayn refers to something which is against debt and is specific and
particular, like this house, car, horse etc.2 It was translated by Nyazee
as corporeal property.3
bayꜤ jizāf refers to a sale where quantity of the subject of sale is
not known specifically.4 It was translated as gross sales5, sale of
unascertained goods6, sale in heaps7 and bulk sale8. The committee
preferred bulk sale.

1
Nazīh Ḥammād, MuꜤjam al-Muṣṭalaḥāt al-Māliyyah wa al-Iqtiṣādiyyah,
(Damascus: Dār al-Qalam, 2008), 386.
2
Ḥammād, 338.
3
Ibn Rushd, The Distinguished Jurist’s Primer, translated by Imran Ahsan Khan
Nyazee, (Reading: Grant Publishing Ltd, 1996), 154.
4
Ḥammād, 163.
5
Wahbah Al Zuhayli, Financial Transactions in Islamic Jurisprudence, translated by
Mahmoud A El Gamal (Beirut: Dar al-Fikr al-Mouaser, 2007), 1:293.
6
Whelan, s. 512, s. 582, s. 585.
7
Ibn Rushd, 2:177-178.
8
LAME, s. 512, s. 582, s. 585.
29
 fāsid as per the majority of the jurists the contract could be ṣaḥīḥ
or bāṭil. However, Ḥanafīs have a third state of the contract which is
known as fasād and the contract would be fāsid. In such a state the
contract has missed out some of the aspects of its validity but is not
absolutely void or perfectly valid.1 Fāsid is sometimes translated as
invalid, corrupted2, irregular, voidable, vitiated.3 As per al-Sanhūrī,
Ꜥaqd fāsid has no parallel substitute in the legal literature of western
scholarship. As per Usmani, a voidable contract would be a sale
contract where a subject of sale which old defect has been delivered,
but not a fāsid sale.4 The committee preferred to go for vitiated as
the closest translation. As per Oxford, vitiated is when the legal effect
of something is destroyed or impaired.5
ghayr when used very often in Majallah so it refers to a party other
than the contracting parties. Hence, it was translated as third party
instead of other.
ḥukum refers to a description of actions of the persons. Hence, it
would be wājib, ḥarām, makrūh, mubāḥ etc.6 This was translated as
rule or ruling.
ḥukum al-Ꜥaqd refers to the basic and legal purpose of the
contract for achieving it in a licit way. For example, transfer of
ownership against a consideration is ḥukum al-Ꜥaqd in a sale
contract.7 In different writings, it was translated as ambit of a
contract,8 terms of contract,9 contract’s provision10. The committee
preferred to adopt effect of contract.

1
Ḥammād, 352.
2
Muhammad Amin Ibn ꜤAbidin, The Book of Sales, Translated by Muhammad Anas
Al-Muhsin and Amer Bashir, (Kuala Lumpur: IBFIM, 2012), 354.
3
Ibn Rushd, 2:153.
4
Muhammad Taqi Usmani, ꜤAdālatī Fayṣalay, (Karachi: Idārat al-Islāmiyyāt, 2000),
265-267.
5
Oxford University Press, Oxford Dictionary of Law, (Oxford: Oxford University
Press, 2015), 654.
6
Abū Jayb, 1:543.
7
Abū Jayb, 1:544.
8
Whelan, s. 205 and 209.
9
LAME, s. 205.
10
Ibid, s. 243.
30
 inꜤiqād al-bayꜤ vs. tamām al-bayꜤ with reference to fiqh
literature, once acceptance is made against an offer, then there will
be a state of inꜤiqād al-bayꜤ which was translated as conclusion of the
sale. Once the contract is established for execution with all its
obligation, then it would be a state of tamām al-bayꜤ which was
translated as formation of the sale.
mawqūf refers to two situations. Firstly, where a contract which
is valid as per the description but transfer of ownership is suspended
because a third party’s right is involved. Secondly, a contract which
contains a condition or done with the session’s option because
ownership has not surpassed to the other party. In both the cases, it
was translated as suspended.1
masā’il (plural of mas’alah) refers to an issue which needs
explanation by the jurists.2 It was translated as issues.
muꜤayyan refers to something which is identified and cannot be
the other one. Hence, this house would be different from any other
house. The opposite of muꜤayyan is mawṣūf fī dhimmah. It was
translated as specific which means something identified at the time
a sale contract is made.3
nuqūd refers to gold and silver.4 Further, jurists have classified
nuqūd into nuqūd khilqiyyah (nuqūd by nature), which include dīnār
(gold-based coins) or dirham (silver-based coins), and nuqūd
iṣṭilāḥiyyah (technical nuqūd) which include nuqūd waraqiyyah
(paper currency) and fulūs (currency in circulation).5 Considering
the modern development of currency notes which are no longer
backed by gold or silver, so nuqūd was translated as money.
ṣaḥīḥ vs. bāṭil: a contract fulfilling all its requirement of
conclusion would be deemed as ṣaḥīḥ which was translated as valid
contract. On the contrary when the contract is ab initio not valid then
it would be bāṭil which was translated as void contract because such

1
SaꜤdī Abū Jayb, MuꜤjam Lughat al-SharīꜤah, (Damascus: Dār al-Bashā’ir al-
Islāmiyyah, 2019), 4:581
2
Abū Jayb, 2:246.
3
Oxford, 587
4
Hammād, 462.
5
Abū Jayb, 4:335.
31
a contract does not enjoy any SharīꜤah provisions due to a
fundamental flaw.
taꜤaddī refers to a situation where a person crosses beyond what
was confined as per SharīꜤah, customs and norms. Sometimes it is
translated as misconduct. The committee preferred to go for the legal
word transgression which indicates trespassing and wrongful act.1
ZZZ

1
P Ramanatha Aiyar, The Law Lexicon, (Nagpur: Wadhwa and Company Nagpur,
1997), 1917.
32
Shari’ah heterogeneity of Indian
Islamic Waqf Law and AAOIFI
Standard: A comparative Study in light
of classical rulings?
Dr. Jawwad Alia | Dr. Yousuf Azim Siddiqi | Dr. Nor Asiah Mohamad | Dr. Rusni
Hassan
===============================================
Journal of Islamic Finance Vol. 12 No. 1 (2023) 96-108 issued by the IIUM Institute
of Islamic Banking and Finance, ISSN 2289-2117 (O) / 2289-2109 (P). It is one of the
earliest academic papers that studied AAOIFI’s Shari’ah Standard No. (60): Waqf.
===============================================
Abstract
The establishment of the institution of Waqf, or Islamic
endowment, was evident from the early days of Islam. Hence, the
Prophet's companions (PBUH) had established Waqf for their family
members or needy people. Over some time, Waqf played a vital role
in Islamic history by serving sectors like health, education, and social
welfare. With the introduction of Islam in India, the institution of
Waqf spread in Delhi and then to other parts. Governance of these
Waqf bodies was directly managed by the royal court of the Muslim
emperor. After the fall of the Mughal Empire, some acts were enacted
by the British empire. Post-independence of India, new laws and acts
related to Waqf were enacted, but Shari’ah observation was not the
core theme of these acts. In 1972, the All-India Muslim Personal Law
Board (AIMPLB) was formed, and it planned to codify fiqh rulings
related to family matters and Waqf. This study compares the rulings
of Indian Islamic Waqf Law with AAOIFI’s Shari’ah Standard on
Waqf (issued in 2019). To achieve this objective, the qualitative
method is adopted. The study is divided into a) Introduction, b)
Literature Review, c) Analysis, and d) Conclusion and
Recommendation. The study found five instances of Shari’ah
heterogeneity where IIWL has less favourable implications, besides
33
22 rulings where IIWL has no stand. The study recommends revising
IIWL to ensure the growth of Waqf and longer sustainability.
Keywords: Waqf, Islamic Endowment, Social Welfare, Shari’ah,
IIWL, AAOIFI. AIMPLB.
1. Introduction
1.1 Waqf in Islam
Waqf is an act by the owner to refrain from any sort of disposition
of what he owns by retaining the asset itself so its return for welfare
to seek Allah’s nearness (Al Bahūtī, 1993). There is some evidence of
the practice of establishing Waqf in the pre-Islamic era. Egyptians
experienced family Waqf, where an elder son of the family was not
allowed to dispose of the subject land rather than disburse the
revenues on his siblings. This was stated in Dahshur declaration as
well (Abū Zahra, 2004). In Islamic history, among the earlier
instances of family Waqf was the Waqf created by the companion
Abū-Talḥa (RA) wherein he endowed his land in Bīrḥā for his family.
Similarly, the companion Umar (RA) endowed his land in Khaybar
to benefit poor and needy people (Al Bukhārī, 2017).
Throughout history, Waqf played an essential role in Islamic
civilization by achieving social cooperation, providing healthcare,
looking after schools and libraries (Majūr, 2014). Overall, Waqf can
be classified as a charitable Waqf, family, or progeny Waqf or a
combined Waqf, where it combines the beneficiaries from the family
and a righteous purpose (Al Nadwī, 2014).
1.2 History of Waqf in India
Upon reaching Islam to the Indian subcontinent, Waqf bodies
were established by the Sultans of Delhi. The first Waqf in Delhi was
Quwwat-ul-Isalm Masjid, which was built by Sultan Quṭb al-Dīn
Aybak in 1193 (Nadwī, 2014). It is reported that Firoz Shah Tughlaq
(d. 1388) created a charitable Waqf to arrange the marriage expenses
of poor girls. More than one thousand girls used to avail funds from
this Waqf. Also, a Waqf was created to distribute more than three
million rupees to the poor and the needy people (Barnī, 2015).
Similarly, Waqf bodies were made to contribute to the running
and construction of religious schools and spending on students
studying there (Al Ḥasnī, 2001). Even Waqf was made for mosques
34
in India. Sultan Firoz Shah ordered the construction of 8 mosques in
Firozabad, near Delhi, which accommodated more than ten
thousand persons (Ṣalwat, 2009). India had huge Waqf to serve the
need of public and private libraries (Rafīq, 1982). Also, Waqf bodies
were made to serve the medical needs of hospitals, which were
known as bimāristān. Firoz Shāh built 50 hospitals, and one of them
was in Delhi, known as Dār al-Shifā (Barnī, 2015). Further, there was
Waqf for serving the Khānqāh and auberge hostel (Ṣalwat, 2009). As
per the current figures, there are around 1964 Waqf properties in
Delhi, including mosques, graveyards, shrines of Sufi shrines,
commercial places, and lands specified for Waqf (Al Nadwī, 2014).
1.3 Governance of Waqf in India
It was observed that the Muslim Sultans of Delhi aimed to achieve
prosperity and development of the public by abiding with norms of
social justice. The Waqf bodies were generally governed by a system
which ensured that a) Waqf bodies were registered, b) the overseer
used to be a person who abides by the teachings and values of Islam,
c) Waqf bodies were managed in compliance with Islamic rulings, d)
Waqf revenues were distributed in line with Shari’a, e) Waqf assets
were duly repaired on time, and f) to ensure running a fair and open
trial for those who misuse funds intended for the Waqf funds (Al
Nadwī, 2014).
During the Muslim era, Waqf bodies were managed by overseers
appointed formally for the post, and they were supervised by Shari’a-
judges. A robust system of governance ensured generating good
revenues. After independence from the British, the responsibility of
Waqf in India was given to the government authorities instead of
handing it over to Muslim organizations. The government has
created the Central Waqf Council, which has various Waqf Boards
in different states (Al Nadwī, 2014).
The British Government has enacted Waqf law under the
Musalman Waqf Validating Act (1913). Various Waqf laws were
followed either as a new law or an amendment to the previous ones.
The last full-fledged act was enacted under the name of the Waqf Act
(1995). It was observed that the Act deals with establishing the Waqf

35
Board at the centre and the state level. Also, the act highlights the
registration of Waqf and the maintenance of accounts.
1.4 Islamic Codification of Waqf
At a community level, the All-India Muslim Personal Law Board
(MPLB) has proposed a law, or a standard, for matters related to
Muslim personal law and matters of inheritance, will, and Waqf
(IFA, 2002). These laws relied on the books and opinions of Ḥanafī
jurists. These laws are not enacted by any government but are applied
in the parallel legal system of Muslims who aim to follow the law of
Shari’a in their day-to-day life. On the other hand, AAOIFI
(Bahrain), being a world-renowned and reputed Shari’ah standard
body, has issued its Standard No. (60) on Waqf in 2019. Considering
the diversity of AAOIFI’s Shari’ah Board members, the rulings
represent various schools of Fiqh. Currently, there are no studies that
focus on AAOIFI’s Waqf standard or conduct a comparative study
with MPLB’s Islamic law of Waqf. The findings will facilitate
identifying the gaps in improving the Islamic law of Waqf in India.
2. Problem Statement
AAOIFI is considered the world’s leading standard-setting body,
which issues standards on Shari’ah, governance, and accounting. The
Shari’ah Board of AAOIFI consists of renowned Shari’ah scholars
from all over the world. The recent Shari’ah Standard No. (59): Waqf
is a re-issuance of an earlier standard which was a result of a long
debate and consideration. On the other hand, Waqf Law issued by
MPLB (India) has wide-acceptance within the Muslim community.
There is no research conducted a study on Shari’ah heterogeneity of
AAOIFI’s standard against MPLB’s law. It is believed such a study
will help with scope of Waqf practices among Indian Muslims.
3. Literature Review
Indian scholars have addressed Waqf's matters through various
writings on fatwā (Al Nadwī, 2014). Among the earliest writings is
Fatāwā Ālam Gīrī, which is also known as Fatāwā Hindiya, that was
written on the order of the Moughal Emperor Aurang Zayb (d.
1707). The book is a compendium of pronouncements of the Ḥanafī
jurisprudence, where the scholars have presented rulings from the
prior references. The work was done under the supervision of Nizām

36
al-Dīn Burhānpūrī. The book on Waqf included 14 chapters that
addressed matters related to the definition of Waqf, its causes,
rulings, and conditions.
Further, it has references on things which are acceptable to be
subject of Waqf and things which are not. Also, it discussed Waqf
with a proviso, usurpation of Waqf, Waqf declaration. The book is
considered one of the earliest efforts of the semi-codification of
Islamic legal rulings as Ḥanafī (Al Zarqā, 2004). Before that, Farīd al-
Dīn Andarpatī (d. 786) had authored a large collection of fatwās on
various aspects of Islamic jurisprudence with the title Fatāwā
Tatārkhāniya. The book consisted of 20 volumes, and the 8th volume
was dedicated to sale and Waqf. The book of Waqf covered all the
aspects related to Waqf rulings and, overall, the book is considered
one of the biggest references on Ḥanafī jurisprudence.
In recent times, Indian scholars addressed the topic of Waqf at a
collective level. In 1997, the Islamic Fiqh Academy (New Delhi)
conducted a three-day session on the topic of Waqf. Scholars,
researchers, government officers, and legal professionals were
invited to contribute to the conference. Upon the conclusion of the
conference, all the presented papers were published by the academy.
The scholarly works, edited by Mujāhid al-Islam Qāsimī, included
papers and articles on Waqf in the modern era, important types of
Waqf in the present times, problems, and issues of managing Waqf,
and assessment of the Waqf Act 1995. Towards the end, there were
resolutions on Waqf with particular reference to India (IFA, 2016).
This could be considered as the first Arabic work in modern Indian,
which was the product and reflection of collective stand by religious
scholars. This was followed by another session of discussion
conducted by the academy in 2004. The proceedings were published
in Urdu in 160 pages under the title Mawjūda Aham Samājī Masā’il
Kay Ḥal Kay Liya Waqf kī Ahamīt Aur Ṭarīqakār [Importance of
Waqf in solving current issues of Waqf and its methodology]. The
proceedings addressed matters related to the necessity of exercising
ijtihād in the modern issues of Waqf, rulings on establishing new
types of Waqf, and, most importantly, usage of Waqf in serving the
social goals when it comes to poverty upliftment.

37
 Contemporary Indian scholars have addressed Waqf either by
writing inclusive books on Waqf or by addressing queries raised by
the public. As far as dedicated books on Waqf are concerned, so there
are few important works in this regard. For instance, Maḥmūd al-
Ḥasan Ārif has written a 282 pages book in Urdu with the title “Islām
kā Qānūn Waqf mia Tārīkh Muslim Awqāf.” The author presented
the legal framework of Waqf in Islam with detail while addressing
the special or general issues which may arise in establishing and
managing Waqf. Also, the book presented the history of Waqf in the
Indian subcontinent. Also, Khālid Sayf Allah Raḥmānī has covered
the topic of Waqf in his encyclopaedic work in Urdu titled Qāmūs
al-Fiqh. The chapter discussed the definition and conditions of
establishing a Waqf besides conditions related to appointing an
overseer and his responsibilities. What makes this work on Waqf
different among the works done Indian scholars are referring to the
rulings of other jurisprudence besides the Ḥanafī rulings.
Considering the particular scenario of India, the section emphasized
Waqf related to the mosques and the places of performing prayers
(e.g., Eid grounds) (Raḥmānī, 2012).
Further, the author has addressed the rulings on Waqf via another
book in Urdu called Jadīd Fiqhī Masā’il, wherein he particular to
unprecedented matters of Waqf establishment and management. In
more recent works is the Urdu book by Ẓafar Ālam Nadwī with the
title Islām kā Niẓame Waqf. The book aimed to re-present the
rulings on Waqf mentioned in the classical references to address new
matters and issues. The book followed contemporary approach in
presenting the rulings and making it easy for the readers to reach the
required information.
On the other hand, Indian scholars responded to general queries
raised by the public from time to time. For instance, Ashraf Alī
Thanwī (d. 1943) complied a fatwā compendium titled Imdād al-
Fatāwā, which addressed matters related to the management of Waqf
like selling assets of the Waqf property to serve other purposes of
Waqf (Thānwī, 1428H). Similarly, Kifāyat Allah Dihlawī (d. 1952)
addressed in his fatwā compendium, titled Kifāt Al-Muftī, various
matters related to Islamic law. In the 7th volume, more than 250 pages
38
were dedicated to various fatwās related to Waqf with focus on Waqf
of mosques, Eid-grounds, graveyards, and Waqf on children. The
author relied on the directives of the Qurān and Sunnah, besides
referring to juristic consensus (Dihlawī, 2001). Further, Abd Raḥīm
Lājpūrī presented a compendium titled Fatāwā Raḥīmiya which
addressed matters related to Waqf of graveyards, mosques, and
religious institutions of a madrasa. The book also contains fatwās on
the management of Waqf by non-Muslims (Lājpūrī, 2003).
In the 1970s, when Muslims of India was the target of a common
civil code which aims to eliminate their juristic identity as advised by
Islam, so Muslim scholars called for a convention to establish the
Muslim Personal Law Board on 27th December 1972, and
Muḥammad Ṭayb Qāsimī was chosen as its head (Nadwī, 1430H). In
due course of time, the board has worked on a draft of Islamic law in
Urdu related to marriage, divorce, gift, inheritance, and Waqf. The
purpose of these laws, which were not enacted by a government, was
to enable Qāḍī or Shari’a-judge, i.e., Muslim judges in parallel courts,
to judge various matters in line with Islamic teachings. The rulings
were divided into 13 books of law, which were known individually as
qānūn. Each law contained sections that were referred to as dufa, i.e.,
the legal section. The Waqf law presented rulings on Waqf
establishment besides its management and governance. In the
footnote, references were given from the classical books of fiqh like
Fatāwā Hindiya, Rudd al-Muḥtār, and Baḥar al-Rā’iq. Undoubtedly,
the effort is the first of its kind in India, which deserves to be
classified as codification. However, it remained mostly confined to
the Ḥanafī view without referring to other schools of jurisprudence.
Also, the law on Waqf was confined to the physical property and gave
no reference to different kinds of possible Waqf.
Considering the scholarly efforts of Indian scholars on matters
and issues of Waqf, it is evident that mostly the Waqf are related to
mosques, graveyards, or religious institutions. Further, the reliance
is mostly made on the Ḥanafī school of jurisprudence. This kind of
approach and scholarly works mark a research gap against the
modern development in the thought and rulings of Waqf, which can
be better understood via AAOIFI’s Shari’ah Standard on Waqf.
39
4. Analysis
Any Waqf institution has certain persons involved in establishing
and running it. The Waqf is created by a party referred into Arabic
as wāqif (MAIA, 2006). In this paper, the party is referred endower
because endowmen, also refer to “any property belonging
permanently to charity” (Oxford, 2015). Further, the Waqf has
mustaḥiq fī al-waqf who is a party entitled to a share in the proceeds
or revenue of the Waqf (Abū Zahra, 2004). This party is referred in
the present study as Waqf beneficiary. The Waqf is managed by the
overseer (nāẓir) who leases property, collects the rental and disburses
the accumulated amount in Shari’ah-wise acceptable ways, and is
also referred to as mutawalī (Ḥammād, 2008). The same position is
also referred to as trustee (amīn) as well which was defined in the
Indian Trusts Act as “one to whom property is entrusted to be
administered for the benefit of others” (Aiyar, 1997).
The Waqf Law proposed by the Muslim Personal Law Board
(India) (IFA, 2002) is referred in this paper as Islamic Indian Waqf
Law or IIWL. On the other hand, reference to AAOIFI’s Shari’ah
Standard No. (60) on Waqf (AAOIFI, 2019) is referred as AAOIFI.
This section of the paper deals with the following aspects of Waqf
rulings: a) creation of Waqf, b) Waqf beneficiaries, c) Waqf assets, d)
governance of Waqf, and e) management of Waqf.
4.1 Creation of Waqf
4.1.1 The Endower’s Qualification
As per IIWL, the person who is instituting the Waqf should be
believing in seeking the religious reward for the act of Waqf.
As per IIWL, the endower should be of full mental capacity and
adult. AAOIFI had no reference on the age and the mental status of
the endower. There seems to a juristic consensus that the endower
cannot be a child. This was adopted by Ḥanafīs (Al Kāsānī, 1986),
Mālikīs (Al Dardīr, 2010), Shaf’īs (Al Ramlī, 2003), and Ḥanbalīs (Al
Bahūtī, 1983).
As per AAOIFI, Waqf can be instituted by a non-Muslim. There
was no reference by IIWL on this point because as per Ḥanafīs, a
Waqf by a non-Muslim will be acceptable if two conditions are
fulfilled: a) the purpose of Waqf was in itself permissible as per
40
Shari’ah, and b) the purpose of Waqf is deemed as a religious
subservience as per the religion of the endower. Hence, a non-
Muslim cannot endow upon a mosque because this is not an act of
subservience in his religion.
As per AAOIFI, the Waqf can be done by a legal entity or juristic
person when the decision to institute the Waqf is made by its owners
or those who have the right to take the decision. IIWL has no
reference to this matter.
4.1.2 Enforceability of Waqf
In general, the Waqf can take effect immediately, which is
referred to in fiqh as nājiz. However, if the endower wanted to put a
contingent condition of affecting the Waqf, then there is a difference
of opinion. IIWL does not permit stipulating such a condition.
However, AAOIFI allows contingent Waqf wherein Waqf is affected
on approval from a supervisory authority or effective from a future
date. The view of AAOIFI is based on Mālikīs (Al Dasūqī, 2010) and
Ḥanbalīs (Al Mardāwī, 1956).
As per AAOIFI, the Waqf asset can be what is subjected to the
rescission option. In case the part, which has the option, affirm the
contract, then Waqf will be enforceable from its inception.
Otherwise, the Waqf will stand nullified. IIWL has no reference on
this same.
As per AAOIFI, Waqf asset can be of something subject of pledge
provided its enforceability is dependent on any of the following: a)
the pledgee waives his rights in the pledge, b) the debt is settled, c)
the pledge applies on the part over and above the debt amount, and
in any of the given cases, the Waqf shall be enforceable from the time
of inception. There is no reference in IILW on instituting Waqf
which is subjected to pledge.
As per IIWL, the Waqf should be absolute and not a promise to
institute a Waqf. Once Waqf is created, it becomes binding, which
cannot be rescinded. This view is taken as per by the majority of the
scholars, including Shāfi’īs (Al Nawawī, 1991), Mālikīs (Al Dasūqī,
2010), Ḥanbalīs (Al Bahūtī, 1983). However, Abū-Ḥanīfah (Ibn
Ābidīn, 2003) sees that Waqf is not binding, and it can be dismissed
by the endower. Although as per Ibn Ḥanbal, the merely verbal

41
statement does not make the Waqf binding, rather its possession is
necessary as the case with gift contract (Ibn Qudāma, 1997).
The endower could be on the death bed while making the Waqf.
AAOIFI and IIWL, the Waqf, cannot be more than one-third of the
left-over properties of the deceased. However, AAOIFI gives the
endower the right to revoke it, but the same right is not possible
under IIWL.
4.1.3 Duration of Waqf
As a principle, the Waqf should be perpetual as viewed by
AAOIFI and IIWL. This view was in line with Ḥanafīs (Ibn Ābidīn,
2003), Shāfi’īs (Al Sharbīnī, 200,) and Ḥanbalīs (A. Ibn Qudāma,
1994). However, AAOIFI also permits a temporary Waqf provided it
a) the period is specified or b) bound by a condition. In case the
period has elapsed, or the condition is met, then the Waqf asset is
returned to its owner or his heir. This view was in line with by Mālikīs
(Al Dasūqī, 2010) and an opinion by Ḥanbalīs (Al Mardāwī, 1956).
4.1.4 Purpose of Waqf
As per IIWL, the Waqf can be done on a thing that can be used,
as per the customs, by rich and poor people. This includes mosques,
hospitals, or auberge hostels. On the other hand, there is no reference
by AAOIFI for such a generalization. Mālikīs opined that the Waqf
could be dedicated specifically for the rich (Al Dasūqī, 2010) and
Shāfiīs (Al Sharbīnī, 2000). However, Ḥanafīs do not allow Waqf,
where the beneficiaries are exclusively the rich. Rather it can be
stipulated that it’s for the rich followed by the poor people (Ibn
Ābidīn, 2003). Even Ḥanbalīs (Al Bahūtī, 1983) does not permit the
exclusive beneficiary to be a group of rich people.
As per AAOIFI, the cause of Waqf could be absolute (muṭlaq), so
it will be disbursed in the charitable causes as found suitable by the
overseer or the judge. IIWL did not refer to a case of absolute Waqf
where a particular beneficiary is not mentioned. As per the majority
of the jurists, such a Waqf is valid (MAIA, 2006). As per Abū Yūsuf,
the poor shall be the beneficiary of such a Waqf (Al Burhānpūrī,
2000). Whereas Mālikīs advised considering the local customs at the
time of instituting a Waqf. Hence, if generally, people disburse the
Waqf for a group of students, then the same will be followed.
42
Otherwise, it will be disbursed to the poor (Al Dasūqī, 2010).
Ḥanbalīs advised considering the sequence and percentage of
inheritance distribution (Al Bahūtī, 1993).
As per AAOIFI, it is prohibited if the purpose of Waqf was non-
permissible, and it shall be substituted by a permissible cause. IIWL
has no reference to the same. Ḥanafīs advised that the purpose of
Waqf which is not an offering, pursuant to the religion of the
endower, then it shall not be validated as Waqf. Hence, Waqf on the
mosque by a non-Muslim will not acceptable (Ibn Ābidīn, 2003). Ibn
Rushd opined that Waqf by non-Muslims on the worshipers of the
church would be void because it’s disobedience, as per Islam, but
Waqf can be instituted by a non-Muslim for repairing the church and
providing treatment to the injured and patients of the church (Ibn
Rushd, 2012).
4.2 The Waqf Beneficiary
As per AAOIFI, the Waqf beneficiary should be a permissible
entity. For example, Waqf to exclusively benefit a bar is prohibited.
It is found that Mālikīs does not recognize a Waqf by a non-Muslim
for a church because the purpose is not a recognized offering as per
Islamic teachings (Al Dasūqī, 2010). Shāfiīs (Al Sharbīnī, 2000) and
Ḥanbalīs (Al Bahūtī, 1993) permit Waqf to a utility of a church which
is used by Muslims as well as non-Muslims like the public passage.
As per AAOIFI, the endower could name himself as the first
beneficiary of the Waqf and then other charitable causes (AAOIFI,
2019). IIWL did not refer to making the endower a beneficiary, but
it allowed the endower to make use of the Waqf asset either partially
or fully during his lifetime if the same was stipulated. As per Mālikīs
(Al Dasūqī, 2010), Shāfiīs (Al Sharbīnī, 2000), and Ḥanbalīs (Al
Bahūtī, 1993), the person who owns something cannot make himself
its owner. However, as per Ḥanafīs (Ibn Ābidīn, 2003), such a
stipulation is permissible.
IIWL recognizes the Waqf for the benefit of the family or the
relatives of the endower. Further, AAOIFI permits the stipulation of
preferential entitlement among the Waqf beneficiaries based on the
marriage, financial or physical status. Ḥanafīs permitted selecting a
group of poor as the Waqf beneficiaries (Ibn Ābidīn, 2003), and it is
43
permitted to prefer a particular person in the distribution or in the
entitlement (Al Ṭarābulsī, 1981).
4.2.1 Discontinuation of Waqf Beneficiary
As per AAOIFI, it is valid if the Waqf beneficiary was an entity
that is intermittent, and upon discontinuation, the Waqf money can
be disbursed on charitable causes which have similar nature. For
example, the endower may stipulate that Waqf income is spent on
pilgrims coming from a particular place or country. In case pilgrims
did not come from that country, then Waqf funds can be spent on
other country pilgrims or same country pilgrims performing Umrah.
Although, the opinion of Ḥanafīs (Ibn Ābidīn, 2003), Mālikīs (Al
Dasūqī, 2010), and Ḥanbalīs (Al Bahūtī, 1993) was to disburse the
amount on the poor if the first beneficiary is no longer available.
There is no reference in IIWL about such a case.
As per AAOIFI, if Waqf beneficiary is no longer available, then
the overseer may disburse the Waqf proceeds into the following
sequence: a) to disburse in the relevant channels as specified by the
endower, b) to disburse in similar kind of channels, and if nothing is
available, then it shall be disbursed in general welfare purposes. IIWL
did not make the reference to such a scenario. As per Ḥanafīs, it is
required to mention a final beneficiary that has a perpetual nature.
Although, Abū Yūsuf has two views if the beneficiary is no longer
existing: a) the endower will resume ownership of the Waqf asset, or
b) after non-existence of the nominated beneficiary, Waqf will be for
the poor due to the perpetuality nature of the Waqf (Ibn Ābidīn,
2003). Mālikī differentiates between perpetual and timed Waqfs.
Hence, for perpetual Waqf, if the beneficiary is no longer existing,
then the close relatives of the endower shall be declared as the
beneficiary of the Waqf with entitlement in line with the share in the
inheritance distribution. However, for timed Waqf, the ownership of
the Waqf will return to the endower or his heirs (Al Dasūqī, 2010).
Ḥanbalīs have the same view as the view of Mālikīs in the perpetual
Waqf (Al Bahūtī, 1993). The treatment Shāfiīs have two opinions
that a) the Waqf continues, and the beneficiaries shall be the close
relatives of the endower based on their needs and not based on the
inheritance, and if no relatives are there, then the ruler may disburse

44
the proceeds of Waqf for the general welfare, or b) the Waqf will
discontinue by disbursing the proceeds to the poor and needy (Al
Sharbīnī, 2000).
4.3 The Waqf Asset
4.3.1 Ascertainment of Waqf asset
IIWL and AAOIFI require that the Waqf asset should be known.
However, AAOIFI permits Waqf over an asset that will devolve into
its knowledge (ya’uwul ilā ilm). As per Ḥanafīs, the Waqf asset
should be known (Ibn Ābidīn, 2003). Similarly, Shāfiīs (Al Sharbīnī,
2000) and Ḥanbalīs (Al Bahūtī, 1993) required the Waqf asset to be
specific. However, Mālikīs permitted to stipulate contingency in
ascertaining the Waqf asset wherein the endower stipulates that if a
particular house was owned by him, then it shall be Waqf, but
contingency cannot be open-ended (e.g., owning any house) (Al
Dasūqī, 2010).
As per AAOIFI, it is not necessary that Waqf asset is existing at the
time of creation of Waqf. For example, fruits of coming seasons can
be subject of Waqf. IIWL did not refer to this scenario.
4.3.2 Types of Waqf Asset
As per AAOIFI, the Waqf asset should be an appraisable property
(māl mutaqawim). As per Ḥanbalīs, it is not valid to institute Waqf
on anything which does not qualify to be subject of sale like a dog,
pig or other predators which are not meant for hunting (Ibn
Qudāma, 1997). One opinion of Shāfiīs permitted Waqf over trained
dog but not otherwise (Al Sharbīnī, 2000). However, Mālikī
permitted Waqf of something owned by the endower even if it
cannot be sold like skin of slaughtered animal, hunting dog or a ran
away slave (abd ābiq) (Al Dasūqī, 2010). IIWL did not refer to this
point because Ḥanafīs (Al Zaylaī, 2002) do not permit Waqf of
movable assets on a standalone basis.
As per AAOIFI, the real estate can be a Waqf asset, and this
includes even movable items which are placed at the real estate for
permanent fixing (itiṣāl qarār). The same view was taken by IIWL.
There is a juristic agreement to accept Waqf of immovable properties
(MAIA, 2006).

45
 As per AAOIFI, any movable item, whether it was a physical
property (vehicle, machinery, tools, production equipment) or
intangible property (websites and digital websites), can be subject to
Waqf. This view is in line with the view of Mālikīs (Al Dasūqī, 2010),
Shāfiīs (Al Sharbīnī, 2000), and Ḥanbalīs (Al Bahūtī, 1993) where
Waqf of any kind of movable thing was permitted. However, as per
IIWL, Waqf of a movable property will be valid only for those things
which have a custom of doing a Waqf on them. Hence, if a movable
thing is rarely subjected to Waqf, then its Waqf will not be valid. As
per Ḥanafīs, movable property cannot be purposefully a subject of
Waqf. However, as per Muḥammad b. Ḥasan, it was permitted to
accept Waqf of movable if its Waqf was a custom among the people
(Ibn Ābidīn, 2003).
As per AAOIFI, the Waqf asset can be over usufruct by its owner,
so a lessee can do Waqf of the lease usufruct provided the period of
Waqf is no longer than the lease period. Also, Waqf can be done on
permissible moral rights (e.g., publication and patent rights) wherein
the endower does Waqf over the proceeds or usage of the same. This
is in line with Mālikīs view (Al Dasūqī, 2010). IIWL did not address
this point. As per Ḥanafīs (Ibn Ābidīn, 2003), Shāfiīs (Al Sharbīnī,
2000) and Ḥanbalīs (Al Bahūtī, 1993), Waqf has to be of a physical
property (ayn) and not of usufruct.
As per AAOIFI, the Waqf asset could be cash where it can be used
in any of the ways like a) investment in a permissible way and
disbursing the proceeds for the purpose of Waqf, or b) extending
permissible loans. As per Ḥanafīs (Ibn Ābidīn, 2003) and Mālikīs (Al
Dasūqī, 2010), Waqf over cash for extending a loan and returning its
substitute (badal) is permitted. IIWL has no reference of cash Waqf.
As per the view adopted by Shāfiīs (Al Sharbīnī, 2000) and Ḥanbalīs
(Ibn Qudāma, 1997), such a Waqf is invalid.
4.3.3 Ownership of Waqf Asset
As per AAOIFI and IIWL, the endower should be the owner of
the Waqf asset. The ownership could be final (bāt) or ancillary (tābi)
like instituting Waqf over dividends of the shares which are owned
by the endower.

46
As per AAOIFI, the owner, who took the ownership in a prohibited
way, cannot institute Waqf over the same. The owner is supposed to
do charity of the same. Further, if the property was a seized asset,
then the restitution (radd al-ḍamān) should take place by returning
the seized asset to its legitimate and original owner. As per Ḥanafīs
(Al Burhānpūrī, 2000), if the usurper purchased the seized land from
the seized party after instituting a Waqf, then the prior Waqf stands
invalid.
4.4 Governance of Waqf
4.4.1 Stipulation by the Endower in Waqf
As per IIWL, any stipulation made by the endower in the Waqf is
considered as valid as undisputed text (naṣṣ). Hence, the Waqf shall
be governed according to the stipulation, but a Shari’a-judge may
institute a change in the Waqf which does not miss out the purpose
of the Waqf. As per AAOIFI, the endower may stipulate any
condition and it should be abided by provided a) the condition is not
against Shari’a, b) it does not prevent any rulings of Waqf. The
prevailing customs may be observed while understanding the
conditions stipulated by the endower. These types of conditions are
referred as valid conditions (shurūṭ ṣaḥīḥa) and are accepted by
Ḥanafīs (Ibn Ābidīn, 2003), Mālikīs (Al Dasūqī, 2010), Shāfiīs (Al
Nawawī, 1991), and Ḥanbalīs (Ibn Qudāma, 1997).
As per AAOIFI, it is voided to stipulate in the Waqf a) a condition
which is prohibited (e.g., depositing the Waqf proceeds in an
interest-bearing account or extending conventional financing to
invest cash Waqf accounts), b) a condition which adversely interferes
with the Waqf (e.g., non-removal of the overseer despite any reason),
c) a condition which poses as an obstacle to the interest of the Waqf
(e.g., paying the beneficiary at the cost of necessary repairs). As per
Ḥanafīs, a condition of no dismissal of the overseer in any case would
be void, but the Waqf is valid (Ibn Ābidīn, 2003). Similarly, as per
Mālikīs (Al Dasūqī, 2010), a condition of paying the beneficiaries at
the cost of repairing the Waqf asset would be void.
4.4.2 Qualification of the Waqf Overseer
As per IIWL, the overseer should be Muslim. As per Ḥanbalī, if
the Waqf beneficiary is a Muslim or it’s a mosque, then it's required
47
that the Waqf overseer is Muslim (Al Bahūtī, 1983). This condition
was not referred to by AAOIFI. As per Ḥanafīs, Islam is not a
condition for the overseer (Ibn Ābidīn, 2003). As per IIWL and
AAOIFI, the overseer should have mental capacity (aqil) and
attained the age of adulthood (bulūgh). The jurists have agreement
on both of these conditions (MAIA, 2006).
As per IIWL and AAOIFI, the overseer should have moral probity
(adālah). As per one view of Ḥanafīs, this condition is a preferential
condition (sharṭ awaliya) and not for the validity of the Waqf (Ibn
Ābidīn, 2003). As per IIWL and AAOIFI, the overseer should have
the administrative skills and capabilities to manage the trust (kifāya).
As per AAOIFI, the overseer could be anyone, either a juristic entity
or a natural person.
4.4.3 Selection of Waqf Overseer
As per IIWL, the right of selecting the Waqf overseer is given,
consequently, to the endower, the administrator, the beneficiaries of
the Waqf, religious and aware residents of the area, and then to
Shari’a-judge. Hence, the primary right of appointing an overseer
remains with the endower, but if the endower did not select one
party, then he shall be considered as an overseer. On the other hand,
based on AAOIFI, if the overseer was not selected, then the relevant
authorities may select one. As per Mālikīs (Al Dasūqī, 2010) and
Ḥanbalīs (Ibn Qudāma, 1997), if no overseer was selected, then the
ruler shall appoint an overseer for non-specific beneficiaries. In case
the beneficiary was specific and adult, then the beneficiary shall be
appointed as an overseer. In case the beneficiary was a minor, then
his guardian will be appointed as an overseer. As per Ḥanafīs, the
overseership is given to the endower, then to the administrator, and
then to the ruler (Ibn Ābidīn, 2003). As Shāfiīs, the judge has the
right to appoint someone as an overseer in this case (Al Sharbīnī,
2000).
As per IIWL, the endower can appoint one or more overseers for
the period he finds suitable. The endower may stipulate the
consecutive turns for overseers’ periods. When a Waqf has more
than one overseer, requires to join decision by both of them. This
view is in line with Shāfiīs (Al Sharbīnī, 2000), Ḥanbalī (Al Bahūtī,
48
1993), and Abū Ḥanīfah (MAIA, 2006). This view was not mentioned
in AAOIFI. As per Abū Yūsuf, both the overseer has the right of
disposition individually (Al Ṭarābulsī, 1981).
4.4.4 Fee for the Waqf Overseer
As per IIWL, the endower, his representative, or Shari’a-judge
may fix a fee for the overseer. As per AAOIFI, the fee for the overseer
can be fixed or a percentage of the Waqf proceeds. As per Ḥanafīs
(Ibn Ābidīn, 2003), Shāfiīs (Al Sharbīnī, 2000), and Ḥanbalīs (Al
Bahūtī, 1993), if the endower fixed the fee for the overseer, then it
can be more than the market rate (ujrat al-mithal). However, as per
Mālikīs, the fee for the overseer is left for the estimate of the judge
and the endower and not necessarily to be linked to market rate (Al
Dasūqī, 2010).
As per AAOIFI, if the relevant authorities found it suitable, then
they may revise the fee. As per IIWL, if the overseer was not allotted
a fee by the endower or relevant authorities, then the overseer shall
be entitled to the market rate. As per Ḥanafīs (Ibn Nujaym, 1997), if
the judge fixes the fee for the overseer, then it cannot be more than
the market rate. As per AAOIFI, the fee of the overseer shall be
deducted from the proceeds of the Waqf asset. The same view is
adopted by the majority of jurists (MIAM, 2006). As per Ibn Attāb,
it was opined that the overseer’s fee would be deducted from Bayt al-
māl (Al Ḥaṭṭāb, 2010). The source of deducting the overseer’s fee was
not stated in IIWL.
4.4.5 Revocation by Endower’s Death
As per IIWL, if no specification was made for the period of the
service to be provided by the overseer, then upon the endower’s
death, the position of overseer is dismissed. In other cases, upon the
death of the endower, the administrator has the right to nominate an
overseer or manage the Waqf asset on his own. In case the
administrator did not keep the period of appointing the overseer
open-ended, then, upon the death of the administrator, the overseer
is dismissed. If the endower appointed someone as administrator
and another party as overseer, then upon endower’s death, both the
parties will be jointly performing the job of overseer.
4.4.6 Dismissal of the Overseer by the Endower
49
 As per AAOIFI, the endower may dismiss the overseer in the
following cases: a) the right of revocation was stipulated in the Waqf
deed, b) revocation was in the interest of the Waqf, or c) misconduct
or negligence from the overseer. As IIWL, the endower can dismiss
the overseer from his position provided Shari’a-judge has not given
a judgment in maintaining his position. As per Ḥanafīs, if the
endower has stipulated that he and his children will have the
authority to dismiss the overseer, then it would be permitted for the
endower to dismiss the overseer anytime. However, if no authority
was taken, then the overseer represents the beneficiaries of Waqf
(Ibn Nujaym, 1997). As per Shāfiīs (Al Sharbīnī, 2000) and Ḥanbalīs
(Al Bahūtī, 1993), if the initial overseership was given to the endower,
then the overseer can be dismissed by the endower, otherwise it will
not be possible. As per Mālikīs (Al Ḥaṭṭāb, 2010), self-appointment
by the endower is not permitted. Hence, revocation of the overseer
should be by Shari’a-judge.
4.4.7 Appointment by Shari’a-judge
As per IIWL, Shari’a-judge may appoint an overseer in cases like
a) the endower is alive, but neither shows interest in the Waqf asset
nor appoints someone as an overseer or b) the endower died but did
not name as Waqf overseer or administrator of the inheritance.
4.4.8 Dismissal of the Overseer by the judge
As per IIWL, a Shari’a-judge may appoint a protector above the
overseer based on the overseer’s breach of trust. By this appointment,
the overseer has no liberty in his decisions. Otherwise, he may make
decisions as he finds them suitable.
As per AAOIFI and IIWL, if the overseer commits negligence and
misconduct, then the judge/Shari’a-judge or relevant authorities may
dismiss the overseer who was appointed by the endower, another
Shari’a-judge, or another relevant authority. This view is in line with
Ḥanafīs (Ibn Ābidīn, 2003), Mālikīs (Al Ḥaṭṭāb, 2010), and Shāfiīs
(Al Sharbīnī, 2000). However, as per Ḥanbalīs (Al Bahūtī, 1983), the
judge may dismiss the overseer even without misconduct by the
overseer. As per IIWL, an overseer, who was appointed by the
endower of the administrator, cannot be dismissed by the judge with

50
no valid Sharīah grounds. However, an overseer, who is appointed
by a Shari’a-judge, can be dismissed by another Shari’a-judge.
4.4.9 Resignation of the Overseer
As per AAOIFI, the overseer may resign by himself provided
informing the endower and relevant authorities by a sufficient
period. There is no reference in IIWL about the same.
4.4.10 Responsibilities of the Overseer
As per IIWL, the overseer has the responsibility of presenting the
accounts of the Waqf to a) the endower, b) the parties who are
benefiting from it, c) residents of the area who have an
understanding of things and are religious, or d) Shari’a-judge.
Further, as per AAOIFI, the overseer is supposed to make
independent accounts of the Waqf asset.
4.4.11 Dissolution of Waqf
As per AAOIFI, the timed Waqf stands dissolved by the end of
the period. However, if the Waqf was subjected to total loss, then it
stands dissolved whether it was timed, bound by the condition, or
perpetual. As per Ḥanafīs, if the place of worship is no longer usable,
then either it shall return to the original owner or sold off and
proceeds given to other mosques. However, for investment Waqf, it
will remain a Waqf, and its revenue, even if it was less, will be
disbursed to the beneficiaries (Ibn Ābidīn, 2003). Similarly, as per a
view of Shāfiīs, if the Waqf asset was lost with no human cause, then
Waqf will return to the endower (Al Sharbīnī, 2000). As per Ḥanbalīs,
Waqf continues in its nature and does not return to the endower (Al
Bahūtī, 1983).
4.5 Management of Waqf
The overseer is supposed to manage, repair, develop, and invest
the Waqf asset. As per IIWL, the Waqf beneficiaries can make use of
the Waqf asset through its income or usufruct by retaining the Waqf
asset. However, if the Waqf asset cannot be of use by simply retaining
it, then it should be deployed in business, and the revenue generated
will be used.
4.5.1 Loan Facilities
As per IIWL, the overseer cannot take a loan on behalf of the
Waqf even if it was in the interest of the Waqf. In case the loan was

51
availed, then the overseer is individually liable for the settlement of
the loan amount. As per AAOIFI, for a Waqf of physical properties,
the debt can be availed by the Waqf either in the form of a
permissible loan, credit sale, or obtaining Shari’a compliant
financing provided this debt was taken for: a) something which is
needed for the base of the Waqf and its sustainability (like debt to
maintain or construct the Waqf), b) settlement of financial
obligations due on the Waqf (e.g., payment of electricity bills or
salaries of the staff). However, if the debt was taken for a purpose that
serves an additional interest but not the main one, then taking such
a debt is not permissible for the Waqf unless the endower stipulated
availing such kind of debts provided the proceeds of the Waqf can
service the financing and settle them. In the case of the investment
funds, it is permissible to enter into debt facilities provided it was as
per the commercial norms and observing the interest.
As per AAOIFI, the Waqf property cannot be given on loan, and
the Waqf cannot be the guarantor of other’s debts unless a) it was
stipulated to do so by the endower, b) it was among the purposes of
the Waqf (e.g., cash waqf), or c) it achieves the interest of the Waqf
with the permission from the relevant authorities.
4.5.2 Pledge of the Waqf Asset
As per AAOIFI and IIWL, for physical property Waqf, it is not
permissible to pledge the Waqf asset even if it was permissible to
enter into debt by the Waqf. Further, as per AAOIFI, in the
investment Waqf, it is permissible to pledge the Waqf assets for the
purpose of issuing the bank guarantee or letters of credit.
4.5.3 Sale of the Waqf Asset
As per IIWL, the Waqf property cannot be subject to the sale,
bailment, or substituting it with another pledge. This comes in line
with the principle that the Waqf asset is no longer owned by the
endower.
4.5.4 Lease of the Waqf Asset
As per AAOIFI and IIWL, when the Waqf property is leased so it
should be, at least, against the market rent of it, unless there was an
evident interest. In case the rent was considerably lower than the
market rate, then the overseer remains liable for the shortfall.

52
Further, as per AAOIFI, the overseer may ask the lessee to terminate
the lease unless agreed for the increase also, if the market rate has
increased, so the overseer should have the right to terminate the
lease.
As per IIWL, if the lessee made use of the Waqf asset or retained
its possession, despite the lease turning void, so he is obliged to pay
the market rent for the period he retained the property. The same
treatment applies if the Waqf property was retained by a usurper for
a period of time.
As per IIWL, the overseer has to abide by a period of lease as
specified by the endower while leasing the property or the land. In
case no period of lease was specified, then the Waqf asset cannot be
leased for a period longer than a year. As per AAOIFI, the lease
cannot be for a period that is considered long as per the customs of
the people.
Despite the restriction on a long period of lease. However, both
the laws were permitted to lease for a long period. As per IIWL, if the
lessee cannot benefit from the Waqf asset within a year, then based
on the ruling of Shari’a-judge, the lease could be for a period of up to
three years. The overseer may extend the lease of the land by a time
when the crops can be harvested, provided the rent paid to the Waqf
is equal to market rate. Further, it can be extended provided the
ownership of the Waqf is not compromised due to the longevity of
the lease period. This also includes not giving permission to the
lessee to construct. Similarly, AAOIFI permitted a long lease period
if there was an evident interest, provided a) the lease is linked to a
known and ascertained benchmark, b) the rent is not less than the
market rate.
4.5.5 Substitution of Waqf Asset
Substitution (istibdāl) of the Waqf asset, which is in the form of
real estate, was permitted by AAOIFI and IIWL. As per IIWL, the
subject asset must have become redundant of no use for the
beneficiary provided it was done after seeking permission of a
Shari’a-judge so as proceeds of the existing Waqf asset will be used
in buying a similar real estate. Similarly, if the Waqf asset was the
income generated from the real estate so the redundant real estate

53
could be sold off. On the other hand, AAOIFI specified certain
conditions for substitution which are a) substitution was permitted
as per the stipulation made by the endower, b) if the utilities of Waqf
are no longer functional or the usufruct cannot be used, c) if the
grouping of the redundant Waqf assets will result in revitalizing
them, d) if there is an evident Shari’a interest which cannot be
attained without substitution, e) the substitution is done pursuant to
the approval from the relevant authorities or Fatwa, and f) if the
Waqf asset is investment Waqf which is substituted as per the norms
and customs.
As per AAOIFI, the Waqf asset should be substituted if the subject
matter became non-Shari’a compliant like permissible shares
become non-Shari’a compliant. In case the overseer demanded the
Waqf asset, which is a common share of an indivisible asset, then the
refusing party shall be forced to sell, and the proceeds of the sale will
be deployed in a similar kind of Waqf assets.
As a result of selling off the Waqf asset, a substituting asset must
be purchased out of the proceeds of the substituted asset. As per
IIWL, substituting should be less costly with more returns. As per
AAOIFI, the substituting asset should not be less valued than the
substituted asset or generates less income. The action of purchasing
the substituting asset should be immediate with no delay.
4.5.6 Income and Expenses of Waqf Asset
As per IIWL, the income generated from a property bought out
of Waqf income should be spent on Waqf expenses. As per IIWL and
AAOIFI, the income of Waqf should be spent on what protects and
preserves the foundation of the Waqf asset. As per IIWL, the Waqf
custodian or the Shari’a-judge have the choice to decide whether
repair of the Waqf asset is preferred over the expenses. AAOIFI
further mentioned the sequence of spending as follows: a) honouring
obligation of Waqf (i.e., expenses to the workers and relevant parties
dealing with Waqf), and b) disbursement channel as per the
endower’s stipulation (AAOIFI).
4.5.7 Investment and Sale of Waqf Income Proceeds
As per AAOIFI and IIWL, Waqf income can be invested so it may
not be part of income distribution to its beneficiaries provided a) it

54
was allowed as per the stipulation by the endower, or b) it was made
during the waiting period for income distribution. It should be
ensured that efficient measures were taken into consideration while
investing the income of Waqf. This was not referred to in IIWL but
was permitted to sell a property that was bought out of the Waqf
income provided the purposes of Waqf are taken into consideration.
4.5.8 Disbursement of Waqf Income
As per AAOIFI and IIWL, the income generated should be as per
the manner specified by the endower. As per IIWL, if the purpose is
not existing from the inception of Waqf or ceased to exist, then the
income shall be disbursed in the charity on the poor. Further, as per
AAOIFI, if a surplus remained after distributing the Waqf income to
its beneficiaries, then it will be subjected to the following: a)
investment as given in 0, b) disbursed in welfare channels similar to
the original ones, or c) disbursed in general welfare channels.
4.5.9 Use by the Waqf Beneficiary
As per AAOIFI, the beneficiary may use the usufruct of the Waqf
asset as he finds it suitable either by using it by himself, giving to
others, or leasing it. However, if the endower restricted a particular
usage, then the beneficiary cannot make such use.
5. Conclusion and Recommendation
Over several decades, Indian scholars made various scholarly
contributions, in Urdu and Arabic, concerning the rulings on Waqf.
Waqf Law by All India Muslim Personal Law Board was an effort to
codify Waqf's rulings in accordance with Islamic jurisprudence. The
study compared the rulings of IIWL with AAOIFI’s Shari’ah
Standard of Waqf on the five major areas: a) creation of Waqf, b)
Waqf beneficiary, c) Waqf asset, d) governance of Waqf, and e)
management of Waqf. The study highlighted 67 rulings and found
21 instances of Shari’ah homogeneity. The areas which had the most
instances of Shari’ah homogeneity were i) overseer’s qualification,
and ii) fee for the overseer and iii) lease of the Waqf asset. The study
found 11 instances where AAOIFI had no rulings against IIWL’s
stand. Most of these rulings were found in the dismissal of the
overseer. The study found there are 22 instances where IIWL had no

55
stand against the revealed position of AAOIFI. Most of these rulings
were in the area of i) Waqf beneficiaries and ii) Waqf assets.
Further, the study found five instances of Shari’ah heterogeneity,
which were mostly related to the duration of Waqf, knowledge of the
asset, type of Waqf asset, religion on the endower, and availing loan
by the Waqf. Only in one case, IIWL stands more favourable for the
Waqf institution wherein the endower may dismiss the overseer. By
looking at the classical rulings, it is evident that IIWL restricts, up to
a large extent, in applying rulings of Ḥanafī jurisprudence. However,
AAOIFI takes into consideration various rulings which contribute
positively to higher growth, better governance, and longer
sustainability of the Waqf institution.
The study recommends that AIMPLB may reconsider the rulings
which are not addressed in the Waqf Law. Further, it can consider
the opinions of other jurists when it comes to temporary Waqf, Waqf
of movable items, Waqf of cash, and Waqf by a non-Muslim.
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57
Criteria for Acceptable Financing
Dr. Yousuf Azim Siddiqi
===============================================
Provided as advisory note on 10th April 2021.
===============================================
Background
1. At […] (the “Bank”), an event of Shari'ah non-compliance will
occur if there is non-compliance with a) the resolutions or
guidelines issued by the regulatory bodies, b) the Shari'ah
compliance frameworks issued by the bank, and/or c) resolution
issued by Bank's internal Shari'ah committee.
2. The Islamic bank is responsible for curbing any occurrence of
Shari'ah non-compliance events; therefore, any losses resulting
from these events due to some inadequate or failed internal
process will be borne by the Islamic financial institution.
Firstly: Extending Financing to Entities
Constructions:
3. The Bank cannot extend financing to construct building which
will be used as nightclubs, alcohol factories, pig farms, gambling,
casino, lottery.
Financing based on Scope of Business
a) Financing Sector
4. The Bank cannot provide financing for capital expenses of
conventional banks, conventional insurance companies,
conventional pawnshop, conventional asset management
companies, conventional fund manager.
b) Entertainment & Lifestyle Sector
5. The Bank cannot provide financing for entities involved in
activities non-compliant to Shari’a such as disco, nightclub,
58
 karaoke, prostitution, gaming, concert, funfair, publishing
immoral magazines.
6. The Bank cannot provide financing to relaxation centres (e.g., spa
or massage centre) that provide mixed services.
7. The Bank cannot provide financing to a beauty salon where
customers receive haircutting from a hairdresser of different
gender.
c) Food & Animal Husbandry Sector
8. The Bank cannot provide financing to entities which are involved
in production of non-Halal foods (e.g., animals killed via non-
Halal means or impermissible animals such as pork), non-Shari’a
compliant beverage (e.g., liquor and wine).
9. The Bank cannot provide financing to entities which are involved
in farming and trade of non-Halal livestock, e.g., pig or dog.
10. The Bank cannot provide financing to entities which are involved
in the plantation and production of tobacco-related products.
Secondly: Types of Goods & Services
a. Healthcare and Lifestyle Products
11. The Bank cannot finance any treatment related to tattooing on
the human body.
12. The Bank cannot finance any treatment related to Sex
reassignment surgery (SRS).
13. The Bank cannot finance purchase of tobacco products.
14. The Bank cannot finance purchase of leather products which
are sourced from pig skin (e.g., shoes, handbag).
b. Food & Animal Husbandry Products
15. The Bank cannot finance purchase of non-Halal foods (e.g.,
pork, non-Shariah slaughtered animals).
16. The Bank cannot finance purchase of non-Halal livestock (e.g.,
pig or dog).
17. The Bank cannot finance purchase of non-Halal beverage (e.g.,
liquor products, wine, rum, whisky, herbal liquor).
18. The Bank cannot finance purchase of dietary ingredient, food
flavour seasoning and preservative item which are sourced from
non-Halal items (e.g., products containing non-Halal gelatine).

59
c. Other Items
19. The Bank cannot sell gold, silver or currency on a deferred or
forward basis,
20. The Bank cannot sell idol and any non-Islamic ritual materials.

ZZZ

60
Shari’a Guidelines on Dealing with
Entities based on their Activities
Dr. Yousuf Azim Siddiqi
===============================================
Provided as advisory note on 1st January 2021.
===============================================
Background
1. […] (the “Bank”) closely cooperates with many sectors in the
financial market in Tajikistan, and the size of activities increasing
locally and regionally.
2. The Bank daily receives many requests from
merchant/shops/service providers (the “Business Entities”) that
seeking financing, willing to open an account, deposit funds or
use Bank's QR Code.
3. Business line of Business Entities has different nature; some of
them fully permissible, some of them mixed or fully
impermissible.
4. The Bank avoids investing or dealing in any activity that is
impermissible from Shariah perspectives, such as activities
connected to gambling, alcohol, tobacco or any speculative
activity.
5. The ruling about Business Entities with permissible activities (the
“Permissible Entities”) are clear, so is the case with Business
Entities involved in entirely impermissible activities (the
“Impermissible Entities”).
6. However, daily arises questions regarding Business Entities with
ventures and business lines which are permissible as well as
impermissible (the “Mixed Entities”). Some of queries are given
below:
61
 • Can the Bank finance the Mixed Entities?
• Is it allowed for the Bank to receive deposits from the Mixed
Entities?
• Can the Bank open banking accounts for Mixed Entities?
• Is it allowed to post products of Mixed Entities on Bank’s
online store?
• Is it allowed to add names/logo of Mixed Entities in Bank’s
application (Alif Mobi) where Mixed Entities may receive or
pay funds?
7. The Bank is looking forward to set up/establish Shariah
Screening Methodology/Filter for the Bank to avoid confusion
among staff and clients.
Shari’a Advice:
8. Based on the products and services offered by the Business
Entities (the “Products”), so classification can be as follows:
a- Products which are entirely non-compliant to Shari’a (the
“Prohibited Products”) like pork, liquor, pornography,
drugs.
b- Products which are permissible and rarely can be used in
impermissible activities (the “Permissible Products”), and
this includes
c- Products which have permissible as well impermissible usage
(the “Mixed-use Products”), like raw material to make juice
or liquor.
9. Dealing with Business Entities would be in any of the following 4
forms:
a- Extending financing facilities to the Business Entities for
acquiring goods and service needed as a capital or operational
expenditure (the “Financing Facilities”).
b- Receiving deposits from the Business Entities either on short-
term or long term (the “Deposits Accounts”).
c- Entering into partnership and investment alliances either
through acquisition, merger or joint partnership (the
“Investment Alliance”).
d- Entering into marketing or promotional alliances where the
Bank and the Business Entities benefit from either other’s
62
 platforms or infrastructure for larger benefits (the
“Operational Alliance”).
Financing Facilities
10. The Bank may extend Financing Facilities of Permissible
Products and Mixed-use Products to Permissible Entities and
Mixed Entities with no restriction or pre-screening requirements.
11. The Bank may extend Financing Facilities of Permissible
Products to Prohibited Entities. In case of Financing Facilities of
Mixed Products to Prohibited Entities, then it is should be
ensured that the Product is not used for a non-permissible activity
(e.g., purchase of grapes being financed to manufacture liquor by a
liquor manufacturer).
12. The Bank cannot extend Financing Facilities of Prohibited
Products to any Business Entity.
Deposit Accounts
13. The Bank can receive funds from any type of Business Entities to
open Deposit Accounts irrespective whether the Business Entity
is Permissible Entity, Mixed Entity or Prohibited Entity. Further,
Deposit Account could be saving, current or time-deposits.
Investment Alliance
14. The Bank can enter into the Investment Alliance with Permissible
Entities with no particular restriction or pre-screening
requirements.
15. The Bank can enter into the Investment Alliance with Mixed
Entities provided it is ensured that the Products offered are
entirely Permissible Products or Mixed-use Products.
16. The Bank can enter into the Investment Alliance with Prohibited
Entities provided a) it is ensured the Products offered are
Permissible Products, and b) management of the Investment
Alliance is done by the Bank.
17. Notwithstanding Point (14), (15), (16) it should be ensured that
activities of Investment Alliance are free of interest based lending
and borrowing.
18. The Bank can place Wakala or Mudaraba funding in the general
pool of the Permissible Entity. However, for Mixed Entities and

63
 Prohibited Entities a special pool needs to be created which is
based on revenues of Permissible Products.
Operational Alliance
19. The Bank can enter with Permissible Entities into all types of
Operational Alliance.
20. The Bank can enter with Mixed Entities into Operational Alliance
of Permissible Products and Mixed-use Products.
21. The Bank cannot enter with Prohibited Entities into Operational
Alliance (specially marketing and infrastructural support of
gateway payment).
22. It should be ensured that no Prohibited Products are part of any
Operational Alliance.
23. It should be ensured that image, text and audio messages to
promote Permissible Products as well as Mixed-use Products are
always in line with Shari’a and local customs of the country.
Hence, no Bank’s logo cannot be placed on a communication
containing inappropriate images.

64
Specific Risks Facing Islamic Banks &
Financial Institutions
Dr. Yousuf Azim Siddiqi
===============================================
Published in Islamic Finance Review (ISFIRE), Volume 5, Issue 1, March 2015.
===============================================
Background
Besides standard risks that Islamic as well as conventional banks
face and manage, there are other risks that are specific to Islamic
banks. Some of these risks are entirely new (like commercial
displacement risk) and others are new yet fall under existing
categorization of risk (like credit risk, market risk and interest rate
risk etc.). These risks are specific to Islamic banks with respect to the
Shari’a compliancy requirements. Hence, these could be treated as
specific operations risks faced by IBFIs. Although these risks may
prove fatal in some extreme cases, the management of IBFIs and their
consultants so far have failed to emphasise sufficiently on their
importance.
Islamic banks would be exposed to these specific risks due to a
number of reasons, including the issuance of certain Shari’a
resolutions by its own Shari’a supervisory committee and/or that of
a national Shari’a advisory body (or even an individual Shari’a
scholar), issuance of new guidelines by a central bank or another
financial regulator, or due to issuance of unfavourable decisions by a
court of law. In such a scenario, one must expect an adverse impact
on profits and revenues of the concerned Islamic bank.
On the other hand, on a lighter note, an Islamic bank may be
exposed to a specific risk due to customer defection or customer
dissatisfaction. If such a situation arises then this might result in
65
negative marketing (i.e., word of mouth) and if remained unchecked
for a long period then it could lead to permanent loss in the market
share. We focus on some of the most important risks specific to
IBFIs.
FACTOR 1: RISK OF UNDERLYING ASSET
Most of the financing transactions in IBF are based on selling or
leasing of an underlying asset. In fact, bearing the risk of ownership
of an underlying asset entitles an IBFI to claim revenues generated
from the sale of the underlying asset. The specific risk that an IBFI
faces is a possible or potential loss of the underlying asset prior to
execution of sale/lease contract. According to Shari’a, an IBFI can
claim any amount of profit provided it bears the risk of the
underlying asset at the time of selling or leasing the same.
As per Shari’a rulings, Islamic banks cannot sell an asset before
getting the risk of the underlying asset transferred to itself. For
example, if an Islamic bank buys a car from a dealer and if anything
goes wrong with the car prior to executing an auto Murabaha
contract then Islamic bank has to bear the loss. Similarly, in shares
financing (as a substitute to personal financing), Islamic bank is
exposed to high degree of price risk in case the customer rejects or
defaults in signing the Murabaha or musharaka of shares. Such kind
of risk could be mitigated through various risk minimisation
methods. The most common risk mitigation in this respect is to
ensure that the Islamic bank (as seller) executes sale of the underlying
asset to the customer (as buyer) in the fastest possible time.
Obtaining customer’s acceptance through implied consent would
facilitate Islamic bank to transfer such kind of risk at the fastest
possible way.
As per Shari’a rulings, deferment of risk transfer for a specific
asset is not permissible. For example Islamic bank cannot agree to
sell a specific asset today where the risk will be transferred after one
month. This could be addressed through timing of risk where
execution of the sale of the underlying asset is scheduled only when
the seller is willing to part away from the underlying asset.
As per Shari’a rulings, once risk of the underlying asset is
transferred to the customer (as buyer) then the Islamic bank (as

66
seller) has no Shari’a right of reselling it to other party or the same
buyer at profit. Hence many Islamic bank face losses when Murabaha
customers delay in settling their payments by few months. Islamic
banks do not wish to qualify such delay as events of default but still
they suffer losses due to fixing the price of Murabaha. This could be
mitigated through appropriate pricing of risk whereby the Islamic
bank (as seller) has to agree on the best rate of return/yield at the
time of transferring the risk to the customer (as buyer).
FACTOR 2: SPECIFIC CREDIT RISK
Credit risk specific to Islamic banks can be defined as the financial
loss that an IBFI suffers when a customer defaults. In conventional
banking, when a customer is late on payments, the lender benefits in
terms of default penalty and the additional interest that the customer
has to pay to bring their account in order. In some cases, delay in
payment is expected and welcomed, as it brings additional benefits
to the lender (as is the case in the credit card business wherein credit
card provider actually awaits a transactor to become a revolver). As
default penalty is not allowed in IBF, and where it is imposed, the
finance provider cannot benefit from it except to the extent of the
direct administrative costs associated with it, the credit risk for IBFIs
includes additional loss of income due to default.
Generally, customers of Islamic banks have two kinds of financial
obligations: a) debt settlement; and b) periodic purchase or lease.
In debt settlements (for example settling dues of Murabaha,
Istisna’ and Salam, etc.), the customer has to settle the outstanding
financial obligation irrespective of availability or non-existence of
the underlying asset. Hence, if a car sold on a Murabaha basis is
destroyed, even then the due price has to be paid by the customer.
However, on the downside, Islamic bank cannot claim any extra
returns over the contracted sale price or the outstanding debt. For
example, during financial crises, Islamic banks in Dubai had to stick
to the capped profit amount agreed upon at the time of executing
Murabaha. This incurred heavy losses to a number of Islamic banks
that financed properties under construction, which got delayed on
delivery. This is a major risk facing IBFIs using Murabaha as a
dominant tool of financing in their business.

67
 This is one of the reasons that an increasing number of IBFIs have
now started preferring other modes of financing, which offer
flexibility in the wake of an adverse event. One solution that has been
in practice in some countries is the use of periodic purchases and
sales contracts. Ijara-based leasing is another risk mitigation tool. In
cases of periodic sales and leases, returns for the coming periods can
be adjusted to compensate the Islamic bank for loss due to
customer’s default or changing financial conditions. For example, in
case of ijara, it is possible to increase the rent of the subsequent
months, followed by a default on part of a customer. Similarly, in case
of a periodic sale contract, the sale price can be increased in
subsequent sales if a regular customer happens to default on a
particular obligation.
However, it should be noted that there is a possibility of trade-off
between specific credit risks and the specific risks arising from the
ownership of the underlying assets. While moving to ijara-based
products may help in reducing credit risk, it is expected to increase
the risks associated with the underlying assets. Similarly, moving to
multiple and periodic sales to mitigate credit risk is also expected to
increase likelihood of operational risk (in terms of mistakes, errors
and omissions by the bank’s personnel).
Given this trade-off, care must be exercised to decide on the
contract choice, and other factors like price volatility, customer’s
credit history, and the expertise level of the bank staff must also be
taken into account. If, for example, downward price volatility is the
dominant factor, then one-off Murabaha transaction may be a better
choice. If, however, customer’s default is likely (and is still within the
acceptable risk threshold), then periodic sales and ijara contracts
may be more feasible. If, on the other hand, an IBFI faces excessive
incidence of operational risk, simple one-off Murabaha transactions
may be preferred.
FACTOR 3: RISK OF HUMAN CAPITAL
All banks and financial institutions face people risk, which is
categorized under operational risks. In case of IBFIs, this risk has an
additional dimension, given the Shari’a compliancy requirements.
After all, IBF is driven by Shari’a sensitivity of customers. If IBFI

68
customers perceive employees of such institutions less than
committed to IBF, this will adversely affect their patronage and
custom.
In recent times, a number of Islamic banks in the Middle East
have suffered losses due to irregularities in operations and
inadequacy of policies adopted by the top management that was not
particularly committed to Islamic banking. Similarly, all the Islamic
banks set up in UK had CEOs who came from non-Islamic
background. These CEOs were gradually replaced with Muslim
CEOs who are seen more
favourably by the users of Islamic financial services. A number of
Shari’a boards advise their banks to choose pious Muslims to lead
their businesses, an advice that has not been taken seriously in many
cases though. In South Africa, there has been at least one case where
a top manager of Islamic banking operations was found to be
involved in activities that were questionable from a regulatory
perspective. Consequently, shareholders of IBFIs in Africa have now
adopted a cautious approach in deciding top leadership of such
institutions.
In Malaysia, now there is an implicit understanding that the
central bank will approve only Malay Muslims to lead Islamic banks
and takaful companies as CEOs. This is, however, not so far, the case
when it comes to appointments in the Islamic capital market wherein
Securities Commission Malaysia has yet to adopt such an implicit
approach to manage risk of human capital specific to IBFIs.
In the wake of Islamic banking making its route to new markets
like East Africa where local expertise in Shari’a structuring,
development and audit is highly uncommon, IBFIs are expected to
this specific risk, at least at the initial stage of development of IBF
therein. This is a real challenge faced by IBFIs in the new
jurisdictions where they face acute pressure from their conventional
counterparts. Incapable, inadequately qualified or less committed
human resources in such instances find it difficult to overcome
competition pressure through structuring innovative products and
adopting processes and procedures that favour IBF. Many industry
observers believe that credibility of Islamic banks with less

69
committed workforce will adversely impact their Shari’a identity and
branding.
As a general remedy to human resource related specific risks
faced by Islamic bank, HR departments of Islamic banks should
make more serious efforts to raise the standards for those who are
willing to join Islamic banking through recruitment, localization and
continuous learning and development initiatives. In a study on top
Islamic banking brands, Meezan Bank’s employees were found to be
most loyal to their bank and its brand (see the previous issue of
ISFIRE for further details), and there is a need to study Meezan
Bank’s approach to human resource development.
FACTOR 4: MARKETING RISK
Specific risk of marketing faced by Islamic banks is related to the
possible financial and reputational suffered due to following
inappropriate marketing tools in promoting Islamic financial
products. This includes usage of conventional terminology in verbal
and written communication.
Legal documentation and marketing material with conventional
terminology might lead to shaking Shari’a Board’s confidence in the
true essence of products offered by Islamic banks. Also, the
personnel using conventional terminology will add doubts to the
customers’ minds about Shari’a credibility of Islamic banks and the
products offered by them.
Similarly using inappropriate means of promoting Islamic
financial products (like through music channels or cinema halls)
could force Shari’a boards to take severe and unfavourable measures.
As a general remedy to risk faced by Islamic banks due to
improper marketing efforts, serious thoughts should be given by the
marketing departments of Islamic banks to give a positive and
vibrant image of the Islamic banks, which can attract a larger market
share. Moreover, engaging Islamic banks in sponsoring Islamic
conferences and charitable causes have proven to be a positive step
to mitigate any risk of negative marketing.

70
FACTOR 5: STATUTORY AND LEGAL RISK
Specific risk of statutory and legal risk faced by an IFBI is the risk
of financial loss due to being subjected to certain regulatory
frameworks or unfavourable decision in a court of law.
Except in a few countries (notably Malaysia), the laws of land do
not recognize Shari’a principles and rulings as acceptable and
applicable governing law for commercial and financial transactions.
This means that Islamic financial transactions become subject to
conventional in the event of a dispute. This is particularly true when
the legal documentation clearly stipulates a conventional law, e.g.,
the English law, as the governing law of the transaction.
Furthermore, many Islamic financial transactions are governed
by complex lengthy documentations, which may in many instances
be not understood by judges (who are not well-versed in the Shari’a
law) in the conventional courts. It may also be the case that legal
documentation may have gaps and important exclusions, especially
if they are prepared by law firms not fully exposed to the Shari’a
requirements, or those documentations that are not properly vetted
by qualified Shari’a advisors. If so, it is very likely that the transaction
would be deemed null and void from a Shari’a viewpoint, in case of
a dispute going into a law of court and the judge requires an
independent Shari’a opinion on the transaction. In such a case, the
court will have no option but to adjudge the case from a pure
conventional viewpoint. IBFIs in this circumstance are likely to incur
financial losses.
Specific risk facing an IBFI in the context of regulatory
framework may be understood in the context of liquidity
management. In many jurisdictions, Islamic banks do not have
access to Shari’a compliant instruments to manage their liquidity
requirements. While conventional banks may have access to a variety
of instruments like repos and T-bills, IBFIs may have to resort to
expensive bespoke arrangements for liquidity management. This is
certainly a risk specific to IBFIs.
As a general remedy to the risks faced by Islamic banks due to
statutory and legal factors, it should be ensured that documentation
by Islamic banks’ legal departments are thorough and lean in order

71
to cover all the Shari’a requirements to avoid being subjected to
conventional rulings that are not in line with Shari’a principles. Also,
Islamic banks should work more proactively on Shari’a compliant
alternatives to the existing central bank’s conventional products to
avoid any financial or liquidity risk.
CONCLUSION
Risk management in IBFIs is a trick area, which is fast evolving
with the increase in size and scope of the Islamic financial services
industry. So far, however, risk managers and policy and strategy
personnel of IBFIs have taken into account only secular views of
risks. Consequently, the risk mitigation and management endeavour
by IBFIs have resulted in bringing product development in IBF closer
to the conventional practices. A proper consideration of risks specific
to IBF must result in product development and structuring in favour
of genuinely Shari’a compliant products that fulfil Islamic
requirements in letter and spirit.

ZZZ

72
Price Regulation in Islamic Economic
Law
Dr. Yousuf Azim Siddiqi
===============================================
Published in Islamic Finance Review (ISFIRE), Volume 3, Issue 3, August 2013.
===============================================
Background
It is almost four decades since the world’s first Islamic
commercial and development banks started functioning in the
Middle East. The overall experience was supported by good
intentions of the shareholders and by true spirit of a largely Muslim-
dominated customer base that exhibited sincere attitude in getting
rid of interest-based banking practices. However, a major argument
against Islamic banking products keeps on surfing up every now and
then. Public in general and critics of Islamic banking in particular
object to Islamic banks charging more than their conventional
counterparts for the products and services they offer to the
customers and clients. This is also known as Shari’a premium.
Although this argument stood valid when Islamic banks (like any
new entrant in an established industry) were few and new, which
charged higher rates of profits on financing products and gave away
lower rates of deposits due to higher costs or experience to manage
funds in a profitable way and in compliance with Shari’a. However,
over a period of time, Islamic banks have done fairly well and,
consequently, over-pricing is now almost an outdated argument.
Now, one may observe that Islamic banking products are either
lower or at least at par with conventional banking products. It must,
however, be mentioned at the outset that while pricing of financing
products and contracts is purely result of demand-supply forces,
73
pricing of deposits is greatly influenced by banking regulators that
adopt an interest rate policy that must be in line with the overall
economic policies of government.
Although pricing in the contemporary banking and financial
markets is influenced by government policies, economic doctrines of
Islam are in general in favour of a laissez faire approach, allowing the
market forces to freely price goods and services. This means the
markets are favoured to function in accordance with forces of
demand and supply forces, without any external or government
intervention. This paper focuses on Islamic juristic stance on pricing
of goods and services. The analysis here is based on some of the
classical writings of Islamic jurisprudence, with a special reference to
the Mālikī school of thought. Undoubtedly the most comprehensive
Arabic reference in this regard is “Rulings on Pricing in Islamic
Jurisprudence”1 by Shaykh Muhammad Abu-Hudā Al-Yaqūbī, who
relied extensively on the writing of an earlier Mālikī scholar Yahya
Al-Kanani (circa 10th century) who produced “Aḥkām Al-Souq”
(i.e., Rulings of the Market) in Arabic.2
Types of Prices in Islamic Economic Law
As per Dr. Nazih Hammad3, a famous contemporary Shari’a
scholar, price (thaman) is what the buyer and seller agree in a
particular transaction. For example, A agrees to sell (or lease) his car
to B for £2,000. This may not necessarily reflect what could be
deemed as the fair value of the subject of sale (or lease). The fair value
indeed could be lower, higher or equal to the agreed price.
What can be classified as price under Shari’a? Majority of Islamic
jurists define price as cash receivable by the seller, which could be in
the form of dinars (gold currency) or dirhams (silver currency) or
any other modern-day currency. So if A exchanges a commodity X
with B for £10, then A is the seller and £10 is the price for the subject

1
Yaqoubi, Muhammad Abu-Huda. (2000). Rulings on Pricing in Islamic
Jurisprudence (Arabic). Dar Al Bashaer (Beirut).
2
Most of the quotes in this Article are from Al- Yaqoubi’s book. e reader is
advised to refer to the Arabic Version if he needs to rely on original Arabic quotes
by distinguished scholars.
3
Ḥammad, Nazih (2008), Dictionary of Financial & Economic Terms as per Jurists
(Arabic), Dar Al Qalam (Damascus).
74
of sale, which is the commodity X. In case both the items are cash
then this would be what is known as a sarf contract, i.e., exchange of
cash for cash. For example, A may sell £10 for $25.
However, Ḥanafī jurists opine anything given in exchange of a
subject of sale qualifies to be a price.1 Hence, the price could be cash,
debt, assets, food grains etc. In our modern-day banking, the same
concept becomes extremely handy while dealing with issues of selling
(i.e., transferring) debt owed to a creditor A to another creditor B.
For example, A has entered into a credit-transaction with C whereby
£50,000 would be payable by C after 1 year then as per Shari’a, A is
left with no choice except to hold the payable debt by C for a year or
to transfer the same to B at par. However, A may enter into a separate
and independent sale transaction with B whereby A agrees to buy a
commodity, shares, sukuk worth £45,000 offered by B against a price
which is equal to face value of the debt (£50,000). Once sale is
executed then A can sell the commodity in the open market and
realize £45,000 and B would realize £50,000 on maturity, i.e., 1 year.
Settlement of price can be on deferred or on spot-basis. However,
the Ḥanafī jurists do not allow deferring settlement of price if it is in
kind (i.e., assets). For example, if A sells a house to be delivered on
spot to B against a price which is in the form of a car to be delivered
after a month, this transaction stands invalid because price in kind
cannot be deferred.
Price Regulation
It is not surprising to read the classical books on Islamic
jurisprudence to find a vast variety of opinions on issues related with
trade and market discipline. The diversity of opinions of the jurists
reflects on the time and social circumstances in which these opinions
were issued. Given the diversity of views on price regulation, one
may find that the Islamic law of business transactions covers almost
all possibilities and allows determination of prices in various ways,
including the following three forms:
1. market benchmark;
2. regulated by the ruler / government; or through

1
Jab Allah, Sameer Abdu Noor. (2005). Guidelines of Price & its Application in the
Contract of Sale (Arabic). Dar Kunooz Eshbelia (Riyadh).
75
3. mutual agreement between the seller and the buyer.
Although some of the Prophetic traditions prohibit regulating
price but now there is a complete consensus amongst the jurists of
all schools of thought that the prohibition of regulation of price
cannot be generalized. Hence, the above three ways of price
determination are recognised throughout the Muslim world.
As a baseline rule, prices should be left to be determined by
market factors of demand and supply. However, when interaction of
these factors results into economic inequality and injustice then
intervention or forceful correction is inevitable – the case for
regulation.
Majority of Islamic jurists (ShāfiꜤī, Ḥanbalī, Ḍāhirī and Ḥanafī)
have consensus that seller cannot be forced to sell at the market rate
as long as normality prevails in the market. However, in emergency
cases, the seller can be forced to decrease or increase the asking price
to match market benchmark.
In addition to the market-driven price regulation, there are also
provisions for centrally administered price regulation by the
government. As opposed to regulated price according to a market
benchmark, Islamic law of transactions also allows for regulation of
prices directly by the government or the ruler. Such a regulated price
could be lower or higher than the market benchmark. This is also
known as tasꜤīr jabrī in Islamic law, which means coercive pricing.
As per most of the Ḥanafī and ShāfiꜤī jurists, coercive pricing
applies to only food stuff for humans and animals. However, two
famous Ḥanafī jurists, Sham al-Dīn Qahistānī and Ḥaskafī are of the
view that price can be regulated coercively for anything if
unregulated prices can cause harm to public
interest. As per Imam Nawawi, a ShāfiꜤī jurist, coercive pricing
should not apply to the food
stuff coming from foreign markets (imported items). He allows it
for locally grown food stuff.
Ibn Taimiya, a Ḥanbalī jurist, seems to have a wider scope in
deciding upon the subject of price regulation. As per him, it should
not be restricted to food items or commodities. Rather it should even
include labour and services. Hence if general public is unable to

76
access necessary services and utilities (e.g., hotels or public
hammams) then the government may force the service-provider to
charge no more than the market benchmark.
The same applies to manufacturing facility of war equipment or
building bridges where workers or service providers can be forced to
extend their services at the market benchmark, which would serve as
the regulated price.
Ibn Qayam and Ibn Taymiya also envisaged another form of
regulated pricing wherein the buyers may exploit the situation, and
interests of the seller needs to be protected – the so-called case of
monopsony in modern economics wherein many sellers supply
specific and exclusive goods to one particular buyer. For example,
infrastructure and energy projects, where the state is normally the
sole-buyer to which various construction companies sell. In such
situations the government or an independent regulator needs to
regulate prices to safeguard the interests of the sellers rather than the
buyers.
As per Ḥanafī, ShāfiꜤī and Mālikī jurists, coercive pricing is not
allowed unless it is understood that not doing so will cause social
harm. ShāfiꜤī jurists in particular find no justification for coercive
pricing to determine a floor to prevent them fall below a threshold.
However, they allow for a ceiling if the asking price is unjustifiably
high.
Many Ḥanafī jurists, in particular Al-Mirghīnānī, opine that the
government cannot decide upon a regulated price unilaterally. In
their view, full and unilateral discretion to the government in this
regard may result into financial exploitation by the state-run
corporations. Hence, a very comprehensive market consultation
process is recommended, which must take into account the capital
invested by the sellers, and scarcity of the commodity or its surplus.
This exercise is as good as forming an expert-committee in modern
time. Ibn Ḥabīb further elaborates the formation of the above
committee and its tasks and recommends that the government must
consult market-players or their representatives. And while deciding
the regulated price, the government needs to consider the capital
invested by the seller and their usual profit margins and should

77
ensure that the given price is not, in any way, imposed forcibly upon
them. If care is not exercised in determining the regulated price, this
might result into grave economic consequences like price disruption
and goods hoarding.
Majority of Ḥanafī jurists find a price which is double of
commodity’s value as unjustified, the value of the commodity being
its cost of production or acquisition. The jurists have also debated
the possibility of artificially inflating the cost of acquisition and
recommend a thorough system of monitoring and supervision of
markets. In some cases, where commodities are supplied as gifts to
the seller, the market price will serve as the guiding principle.
On the other hand, hunbali jurists, especially Ibn Taymiya, find it
permissible for the government to force the seller to sell a necessity
commodity if its price goes beyond its known value. In that scenario
the sale needs to be affected at the market rate. Hence as per this
opinion the regulated price is equal to the market benchmark. In case
the seller is forced to sell a commodity at a regulated price (if he at all
wants to sell), without his absolute consent, then what are the Shari’a
provisions for treating this contract of sale?
Interestingly, Ibn Mawdūd Al-Mawsalī, a Ḥanafī jurist, considers
it as invalid sale because the seller was forced or obliged to sell at a
price that he did not fully consent to. Although Ibn Abidin, another
Ḥanafī jurist, puts a counterargument and concludes that firstly the
sale was not forced upon the seller. Secondly, it is not necessary to
obtain absolute consent of the seller if the government finds the
asking price to be causing more harm than achieving personal
welfare.
On the other hand, if the seller sells the commodity at a price that
is higher than the regulated price then, as per Ḥanafī and ShāfiꜤī
jurists, this contract stands valid. In case a credit-buyer refuses to
settle the higher price then he would be persecuted for recovering of
the same. This ensures that the buyer is not taking any undue
advantage of the seller by relying on regulated price post concluding
a transaction at a higher price.
In case it was found that the seller is selling at a price higher than
the regulated price then, as per Ḥanafī jurists, the first incident would
78
be investigated and then warning would be given. If it prevails for
three times, then the government may take suitable action. As per
ShāfiꜤī jurists, violating the price regulations is a punishable crime.
Mālikī School of Thought on Market Discipline
As price regulation is very much the case in banking and finance,
it is worth looking into the views of Islamic jurists on the topic. It
appears as if it is the Mālikī school of thought that emphasises on
price regulation in accordance with a market benchmark.
Market benchmark can be defined as what sellers generally quote
as their asking price for a given commodity. According to Ibn
Qasim’s narration from Imam Malik, the basis for forming a market
benchmark is quotation by at least five market players / sellers.
Another Mālikī Jurist, Al Bājī, opines that a market benchmark
should be accepted by all the market players / sellers. This is what is
agreed upon by the majority of Mālikī jurists.
As per Al-Bājī, the market benchmark is determined for all
measurable or weighable commodities, whether eatable or non-
eatable. It should be ensured that the universe of market benchmark
comprises of only fungible goods and do not include non-fungible
goods.
Moreover, if the quality is different for the same commodity, then
one market benchmark cannot be applied for different qualities of
the commodity. As per Yaḥya Al-Kanāni, a seller of a superior
quality commodity cannot be forced to sell the same at a lower rate.
There is a general consensus among Mālikī jurists that the seller
cannot be allowed to sell a commodity at a price lower or higher than
the market benchmark. Stopping seller from selling commodities at
a price higher than the market benchmark is understandable because
that, eventually, amounts into reaping higher profits by a selected
number of sellers, which results into economic exploitation. But why
the seller is stopped from selling at a lower rate? This would ensure
that chances of economies of scale are eliminated. Hence the seller
shouldn’t be able to sell larger number of units at lower rates and
eventually achieve overall bigger profits which other sellers miss out.
In today’s time, issues surrounding dumping policies can be read in
connection with this philosophy of prohibition.

79
 In case a large number of sellers started offering commodities at
a price below the market benchmark, then sellers offering original
benchmark will not be forced to lower their rates to match the lower
rate.
On the other hand, if one or few sellers raised their rates above
the market benchmark, then other sellers will not be forced to raise
their prices. And in case a majority raised their prices above the
market benchmark then sellers offering original rates will be forced
to raise their prices to match the new market benchmark. This means
that lowering the rate by the majority will not result into lowering
the market benchmark. However, raising the rates by a majority of
sellers will result into a new market benchmark.
As per two reputed Mālikī jurists, Ibn Ḥabīb and Al Bājī,
individual sellers need to abide by the market benchmark even if they
are selling the commodity to their clan. The underlying assumption
in this viewpoint seems to be fixed supply of the commodity; if some
consumers buy it for a lower price than some others must pay a
higher price to maintain the overall balance in the market. A similar
concept is adopted in the contemporary accounting practices of
transfer pricing in what is known as Arm’s Length Principle.
Considering the price restrictions on local market-sellers, the
outsiders (i.e., foreign traders) can offer commodities at a rate that is
different from the market benchmark. This comes in order to ensure
that supply of necessary goods is not disrupted due to restriction to
sell at the market benchmark. However, as per Ibn Ḥabīb, the
outsiders should have a benchmark for themselves and they need to
abide by the same rate.
Conclusion:
It can be concluded that Islamic rulings on price regulation are
dynamic and versatile and can be explored for various cases of
modern practices of Islamic banking, wherein higher rates of profit
on Murabaha or Ijara can be regulated or benchmarked as a Shari’a
requirement to protect larger and bigger public interest of the
society.
The concept of the government deciding upon the regulated price
could be easily executed/replaced by central bank of the country

80
provided the procedural guidelines given in the Mālikī references are
followed in terms of forming a multi-task committee.
Also, it is evident that Islamic jurists did not restrict discussion
on price regulation to food grains or animal fodder. Rather it was
extended to services as well. Hence Mudaraba deposits or other
services can be subject to price regulation as the case with Murabaha
sale.
Given this allowance for regulation of prices of goods and
services, it may not be completely unadvisable to regulate prices of
Islamic financial products to ensure that they are not higher than the
equivalent conventional products. Although, this will mean more
resemblance between Islamic and conventional financial products in
the short run, it will however push Islamic banks and financial
institutions to innovate hard to come up with products that are
sufficiently different from their conventional counterparts.

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81
Shari’a Training in Islamic Financial
Institutions: An Extra-curricular
Activity or an Independent Function?
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 23rd November 2024.
===============================================
Background
In May 2020, the Central Bank of the UAE issued a new standard
titled the “Shari’ah Governance Standard for Islamic Financial
Institutions”. This marked a giant leap in the field of Shari’ah
governance within the Islamic finance industry, detailing
responsibilities and emphasizing key governance aspects.
One notable feature of this standard is the identification of
various functions of the Internal Shari’ah Control Division (or
Section) within the IFIs. For the first time, the standard recognizes
Shari’ah Training as an independent function, alongside well-known
responsibilities such as providing Shari’ah consultations, secretariate
of Shari’ah Committee, and product development.
Before the issuance of the standard, Shari’ah training was
deemed to be an extra-curricular activity conducted during idle
times, such as during the conversion of a conventional institution to
Islamic or for introducing basic concepts of Islamic banking
principles to onboarding staff. While the intention behind these
efforts was commendable, Shari’ah training often remained a
sporadic activity, much like the rare appearance of a “red moon”—
an event that occurs every 2-4 years without becoming a constant
feature of institutional practice.

82
 The new standard fundamentally altered prevailing norms—not
by a mere 360 degrees, rather by 720 degrees! It defines the Shari’ah
Training Function as “conducts training for IFI's staff on those
aspects of their duties related to IFI's compliance with Islamic
Shari'ah”. Moreover, it emphasizes that “this function also provides
adequate trainings for the staff on what they need to be equipped
with information and skills, depending on nature of work of each
employee, to ascertain that the IFI complies with Islamic Shari'ah at
all times”. Article 3.5: States that the Shari’ah Governance
Framework of an IFI’s must include "Providing training and
awareness programs related to compliance with Islamic Shari'ah in
the IFI, this should include all levels in the organization”. Article 5.6
elaborates that “the IFI must spread awareness regarding Islamic
finance and boost the culture of compliance with Islamic Shari'ah
within the IFI, including workshops for the members of the Board
and senior management on Islamic financial transactions and
compliance with Islamic Shari'ah”.
Article 6.18. states: that “the Senior Management is responsible to
establish sufficient knowledge regarding the Compliance with
Islamic Shari'ah requirements and the culture of Islamic Shari'ah
compliance banking in the IFI”.
These provisions highlight the critical importance of the Shari’ah
training function as a formal and ongoing responsibility, not merely
an additional task to be delegated at will. Its ultimate purpose
transcends disseminating static and dull sets of information, aiming
instead to enrich the culture of Shari’ah-compliant banking
practices.
Target Audience
It is often assumed that Shari’ah training is only for new joiners
in Islamic banks or those unfamiliar with Islamic banking concepts.
As a result, Shari’ah trainers may hesitate to invite experienced
employees or members of the Shari’ah departments. This perception
might be correct if scope of Shari’a training was confined to
introducing basic principles of Islamic banking.
However, on a broader level this hypothesis fails to be true.
Shari’ah training primarily addresses compliance with Islamic

83
Shari’ah which defined as adherence to resolutions of the Higher
Shari’ah Authority (HSA) and the Internal Shari’ah Supervisory
Committee (ISSC) of the IFI. Since new resolutions, regulations, and
standards are frequently issued, even those trained a year ago may
require updated training. This includes employees in internal
Shari’ah audit and Shari’a control departments. For instance, the
Accounting and Auditing Organization for Islamic Financial
Institutions (more commonly known as AAOIFI) regularly issues
new Shari’ah standards, necessitating timely training for
professionals to remain up to date about the latest requirements of
Compliance with Islamic Shari’ah.
Scope of Training
Shari’ah training can be categorized into three scopes. Firstly,
theoretical scope that focuses on general principles without delving
into specific institutional practices. Secondly, policy scope that
covers policies, regulations, and Shari’ah standards relevant to the
IFI. Thirdly, technical scope that involves operational aspects of
Shari’ah-compliant products and services.
A training session may incorporate all three scopes or concentrate
on one, depending on the audience and institutional needs.
Training Categories
Shari’ah training courses can be classified into three categories.
Foundational Training - provides general knowledge applicable
across multiple products and services, such as Shari’ah standards and
introductory courses. Product-Specific Training that focuses on
Shari’ah compliance related to specific products, such as car
Murabaha or Ijarah-based home financing. Leadership Training that
targets decision-makers and senior officials, emphasizing strategic
and comprehensive principles of Islamic banking rather than narrow
operational details.
Features of Effective Shari’ah Training
To ensure long-term effectiveness, Shari’ah training programs
should possess certain attributes. Standardization: training materials
must be uniform and aligned with institutional standards in format
and presentation. Business Continuity: training sessions should
avoid causing business disruption due to their longevity. Hence, if a

84
Shari’a trainer delivers a session for 4 hours to one particular
department then the entire department will be out of business for
such a long duration. The training sessions should be bilingual so
that target audience can be easily divided. Moreover, concept of
Cupcakes must be applied wherein it is understood that small cakes
are never stomach filling, but they can serve some purpose. Hence,
sessions can be designed in shorter durations (e.g., 45 minutes) and
offered at various times to accommodate diverse schedules.
Customization: Training must address the specific needs of different
departments. For example, training on Islamic credit card operations
should not be provided to employees in LG operations, as this
misalignment may lead to disengagement.
Content of Shari’ah Training
The core offerings of the Shari’ah training function include:
Introductory Sessions that cover the history of Islamic banking,
foundational principles, the prohibition of Riba, and common
financing structures like Murabaha, Ijarah, and Istisna’. These can be
delivered through recorded sessions for broader accessibility. Next is
AAOIFI Shari’ah Standards. Shari’a trainer can offer foundational
sessions on key Shari’ah standards, such as: Standard 8: Murabaha,
Standard 9: Ijarah, Standard 12: Partnership, Standard 24:
Syndicated Financing. Also, training on Shari’ah Governance by
introducing staff to Shari’ah Governance Standard issued by the
UAE Central Bank and other related regulatory standards. Also,
training on legal aspects, by giving insights into relevant laws, such
as the Chapter VI of Book III of the UAE Commercial Transactions
Law (2022), which outlines key provisions for contracts executed by
Islamic financial institutions. Very importantly, technical training
that covers product structures, documentation processes, contract
execution, and common errors observed during Shari’ah audits.
Awareness Beyond Training
In addition to structured courses, Shari’ah training functions can
contribute to information sharing initiative such as preparing FAQs
on products, writing contents of Shari’a flyers, and disseminating
Shari’ah principles to promote better understanding.
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85
Importance of AAOIFI Shari’ah
Standards
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as part of introductions to Author’s series of Banker’s Commentary,
published by Kanz Publishers from time-to-time.
===============================================
Background
In 1990, the Islamic banking and finance industry was going to
witness a giant leap towards industry regularisation when decision-
makers of select banks decided to establish a global organisation to
look after issues of accounting that are particular to Islamic banks
and financial institutions. Later, that organisation was renamed and
was known as the Accounting & Auditing Organization for Islamic
Financial Institutions (more commonly known by its acronym of
AAOIFI).
At its inception, AAOIFI focused on issuing accounting and
auditing standards for Islamic banks and financial institutions. Later,
the mandate was expanded to start publishing Shari’ah standards.
The purpose of issuing these standards is to provide the Islamic
financial industry with a base set of rules that can be used and
referred to in the regular business and operations carried out by
Islamic banks and financial institutions. The purpose shall not be to
curtail the freedom of juristic interpretation (ijtihād) but rather to
set bare-minimum requirements of Shari’ah in each type of
transaction.
Initially, the documents were released with the title: “Shari’ah
Rules for Investment and Financing Instruments No. (1) Murabaha to
the Purchase Order”. After issuing four standard rules in 2001 on
86
Murabaha, Ijarah, Salam, and Istisna, the Shari’ah Board of AAOIFI,
the issuing body of Shari’ah documents, decided to rename them to
Shari’ah Standards. Hence, the first Shari’ah Standard was issued
with the title: “Trading in Currencies”. The earlier Shari’ah Rules
were re-issued as Shari’ah Standards No. (8), (9), (10), and (11),
respectively.
Within less than a quarter century, the Shari’ah Board of AAOIFI
reached the far away milestone by publishing more than 61 Shari’ah
Standards, which were recently published in its Arabic version
expanding more than 1200 pages. Considering the juristic
sophistication and significant on-ground implications of each ruling
and Shari’ah provision given in these Standards, it is remarkable to
notice the achievement accomplished by the Shari’ah Board of
AAOIFI.
The juristic soundness and industry coverage of these Shari’ah
Standards made them a reliable point of reference among the
Shari’ah practitioners, Islamic bankers, and the regulators
themselves. Hence, in 2018, the Central Bank of the UAE issued a
circular making compliance with the AAOIFI Shari’ah Standards a
mandatory requirement for all the Islamic banks and financial
institutions functioning within the country. This giant leap proved
to be, undoubtedly, a turning point in the history of the Islamic
banking industry. Efforts of codification, over years and years, are
now going to be relied on by the Islamic financial institutions instead
of casual referral by some Shari’ah scholars. The entire industry was
going to move in a mood of Shari’ah synchronisation instead of dull
and unwelcomed standardisation.

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87
An Introduction to AAOIFI SS. (55):
Competition & Prizes
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as introduction to Author’s book: Banker’s Commentary on AAOIFI
Shari’ah Standard No. (55): Competition & Prizes, published by Kanz Publishers in
2024.
===============================================
Background
In the 34th Meeting of AAOIFI’s Shari’a Board, it was resolved to
appoint a Shari’ah advisor to start preparing the initial study on a
Shari’ah standard related to competitions, prizes, incentives, draws
and marketing. Between Jan-Feb 2016, 3 hearing sessions were held
in Morocco, Jordan and Saudi Arabia which were attended by
scholars, regulators and academicians. After rounds of discussions,
finally on 7th May 2016, Shari’ah Board endorsed issuance of Shari’ah
Standard No. (55): Competitions and Prizes.
Considering nature of earlier Shari’ah standards issued by
AAOIFI, it is evident that mostly, if not all, the standards outline
Shari’ah rulings and provisions related to products and contracts
used by Islamic financial institutions. However, this Standard was
unique in its scope and applications. This is one of the few Shari’ah
standards that has a wider scope of Islamic trade and commerce
(tijāra). Hence, non-banking sector even deal with matters related to
competitions and prizes. This is not limited to institutions, rather it
includes individuals. Very often, we are offered discount cards or an
option to participate in points system of an airline or a shopping
mall. Similarly, banking and financial institutions consider offering
promotional gifts to expand their customer base or to generate
88
liquidity for lucrative seasonal offerings. Further, sponsorship of
competition events is seen as a marketing opportunity by Islamic
banking and financial institutions. The current Standard achieves
synergies between Islamic banking and Islamic commerce.
The Standard was released in May 2016 in Arabic. Its official
English translation is available on AAOIFI’s site. Recently, AAOIFI
has issued the Arabic version of Shari’ah Standard No. (61): Payment
Cards, which made cross-references to this Standard on 3 occasions.
This encouraged me to present this humble work which can assist
English readership to understand the original Arabic text with simple
examples.

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89
An Introduction to AAOIFI SS. (56):
Liability of the Investment Manager
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as introduction to Author’s book: Banker’s Commentary on AAOIFI
Shari’ah Standard No. (56): Liability of the Investment Manager, published by Kanz
Publishers in 2024.
===============================================
Background
On 20th March 2015, AAOIFI Shari’ah Board decided to appoint
a Shari’ah advisor to start preparing the initial study on a Shari’ah
standard related to provisions of liability of the investment manager
(including Mudarib, partner and investment agent). Between Jan-
Feb 2016, 3 hearing sessions were held in Morocco, Jordan and Saudi
Arabia which were attended by scholars, regulators and
academicians. After rounds of discussions, finally on 19th November
2016, Shari’ah Board endorsed issuance of Shari’ah Standard No.
(56): Liability of the Investment Manager.
This Standard has its own significance among all the Standards,
since it is one of the select standards that represents uniqueness of
Shari’ah compliant products and proudly carries the legal DNA of
centuries-old Islamic jurisprudence. Since Islamic bank realized that
common modes of financing, like Mudaraba and Istisna, have
limited application that cannot go beyond financing assets and
equipment and creating a fixed-instalment facility, it was a task of
solution searching for a more dynamic modes of financing that
generate variable returns with the possibility to trade the instrument
without compromising with rulings and maxims given in the books
of Islamic jurisprudence. Since Murabaha stood idle to such far
90
reaching goals, Islamic banks found Mudaraba, Musharaka and
Investment Agency as answers to what stood as impediment in debt-
oriented financing. Application of investment management started,
initially, from small and corporate deposits based on Mudaraba, but
eventually banks found many its applications in terms of structured
notes, treasury products and even capital and debt market
instruments. Sukuk worth billions of dollars were structured on the
basis of investment management instead of non-negotiable
Murabaha or Istisna. As the story goes with any production line,
some malfunctioned and adulterated pieces even surfaced in the
market. The vested interest behind such attempts was to turn
Shari’ah compliant modes of investment management mimic the
most usurious conventional products by twisting the Shari’ah rulings
as much as possible. The idea was not innovation rather achieving
bigger and bigger numbers at the cost of Shari’ah soundness.
However, such an attempt eventually failed in a miserable way.
Thanks to AAOIFI’s firm stand of issuing a public statement in early
2008 that required the industry to abide by some broad guidelines.
Eventually, Shari’ah Standard No. (56): Liability of the Investment
Manager comes as cornerstone for establishing any innovative and
dynamic products of Islamic investment management. Readers will
certainly experience the juristic depth and the breath of the standard
when they go through its six parts.
The Standard was released in November 2016 in Arabic. Till date,
its official English translation was not available for non-Arabic
speakers. Recently, AAOIFI has issued exposure draft of Shari’ah
Standard No. (62): Sukuk. The landmark document made cross-
references to earlier Shari’ah standards. On 23 occasions, reference
was made to Shari’ah Standard No. (56). This encouraged me to
present this humble work which can, at least, assist English
readership to understand the original Arabic text.

ZZZ

91
An Introduction to AAOIFI SS. (58):
Buyback
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as introduction to Author’s book: Banker’s Commentary on AAOIFI
Shari’ah Standard No. (58): Buyback, published by Kanz Publishers in 2024.
===============================================
Background
On 13th July 2010, Shari’ah Board of AAOIFI decided to initiate
research work for preparing a Shari’ah standard on buyback (iꜤādat
al-shirā’). On 13th April 2017, Shari’ah Standard No. (58) was
endorsed by Shari’ah Board in its final form post rounds of
discussions and a hearing session held in Riyadh (Saudi Arabia)
which was attended by more than 50 scholars and banking experts.
This document is one of the unique Shari’ah standards because it
presents Shari’ah provisions related to one of the most differentiating
contractual features in Islamic banking products in all the segments.
As we know, buyback is often heard in the context of shares and
deposit certificates. Similarly, treasury departments of conventional
banks and institutional investors raise or place liquidity through
money market products called repurchase, or more commonly
known as repo. In both these products, one party undertakes to re-
acquire any asset (i.e., shares or bond certificates) sold initially
through a structured arrangement. Application of such an
arrangement is confined to investment and treasury products. No
corporate or retail products, offered by conventional banks, has such
legal feature where an asset is re-acquired by the original seller
involved in the financing arrangement. However, in Islamic banking
heavy reliance is made on asset-backed products in all the segments
92
of Islamic banking. Hence, if a retail customer wants financing to buy
a refrigerator for $ 1500/- or a large conglomerate is looking for a
syndicated financing of $ 5 Billion, in both the cases, an underlying
asset has to be transacted by an Islamic bank. The mode of
transaction could be sale, lease or partnership. No profit-yielding
financing can be thought off without assumption of risk (taḥammul
al-ḍamān). This is based on the golden legal maxim: (al-kharāj bi al-
ḍamān), (i.e., reward is associated with liability). Hence, for any
profit-yielding contract, one of the parties should have a long
position even for a short duration and there is risk exposure,
irrespective it is large, medium or even tiny. To avoid and tackle
asset-based risk, the party with long position might mitigate the risk
through either acceptable or prohibited means. One of such means,
which became evident in Islamic banking practices over number of
years, is buyback arrangement, i.e. a sold asset is bought back by the
original seller. No blanket statement can be made that buyback is
permitted or prohibited in all the circumstances. Due to legal
complexity of Islamic banking products, irrespective of their volume
and value, Shari’ah provisions of buyback are very sensitive and
slightest ignorance will lead to serious Shari’ah violations and
forfeiture of profits. Fortunately, AAOIFI’s Shari’ah Board has
articulated the Standard in the best possible manner to help
practitioners as well as Shari’ah experts to figure out the Shari’ah
requirements while suggesting a buyback arrangement.
It is worth mentioning, that the Arabic title of the Standard, iꜤādat
al-shirā’, can be translated to repurchase or buyback. However,
repurchase is more often used in the industry to refer to a money
market product known as repo. The Standard does not deal
exclusively with repo, although s. 5.6 dealt with it, rather it covers all
forms of repurchasing. Hence, we preferred to translate (iꜤādat al-
shirā’) to buyback instead of repurchase.
The Standard was released in April 2017 in Arabic. Till date, its
official English translation was not available for non-Arabic
speakers. Recently, AAOIFI has issued exposure draft of Shari’ah
Standard No. (62): Sukuk. The landmark document made cross-
references to earlier Shari’ah standards. On 14 occasions, reference

93
was made to Shari’ah Standard No. (58). This encouraged me to
present this humble work which can at least assist English readership
to understand the original Arabic text.

ZZZ

94
An Introduction to AAOIFI SS. (59): Sale
of Debt
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as introduction to Author’s book: Banker’s Commentary on AAOIFI
Shari’ah Standard No. (59): Sale of Debt, published by Kanz Publishers in 2023.
Further, a portion written on defining the debt from Shari’a perspective was re-
presented.
===============================================
In December 2018, AAOIFI Shari’ah Board issued the official
Arabic version of Shari’ah Standard No. (59): Sale of Debt. The
Standard took long rounds of preparation and discussion. Scholars
and researchers contributed extensively to fine tuning the final
product. Surprisingly, when the Standard came, some people argued
that the Standard is merely a by-product or a derivative of earlier
Shari’ah standards. Although it is evident that some provisions and
rulings of the Standard were never expressed in the earlier Shari’ah
standards (e.g., sale of entities with mixed assets (i.e., debt and
tangible assets). The Standard covers 80 Shari’ah rulings whether it
terms of permitting, prohibiting or not permitting different matters
related to sale of debt. The text gave 3 definitions and gave 22
illustrative examples. Also, the Standard made 14 cross references to
earlier Shari’ah standards issued by AAOIFI.
Further, some persons from the legal fraternity have raised
emergency flags that implementation of Shari’ah Standard No. (59)
means nothing but end of Sukuk industry and syndicated financing.
Luckily, these alarming statements were often made verbally,
otherwise they would have been a good material for comical usage
referred to by future audience. The fact remains that Shari’ah
95
 Standard No. (59) was implemented in full force and the industry
moved to a new set of products and norms. I was fortunate to be part
of the translation team that translated the Standard from Arabic to
English. The English translation was released on 26th March 2021.
What constitutes a debt?
22 A debt is an established asset that is owed by the debtor,
irrespective of its cause of establishment. The debt could be
established as a result of:
- a loan contract: For example, Mr. (A) borrowed $ 1000 from Mr.
(B). The loan amount to be repaid is a debt;
- a commutative contract (Ꜥaqd muꜤāwaḍa). For example, an
Islamic bank sold a car on deferred payment basis for BD
10,000/-. The sale price will be a debt;
- an act of misconduct (taꜤddī) or negligence (taqṣīr). For example,
there was negligence from the data management company, and
the Islamic bank suffered a direct and actual loss of BD 10,000/-
. If the claim of the loss is made, then this amount will become a
debt.
A debt could be in the form of money, commodities, or usufructs.
Generally, people assume that debt refers to money. Hence, it is
assumed that debt in kind is neither possible nor correct to be
described that way. This view was reflected in Oxford’s Dictionary of
Law, debt is defined as: “1. A sum of money owed by one person or
group to another. 2. The obligation to pay a sum of money owed”.1
However, as per Black, debt was broadly defined as: “a
nonmonetary thing one person owes another; such as goods or services
<her debt was to supply him with 20 international first-class on the
airline of his choice”.2 Even Aiyar mentioned: “debt includes cash or
kind”.3 It is very crucial to take the nonmonetary aspect into
consideration at this point because Islamic banks enter into contracts
of Forward Ijarah, Salam or Istisna. In all these contracts, a debt is
established which is in the form of usufructs or goods to be delivered
in the future. The subjects of contracts are specified and unidentified.

1
Oxford Dictionary of Law, pg. 173.
2
Black’s Law Dictionary, pg. 506.
3
The Law Lexicon, pg. 483.
96
The seller (in Salam or Istisna) owes to the buyer goods or
commodities to be delivered. Similarly, the lessor (in Forward Ijarah)
owes to the lessee usufruct to be delivered as per specifications.
In a sale contract, such as Istisna or Salam, the subject of sale will
be considered as debt because its delivery is futural. Similarly, the
price will be a debt if its deferred or partially paid. This could be
looked at as ibtidā al-dayn bi al-dayn (establishing a debt against a
debt) which is a form of bayꜤ al-dayn bi al-dayn (sale of debt for
debt). This results in ta’jīl al-badalīn (delay of both the
considerations). Some jurists considered it as a form of bayꜤ al-kā’li
bī kā’li, which is prohibited as per the text of Ḥadīth (naṣṣ al-Ḥadīth).
However, Dr. Yāsir ꜤAjīl al-Nashmī discussed the scenario in
detail in light of opinions of jurists of four schools of jurisprudence.
It was concluded that sale-of-debt-for-debt is a mean to avoid a
Shari’ah prohibition, and its avoidance is not an objective which
needs to be met at all the times. Further, such a sale is valid, as per
Ḥanbalī jurists, provided the subject of sale should be delivered as per
the specifications agreed at the time of sale. As per an opinion of
Ḥanafīs and the view of Mālikīs and ShāfiꜤīs, such a sale is Salam and
not Istisna (i.e., the price cannot be deferred). The price should be
stated at the time of forming the contract. As per Dr. Yāsir, if the
below conditions are met, the sale is makrūh (reprehensible):
1. The Istisna seller should have expertise in securing the subject
of Istisna sale;
2. The subject of sale should be described as the case of Salam
contract;
3. The subject of sale should be widely available at the time of
contract, or possible to be delivered at the time of delivery;
4. The sale is not with spot delivery;
5. The sale will not involve ribā, excessive uncertainty, or excessive
incognizance.
6. Delay of price is in the interest of the contracting parties and
will not cause harm for any of the parties.
However, there are many scholars who permitted entering into a
sale wherein delivery of both the considerations of the contract is
deferred. Some of them are: SaꜤīd b. al-Musyyib, al-Sāmirī, Ibn al-

97
Qāsim, Ashhab, Ibn Ḥabīb, al-Bājūrī. Some contemporary scholars,
like Sheikh Abdullah b. Bayyah and Sheikh Muhammad al-Mukhtār
al-Sallāmī, permitted such a sale if there was a need to enter into such
a sale.1
Hence, the practice followed by Islamic banks in financing via
Istisna or Forward Ijarah with delay in settling the price would be
permitted based on this view.

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1
Ta’jīl al-Badalyn fī ꜤUqūd al-MuꜤawaḍāt, pg. 345-417.
98
Importance of AAOIFI Shari’ah
Standard No. (62): Sukuk, in light of
Financial Times Article
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 25th February 2025.
===============================================
Background
On 6th November 2023, the exposure draft of Shari’ah Standard
No. (62): Sukuk was made public by the General Secretariat of the
Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI). Its issuance had been long anticipated for
several reasons. This draft represents a standard equivalent in size to
(10) ten Shari’ah standards. While the financial market has surpassed
hundreds of billions in value, the oscillation of Shari’ah opinions—
ranging from permissibility to prohibition—have spanned over a
worrying spectrum. Given the significance of this Standard within
the industry, for the first time, the exposure draft was translated into
English to enable participants in the hearing sessions to submit their
feedback in a foreign language, in addition to Arabic.
Importance of the Shari’ah Standard was highlighted in one of my
LinkedIn articles, titled: An Epitome of Excellence in Shari’a:
Guidance for a Multi-Billion Dollar Industry, that was later published
in the Islamic Finance Review (ISFIRE), Volume: 14, No. 6,
December 2024.
Despite the tremendous effort invested in drafting the Standard,
voices have emerged exaggerating and instilling fear about every new
and beneficial development, calling for suspension of efforts to
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uncover areas of weakness and shortcomings in many of the existing
issuances. At times, credit rating agencies raise concerns about the
anticipated impact, and at other times, someone from the legal
fraternity tagged as "Islamic lawyer" assumes the role of a concerned
advisor on the grand stage of the debt market—with a tragic
background score—especially when it becomes evident that the
conventional bond is on the verge of losing one of its duplicate
alternatives.
Despite all these reactions, and somehow over-reactions, there is
no doubt that the Standard is a masterpiece of scholarly craftmanship
that will help the industry for the coming decades and will have its
towering position in the history of Shari’a governance and
standardisation.
In this context, I would like to self-quote what I wrote in the
introduction of my tiny commentary on the Shari’ah Standard No.
(59): Sale of Debt: (further, some persons from the legal fraternity have
raised emergency flags that implementation of Shari’ah Standard No.
(59) means nothing but end of Sukuk industry and syndicated
financing. Luckily, these alarming statements were often made
verbally, otherwise they would have been a good material for comical
usage referred to by future audience. The fact remains that Shari’ah
Standard No. (59) was implemented in full force and the industry
moved to a new set of products and norms). [Refer: Banker’s
Commentary Shari’ah Standard No. (59): Sale of Debt, Kanz
Publishers, pg. 10].
Before the Shari’ah Standard No. (59): Sale of Debt was
introduced, AAOIFI Shari’ah Board issued a statement in 2008
prohibiting investment managers from guaranteeing the principal in
the issuances of Sukuk certificates. This statement effectively halted
capital-protected Sukuk whether based on Mudaraba, Musharaka or
Wakala.
Later in 2015, AAOIFI Shari’ah Board has issued Shari’ah
Standard No. (56): Liability of the Investment Manager. I self-quote
my statement in the introduction of its Banker’s Commentary: [This
Standard has its own significance among all the Standards, since it is
one of the select standards that represents uniqueness of Shari’ah

100
compliant products and proudly carries the legal DNA of centuries-old
Islamic jurisprudence. Since Islamic bank realized that common
modes of financing, like Murabaha and Istisna, have limited
application that cannot go beyond financing assets and equipment and
creating a fixed-instalment facility, it was a task of solution searching
for a more dynamic modes of financing that generate variable returns
with the possibility to trade the instrument without compromising
with rulings and maxims given in the books of Islamic jurisprudence.
Since Murabaha stood idle to such far reaching goals, Islamic banks
found Mudaraba, Musharaka and Investment Agency as answers to
what stood as impediment in debt-oriented financing. Application of
investment management started, initially, from small and corporate
deposits based on Mudaraba, but eventually bank’s found many its
applications in terms of structured notes, treasury products and even
capital and debt market instruments. Sukuk worth billions of dollars
were structured on the basis of investment management instead of
non-negotiable Murabaha or Istisna. As the story goes with any
production line, some malfunctioned and adulterated pieces even
surfaced in the market. The vested interest behind such attempts was
to turn Shari’ah compliant modes of investment management mimic
the most usurious conventional products by twisting the Shari’ah
rulings as much as possible. The idea was not innovation rather
achieving bigger and bigger numbers at the cost of Shari’ah soundness.
However, such an attempt eventually failed in a miserable way.
Thanks to AAOIFI’s firm stand of issuing a public statement in early
2008 that required the industry to abide by some broad guidelines.
Eventually, Shari’ah Standard No. 56: Liability of the Investment
Manager comes as cornerstone for establishing any innovative and
dynamic products of Islamic investment management. Readers will
certainly experience the juristic depth and the breath of the standard
when they go through its six parts].
Now, history appears to be repeating itself for the third time—this
time in the form of Standard No. 62!
AAOIFI’s General Secretariat has so far conducted (6) six hearing
sessions across various countries, including Bahrain, Saudi Arabia,
Pakistan, Malaysia, and the UAE, along with a virtual session

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attended by hundreds of participants. The number of written and
verbal comments has exceeded 400. AAOIFI Shari’ah Board has
assured that all feedback will be carefully reviewed and considered
by the issuing body of the Standard.
On 20th February 2025, the renowned UK newspaper Financial
Times published an article by Rafe Uddin and Joseph Cotterill on the
upcoming Shari’ah Standard: Sukuk. The article was titled: "Clerics’
rule change threatens to throw Islamic debt market into turmoil."
In this short article, I will be going through the entire article and
making some relevant comments.
The article had a subheading: "Proposed new standards could
reshape Sharia-compliant bonds and hit growth of $1tn market."
Anonymous Warning from a Rating Agency
The article opens with an introductory paragraph quoting an
anonymous source from the credit rating agency.
“The issuance of Islamic bonds could seize up over a new and
controversial set of proposals from religious clerics, say credit
rating agencies, which warn that the fast-growing $1tn market
could fragment as a result of the plans”.
Apprehension Over Legal Ownership
The article then mentions the anticipation of the issuance of the
Shariah standard at the national level.
“Saudi Arabia and other Muslim-majority states are awaiting
the outcome of a consultation by the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI), the
industry’s main standards-setting body, on its plans for issuers
of Islamic bonds to transfer the legal ownership of assets that
underpin them to investors.”
As is often the case with many who confuse between what is
permissible to be owned by virtue of Shari’ah and the law with legal
registration of the underlying asset. This article suggests that the legal
transfer of the underlying assets of Sukuk is a fundamental
requirement of the Standard.
However, this is a misunderstanding of what is actually stated in
the standard (whether in previously issued Shari’ah Standard No.
(17) or the upcoming version SS. No. (62)). The Standard does not

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mandate the registration of underlying assets in the name of
investors (i.e., Sukuk certificate holders). Instead, it requires
ascertainment that the underlying assets being sold can be
transferred from the originator to the Sukuk holders by virtue of
Shari’ah and law. The exposure draft standard, under s. (5-2-5),
states: "If legal, tax, or procedural reasons, or the like, require not
registering the underlying assets in the name of the certificateholders
or their representatives, and allows to continue keeping the underlying
assets registered in the name of the originator and in its balance sheet,
then the following conditions must be fulfilled: …”. The Standard then
outlines (7) seven conditions that must be satisfied, making the
requirement easily attainable.
If we assume—hypothetically—that we are selling assets that are
legally prohibited from being sold, let alone registered, this will
constitute a fundamental structural flaw. In such a case, the
transaction would not merely be a subterfuge or a sham
arrangement, rather it would amount to fraud and swindling and
uncertainty as per the law.
Importance of Issuing the Standard
The article then quoted a statement from AAOIFI regarding the
importance of issuing the standard.
“AAOIFI says the move is required to harmonise issuance across
several jurisdictions and ensure they more closely adhere to
Islamic principles of risk-sharing in contracts. The body said in
hearings this month that it would bring in the measures, known
as Standard 62, this year, although issuers are expected to be
given between one and three years to implement them.”.
What was quoted from AAOIFI is the crux of the issue itself.
Issuances of Sukuk have varied significantly in their level of Shari’ah
compliance. This inconsistency affects their tradability and liquidity
fluctuations within Islamic financial markets. Only standard-setting
bodies, with the stature of AAOIFI, can play the role of ensuring
Shari’ah harmonization, especially given that AAOIFI Shari’ah
standards have become mandatory in the United Arab Emirates
since 2018.

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 The statement also clarified that the issuance of the Standard does
not necessitate immediate compliance with its provisions. Instead, a
reasonable transition period should be provided to ensure both
Shari’ah alignment and structural consistency, and such a
responsibility lies with the regulatory bodies that are looking after
the Shari’a governance.
Hike of Transaction Cost
The article then quoted a general statement reflecting analysts'
concerns:
“Analysts have warned that the proposals represent a seismic
change that would add huge legal complexity and raise
transaction costs for Islamic bonds, known as sukuk. They say
this could put off investors and stymie issuance, and lead to
different countries following different standards.”.
The article did not clarify the key legal complexities that analysts
(quoted anonymously) referred to, nor did it explain how these
complexities would increase transaction costs.
During the hearing sessions, topics such as preparing financial
statements for Special Purpose Vehicles (SPVs), establishing a
dedicated Shari’a board for Sukuk, and requiring the Shari’ah Board
to issue periodic reports on the performance of the underlying assets
were raised. These are, in themselves, reasonable demands.
If the objection is merely that these requirements are being
introduced two decades after the Sukuk market's development, then
the concern itself is rather puzzling.
Does this imply that the Special Purpose Vehicle (SPV) does not
actually own assets, and that these assets have been disposed of since
the very first day of issuance of Sukuk?
And can one even envisage of a scenario where there is no
Shari’ah Board overseeing the Sukuk’s compliance with Islamic
Shari’a, despite having been the very body that certified Sukuk’s
existence—only to abandon the underlying assets to either plummet
to the depths or fly uncontrollably in the interstellar?
Undoubtedly, these governance requirements do not significantly
increase legal or regulatory costs to the extent that issuers would have
double thoughts of Sukuk issuance altogether. On the contrary,

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adhering to such governance measures enhances the credibility of
Sukuk as a legitimate alternative to conventional interest-bearing
bonds.
Fear of Market Stratification
The article then quoted a statement from a former banking
official:
“There will be an immediate impact,” said Reza Baqir, former
governor of Pakistan’s central bank and a managing director of
sovereign advisory services at Alvarez & Marsal. “There’s a
risk it will stratify the market and delay the [wider] adoption of
sukuk.”
A stratified market is a market that is divided into distinct
segments or layers based on certain characteristics such as
regulations, investor preferences, risk levels, or compliance
standards. Each segment operates under different conditions,
creating variations in pricing, liquidity, and accessibility. In the
context of Sukuk, a stratified market would mean existence of
segments of Sukuk for the same originator (or the obligor) where in
one the market complies with the Standard and another that does
not.
This statement outlines the importance of regulatory
enforcement of AAOIFI Shari’ah standards, rather than simply
having them issued by AAOIFI Shari’ah Board and left confined to a
print edition for academic enrichment with no practical impact.
If Shari’ah standards are mandated at the regional market level,
the creation of a parallel, non-compliant market would be out of
question, as such a market would violate regulatory frameworks.
Moreover, standards play a key role in enhancing industry-wide
quality—they are not merely intended to validate whatever the local
market produces, as good or bad.
Necessity of having Sukuk
The article then highlighted the necessity of developing and
issuing sukuk.
Sukuk provide a means of working around the Muslim
prohibition on partaking in transactions involving interest, by
putting a borrower’s asset into an independent trust that then

105
 pays investors a pre-determined income rather than a fixed
coupon.
There is no doubt that the primary purpose of having Sukuk is to
offer a Shari’ah compliant alternative to conventional bonds, which
are based on borrowing and earning returns from interest (riba). The
periodic returns paid on invested amounts are referred to as a
"coupon."
However, many investors and Sukuk issuers still believe that
Sukuk, in their Shari’ah compliant structure, must fully mirror (or
mimic) conventional bonds. They assume that capital protection is a
necessity, where the investor is treated as a lender and the Sukuk
originator as a borrower, ensuring that the principal remains
guaranteed. Likewise, they expect Sukuk to provide fixed and
guaranteed returns, where the coupon remains assured regardless of
the underlying structure of the issuance.
Exponential Growth of Sukuk Market
The article then highlighted the phenomenon of exponential
growth in the global sukuk market.
The market for these bond-like instruments has grown rapidly,
with issuance forecast to reach $200bn this year, according to
S&P Global. Foreign currency issuance has climbed 24 per cent
over the past year, as borrowers start to tap investors in the US
and Europe.
These statements underscore the importance of issuances of
Sukuk and demonstrate that investors and rating agencies are well
aware of the risks associated with the underlying assets or Sukuk
holdings.
Worrying Trends
The article then noted that growth figures alone are not sufficient
to establish full or absolute legitimacy from the Shari’a perspective.
However, AAOIFI’s scholars have been concerned that the
market in its current form does not adhere to the spirit of Islamic
financial jurisprudence. Many clerics want to see something
more akin to an equity investment, where ownership of the
underlying asset is transferred for the length of the contract.

106
 Expressing concern despite figures of exponential growth is not
surprising; rather, it is a sign of ongoing oversight and sustainable
improvement.
Global accounting, governance, tax, and regulatory practices aim
to evolve by enhancing controls, not by imposing unnecessary
complexity. Eventually enhanced controls result in a sensible and
matured markets that are the ultimate goals of ESG.
The structural resemblance of Sukuk to other equity instruments,
when observed superficially, is merely a vague presumption. If this
assumption were entirely accurate, the AAOIFI Shari’ah Board
would not have issued such a comprehensive and lengthy standard;
instead, it would have sufficed with a statement banning issuances of
Sukuk altogether and advocating for shares instead. Shari’ah Board
differentiates the class asset of Sukuk vs. shares.
However, if the argument is that both shares and Sukuk have one
thing in common, i.e., risk assumption tied to the underlying assets,
then the legal answer is, simply, Yes.
Results of Collective Ijtihād
The article then highlighted the importance of collective ijtihād:
Islamic law is open to interpretation and there is no single
agreed-upon set of rules, with AAOIFI providing guidance based
on the consensus view of 21 senior scholars in Islamic law and
finance.
This paragraph highlights the importance of Shari’ah standards
in the codification of Islamic finance. In the absence of universally
recognized international conventions governing Islamic banking
transactions—like the Uniform Customs and Practice for
Documentary Credits (UCP) in conventional finance—Shari’ah
standards, which are the result of a sincere effort in collective ijtihād,
spanning over a quarter of a century, serve as a solid foundation for
structuring financial instruments. These standards protect consumer
rights and provide a reference framework for dispute resolution in
the courts of laws and for the arbitrators.
Crossroads with the Industry
The article then discussed the critical crossroads between the
Sukuk industry and AAOIFI.

107
 In 2008, in a seminal moment for the industry, AAOIFI’s chair
Sheikh Muhammad Taqi Usmani said 85 per cent of the market
breached key principles of Islamic law by not adequately sharing
risk between obligor and lender. This triggered a transition to
more asset-backed securities.
The reference here is to the investment manager’s guarantee and
the originator’s obligation to make out any shortfall in the periodic
coupons, which had eventually turned to be a deteriorating force in
the Shari’ah compliant structuring.
However, following the 2008 statement (cited in the article), the
status of capital-guaranteed Sukuk—based on Mudaraba,
Musharaka, and Wakala—was revised. This did not necessarily lead
to a complete shift toward asset-backed Sukuk, but rather, asset-
based sukuk continued to represent the largest share of listed sukuk
globally.
The root cause of Reluctance
The article then discussed the main reason behind the reluctance
to implement the Standard and the consequences of its issuance.
Rating agencies S&P Global and Moody’s said bond investors
would be put off, either temporarily or permanently, because of
AAOIFI’s proposal, as the new structures would no longer mimic
a conventional bond. The latter has also said the move can
“significantly” dampen sukuk issuance in 2025 if adopted in its
proposed form. Fitch has said further moves towards a quasi-
equity structure can render the instruments unrateable.
“If sukuk ceases to be a fixed-income instrument, you will lose
investors,” said Mohamed Damak, global head of Islamic
finance at S&P Global.
Analysts have also said that rules blocking foreigners from
owning land and property in some Middle East states can make
it difficult for sovereigns to transfer ownership as part of any debt
issuance, even on a temporary basis.
Saudi Arabia is now the biggest issuer of sukuk, having sought
foreign investment to help finance Crown Prince Mohammed
bin Salman’s ambitious Vision 2030 plans to modernise the

108
 kingdom. Islamic bonds make up about 60 per cent of its total
debt issuance, according to data provider Dealogic.
Multiple lawyers involved in structuring Islamic sukuk contracts
said they expected Saudi regulators to apply rules based on a
looser interpretation of Islamic law, rather than comply with
AAOIFI’s strict interpretation, splintering the market.
If we construct the hypothesis that Sukuk differ from
conventional interest-bearing bonds due to the absence of secured
lending and income in the form of interest, then replicating Sukuk in
their structural characteristics in these two aspects is a clear cause for
concern.
However, if the replication occurs in matters outside these two
aspects, then there is no issue from a Shariah or customary
perspective. For this reason, the Standard has adopted technical
characteristics from Additional Tier 1 (AT1) capital bonds and
incorporated them within AT1 Sukuk, as features like delayed profit
distribution or investor subordination do not affect the core Shari’ah
validity of the underlying contract of Sukuk.
As for the consequences mentioned, they are a natural outcome
of any regulatory, governance, or accounting reform. When existing
standards change, the market needs to reposition and realign itself to
adapt to the new regulations. This is a general all over the world and
nothing new to it.
The claim that reluctance to apply the Standard stems from Sukuk
no longer being a debt instrument presents a major legal issue, even
without the issuance of the new version of Shari’ah Standard No. 62.
Since the earliest issuances of Sukuk in 2005, Sukuk have been
fundamentally defined as instruments representing common
ownership in the underlying assets or Sukuk holdings. If we argue
that Sukuk are merely debt instruments and that their returns are not
linked to the performance of their underlying assets, this implies that
the very structures at risk of being affected are fundamentally
misaligned with the core concept of ownership and profit generation
from assets actually or constructively owned by the Sukuk certificate
holders.

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 As for the speculation regarding market stratification, it is
premature to assume it with assertiveness. Over the past decades, the
global Sukuk market has already stratified into various regional
Shari’a compliant structures across Southeast Asia, Pakistan, GCC,
the U.S., and Europe. The choice has always remained with investors,
allowing them to select the market that aligns with their Shari’ah
investment preferences.
The Impact of Classical Approach
The article then discussed the implications of the classical
approach.
“If you interpret the rules in the most rigid and black-and-white
way, it will be an own goal, because it will shrink the market,”
said Debashis Dey, a partner at law firm White & Case.
Dey added that Standard 62 could lead to the creation of a range
of structures, including a covered bond-like instrument — an
ultra-safe debt that gives investors recourse both to the issuing
bank and an underlying pool of assets — at one extreme and an
equity-like instrument at the other.
Despite AAOIFI’s Standard 62 being laid out as guidance,
religious scholars have grown wary of the various routes
practitioners adopt to bypass intended changes.
The Islamic lawyer who participated in structuring Sukuk and
syndicated finance transactions expressed his opinion on the
methodology of issuing Shari’ah rulings. According to his claims,
Shari’ah rulings should not be viewed in binary terms—as either
white (approved) or black (rejected). Instead, he appears to advocate
for a spectrum of colours, suggesting, may be, the possibility of "grey
rulings" (rejected but conditionally approved if the transaction is
profitable) or even dual-coloured rulings!
In reality, the market needs a judicious expert would aspire to
distinguish between genuine and flawed financial instruments and to
ensure that the market remains pure and sound from Shari’a
perspective.
Regarding the lawyer’s concern about the emergence of new
Sukuk structures, perhaps such structures are not only desirable but
should actually be the norm. Sukuk holders should be actual owners

110
of the underlying assets, with full rights to manage and dispose of
them. Ownership implies the right to monitor returns, assess asset
performance, and determine future outcomes, rather than merely
knowing the dates of profit distributions in a dubious manner that
mimics conventional interest-based bond coupons.
The article suggests that the issuance of the new Standard—by
Allah’s will—will be a landmark in the Sukuk industry. Even if
compliance with the Standard remains non-mandatory in some
regions, it will expose the true nature of defected and corrupted
Sukuk structures. Shari’ah auditors will then have to actively address
inherent weaknesses, even if the market does experience
stratification as a result.
Further, the article shows the constant oversight by Shari’a
scholars across the industry in raising the level of Shari’a quality.
Sukuk vs. Bonds
At the end of the article, a statement was quoted from an expert
regarding the current state of sukuk.
“Sukuk do not look very different to conventional bonds any
more and the market [needs] to move back to its roots, which is
in trade not debt,” said Harris Irfan, former head of Islamic
finance at Deutsche Bank and founder of Cordoba Capital.
“There will be a painful transition period. Some sovereigns might
say that ‘we’re not playing this new game’ . . .[but] there’s no
reason why institutional investors can’t participate,” Irfan
added.
The call is coming from inside the house!
This is the outcome of the current Sukuk structuring approach,
where Sukuk have increasingly come to resemble debt instruments
in essence, rather than being genuinely linked to commutative
contracts, upon which their structures are supposed to be built.
The absence of government or sovereign entities in upcoming
issuances of Sukuk can be attributed to (2) two main reasons. Firstly,
there may be an insufficient pool of sovereign assets that can be
subject of sale by virtue of Shari’a and law. Secondly, there may be no
suitable structures available that align with the nature of sovereign
assets at the time.

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To address this issue, the underlying contract for such sukuk
structures should be long-term usufruct leasing (Sukuk of Intifa
(usufruct rights)), rather than the usual sale that aims conveyance of
the corpus (raqaba) along with the usufruct (manfaꜤa), as is
commonly done in the current Sukuk structures.

ZZZ

112
Shariah resolution as determining
factors in treasury products
Dr. Yousuf Azim Siddiqi
===============================================
Published in Islamic Finance News (IFN) on 27th November 2019.
===============================================
The Dubai Government hosted the 24th Conference of OIC Fiqh Academy between
the 4th and 6th November 2019 attended mostly by Shariah scholars worldwide. Panel
discussion in the conference concluded a number of resolutions which could be directly
impacting treasury products offered by Shariah compliant institutions. In this article,
DR YOUSUF AZIM SIDDIQI would like to highlight the current practises and
compare them with the resolutions obtained at the conference.
Resolution on cryptocurrency
Different forms of cryptocurrencies, specifically Bitcoin, are
gaining significant place of discussion among practitioners,
investors, regulators, economists and even Shariah scholars. As per
the Resolution No. 237 (24/8), the mechanism and modus operandi
of such currencies were highlighted but the Shariah stand was not
concluded since two matters are still open for further discussion and
deliberation a) how to treat the currencies, whether as goods,
usufruct, financial investment asset or digital asset, and b) the
possibility of considering the cryptocurrency as appraisable property
from Shariah perspective (mutaqawwim). It is evident that the
resolution followed a cautious approach, but treasury departments
of Islamic banks remain undecided to deal with their customers who
might be interested to invest or transact in such currencies.
Resolution on debt settlement during hyperinflation
How to settle debt during a hyperinflation scenario? As per the
Resolution No. 231 (24/2), in case of hyperinflation the concerned
parties may agree to settle the financing by value or to have a
settlement arrangement where the loss is shared between them
113
provided it was in light of an arbitration or judicial order, and such
a condition was not pre-agreed in the contract. It is evident that the
resolution will give a relief from financial hardship for Islamic bank’s
treasury which might be exposed to settlement risk in money market
deals during hyperinflation.
Resolution on compensatory financing
Compensatory financing (Qurūḍ Mutabādala) is a bilateral
arrangement where both the parties agree that whenever an interest
free financing (Qarḍ Hasan) has been taken by a party, then it will be
obliged to extend, in the future, a financing of similar period and
amount to the creditor. Such mechanism proved to be useful in
correspondence banking where, sometimes, NOSTRO accounts are
overdrawn so Islamic banks can extend interest free loans to the
drawee bank. As per the Resolution No. 238 (24/9), the mechanism
of compensatory loans is prohibited. It is evident that this resolution
will have an adverse impact on Islamic bank’s financial institutions’
relations since most of the foreign banks do not accept inclusion of
any condition where the debtor pays an amount to charity.
Extended offer in currency
As per the classical literature, offer and acceptance need to be
exchanged in the same session of the contract. However, a form of
new offer had emerged as per the contemporary practises which are
known as extended offer wherein the offer remains binding on the
offeror for a period beyond the contract session or receiving the same
by the recipient. This kind of offer proved to be useful in forex
transactions wherein Islamic bank may buy or sell currencies to its
customer through written correspondence. The recipient is not
obliged to respond immediately to the offer which was sent by the
Islamic bank. As per the Resolution No. 238 (24/9), the extended
offer in the currency contract is not permissible. It is evident that this
resolution will have an adverse impact on Islamic bank’s treasury
operations due to no possibility of exchanging documents via
correspondence.
Hedging of currency risk
Islamic banks started, in the recent years, using Shariah
compliant derivatives to hedge against the currency risk. This is done

114
through, mostly, executing multiple Tawarruq transactions. They
applied structures that are different from the conventional hedging
products on the operations and legal side but financially they
achieved the same purpose intended by their counterparts in the
conventional industry such as hedging the risk. As per the Resolution
No. 238 (24/9), it is prohibited to enter into products based on
multiple organized Tawarruq. It is evident that this resolution will
have a direct and adverse impact on Islamic bank’s risk portfolio
besides treasury business which started slowly adopting products
standardized by the International Islamic Financial Market, Bahrain.
Option premium via Murabaha
Offering conventional options is not acceptable in Islamic finance
because charging a premium for an obligation to buy or sell cannot
be considered as an appraisable income from Shariah perspective. As
an alternative, Islamic banks started offering option products via
structuring them on the basis of Murabaha. As per the Resolution
No. 238 (24/9), it is prohibited entering into Murabaha arrangement
for the purpose of gaining option premium. It is evident that this
resolution will have a direct and adverse impact on Islamic bank’s
currency risk managed by treasury departments.
Bilateral promises
Islamic banks enter into set of promises with variant conditions.
Hence (A) promises to buy from (B) in June 2020 for X price. On the
other hand, (B) promises to sell to (A) in January 2020 for Y price.
Such arrangements are applied in Tawarruq, as well as, and in the
currency hedging transactions. As per the Resolution No. 238 (24/9),
it is prohibited entering into such promises because they amount,
overall, to bilaterally binding promise. It is evident that this
resolution will have a direct and adverse impact on an Islamic bank
which would like to mitigate its own risk and giving the customer a
comfort of not being exposed to the risk of default by the Islamic
bank.
Conclusion
Looking at the Shariah basis of AAOIFI Shariah Standards, it is
evident that the collective efforts of jurists and Shari’a scholars
played an instrumental role in developing Shariah stand on various

115
products of Islamic Treasury. The given resolutions have serious and
direct impact on the Islamic banking treasury which is making an
endeavour for small and slow progress in order to come up with
alternative conventional treasury products. The coming days will
highlight whether the given resolutions are applied, modified or
ignored by the industry players.

ZZZ

116
Shari’a Review of Non-standardized
Deals (Sukuk & Syndication)
Dr. Yousuf Azim Siddiqi
===============================================
A technical paper on how to conduct Shari’a review of Service Agency Sukuk and
Murabaha Syndication, presented by the Author during the Second Shari’a
Departments Forum held in Dubai on 22nd April 2017.
===============================================
Firstly: Parties related to Shari’a Review
While conducting a Shari’a review of documentation pertaining
to Service Agency Sukuk or Murabaha Syndication, the Shari’a
personnel will be dealing with different parties and departments such
as:
1. External Legal Counsel:
It could be any known international law firm which will be
entrusted with the job of preparing the first draft of the Sukuk or
syndication agreements. Known firms in this field are Allen &
Ovary, Clifford Chance, DLA Piper etc.
2. Legal Department:
It is very important to on-board Legal department during the
process of reviewing and negotiating the Shari’a requirements
with External Legal Counsel. On the other hand, Legal
Department plays an important role in highlighting the legal
relevance of certain Shari’a requirements as stated in the Fatwa.
For example, an action which is, as per Fatwa, a discretionary
might be a legally binding obligation.
3. Shari’a Board:
In Service Agency Sukuks, Shari’a Boards of the Obligor and
Arrangers play the most important role in endorsing the
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 agreement from Shari’a perspective. Also, no other body,
company or department is allowed to deviate from the Shari’a
requirements as given in the Fatwa issued by the Shari’a Board.
Similarly, Investment Agent’s Shari’a Board issues Fatwa in a
Murabaha Syndication deal.
4. Risk Department:
In Service Agency Sukuks, it is important to monitor the risk
quality of the underlying assets during the life of the Sukuks. On
the other hand, in Murabaha Syndication, Risk should be about
the Shari’a limitations of rescheduling or restructuring of the
outstanding Murabaha amount.
5. Accounting Department:
In Service Agency Sukuks, Shari’a requirements have a direct
accounting impact on how the bank will be recording or
reflecting sale and purchase of assets to the SPV and this comes
under off-balance sheet recording. In Murabaha Syndication, the
bank’s accountants need to be aware about profit rate fixation
during the particular financing period in order to calculate the
cost of funding.
6. Corporate Department:
Murabaha Syndications are usually done for clients of the Corporate
Department.
7. Investment:
In Service Agency Sukuks, if the underlying assets are sourced
from the bank’s proprietary investment book, then Investment
Department needs to be coordinated for fulfilling the Shari’a
requirements of the Fatwa.
8. FI:
Once Service Agency Sukuks are issued, then other FIs might
approach Obligor’s FI to inquire about Shari’a grounds of certain
points. In Murabaha Syndication, Bank’s FI plays an important
role in off-loading bank’s participation, and it should be ensured
that it is done through commoditized sale of debt.
Secondly: Purposes of Financing
1. New Financing:

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 The Obligor might raise financing through Murabaha
Syndication or Service Agency Suk as a fresh financing which
serves as working capital. In such a case, scope of activities of the
Obligor should be closely reviewed to ensure that proceeds of
Sukuk will be not non-Shari’a compliant purposes.
2. Restructuring:
In such cases, the Obligor might be an existing Murabaha
Syndication customer which is (or might be) facing cash-flow
difficulties and require execution of new Murabaha Syndication
to settle the existing Murabaha over a longer period.
Restructuring of Service Agency Sukuk is more convenient from
Shari’a perspective because the Sukukholders (via the SPV) hold
the Wakala Assets which can be sold back to the Obligor on an
extended date against the agreed date of Sukuk redemption.
3. Refinancing:
In Murabaha Syndications, sometimes the Obligor might have an
existing relationship of Murabaha Syndication and would like to
re-enter into Murabaha transaction in order to take up the funds
which were already paid as per the previous Murabaha
Syndication. In the Service Agency Sukuks, refinancing is
possible only through sale of additional assets by the Obligor to
the Sukukholders (via SPV).
4. Business Expansion:
In some cases of Service Agency Sukuks issuance or Murabaha
Syndication, the Obligor might plan to expand its business or
require financing for specific goods. Proceeds of Sukuks or
Syndication will be used for CAPEX purposes.
Thirdly: Service Agency Sukuk
Basic Structure:
Sale of Wakala Assets:
On the Issuance Date, the Obligor will sell profit-generating
Shari’a complaint assets (“Wakala Assets”) to the SPV.
1. Service Agency:
The Obligor shall be appointed as Service Agent to provide
certain services in relation to the Wakala Assets.
2. Profit Servicing:

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 On periodic basis, the Obligor (as Service Agent) will distribute
of profits collected on the Wakala Assets.
3. Purchase Undertaking:
Upon maturity, the Wakala
Assets are purchased back
by the Obligor against a pre-
defined Exercise Price.
Parties Involved:
More than 18 parties are
involved to issue Service
Agency Sukuks. Some of
these parties are as follows:
The Financing Parties:
1. The Obligor:
it’s the party which is availing financings through Service Agency
Sukuk. It should be ensured, from Shari’a perspective, that the
Obligor has sufficient profit generating assets on the Issue Date
of Sukuk and throughout the life of the Sukuk.
2. The Trustee:
it’s an offshore SPV which is entrusted with the duty of holding
the ownership over the Sukuk assets as a trust on behalf of the
Sukukholders. In EI Service Agency Sukuk, an SPV was
established in Cayman Land. The Trustee is the body which,
usually, issues Sukuk certificates so it is called as The Issuer as
well. Any Sukuk can be differentiated by its Issuer and not by the
Obligor. Hence ADIB or DIB might have various Sukuk
issuance, but you may trace a particular Sukuk offering (as stated
in a Shari’a pronouncement) through the name of the Issuer.
3. Sukuk holders:
The individuals or entities (corporate, government or other)
which subscribe to the Sukuk issuance.
4. SPV Corporate Service Provider:
A firm which manages company affairs of the SPV in terms of
filling the documents of incorporation and nominating persons
who will act as directs of the SPV. In EI Service Agency Sukuk,
SPV Corporate Service Provider was Maples.
Parties related to Listing:
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5. Rating Agency:
A credit rating agency which rates the Sukuk based on Obligor’s
financial performance. World’s famous rating agencies are S&P
and Moody’s.
6. Stock Exchange Agent:
The party which assists the Obligor in listing the Sukuk on a
foreign stock exchange. In EI Service Agency Sukuk, Walkers
acted as Stock Exchange Agent for listing Sukuks in Ireland
Stock Exchange.
Parties related to Compliance & Legal:
7. Shari’a Boards:
usually 2 Fatwas are issued on the Sukuk issuance, one is by
Obligor’s Shari’a Board and the other by one of the Arranger’s
Shari’a Board.
8. Auditors:
it’s an external audit firm which provides an unqualified opinion
about Sukuk issuance and also endorses the financial statements
of the Obligor. World’s famous audit firms are Deloitte,
PricewaterhouseCoopers, Ernst & Young and KPMG.
9. Obligor’s Legal Counsel:
It’s a law firm which drafts the Transaction Documents for the
Obligor. In EI Service Agency Sukuk, Clifford Chance did this
job.
10. Dealers’ & Arrangers’ Counsel:
A law firm representing the Dealers and Arrangers and is
responsible for reviewing the Transaction Documents drafted by
the Obligor’s Legal Counsel. In EI Service Agency Sukuk, Allen
& Overy did this job.
11. SPV’s Counsel:
A law firm which provides legal advice for the SPV. In EI Sukuk
Service Agency Sukuk, it was Maple & Calder.
12. The Delegate:
It’s a party that takes care of Sukukholders’ interest. In EI Service
Agency Sukuk it was Deutsche Bank UK.

Parties related to Issuance & Post Issuance:

13. The Arranger:
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 it’s a party which is responsible for arranging investors meeting
and promoting the upcoming Sukuk issuance in a pre-launch
stage. In EI Service Agency Sukuk, the Arrangers were Standard
Chartered, HSBC, Maybank, Bank ABC, Emirates NBD Capital,
Noor Bank, Al Hilal Bank and DIB.
14. Joint Lead Manager:
it represents all the parties which are responsible to market and
sell the Sukuk to their investors on the Issue Date. Each JLM is
supposed to look into his own region or country. For example, a
UAE-based JLM might market the Sukuk within UAE, GCC or
even MENA region. There might be a commitment from a JLM
for a particular amount (referred to as Underwriting Amount)
then the JLM will be called as Underwriter as well. In case
Sukuks were under-subscribed, then the balance is subscribed by
the Underwriter JLM for the Underwriting Amount. When
commitment is non-binding, then it is known as soft
commitment.
15. Global Coordinator:
it’s a party which carries the job of JLM for global markets. HSBC
and SCB are famous Global Coordinators of Sukuks. In EI
Service Agency Sukuk, SCB and EI was the Global Coordinators.
16. The Dealer:
At the time of issuance, Sukuks can be bought only from a
designated Dealer. Once available in the secondary market, then
other banks and financial institutions can offer them for sale.
17. Book-runner:
it’s a party which consolidates all the orders placed for
subscribing the Sukuks on the Issue Date.
18. The Agents:
There are various parties which perform agency roles during the
life of Sukuk, for example:
a. The Registrar is responsible for holding the original Global
Certificate.
b. The Principal Paying Agent is responsible for collecting
the money raised from Sukuk-subscription and then
transferring it to the Obligor, and also it transfers the
money back to the Sukukholders on redemption.
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 c. The Calculation Agent is responsible for calculating the
coupon amount.
d. The Payment Administrator is responsible for
monitoring payments of coupon.
e. The Transfer Agent is responsible for transferring the
coupon amounts to the Sukuk holders.
Documentation:
Financing Documents:
It refers to all the agreements which govern the Shari’a
relationship between the Obligor and the SPV.
1. Master Purchase Agreement:
Pursuant to this agreement, Wakala Assets are sold by the
Obligor to the SPV. From Shari’a perspective, points to be
closely reviewed are:
(i) Sale & Purchase of Initial Wakala Assets,
(ii) Duties of the Seller in respect of the Initial Wakala Asset,
(iii) Representation & Warranties
(iv) Exercise of Right
Upon the Shari’a review, the answer to the following should be
clear:
(i) What will be the components of the Wakala Asset? Are
tangible assets sufficiently more than intangible assets?
What is the risk quality of Wakala Assets?
(ii) What are the warranties extended by the Seller?
2. Service Agency Agreement:
Pursuant to this agreement, certain services will be provided by
the Obligor to the SPV in relation to the Wakala Assets. From
Shari’a perspective, points to be closely reviewed are
(i) Services.
(ii) Accounts.
(iii) Representation & Warranties
(iv) Payments
(v) Indemnity
Upon the Shari’a review, the answer to the following should be
clear:

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 (vi) What are the basic and regular duties of the Service Agent?
The scope of duties of the Service Agent needs to be different
from proactive investment services.
(vii) When the Service Agent stands at default? This will mainly
include insurance payment in the case of the total loss of the
Wakala Asset.
3. Sale & Purchase Undertakings:
Pursuant to these undertakings, the Obligor or the SPV
undertake to purchase or sell the underlying assets. From
Shari’a perspective, points to be closely reviewed are:
(i) Grant of Rights
(ii) Exercise of Rights
(iii) Upon the Shari’a review, the answer to the following
should be clear:
(iv) What does Exercise Price Stand for?
(v) When can the Obligor or the SPV enforce these
undertakings?
Issuance Documents:
It refers to all the agreements which govern the relationship of
parties’ which issue Sukuk as financial security, such as:
4. Agency Agreement:
This agreement represents the relationship between the SPV,
the Obligor, the Delegates, the Payment Administrator, the
Principal Paying Agent, the Calculation Agent, the Registrar
and the Transfer Agent. From Shari’a perspective, points to be
closely reviewed are:
(i) Duties of Paying Agents, Registrar, Transfer Agent, Principal
Paying Agent.
(ii) Non-receipt of Payment Instructions
Upon Shari’a review, the answer to the following should be
clear:
(iii) What are the duties of all the parties?
(iv) What are the consequences of non-payment by the SPV?
5. Master Trust Deed Agreement:
This agreement governs the relationship between the SPV, the
Obligor and the Delegates. From Shari’a perspective, points to be
closely reviewed are: Declaration of Trust.
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 (i) Duties of Trustee
(ii) Undertakings of Obligor & Application of Money.
Upon the Shari’a review, the answer to the following should be
clear:
(i) What's the type of ownership? Beneficial or co-ownership.
(ii) What are the duties of the Obligor?
6. Programme Agreement:
This agreement governs the relationship between the SPV, the
Obligor and the Initial Dealers. From Shari’a perspective, points
to be closely reviewed are:
(i) Agreement to Issue and Purchase
(ii) Increase in the Aggregate Face Amount
(iii) Undertakings from SPV, Obligor and Dealer
Upon the Shari’a review, the answer to the following should be
clear:
(i) would be the impact of the increasing the face amount of the
Programme?
(ii) What are the representation and warranties?
Market Document:
It refers to all the documents which are used by the
Sukukholders in understanding the structure and risk of the subject
Sukuk:
1. Base Prospectus:
It’s a detailed document which includes mainly the following
information:
i. Risk Factors:
It highlights different types of risk which face the performance
of the Service Agency Sukuk. From Shari’a perspective, it is
important to read: Risk Factors related to the Wakala Assets.
ii. Form of Trust Certificates:
it contains the vital details of each Sukuk unit which will be
shared with the client upon issuance of Sukuk.
iii. Structure and Diagram and Cashflow:
It gives a brief structure of the Service Agency Sukuk along with
a diagram reflecting the movement of Cashflow and transfer of
asset ownership based on Shari’a contracts.
iv. Terms and Conditions of the Trust Certificates:
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 It is one of the most important parts of the Base Prospectus
because it gives full details of the Programme and how it runs
under the Shari’a compliant arrangement.
v. General Description of the Programme:
it’s a quick check of answering all your queries pertaining to
Dealers, Arrangers, and Ownership of the Trustee etc.
vi. Description of the Trustee:
it gives details of how SPV is registered and who owns it?
vii. Use of Proceeds:
it gives details of how the funds of the Sale & Purchase
Agreement will be used.
viii. Summary of the Principal Transaction Documents:
it gives a summary of all the transaction documents.
2. Shari’a Fatwa:
It’s a pronouncement by the Shari’a Board of the Obligor which
will highlight Shari’a features of the Sukuk and opinion about its
permissibility.
Fees & Profit:
Amounts related to Financing:
Expected Profit:
it’s the amount of profit which is expected to be generated from
the Wakala Assets for the Sukukholders. This is referred to in the
Service Agency Agreement as Expected Income Revenues Amounts.
Agency Fee:
which is usually USD 100/- payable by the SPV to the Obligor for
performing the job of Service Agent.
Liquidity Facility:
in case the actual profit generated on the Wakala Asset was less
than the Expected Profit then the Service Agent can extend, on its
own discretion, a facility to the SPV for the shortfall amount.
Amounts related to Listing:
Listing Fees:
it includes all the fees which are payable by the Obligor to the
Stock Exchange Agent for listing the Sukuk in a foreign exchange. EI
Service Agency Sukuks have listed on Irish Stock Exchange as well as
Nasdaq Dubai. Since EI (as Obligor of EI Service Agency Sukuk) is

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incorporated in the UAE, so it does not require a listing agent for
Nasdaq Dubai.
Central Bank Doc Approval Fee:
represents a fee paid to the Stock Exchange Agent for obtaining
approval of the central bank in a foreign country.
Stock Exchange Review Fee:
Represents a fee paid to the Stock Exchange Agent for getting the
Sukuk issuance reviewed by a particular stock exchange.
Filling Prospectus & Listing:
It represents a fee paid to financial regulatory bodies for
approving and releasing the Sukuk prospectus. EI Service Agency
Sukuks are regulated by the DFSA (Dubai Financial Services
Authority).
Amounts related to Compliance & Legal:
Tick & Tie Work:
It is the fee paid to the Auditors for providing approval on the
financial statements of the Obligor.
Programme Update & Issuance Fee:
It is the fee paid to the External Legal Counsel for updating or
issuing the Sukuk programme.
SPV Corporate Service/FATCA
It is an annual fee paid to the SPV Corporate Service Provider.
Change of SPV Name:
It is a one-time fee paid to the SPV Corporate Service Provider
for changing the name of the SPV.
Annual Admin Point of Contact:
It is an annual fee paid to the SPV Corporate Service Provider for
carrying services of the SPV.
Amounts related to Issuance:
Roadshow Expenses:
It is the amount borne by the Obligor for carrying roadshows of
Sukuk.
Arrangement Fee:
It is the fee paid to the Arranger.
Removal of Dealer:
In case a Dealer has been removed then the External Legal
Counsel charges a fee for the same.
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Postproduction:
Once Service Agency Sukuks are issued, then Shari’a personnel
have the following duties:
Asset Monitoring:
Close monitoring of the Wakala Assets which were selected for
Sukuk issuance to ensure that there is no breach of tangibility ratio.
Shari’a Assistance:
In case of pre-mature settlement of any asset or need for replacing
it then suitable Shari’a guidance is provided to avoid any Shari’a gaps.
Periodic Reporting:
Prior to profit distribution, a request should be made to the
relevant units to provide details of the actual performance of the
Wakala Assets. If actual profits were less than the coupon, then a
liquidity facility would be extended by the Obligor. Any liquidity
facility to the SPV should be profit bearing and correctly
documented. Based on actual findings, a report needs to be presented
to the Shari’a Board.
Updating Shari’a Board:
In case a sudden and unexpected change happened in the
composition of Wakala Assets or in the trading or settlement to the
Paying Agent then immediately inform the Shari’a Board and seek
Shari’a guidance.
Fourthly: Murabha Syndication
Basic Structure:

Investment Agency:
The Participants appoint a Shari’a compliant bank as their
Investment Agent to execute Murabaha transactions on their behalf.
Spot Purchase:
The Investment Agent purchases the underlying assets of the
Murabaha Syndication from Dealer-1. The underlying has to be
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Shari’a compliant asset. In EI, Murabaha Syndication is done on
Nasdaq certificates.
Murabaha Sale:
Once the underlying asset is purchased by the Investment Agent
then it is sold to the Obligor on Murabaha basis.
Spot Sale:
The Obligor has the right to hold the underlying asset or to sell it
to a Dealer-2 which has to be an independent and different from the
Investment Agent as well as the Participants.
Parties Involve
there are different parties of involved in the execution syndication
which can be classified as follows:
Financing Parties:
These are all such parties which either extending or receiving
Murabaha financing such as:
The Obligor:
it’s a party which is taking financing through Murabaha
Syndication. From Shari’a perspective, it should be ensured that the
Obligor is not a non-Shari’a compliant entity which could be using
the fund for non-Shari’a compliant financings or activities.
The Participants:
One or many parties could be acting as the financier for the
Obligor. Usually, conventional banks also participate in a Murabaha
Syndication provided Investment Agent is a Shari’a compliant entity.
The Investment Agent:
A party which is entrusted with the duty of executing the
Financing Documents (as given in 4.c.i) with the Obligor. In
conventional syndication, it is called a facility agent.
Underwriter:
A party which is undertaking to extend financing about the
shortfall amount in case Participants did not contribute the full
amount of Murabaha Syndication.
Facility Parties:
These are all such parties which are involved in arranging the
Murabaha Syndication such as:
The Security Agent:

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 It’s a party which holds (on behalf of the Investment Agent) all
the securities provided by the Obligor.
The Arranger:
It is a party which are coordinates with potential participants for
Murabaha Syndication to be extended to the Obligor. There is no
obligation on the Arranger to extend financing or to underwrite the
deal. The party which is leading the discussion (usually the originator
of the deal) will be labelled as Lead Managers.
Global Agent:
Sometimes syndication is done in 2 or many tranches. For
example, a tranche would be based on Murabaha and the other one
based on the conventional loan facility. Also, a tranche might be
based on commodity Murabaha and the other one based on Nasdaq
certificates. In such a case, the Investment Agent, which is managing
the syndication is called the Global Agent.
Documentation:
Financing Documents:
It refers to all the agreements which govern the Shari’a
relationship between the Obligor and the Investment Agent:
Master Murabaha Agreement:
Pursuant to this agreement, certain assets are sold on Murabaha
basis by the Investment Agent to the Obligor. From Shari’a
perspective, points to be closely reviewed are:
- Murabaha Transaction
- Conclusion of the Murabaha
- Murabaha Assets
- Deferred Payment
- Late Payment
- Increased Cost
- Events of Default
Upon the Shari’a review, the answer to the following should be
clear:
What is the flow of Murabaha execution?
i. Is the ownership of Murabaha Asset absolute or revocable?
ii. How profit is calculated and is it fixed.
Facility Documents:

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 It refers to all the agreements which state the terms and
conditions related to the facility and its settlement:
Commercial Terms Agreement:
It is a lengthy and detailed agreement (usually over 100 pages)
which governs the over-all common terms of the agreement between
all the parties involved in the Murabaha Syndication. From Shari’a
perspective, points to be closely reviewed are:
- Definition,
- Conditions of Utilization
- Cancellation of the Facility
- Prepayment
- Increased Cost
- Events of Default
Upon the Shari’a review, the answer to the following should be
clear:
i. Have the Participants the right to cancel the facility post-
execution of Murabaha?
ii. When the Increased Cost is charged and how it is recovered?
iii. What are the events of default? Whether any conditions of
anticipatory default is incorporated.
Inter Creditor Agreement:
If Murabaha Syndication is part of a multi-tranche syndication
deal then a grander commercial terms agreement is prepared which
governs the over-all common terms of the agreement between all the
parties involved in a multi-tranche syndication deal. If one of the
tranches are non-Shari’a compliant, then the reference will be made
about payment and settlement of interest due as per the conventional
syndication.
Investment Agency Agreement:
It’s an agreement which governs the relationship between the
Investment Agent, the Obligor and the Participant Bank. From
Shari’a perspective, points to be closely reviewed are:
- Payment by the Participant Bank,
- Role of Investment Agent,
- Assignment and Transfer by the Participant Bank.

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 Upon the Shari’a review, the answer to the following should be
clear:
i. What are the duties of Investment Agent?
ii. What kind of warranties and guarantees are extended by the
Investment Agent?
Agency Fee Letter:
It is a document which states the fee payable by the Obligor to
the Investment Agent for performing the duties as per the
Investment Agency Agreement.
Structuring & Advisory Letter:
The document states the fee which is payable to the Investment
Agent for performing structuring the deal.
Security Agreement:
It’s a document which contains details of all the securities
extended by the Obligor. Securities included all types of (i) pledges
(whether on shares or financial securities); (ii) mortgages (whether
on real estate or other assets); (iii) assignments and (iv) guarantees
(whether corporate or personal).
Upon the Shari’a review, the answer to the following should be
clear:
i. Are all the pledged shares acceptable to Participants’ Shari’a
Boards?
ii. Are mortgaged properties used for non-Shari’a purposes?
iii. Does assignment is over non-Shari’a compliant source of
income?
Fees & Profit:
Transaction Profit:
Includes all the amounts payable as per the Transaction
Documents:
- Profit:
- it’s a profit amount to be paid by the Obligor to the
Participants (via Investment Agent) pursuant to the
Murabaha Agreement.
- Brokerage Fee:
- In case Murabaha Syndication was based on commodities or
Nasdaq certificates, then Brokerage Fee is the amount to be
paid, respectively, to the metal dealer or the broker.
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Facility Fee:
it includes all the fees and amounts which are payable by the
Obligor for arranging the facility:
Structuring Fee:
It’s an amount paid by the Obligor for structuring the Murabaha
Syndication deal. It is paid to the Investment Agent and shared with
all the Participants.
Agency Fee:
It’s an amount paid by the Obligor to the Investment Agent on
an annual basis for managing the Murabaha Syndication deal.
Global Agency Fee:
It’s an amount paid by the Obligor to the Global Agent for
providing agency service of Murabaha Syndication in a multi-
tranche syndication deal.
Commitment Fee:
In conventional syndication deals, if a portion of committed
facility lines is not used by the Obligor, then the Participants charge
a commitment fee. However, this is not accepted as per Shari’a.
Hence Participants can include such amounts in the coming
Murabaha profits if the Murabaha Syndication was executed on roll-
over basis.
Arrangement Fee:
It’s a one-time amount paid by the Obligor to the Arrangers for
arranging the Murabaha Syndication facility. This fee is paid
irrespective of actual Murabaha funding happened or not.

Underwriting Fee:
It’s a one-time amount paid by the Obligor to the Underwriter
for committing to subscribe to unfunded portions of the Murabaha
Syndication. This amount is taken as part of Agency Fee.
Security Agent Fee:
It’s an amount paid by the Obligor to the Security Agent on an
annual basis for holding the securities provided for availing
financing through Murabaha Syndication.
Documentation Fee:
It includes all the fees which are payable by the Obligor to
External Legal Counsels.
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Postproduction:
Once Murabaha Syndication facility is disbursed then Shari’a
personnel have the following duties:
Restructuring Solutions:
In case the Obligor fails to honour payments due as per
Murabaha Syndication, then there are chances of rescheduling or
restructuring the Murabaha Syndication. It should be ensured that
Shari’a guidelines of Participant/Investment Agent are dully
followed.
Updating Shari’a Board:
In case there were a Shari’a audit issues pertaining to ownership
of the Murabaha assets at the time of executing schedules of the
Master Murabaha Agreement then Shari’a Board of the Investment
Agent should be informed on an immediate basis to seek guidance
about correcting the fault.
Fifthly: Issuance of Fatwa
Draft
Draft Legal Signing
Structure &
Structure Counsel's Structure
Agreement
Fatwa View Fatwa
Fatwa

Signing
Legal
Structure & Sharing the
Consel's
Agreement Fatwa
View
Fatwa

Draft Structure Fatwa:

Once Shari’a personnel has a clear understanding about the
executional aspects of the proposed Service Agency Sukuk issuance
or Murabaha Syndication deal then a Draft Structure Fatwa can be
prepared. It is preferable to prepare a bilingual Fatwa (in Arabic and
English).
Legal Counsel’s View:
Once the Draft of Structure Fatwa is prepared then share it with
Legal Counsel to ensure that it reflects the agreements which are
under-preparation.
Signing Structure Fatwa:
Shari’a personnel is supposed to present the Structure Fatwa to
the Executive Member of the Shari’a Board of the Obligor (in case of
Service Agency Sukuk) or the Investment Agent (in case of
Murabaha Syndication). If no changes are required there, then the
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Fatwa can be signed by the Shari’a Board member. Share the signed
the Structure Fatwa with External Legal Counsel to ensure continue
drafting the agreement on the same grounds.
Draft Structure & Agreement Fatwa:
Once all the relevant documents are reviewed from Shari’a
perspective then Draft Structure & Agreement Fatwa is prepared. It
is advisable to mention a serial number of all the legal documents
which were submitted as the final version by External Legal Counsel.
Legal Counsel’s View:
Once the Draft of Structure & Agreement Fatwa is prepared then
share it with Legal Counsel to ensure that it reflects the agreements
which have been already prepared.
Signing Structure & Agreement Fatwa:
Shari’a personnel is supposed to present the Structure &
Agreement Fatwa to the Executive Memo or the Shari’a Board of the
Obligor (in case of Service Agency Sukuk) or the Investment Agent
(in case of Murabaha Syndication). The closing remark of the Fatwa
would be Shari’a Board’s acceptance of the structure as well as the
agreements.
Sharing the Fatwa:
Once the Fatwa is signed then share it with the relevant units and
keep it handy, so it can be shared when required with FI, Investment
and Corporate etc.
Sixthly: Recommendations
Shari’a Checklist:
It is suggested that each bank prepares Shari’a Checklist which
can be used by other Shari’a Departments of the UAE for conducting
Shari’a review of different Sukuk structures (based on Mudaraba,
Ijarah, Wakala Investments). Also, such checklists can be used in
syndication deals as well (like Ijarah, Musharaka, Mudaraba, etc.).
Sharing Latest Development:
It is suggested that Shari’a Departments share with each other any
new development related to Shari’a Resolution concerning Sukuk
and Syndication. This will reduce the probability of re-presenting the
same query to different Shari’a Boards. This will further help in
unifying Shari’a stand of UAE Islamic banks.
Updating AAOIFI:
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 It is recommended to submit this paper to AAOIFI Shari’a Board
in order to develop Shari’a Standard (17): Investment Sukuk and
Shari’a Standard No. (24): Syndicated Financing. The purpose of this
initiative would be to cover the standards from relevant and practical
aspects like parties related to Sukuk and financing deals and how to
charge and treat certain fees.
Shari’a Adaption of Conventional Agreements:
Usually, external legal counsels use standard agreements as
proposed by Loan Market Association (UK). Suggested device this
amendment from Shari’a perspective and get them endorsed by the
said association as a standard template.
Document Arabization:
It is recommended that Shari’a Departments require Arabic
translation of, at least, the Financing Documents related to
syndication on this. Also, Fatwa should be bilingual even though the
English version was the base text.

ZZZ

136
Structures and Products

137
Daunting Issues in the History of
Shari’a Structuring
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 15th December 2024.
===============================================
Introduction
Next year, 2025, will mark fifty years since the regulated and
organized beginning of the Islamic banking industry. This milestone
dates to the establishment of the first Islamic commercial bank, i.e.,
Dubai Islamic Bank (DIB) in Dubai, and the first Islamic
developmental bank, i.e., the Islamic Development Bank (IDB) in
Jeddah.
A half-century is sufficient time to recount the history of an
industry that started as an experiment and rapidly evolved into a
global reality, with its achievements, growth rates, and varied
statistics.
This period has not been limited to successes alone. The industry
has also faced complex challenges and daunting issues, some of
which were easy to tackle, while others were daunting and only a few
could withstand them and have the great courage to overcome them.
Broadly speaking, the challenges facing the Islamic financial industry
can be categorized into financial and economic issues (such as
liquidity crisis or the collapse of a country's macroeconomic system),
governance issues (such as disputes between members of the Shari’a
Board and the executive management), or Shari’a structural issues,
which are the focus of this write-up.
The core vision behind launching Islamic banking was to lay the
foundation of a comprehensive Islamic economic system. Its mission
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was to achieve growth in financial transactions and attract the largest
number of deposits. The desired goal was alignment between this
mission and the core vision in all the activities and operations of
Islamic banks. However, in times of crisis, challenges reveal the true
strength of individuals and institutions. In some cases, financial goals
have overshadowed the core vision, sometimes playing around with
the DNA of Islamic banking and shaking the very foundations of
such a noble industry.
In this brief exploration, I will highlight key turning points in the
history of Shari’a structuring. Were it not for divine providence and
the efforts of dedicated scholars in Islamic jurisprudence, these issues
could have derailed the industry from its core vision and resulting in
robotic humans focusing solely on financial gains at the expense of
its core vision and raison d'être.
Issue 1: Organized Tawarruq (Monetization Transactions)
When Islamic banks began offering Shari’a compliant financing
products as alternatives to conventional bank loans, they found that
auto Murabaha was an ideal substitute for car loans, local goods
Murabaha replaced personal loans, and Murabaha/Musharaka of
international goods became the alternative to conventional financing
letters of credit. For real estate financing, Ijarah (leasing) was deemed
appropriate. However, once these solutions were exhausted and used
to their fullest scope, customers demanded Shari’a-compliant
solutions for liquidity financing amongst others. Brokers, however,
saw a golden opportunity in sourcing metals from over-the-counter
markets (OTC) to avoid price volatility and ensure buyback
guarantees.
At first, some companies exploited the banks’ geographic
limitations and need for commodities, entered into sale contract
without the backing of real commodities. This implies that
subsequent transactions, including Murabaha with bank’s client,
were rendered void. Hence, this had a dominos effect. Such dealers
had to shut down their business or forget dealing with Islamic
banking industry. Also, myths about international commodities
arose.
Eventually, reputable firms such as DD&Co., led by Stella Cox in
the UK, grew and gained credibility by addressing Shari’a scholars'
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key concerns over two decades. The company had even formed an
independent Shari’a board featuring globally recognized scholars.
Conversely, some scholars viewed the Organized Tawarruq as
prohibited by all means. Organized Tawarruq was a financing
mechanism whereby the seller of commodity on-credit facilitates
liquidating the sold commodity for the benefit of the buyer on-credit.
Over a period of times, this facilitation became so ring-fenced that
the buyer on-credit had no choice except to appoint the seller on-
credit to sell off on his behalf with minimal or no chances of holding
back the commodities purchased on deferred payment Murabaha.
This issue was discussed at length in a symposium arranged by OIC’s
International Islamic Fiqh Academy in Sharjah in April 2009, which
issued Resolution No. 179 (19/5). Organized, referred in the
Resolution as structured, Tawarruq was defined as: “the case of a
person who buys a good on credit from local or international
markets. Then the seller (the financer) arranges selling of the good,
either directly or through an agent or in collusion with the buyer (the
mustawriq), at a cash price, which is (in most cases) lower than the
purchase price”. Further, the Resolution defined the Reverse
(inverse) Tawarruq as it “takes the same form of structured Tawaruq
except that the mustawriq is the institution, and the financer is the
client.” The ruling was: “structured and inverse Tawaruq are
prohibited because they involve explicit, implicit or customary
collusion between financer and finance seeker (mustawriq) to make
a trick for obtaining a present cash for a larger amount in future debt
which is ribā (usury).”.
This resolution was a shock for those Islamic financial
institutions that relied solely on Organized Tawarruq structure.
Further, it was a paradigm shift in the field of product development.
The main reason behind such an impact was that Tawarruq was not
confined to retail banking; it encompassed billions of dollars in
corporate and treasury divisions. In response, Islamic banks began
revising transaction structures. As a first-aid step, delegation of
agency by the customer to the Islamic bank was avoided. Either the
customer would sell the commodity directly to the on-sale purchaser
or he shall appoint the Islamic bank (financier) as client’s messenger.

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No doubt, messenger’s roles and responsibilities remain much lesser
and narrower than full-fledged agency.
In the long run, Islamic banks started to search for off-the-shelf,
and somehow frozen products, in its product offerings. Islamic
banks had mummified products such as Ijara of services, asset
partnership, Istisna of movable assets etc. These products were
developed many years ago but remained limited in use.
In case Islamic banks found that classical suit of products do not
address all the financing requirements of the customer, a new asset
category was established which included those assets that are fit to be
the underlying assets of Shari’a compliant Tawarruq. Some of these
solutions were Murabaha through DMCC, National Bonds and
Nasdaq Murabaha.
Issue 2: Credit Cards with Fees
When Islamic banks introduced payment cards, they were
initially limited to debit cards, where users could only spend their
own funds. So, if you do not have the funds, do not bother to buy a
commodity or a service. In contrast, Western economic models
(especially the US one) heavily depend on short-term credit through
credit cards. Hence, if you do not have cash and want to buy a
refrigerator then simply flash your credit card and buy within the
allotted (approved) credit limit. On the payment date (after 45 days),
if the cardholder did not pay the utilized amount fully, he shall be
paying monthly interest amount as per the agreement between the
cardholder and the card issuing bank.
Some Islamic banks issued credit cards against fees, ensuring they
did not charge interest. Instead, they agreed to lend funds to the
cardholder on interest-free basis. On parallel lines, the customer is
charged a monthly fee for associated benefits (e.g., member to gym,
airport lounge access, etc.). However, following incremental model
for the fee without mirroring enhancements in the offered services
raised Shari’a concerns.
Some Shari’a boards identified the error in the structure, and it is
an example of (bayꜤ wa salaf) which is a sale contract accompanied
with a loan contract, in addition to favouritism (muḥābā) where the
fee charged to the cardholder is not justified for the offered services.

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Hence, such Islamic banks were asked to increase the services based
on different fee ranges without relying on increase of the fee against
the credit card limit. With these Shari’a requirements, the demand
for such credit card dropped and banks started to look for covered
card based on Tawarruq.
Issue 3: A Guarantee by-Agreement
It could be said that this was one of the most critical issues in the
history of Islamic financial structuring since the start of the industry.
On the financing side, an Islamic bank may finance its customer
on Mudaraba or Wakala Investment. It is known that as per Islamic
jurisprudence, the Mudarib or the investment manager shall not
guarantee the capital invested with the client unless and until it was
proven that he committed an act of negligence or misappropriation.
Similarly, an investor can place his funds through securities (e.g.,
Sukuk) with an entity seeking financing through modes of Mudaraba
or Wakala Investment. Returns and face value of such securities is
supposed to be not guaranteed, by virtue of Shari’a.
An approach emerged permitting imposing the liability (taḍmīn)
up on the investment manager (whether in financing facilities or
financial securities) based on the feasibility study/investment plan
presented by the investment manager. If the customer mentioned
that as per analysis the market or the sector, he functions within, will
generate 7% p.a. returns and the actual returns were 6%, for example,
then he is deemed to have committed an act of misappropriation or
negligence. Hence, he is supposed to compensate the Rab-al-Mal or
the principal for the loss in the profit and capital (if any).
Similarly, if the financed party (in a Sukuk structure) mentioned
that returns on Sukuk shall be 4% and the actual returns were
anything less than that, then such an entity has to compensate based
on the investment plan presented at outset.
At the start of first decade of 21st centaury, such an uneven and
outlandish opinion gained massive popularity among Shari’a
structurers and lawyers. This resulted in multi-billion-dollar Sukuk
issuances structured on this opinion. Why not? Such a view was
personification of investors hidden wishes to have Shari’a-labelled
securities that mimic exactly the conventional securities. The effect

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did not confine to Sukuk. Rather, the product developers even urged
to have Mudaraba and Wakala Investment with a condition to
impose liability upon the customer.
In November 2007, Mufti Muhammad Taqi Usmani issued a
statement highlighting that nearly 85% of Sukuk structures were
Shari’a non-compliant. In this period, a masterpiece paper, titled:
Sukuk and their Contemporary Applications, was presented by him
to the Shari’a Board of AAOIFI. In February 2008, AAOIFI Shari’a
Board issued a statement which put things in perspective to avoid
any derailment from the right path of Shari’a. The statement has
categorically stated: (It is not permissible for the Mudarib
(investment manager), sharīk (partner), or wakil (agent) to
undertake {now} to re-purchase the assets from Sukuk holders or
from one who holds them, for its nominal value, when the Sukuk are
extinguished [cancelled], at the end of its maturity. It is, however,
permissible to undertake the purchase based on the net value of
assets, its market value, fair value or a price to be agreed, at the time
of their actual purchase).
Those, who defended the distorted version of investment-based
Sukuk with guaranteed capital and returns, warned the industry that
such changes will have catastrophic impact on the industry. The
statement came near 2008 economic crises and the criers have
expressed their happiness with overall down fall in the capital
markets. However, by mid-2010 the industry gained its momentum
and eventually, the concept of explicit imposition of liability upon
the investment manager has disappeared.
Such an imposition of liability was existing in another form in
retail products. Hence, sometimes personal finance products were
structured based on services Ijara. Hence, Islamic bank hires travel
service from an airline and then leases the same to the customer
against rent to be paid in instalments. In case the airline breaches in
offering the services as per the agreed way, then, as an initial
presumption, the client will not be asked to pay the rent and he has
the right for rescission. Further, it is not permitted to stipulate
absolution from defects (lease on as-is basis) if the subject of lease is
specified-cum-unidentified. However, some practices included

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clauses that absolved Islamic banks from liability as the service
provider to the customer. To address this, corrective measures were
introduced by adding a condition stipulating that, in such cases, the
Islamic bank would authorize the client to claim compensation from
the service provider on behalf of the bank. If compensation could not
be obtained, the Islamic bank would bear the loss on its own.
Another form of liability imposition emerged in the context of
parallel Istisna (manufacturing contracts). In this structure, the
Islamic bank enters into an Istisna contract as the seller with its client
and simultaneously enters into a parallel Istisna contract as the buyer
with the manufacturer or the contractor of the subject of Istisna.
These two contracts must remain independent, without any overlap
in the rights and obligations of the parties involved.
In early practices, some Islamic banks included terms whereby
the client (as the buyer in the original Istisna contract) would be held
liable for the default or shortcomings of the manufacturer or the
contractor in the parallel Istisna contract. This practice was
prohibited. Instead, Islamic banks adopted another mode of
financing known as reverse Istisna. In this arrangement, the Islamic
bank acts as the buyer in the primary Istisna contract, purchasing the
manufactured item from the client (as the seller). The proceeds are
then paid by the client (as the buyer) to the manufacturer or
contractor under the parallel Istisna contract. The manufactured
item is ultimately owned by the Islamic bank as the buyer in the
primary contract and can later be leased back to the client.
In cases where the manufacturer or contractor fails to deliver, the
Islamic bank avoids bearing liability by claiming the amount paid to
the client under the primary Istisna contract. This adjustment
ensures that the risk is properly distributed without violating Shari’a
principles.
Issue 4: Overlap Between Service Agency and Investment
Agency
When Sukuk market stabilized in mid-2010, ensuring they were
free from explicit liability-imposition upon the investment
managers, Islamic banks turned to the use of the mode of Service
Agency. As per Shari’a, the service agent is permitted to guarantee
the repurchase of an asset at its face value rather than its market
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value. For instance, if you purchase an apartment in a residential
complex where a service company provides operational services like
maintenance, cleaning, or decoration, it is permitted for this
company to extend an undertaking to repurchase the apartment at
its face value or a mutually agreed-upon price without reference to
the market value. Naturally, the mode of Service Agency provides
greater security to investors compared to the Investment Agency
mode.
Issuances of Sukuk based on the Service Agency were launched
accordingly. Upon closer examination, it became evident that many
of these were in fact operating under the mode of Investment
Agency. In these cases, the so-called "service agent" undertakes to
manage and invest funds. If anticipated returns fell short, the agent
bore the responsibility of reinvestment, failing which the “service
agent” would be deemed negligent. These tasks were clearly not
mechanical (operational) in nature but purely investment-related,
coupled with lability-imposition.
This issue was addressed during the issuance of Emirates Islamic
Bank Sukuk in 2016. The Fatwa issued by the Shari’a board on 5th
May 2016, explicitly outlined the duties of the service agent, stating:
“No active investment: EI will not be actively managing the existing
assets of the Wakala Portfolio and will not present any investment
plan”. Further, this corrective effort was supported by the draft of
Shari’a Standard No. 62 on Sukuk, which distinguished between the
two types of agencies. It stated: "if the service agent manages the
underlying assets according to an investment plan, that features
independence in terms of taking investment decisions regarding [the
underlying assets] so that the underlying assets can be turned around
(taqlīb), substituted with other assets, or sold for the purpose of
dissolution, and [it is] not just a plan for the service, so [the service
agent] turns into an investment agent and its [respective] provisions
shall apply to it”.
Issue 5: Overlap Between Joint-Ownership and Joint-Enterprise:
Following AAOIFI's 2008 statement prohibiting the explicit
imposition of liability upon the investment manager, some financing
arrangements adopted the joint ownership (Sharikat al-Milk)
structure.
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 Joint ownership is defined in the Shari’ah Standard on Sharikat ul
Milk and Diminishing Musharakah, issued by the Shari’ah Advisory
Committee of the State Bank of Pakistan, as “a joint ownership of
two or more persons in a particular asset or property without
common intention to engage in business with respect to such asset
or property”. For example, if a person owned an apartment in a
residential building, so he becomes joint owner with owners of other
apartments. It is permitted for a party to undertake to buy the other's
share at the face value or a value agreed by the parties, without
looking at the market price.
Such an explicit liability-imposition upon the investment
manager was a big relief and way-out for the structurers especially in
syndicated financing. However, it was evident that such syndicated
financings were actually co-ownership in shares of third party or
funds or shares of the financed party with an active intention of
carrying out business activity. Hence, the underlying asset was
actively turned around with permission to one of the partners to have
commercial disposition for the general benefit of the partnership.
Once Shari’a Boards realized this, such an arrangement was ceased
to be considered as joint ownership, rather it was declared as joint
enterprise (sharikat al-Ꜥaqd). Hence, not allowed to stipulate liability
imposition upon the investment manager.
Issue 6: Organized Salam
After the International Islamic Fiqh Academy’s resolution to
prohibit Organized Tawarruq, some Islamic windows sought
Shari’a-compliant alternatives for Tawarruq. One of these solutions
was Organized Salam.
Pursuant to the classical form of Salam, a buyer pays the full price
in advance for a future delivery of specified-cum-unidentified goods.
The use of Salam is typically limited to specific cases in client
financing (as the buyer), where the Salam buyer is supposed to pay
the Salam without delay.
However, this concept was flipped upside down in the proposed
structure as an alternative to Tawarruq. The Islamic bank (acting as
the Salam buyer) purchases specified-cum-unidentified goods from
the client (acting as the Salam seller) and pays the full price in a single
payment to the client. On the instalment dates, the client is required
146
to deliver specific quantities of goods, and the client authorizes the
Islamic bank to purchase these goods on his behalf using the funds
deposited in the client’s account. The Islamic bank withdraws the
deposited amount on the instalment date and uses it to purchase the
required quantity of goods on behalf of the client. After completing
the purchase, the bank retains the goods for itself, thus fulfilling the
client's obligation to deliver the specified quantity. The Islamic bank
(having acquired ownership in its own capacity) has the right to
dispose of the goods as it sees fit, typically selling them to a third
party or to the original seller from whom the goods were purchased
on behalf of the client.
At first glance, the product appeared to meet Shari’a
requirements, but it carried significant operational risks that also led
to Shari’a non-compliance (SNC) risks. If the subject of Salam is
specified-cum-unidentified, the client is not required to authorize
the Islamic bank to purchase the goods from a specific factory or
workshop. In the classical texts, it is mentioned that purchasing dates
from a specific orchard, for example, would be considered an invalid
condition in a Salam contract, as such identification negates the
feature of (being a liability) from the subject of Salam. On the other
hand, if the subject of Salam is accepted from the client, this creates
operational risks that are difficult to manage. Imagine that, on the
due date for fulfilling the in-kind instalment (i.e., partial provision of
the Salam goods), all Salam clients could potentially flood the branch
of an Islamic bank with large quantities of dates, sugar, or salt which
they agreed to sell to the Islamic bank under the Salam contract. The
bank, as the Salam buyer, cannot refuse to accept these quantities
unless they fail to meet the agreed-upon specifications.
Issue 7: Salam in Shares and Securities
Salam sale is a sale of specified-cum-unidentified goods against
spot payment. The subject of Salam may not exist with the seller at
the time of the contract, making it look like a sale of a non-existent
item. However, jurists have exempted this type of sale from the
prohibition of selling non-existent items, provided that the
specifications of the Salam goods and their delivery date are clearly
defined.

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 The subject of Salam must be fungible items, such as
manufactured goods, agricultural crops, merchandise, etc. Salam
cannot apply to stocks. Article (11/3) of Shari’a Standard No. 21 on
Securities (Stocks and Bonds) explicitly states: “Salam in stocks is not
permitted”. The reason for this prohibition, as explained by Mufti
Muhammad Taqi Usmani, that for Salam in the shares of a specific
company, the Shari’a Board of AAOIFI has prohibited it because
companies may cease operations or be liquidated, making it similar
to Salam in the fruits of a specific orchard. Another reason for
prohibiting Salam in company shares is that shares, as per their
Shari’a characterization, represent a proportional share in the
company’s assets, which include cash, debts, immovable assets, and
divisible tangible assets, which are not permissible subjects of Salam
[Fiqh al-BuyūꜤ: 1/560].
Certain investment funds have engaged in the practice of Salam
in stocks and securities. The financing-seeker entity sells its shares in
a Salam contract to the financier in exchange for receiving the
financing amount. On return distribution dates, the financing entity
delivers the shares, accompanied by a promise to repurchase them at
an agreed-upon price. This agreed price represents the financier’s
periodic return. Therefore, Salam in stocks mirrors the forward sale
product. The non-sale of securities at market value promotes the
concept of “asset garbation,” where the purchased or sold asset is not
the actual objective of the contract parties, but rather its
predetermined price. The assets in question may have a real value of
$10 but are sold for $50 million merely to legitimize a riba-centric
product, as seen in structured 'inah sales.
The intention behind this was to create a way-out and
workaround for forward contracts and binding promises. If a party
wishes to sell their shares under a forward sale (i.e., deferred to a
future date), this is not permitted under Shari’a because it prohibits
risk postponement for a subject of contract that is specific
(identified). A potential solution may be for one party to provide a
binding promise to purchase or sell, provided that it is not the case
of bilaterally binding promises.
Issue 8: Self-Charity for Late Payments

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 At the outset of Islamic finance, Islamic banks faced significant
challenges due to customer procrastination and default in timely
settlement, particularly in deferred payment contracts such as
Murabaha and Istisna. The instalment becomes due, and the
customer procrastinates in settling the instalment because he is
aware that Islamic banks were prohibited from imposing any
additional charges on the debt amount—lest it be deemed as riba.
Shari’a provisions prohibit creditors from imposing financial
penalties or late payment conditions in contracts where a party is
obliged to settle receivable financing.
To address this issue, Islamic banks adopted the concept of a
"commitment to charitable donation." Under this arrangement, the
delinquent debtor (regardless of the type of deferred payment
contract) undertakes to donate a fixed amount or a percentage of the
unpaid debt to charitable causes. This concept is supported by the
Shari'a basis cited in the Shari’a Basis of Shari'a Standard No. (3):
Procrastinating Debtor, which states: “The permissibility of
stipulating that a delinquent debtor commits to donating an amount
exceeding the debt, to be allocated by the institution to charitable
purposes, is based on the Mālikī principle of commitment to donation.
This is a view attributed to Abū Abdullah b. NāfiꜤ and Muhammad
Ibn Ibrāhīm Ibn Dīnār from the Mālikī school of thought.”
This clause acted as a contractual deterrent—commonly referred
to as a "hammer clause"—to discourage deliberate delays in
repayment that would harm the financing institution.
However, inappropriate practices emerged in some Islamic banks
regarding the utilization of funds in the charity accounts. Some
banks, for instance, deducted employee salaries from these accounts,
even though the principle dictates that only direct and actual costs
should be deducted. Others used the funds to cover costs and
expenses for corporate social responsibility campaigns. The most
alarming practice involved deducting amounts equivalent to the
overdue debt from the charity account and disbursing it to the
delinquent debtor, enabling him to settle their overdue obligations.
In this manner, the financing institution directly benefited from
these charitable funds, under the pretext that the debtor had

149
voluntarily used the funds to repay his dues owed to the same
financial institution.
To prevent such misuses, such financial institutions were
mandated that funds in these charity accounts be transferred to
officially recognized charitable organizations approved by the state.
This ensured that such funds would not be exploited or used for
profiting the creditor.
Issue 9: Debt Rollover in Refinancing
Islamic banking customers may need new financing,
restructuring, refinancing, or rescheduling. Contractual
requirements for new financing can be met by using the appropriate
financing structure. However, for rescheduling, the financing bank
must extend the repayment period without generating profit in
deferred payment contracts.
The challenge arises in restructuring. For instance, a client may
have obtained financing at a rate of 4% for ten years but, after two
years, wishes to restructure the financing to obtain a new facility at a
rate of 5% for twelve years. Restructuring is relatively straightforward
when the underlying financing structure is linked to an existing asset.
For example, if the transaction is based on Ijarah (leasing) or
Musharakah (partnership), restructuring can be achieved as agreed,
provided no additional debt is incurred. However, if the transaction
involves deferred debt—such as for purchasing an asset through
Murabaha or Istisna, or for liquidity provision through Tawarruq—
the practical issue lies in how to deal with the existing debt and
replace it with a new debt under different contractual terms, with a
higher profit rate and a longer term.
It is well known that Murabaha profit remains fixed throughout
the financing period and cannot be linked to an index. If a client
requires long-term financing but lacks assets eligible for leasing or
partnership, banks often resort to repricing the transaction through
periodic Tawarruq arrangements. For example, a corporate client
may purchase a fleet of vehicles worth USD 1 million via a Murabaha
contract with a 3% annual profit for the next three months. At the
end of the period, the client pays the profit for the current period and
enters a new Tawarruq arrangement with the financing bank. The
client uses the liquidity obtained from the new Tawarruq transaction
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to settle the unpaid debt from the previous Murabaha and establishes
a new Tawarruq arrangement for the next three months at a profit
rate linked to the index at the time of contract formation. At the end
of the new period, profits are settled, and a new Tawarruq
transaction is entered into at a new profit rate. Occasionally, if the
corporate client fails to pay the due profits, the unpaid profit
amounts are capitalized, becoming part of the cost of the new
Tawarruq transaction, with profits calculated on them.
Many Islamic banks have followed most, if not all, of the practices
described above, which are collectively referred to as (qalb al-dayn)
"debt rollover". Sheikh Nazīh Ḥammād defines debt rollover as:
"Postponing the payment due on a due debt by the debtor in return
for an increase in the debt amount, which the creditor achieves
through a transaction (not intended for its own sake) that is used to
achieve this purpose" (MuꜤajam al-Muṣṭalḥāt al-Maliyya wa al-
Iqtiṣādiya, p. 369).
AAOIFI’s Shari'a Standard No. (59): Sale of Debt, issued in
December 2018, provides rules for entering into a new Murabaha
transaction to close an existing Murabaha. The rules include:
1. Independence of the two transactions, including obtaining credit
approval for the new transaction.
2. The new contract must produce its Shari’a effects, such as the
client's right to receive the purchased commodity.
3. The client must have the right to manage the proceeds from the
sale and deposit the amount into his account for the entire
business day.
4. No place for a consideration for delay in settling the first debt,
and the profit rate for the new Murabaha must not exceed the rate
for a similar client who is not in default.
These guidelines posed significant challenges for banks
accustomed to debt rollover practices, including profit capitalization.
To address these challenges, Islamic banks introduced the
concept of dual-Murabaha contracts: one long-term (covering the
Murabaha cost) and the other short-term (covering the profit for the
current period). For example, if a client needs Murabaha financing

151
worth $ 100 million over ten years, the solution will proceed as
follows:
1. The Islamic bank purchases an underlying financing asset (e.g.,
international commodities, national bonds, investment
certificates, or shares) worth the principal amount ($ 100 million
in this case) from the supplier (original seller) and sells it to the
client under the long-term Murabaha contract. The cost equals
the financing principal ($ 100 million), and the profit is a fixed
amount equal to one month's profit. Payment of the principal is
made at the end of the financing period (e.g., the tenth year) or
during periodic intervals (e.g., quarterly, semi-annually, or
annually).
2. The Islamic bank purchases the underlying asset from the
supplier for an amount equal to the profit for the first period (e.g.,
the next quarter, half-year, or year) and sells it to the client under
the first short-Murabaha contract. The cost equals the profit for
the first period, with a symbolic profit amount. Repayment is due
at the end of the first period.
3. At the end of the first period, the client settles the amount due
under the short-Murabaha contract in full, without rolling over
or transferring the debt amount.
4. On the same day, the Islamic bank calculates the profit for the
second period (e.g., $ 100,000). It then purchases the financing
asset from the supplier for ten times the profit for the second
period (= $100,000 x 10). The bank sells it to the client under the
second short-Murabaha contract, with the cost being ten times
the second period's profit (=$ 1 million) and the profit equal to
the second period's profit ($ 100,000). The total Murabaha price
is the sum of the cost and the profit ($ 1.1 million). It is agreed
between the parties, that part of the price is paid upfront, and the
remainder is deferred.
5. The client sells the financing asset to a third party and uses the
proceeds to settle the upfront portion of the second short-
Murabaha price (i.e., $ 1 million). The deferred portion ($
100,000) remains due at the end of the second period.

152
6. At the end of the second period, the client pays the deferred
portion of the second short-Murabaha price ($ 100,000). The
process outlined in steps 4 and 5 is repeated for each subsequent
period where variable profits are calculated.
Issue 10: Income-Generating Loans
It is well established that loans fall under the category of
benevolent contracts and not those of commutative or partnership.
Since the inception of Islamic banking, this legal and Shari'a
principle has been upheld, and loan products have not been
introduced in the realm of financing. However, in customer deposits,
the concept of qard hasan (interest-free loans) has been applied to
current accounts, with the stipulation that not even prizes or rewards
are distributed to current account holders.
Despite the risks of misusing loans for profit, qard hasan has been
used in a financing capacity by some financial institutions. This has
occurred in scenarios such as providing loans for school fees to
parents and then repaying the amount in instalments. These
institutions often charge a commission from the school, under the
claim that the extra return over the loan is paid by a third party and
not the borrower, making it permitted. However, this argument was
refuted in the Islamic Economics Forum Statement No. (5/2024),
which stated: "It is argued that stipulating an increase from a stranger
is not considered ribā. Firstly, no jurist from the early scholars has
adopted such a view. Consensus has reached on the prohibition of
the lender stipulating any increase on his loan whatsoever. The
maxim accepted by jurists is that kullu qarḍ jarra naffꜤan fa huwa
ribā (every loan that derives a benefit is ribā). None of the scholars
have exempted the conditionally stipulated increase on the loan,
even if it comes from someone other than the borrower. As per Ibn
Abdul Barr, an increase on the loan is considered ribā by all scholars
if such an increase is known, intended and stipulated (see: Al-
Istidhkār by Ibn ꜤAbd al-Barr (20:82)). On similar grounds, the
statements of jurists in various schools of jurisprudence were made.
However, the jurists’ statements where the increase was attributed to
the borrower, does not imply to restrict ribā in the increase given by
the borrower, because the referred restriction is for the commonly

153
referred [case] (makhraj al-ghālib), it should not be taken in its
divergent meaning (mafhūm al-mukhālafa)".
The original stance has always been to avoid such deviant
practices, particularly when there are clear Shari'a-compliant
alternatives like Ijarah-based (leasing) products, which are free from
explicit Shari'a concerns.
With advancements in financial technology (FinTech), new
solutions such as "Buy Now, Pay Later" (BNPL) have emerged. This
involves short-term financing provided by firms licensed under the
respective central bank’s supervision. Customers purchase goods or
services via loans provided by BNPL companies, which earn
commissions from merchants or service providers in exchange for
facilitating these payment options.
The matter was subjected to extensive study, culminating in a
clear and comprehensive statement issued by the Islamic Economics
Forum (a globally recognized WhatsApp group), which concluded:
"Consequently, the transaction in its current form contradicts the
principles of Shari’a, and it is not permitted for anyone to enter into
it or assist in it".
Conclusion
It is said – elenco perfecto means it is perfectly ten.
Shari'a structuring is the result of innovation, creativity, and the
convergence of banking ideas with jurisprudential rulings. However,
this does not mean accepting any random idea under the guise of
serving customers or promoting double-digit industry growth,
especially if it undermines the solid jurisprudential foundations.
Usury (riba) may be hidden in the form of increasing a debt after its
creation or profiting from loans, even if taken care by a third party.
Whenever advocates of these structurally damaged innovations
arise, they assume that no one will challenge them. Yet, God's decree
has always prepared men for every issue—those who call for
correcting the trajectory of product development and returning to
the true principles that maintain the Islamic financial system based
on the noble Shari’a teachings emanating from the Holy Quran and
Ḥadīth. This ensures that it stands proudly tall based on the legacy of

154
jurisprudence, rather than leaning towards collapse under the
intoxication of hasty profiteering.

ZZZ

155
Auto Murabaha: Applied Shari’a
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 8th March 2015.
===============================================
Introduction
With no doubt, Islamic banking has evolved considerably over
the past 3 decades. Although the over-all size of Islamic banking is
much smaller than the conventional (i.e. standard) banking which is
4 centuries older, but the fact cannot be overlooked that application
of Islamic jurisprudence (over fourteen centuries old) in modern
banking practices was itself one of the biggest achievements the legal
minds could have thought of.
Despite the solutioning provided by Islamic banks, under the
focused guidance of Shari’a scholars sitting on different Shari’a
Supervisory Boards, it was disheartening to hear and experience that
existing or upcoming Islamic banks are unaware of some of the basic
Shari’a techniques which can solve many issues faced on daily basis.
There is no doubt that Shari’a Standards published by Accounting
and Auditing Organizations for Islamic Banks (Bahrain), or more
commonly known as AAOIFI, were one of the greatest joint-efforts
to codify Islamic commercial law after the enactment of Al-Mejelle
(during the last century of Ottoman Empire). However, a normal
banking professional remains at disadvantage to benefit from these
standards due to its complex regulatory flavor. Moreover modern
banking pronouncements in Arabic references are nothing but
hidden jewels for English speaking banking professionals.
The efforts made by some contemporary Shari’a scholars
(especially Mufti Muhammad Taqi Usmani and Dr. Abdulsattar Abu
Guddah) and some training institutions to simplify and demystify
the Islamic banking concepts like Murabaha, Ijarah, Mudaraba
Istisna, Musharaka etc. are nothing but mesmerizing and
outstanding. However, the need remains to take these steps further
through introduction of concept of Applied Islamic Finance where
the banking professional is exposed to Islamic juristic reasoning and
some helpful techniques can be shared with them which can address
some profitability issues or mitigate any minor or major Shari’a risks.
To start with, our first paper is on Auto-Murabaha which is
undoubtedly, one of the most common products in Islamic banking.
God willingly, we will be releasing more than a dozen papers. Also
new versions will unearth more jewels and endeavor to raise the
previous standards. Kindly ensure that any Shari’a rulings
mentioned in these papers do not, necessarily, reflect the official
opinion of either AAOIFI or Shari’a Boards of my present or past
employers.
Auto Murabaha
Subject of Financing/ Movable transport tools like cars, bicycles,
Underlying Asset: airplanes, ships, scooters, boats, trains, motorbikes
etc.1 (collectively referred as “Car”).

Relevant Parties Car dealer i.e. the Dealer

Financier i.e. the Islamic Bank
Obligor i.e. the Customer

Purpose: New Acquisition i.e. the Customer is willing to

buy the Car for
his or her use.
Basic Steps:

1
Some Islamic banks treat financing of small boats as a part of Goods Financing
purely due to credit reasons.
Functionality with Requirements:
Stage 1: Price Quotation & Promise to Purchase:
The Customer will approach the Dealer to obtain a price
quotation with details of the Car. Upon submission of relevant credit
documents, the Customer signs Promise to Purchase with the
Islamic bank wherein he undertakes to buy the Car on Murabaha
basis if the same was made available by the Islamic bank.
Complete Description in the Price Quotation:
Although the price quotation does not have any significant
Shari’a standing on its own, but sometimes the main documentation
(i.e. LPO or Murabaha contracts) rely (through reference) on the
Price Quotation. In such cases, incomplete description could lead to
invalidate the Murabaha transaction.
Addressing Quotation to the Islamic Bank:
As it is understood that Islamic Bank is going to purchase the Car
from the Dealer then in ideal situation, the Price Quotation should
be addressed to the Islamic Bank. However, in many cases the
Customer fails to obtain Price Quotation in favor of the Islamic
Bank.
Adjustment of Down payment:
In some cases, the Dealer asks for a price for issuing the Price
Quotation which will be non-refundable and cannot be adjusted in
the final payment of the Car. Interestingly, any non- refundable
amount taken by the Dealer cannot be accommodated as Urboon
(advance payment) since the Dealer might not own the Car at the
time of claiming this money. Moreover, this amount cannot be taken
as Hamish Jiddiah (earnest money) because such amount should
adjust only the actual loss incurred by the Dealer in case the sale (by
the Customer or the Islamic Bank) did not go through.
Existence of the Subject of Financing:
Transfer of constructive or physical possession of the Car to the
Customer is necessary at the time of signing Murabaha Contracts
(i.e. Step 3). In case, it was evident that the subject of financing
(especially in the case of heavy machinery or ships) would be
constructed and then delivered at later stage then Auto Murabaha
cannot be applied. Alternatively, Auto-Istisna (to be released later
on) can be applied in such cases.
Type of the Customer:
As far as retail banking is concerned so Shari’a restrictions in
selecting the type of customers are limited because Islamic banks can
extend Auto Murabaha to any sort of individual irrespective of his
religion or his source of income provided it is in line with legal and
regulatory requirements.
On the other hand, Islamic banks are not permitted to extend
Auto Murabaha to corporate entities which are involved, as part of
core business, in non-Shari’a compliant activities. This means
Islamic bank cannot extend Auto-Murabaha to a banking or
financial institution. Similarly, it impacts business with music
channels, liquor manufacturer or night-clubs. Although financing
can be extended to their individual employees but not directly to
these entities since it will result in supporting the non-Shari’a
compliant business.
Eliminating Chances of Collusion:
Auto Murabaha is a Shari’a compliant structure of financing
which should not be misused in order to achieve goals like
borrowing funds from the Islamic Bank against interest. To abstain
the Customer from committing any act of collusion, Islamic Bank
should ensure that it is not buying the Car from Mr. A and then
selling it to Mrs. B where Mr. A is, for example, spouse of Mrs. B. In
most of the cases such financing request implies that Mrs. B has no
real need or intention to buy the Car. Rather Mr. A will get USD
25,000 and Mrs. B will be liable to pay back USD 30,000. However,
the car will remain, effectively, in the use and ownership of the Mr.
A who will secretly settle Mrs. B’s financial obligations towards the
Islamic Bank!
Similarly chances of collusion do exist where the original seller
and the buyer are direct relatives. However, chances of collusion
could be ruled out if it was ascertained that both the parties have
independent financial status and do not want to collude the Islamic
bank for getting USD 25,000 on spot which will be paid back USD
30,000 on deferred payment.
Fulfilling the Promise:
Usually, the Customer signs Promise to Purchase which implies
that the Customer will purchase the Car once made available by the
Islamic bank. This does not imply that a sale transaction has already
taken place. The Customer cannot oblige the Islamic bank to sell the
car to him even if he is ready to abide by his own promise. Promise
to purchase in Auto-Murabaha is a unilateral promise which is
binding on the Customer and should not be confused with bilaterally
binding promise which is a forward sale. Some Islamic banks try to
tone down the language of Promise to Purchase by stating that the
Islamic bank is under no obligation to enter into Murabaha in case
Customer’s financial credentials do not meet with bank’s credit
parameters. This implies that the Islamic bank is, eventually, under
obligation to enter into Murabaha in case the Customer qualifies
with bank’s credit parameters. Unfortunately, this approach is not
acceptable as per Shari’a since it is nothing but bilaterally binding
promise which is classified as forward sale.
Stage 2: Issuing LPO:
Islamic Bank will issue Local Purchase Order (“LPO”) in favor of
the Supplier. Upon successful signing or executing of the LPO, the
ownership of the Subject of Financing will be transferred from the
Dealer to the Islamic Bank. This stage is extremely crucial since the
seller cannot enter into sale of specific assets prior to acquiring
ownership of the same.
Delay in signing LPO:
To serve the Customer more efficiently, Islamic bank has to
ensure that LPO is signed in a very smooth and efficient way. Islamic
banks can seek acceptance from the Dealer through facsimile or
electronic messaging.
Transfer of Risk:
As given above, signing of LPO by the Islamic Bank and the
Dealer implies that any risk associated with the Car will be
transferred from the Dealer to the Islamic Bank. And the Islamic
bank remains facing this risk till the time Murabaha is not signed
with the Customer. Sometimes people argue insurance coverage not
only mitigates the asset risk rather it, almost, nullifies the risk. It is
true that systematic risk management through insurance reduces
Islamic Bank’s risk exposure, but the fact remains that there are
many hidden factors which are not covered by all the insurance
policies. For example, recent events of piracy near Somalia changed
the way insurance companies were ready to cover the losses or
damage of sea goods sailing through the Indian Ocean. Also many
insurance companies restricted themselves from covering any losses
due to terrorist attacks. Moreover, losses or damages due to
government failure (like electricity breakdown) are usually not
covered under a standard insurance policy.
No Delay in Transfer of Risk:
As per Shari’a, it is not permitted for the seller to delay transfer of
risk of specified assets. For example, the seller cannot tell the buyer
that his car (Nissan Altima with plate number 41060) is sold to him
but the risk will be transferred to the buyer after one month. Risk
transfer (of specified asset) from the seller to the buyer should be on
immediate basis. Similar way, Islamic bank cannot purchase the Car
from the Dealer but put a condition that risk of the specified (i.e.
selected) car will be transferred to the Islamic Bank once the
Customer is available in the branch to sign Murabaha agreement.
Bailment Arrangement:
Upon executing LPO, Islamic Bank has the right to claim delivery
of the Car from the Dealer. However Islamic Bank neither has
resources nor interest to maintain an inventory of thousands of cars
in its own warehouses. In the initial days of Islamic banking, some
banks used to claim from the Dealer the physical delivery of the
purchased car and get them parked under their own warehouses.
However, this turns out to be a quite risky exercise which can cost
the Islamic Bank even loss up to the entire value of the Car. To avoid
any operational and legal complications, Islamic Bank prefers to
leave the car with the Dealer wherein the Islamic Bank acts as bailor
and the Dealer as bailee under bailment arrangement. Usually there
are no charges for custody services.
Completeness of the Details:
Some Islamic Banks rely on the initial Price Quotation (issued at
Stage 1) while drafting the LPO. In case the original price quotation
was incomplete or contain incorrect information then LPO would be
invalid. This could have severe legal consequences since the Islamic
Bank will end up selling what it has not purchased from the Dealer.
Contingent Sale:
Promise to Purchase from the Customer. Rather Islamic banks
prefer to execute contingent sale with the Supplier. This implies that
subject of financing is sold on a condition that within, for example,
10 days the Islamic bank has the right to cancel the deal. Although
the original evidence from the Prophetic tradition is specified with 3
days of conditional sale, but Ḥanafī jurists concluded that
conditional period has no restriction in terms of number of days
provided it is agreed between the seller (i.e. the Dealer) and the buyer
(i.e. the Islamic Bank).
Stage 3: Murabaha Sale to the Customer
Upon signing of LPO, Islamic Bank sells the Car against a
disclosed profit amount:
Murabaha Price = Cost of Acquisition +Profit of Murabaha
The Cost of Murabaha does not include the cost of production
(incurred by the Dealer) or the cost of funding (incurred by the
Islamic Bank). Rather it refers to the cost incurred by the seller (in
this case, the Islamic Bank) in acquiring the Car.
Risk of Underlying Asset:
Upon signing of Murabaha contract, all risks associated with the
Car will be transferred from the Islamic Bank to the Customer. From
risk management perspective, this is a crucial moment which should
be taken care off on quick and immediate basis. Many Islamic banks
delay in signing Murabaha with the Customer which can cause
potential financial loss to the Islamic Bank.
Determination of Profit Amount:
Islamic Bank has to disclose to the Customer the cost of acquiring
the Car from the Dealer. Similarly Islamic Bank has to disclose the
total amount of profit it is going to make from this transaction of
sale. This amount of profit has to be specific and fixed. Although
Islamic Bank can agree, at the time of accepting Promise to Purchase,
that rate of Murabaha profit will be, for example, LIBOR+3%. But
on the date of signing Murabaha, LIBOR rate should be checked, and
an exact percentage of profit should be mentioned.
Claiming Fees from the Buyer:
While processing a loan transaction, conventional banks charge
an upfront amount as a processing fee which is independent from
the interest and principal to be paid by the Customer through EMI
settlement.
Since Murabaha is a sale transaction so it is not permitted, as per
Shari’a, for the seller (i.e. the Islamic Bank) to charge anything
other the profit. And importance of this fee cannot be understated
since Islamic banks wish to maintain over-all long-term profitability
of the financing (through profit component of EMIs) separate from
the commissions which are paid upfront to the relationship
managers or sale staff. Hence it is suggested to club any kind of such
fees as a part of Murabaha profits. However, profits are divided into
Deferred Profit (which is recovered over the life of the facility) and
Additional Profit (which is paid up front by the Customer). This
could be further clarified by the illustration given on the right:
Stage 4: Murabaha Price Settlement
Settlement of Murabaha Price:
The entire Price of Murabaha can be settled in any of the three
ways:
- 100% on deferred payment basis
- Partially on spot and the reminder on deferred payment.
- 100% on spot.
Since Auto Murabaha is used as a financing structure so it usually
involves deferred settlement of a portion of Murabaha price.
Nevertheless, spot Auto Murabaha can be used by Islamic banks in
such cases where the cash-buyer (i.e. the Customer) is not able to
approach the Dealer directly. In such cases, Islamic Bank can
purchase the Car from the Dealer and then sell the Car on spot
payment with an agreed upon Murabaha Price to the Customer.
It is worth mentioning that Deferred Sale is different from
Murabaha. Hence Auto Murabaha being a complex financial
arrangement combines Murabaha Sale along with settlement on
Deferred Sale terms.
Late payment charges:
The Murabaha Price due post signing the Murabaha contract is
fixed and cannot be increased, even with mutual consent of the
Islamic Bank and the Customer. This is due to the fact that deferred
Murabaha Price turns into a debt and any increase over the debt is
considered as interest.
The Islamic Bank is allowed to claim any actual and direct cost
incurred in recovering the Murabaha Price. Sometimes Islamic
banks, mistakenly, consider salaries of collection department staff as
a part of direct cost. However, the cost, which the Customer (as
debtor of Islamic Bank) is supposed to pay, is confined to the cost
which the Islamic Bank incurred directly due to the act of default by
the particular customer. It is immaterial whether the amount is large
or very tiny. But it must be direct and actual. Hence the Islamic Bank
is allowed to recover legal charges incurred by the Islamic Bank in
filling any legal suit.
It is evident that not all the banking customers, who delay (and
not default), are intending to go for the harsher route of legal
complications. Sometimes customers delay in settling on time due to
habitual laziness in making payments on time. Also, some customers
want to take undue advantage of the bank. Such cases happened
where Customers knew that Islamic Bank are helpless not to charge
any amount beyond the Murabaha Price as stated in the Murabaha
contracts. Hence Shari’a Boards suggested including a clause in the
Murabaha agreements where the Customer agrees to pay a specified
amount for charitable causes. And such undertaking to do charity
can be made obligatory according to opinion by Mālikī jurists like
Imām Abdullah b. NāfiꜤ and Muhammad b. Ibrāhīm b. Dīnār.
Further the clause was rectified to include that this undertaking will
be affective on Islamic Bank’s demand. Hence during financial
hardship or economic crises, Islamic Bank has the right to waive
claiming such amounts from those customers who defaulted due to
genuine reasons.
Fixed returns:
Returns (i.e. Murabaha Profits) cannot be increased once
Murabaha contract is executed. Any effort to reduce the same will be
a simple case of profit waiver where no legal or Shari’a complications
occur, and it could be happened unilaterally from Islamic Bank’s
side. However, when the Islamic Bank realize that Murabaha Profits
are not justified against the life of the facility or due to over-all
economic crises then the Islamic Bank has no Shari’a right to amend
the Murabaha Profits. Usually, Murabaha Profits on Auto Murabaha
are settled within maximum 8 years. Hence Islamic Banks take into
consideration any chances of sudden fall in the over-all financial
performance of the bank or the economy.
There is one individual opinion by Imam Hassan Ibn Ziyad (of
Ḥanafī School of jurisprudence) who allowed the buyer and the seller
to amend the price of Murabaha even when the subject of contract
has already perished. Few years back, Bank Al Bilad hosted a
discussion panel for Murabaha with variable returns. The most
stimulating article was the one by Sheikh Yūsuf Al-Shubaylī who
defended the same opinion but with wider and modern juristic
reasoning. The same will be dealt in detail in our upcoming paper:
Property Murabaha.

ZZZ
Restructuring Auto Finance: Applied
Shari’a
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 25th March 2015.
===============================================
Background:
As per Auto Murabaha, the Customer who has already entered
into Murabaha contract with the Islamic Bank is obliged to settle a
fixed amount of Murabaha Price which includes the cost (i.e.
principal) and the profit (intended to be charged by the Islamic bank).
Now there could be scenarios where the need for restructuring
arises. This section deals with restructuring of Auto Murabaha
scenarios.
Basic Steps:

Steps 1 to 4 are dealt with in detail in our previously published post

on Auto Murabaha. In this post we will highlight about the fifth step:
Restructuring of Auto Murabaha.
Functionality with Requirements:
Stage 5: Restructuring of Auto Murabaha
Reasons for Restructuring:
 The customer who is obliged to settle his dues as per Auto
Murabaha will request for Restructuring of Auto Murabaha as a result
of:
1. Financial Hardship
Always banks follow Central Banks guidelines in extending credit
to retail and corporate clients. For example, if Debt- burden-Ratio is
more than 50% then the Islamic Bank will not extend financing to the
Customer. Although some Islamic Banks follow more conservative
credit policies, but this does not mean that even 20% or 30% are
sufficient for the Customer to manage his monthly expenses so easily.
Sometimes customers face financial hardship through loss of job or
increasing cost of living. In such scenarios, the customer request to
reduce the monthly instalment amount (EMIs). Similarly in the
corporates, the business entity might face sudden economic
downturn. In such a case, the company (as Auto Murabaha obligor)
will not be in a position to honour settlement of Murabaha Price on
time.
2. Early Settlement
Sometimes the Customer save some amount of money and would
like to settle the outstanding Murabaha Price in one-lump-sum.
The Customer in such a case expect some discount to be extended to
him due to early settlement of Murabaha dues.
3. Mutual Agreement
In some cases, especially for corporate banking customers, the
Customer and the Islamic Bank are willing to restructure the existing
the facility neither to exit the existing relationship nor to legally pursue
the Customer who is subject to Murabaha obligation.
Fee for Restructuring:
Upon signing of Murabaha, the Deferred Murabaha Price becomes a
debt. Hence as per Shari’a, Islamic Bank (as a creditor) is not allowed
to make a profit out of Restructuring of Auto Murabaha. This
restriction applies directly to Deferred Murabaha Price and indirectly
through charging fee. On the other hand, administrative fee can be
charged by the Islamic Bank provided the same is a nominal amount
and in line with market practices. This fee is charged against processing
a standard application. In the UAE, Islamic Banks usually charge AED
100/-.
Restructuring the Price of Murabaha
 Once the Customer and the Islamic Bank agree to go ahead with
Restructuring of Auto Murabaha then financial obligation due post
Restructuring of Auto Murabaha can be any of the following:
1. 100% Waiver of the Outstanding Murabaha Price:
It is possible that in some cases of financial hardship, Islamic
Bank waives 100% of the outstanding unpaid Murabaha Price. This is
known as profit write off. Usually in the cases of customer’s death
and non-recovery of funds from the insurance company, Islamic
bank resorts to this kind of waiver. This will result in liberating the
Customer from any future financial obligation.
2. Reducing the EMIs with Increasing the Tenure:
Sometimes Islamic Banks realize that the Customer is unable to pay
the monthly instalment as agreed in the Murabaha contract whereby
he is supposed to pay USD 1458.33 for the coming 48 months. Hence
if the Customer requests for financial relief, then the Islamic Bank has
the right to reduce the monthly instalments (i.e. EMIs) provided the
sum of amount paid before and post Restructuring of Auto Murabaha
should not exceed the Total Deferred Murabaha Price (in this example
USD 70,000).
Example 1:
If in the 12th Month, the Islamic Bank and the Customer agree to reduce
EMIs (in this example) from USD 1458.33 to USD 1200.00 for the coming
th
48 months (i.e. 60 month from the signing of Murabaha) then the
Islamic Bank has to look into the following:
Before Restructuring:
Sum of EMIs paid till the 12th Month = 14583.33 x 12 = USD 17,499.96
Post Restructuring:
Sum of EMI to be paid from 13th Month till the next 48 month (60th
Month from the origin) = USD 1200 x 48 = USD 57,600
This means that the aggregate amount paid by the Customer before and
post Restructuring of Auto Murabaha will be USD 75,099.96 which is
higher than Deferred Murabaha Price as agreed initially which was USD
70,000. This means that due to Restructuring of Auto Murabaha, the
Customer will pay more than what he was supposed to pay as per Auto
Murabaha. Hence this arrangement is not acceptable as per Shari’a.
Example2:
If in the 12th Month, the Islamic Bank and the Customer agree to reduce
EMIs (in this example) from USD 1458.33 to USD 1200.00 for the coming
 43 months (i.e. 53rd month from the signing of Murabaha) then the
Islamic Bank has to look into the following:
Before Restructuring:
Sum of EMIs paid till the 12th Month = 14583.33 x 12 = USD 17499.96
Post Restructuring:
Sum of EMI to be paid from 13th Month till the next 43 month (53rd
Month from the origin) = USD 1200 x 43 = USD 51600
This means that the aggregate amount paid by the Customer before and post
Restructuring of Auto Murabaha will be USD 69099.96 which is less than
Deferred Murabaha Price as agreed initially which was USD 70,000.
This means that due to Restructuring of Auto Murabaha, the Customer
will pay an amount (USD 69099.96) which will be less/equal than what
he was supposed to pay as per Auto Murabaha. Hence this arrangement
is acceptable as per Shari’a.
The Thumb-rule is that reducing EMIs is not a condition for
determining whether Restructuring of Auto Murabaha is done as per
Shari’a or not. Rather we need to look whether the aggregate amount
paid before and after the Restructuring is not exceeding the Murabaha
Price agreed initially at the time of sale of Car on Murabaha basis.
3. Increasing the EMIs with Reducing the Tenure:
Sometimes the Customer comes forward (as the case with Mutual
Agreement) and asks for increase in the amount of EMIs. This will
be due to customer’s willingness to settle his financial obligation in a
shorter span of time.
Example 3:
If in the 12th Month, the Islamic Bank and the Customer agree to
increase the amount of EMIs (in this example) from USD 1458.33 to USD
1800 for the coming 29 months (i.e. 41st month from the signing of
Murabaha) then the Islamic Bank has to look into the following:
Before Restructuring:
Sum of EMIs paid till the 12th Month = 14583.33 x 12 = USD 17499.96
Post Restructuring:
Sum of EMI to be paid from 13th Month till the next 29 months (41st
Month from the origin) = USD 1800 x 29 = USD 52200
This means that the aggregate amount paid by the Customer before and
post Restructuring of Auto Murabaha will be USD 69699.96 which is less
than Deferred Murabaha Price as agreed initially which was USD
70,000.
 This means that due to Restructuring of Auto Murabaha, the Customer
will pay an amount (USD 69699.96) which will be less/equal than what
he was supposed to pay as per Auto Murabaha. Hence this arrangement
is acceptable as per Shari’a.
4. Increasing the EMIs with the Same Payment Tenure:
It is a known fact that Islamic Bank as a seller in the Auto
Murabaha cannot increase a single penny over Deferred Murabaha
Price so Islamic Bank face the risk of fixing the price over a long
period of time. This risk is a major concern for those financings
where Murabaha was extended against preferential rates of
financing.
Change is considered as the most efficient and suitable way to deal
with risk of sudden rate shocks during the short-term Auto
Murabaha.
5. Partial Waiver of the Outstanding Murabaha Price:
In all cases of Early Settlement, the Customer settles the Deferred
Murabaha Price (due as per Auto Murabaha) earlier than the stipulated
time. This settlement could be by choice or by force.
For example, in cases where the Customer defaulted in settling his
payments, so an event of defaults occurs and settlement of
outstanding unpaid Deferred Murabaha Price becomes due
immediately. Similarly Early Settlement could be by customer’s choice
to relief himself from financial burden.
In all cases of Early Settlement, the Islamic Bank has the right to
decline accepting Customer’s request to accept payment of the
outstanding unpaid Deferred Murabaha Price. This is in line with
Customer’s right to refuse acceleration of payment when he has not
defaulted.
Now Early Settlement in conventional bank’s car loans is quite
simple. Conventional banks have principal amount of loan and accrue
interest on daily basis. In case the customer early settles his car-loan
then conventional bank merely stops accruing interest for the
remaining tenure and charges a fee over the loss occurred due to this
settlement.
On the other hand - Islamic Banks agree on the entire Deferred
Murabaha Price at the time of signing the Murabaha contract. All the
profits (up to the maturity) are due to the Islamic Bank, which is
entitled, as per Shari’a, to claim such amounts because it took risk of
the underlying asset (i.e. the Car purchased from the Dealer).
Although in the internal accounting systems, Islamic Banks divides
the EMI into Principle and Profit but as per contractual obligation the
entire amount of EMI represents Deferred Murabaha Price. In this
case, when the Customer early settles the outstanding Deferred
Murabaha Price, so the Islamic Bank has the legal right (as per Shari’a)
to claim the full amount without taking into consideration the
outstanding profit and principle in the system.
In order to reward the Customer for his good financial behavior,
Islamic Banks, usually, waive a portion of the outstanding Murabaha
Profit. Any obligation on the Islamic Bank to reduce Deferred
Murabaha Price is nothing but reverse Riba. Since in standard Riba
(Islamic term for usury) the financial obligor is charged extra amount
over the outstanding debt in case he delays settling the same by end
of the agreed upon period. However, in reverse Riba, the creditor is
forced to waive a portion of the debt due to settling the same prior to
the agreed upon date.
Some conventional regulatory bodies (in the UAE) and court of
laws (in Malaysia) saw a sense of injustice where Islamic Banks
misusing the Shari’a rulings to make the obligor (i.e. the Customer)
suffer through paying more than his financial obligations with
conventional banks. Hence Islamic Banks were required to maintain
the percentage of waiver of outstanding unpaid Deferred Murabaha
Profit with the early settlement fee charged by other conventional banks.
Although Islamic Banks, in most of the cases, maintain the same
percentage of profit waiver but it is not stipulated anywhere in the
Auto Murabaha agreements that Islamic Bank are obliged to waive
X% of the outstanding Murabaha Profit in case of early settlement.

ZZZ
International Commodity Trading
through DD&Co. Limited
===============================================
A paper jointly written in 2008 by Abu Dhabi Islamic Bank (ADIB)’s Shari’a Division
(headed by Dr. Osaid Kailani) of Dubai Bank’s Shari’a Department (headed by Dr.
Abdulsalam Kilani). The Author contributed in translated the original draft in Arabic
to English, and it is one of the earliest papers on commodity trading via DD&Co.
===============================================
Various issues related to trading in metals by an Islamic Financial
Institution (Institution) can be clarified based on
• Meeting held on 14th February 2007 with DD&Co Limited
(Company) in its London Headquarter with Shari’a scholars
representing various Islamic institutions like Abu Dhabi Islamic
Bank, European Islamic Investment Bank etc.
• Letters exchanged between the Shari’a Division of Abu Dhabi
Islamic Bank and the Company in response to various Shari’a
queries.
Membership in London Metal Exchange and Scope of Work
The Company is a member of London Metal Exchange (LME)
besides being member of London Platinum & Palladium Market and
Dubai Commodity Receipt, the physical commodity arm of the
DMCC. Most of the commodity trading at LME is conducted
through either futures or option contracts, in which The Company
is not involved as its authorities do not permit it to engage in
speculative or unhedged activity.
The trading of commodities that is carried out by the Company
for the Institution, is conducted off-exchange in the physical, OTC
market of LME metals. A warrant is issued for every lot of
commodities held in an LME approved warehouse. Warrants give
right of possession to the specific commodity they identify and are
issued by the LME approved warehouse companies. In January 1999,
the LME and the London Clearing House launched an initiative
called SWORD. SWORD is a secure electronic transfer system for
LME warrants which are all held in a central depository. Purchases
and sales of commodity are evidenced between buyers and sellers
through the supply of documents that summarize the details of the
warrants. Because the Company is transacting in physical, OTC
metal with the Institution, and the trades do not cross the LME,
SWORD is not used.
Although the rules and regulations of the LME are not directly
applicable for the trading activities of the Company, as it does not
trade on the LME, the Company has to abide by the Rules &
Regulations of LME for procedural standards and codes of conduct
and would be penalized were it not to comply.
Dealing with Individual customers
If the customers of the Institution would like to transact with the
Company, they could do so by opening a commodity account with
the Company. The requirement of signing a Master Agreement
could be waived, provided the Institution submits an
acknowledgement to the Company that these are their customers.
The Traded Metal
Type & Use of the Commodity
The commodities which are transacted are neither fixed
commodities (do not change) nor futile commodities (with no use).
Rather these commodities are eventually purchased by end users.
Hence the available quantity and type of metal change from time-to-
time due to request for physical delivery by their end users.
The Company may trade in various LME approved non-ferrous
base metals (or commodities) i.e. copper, nickel, lead, aluminium,
aluminium alloy, zinc and tin. The Company may also trade in
Platinum Group Metals principally platinum, palladium and
rhodium. The standard terms and conditions for trade in these
metals is overseen by the London Platinum and Palladium Market
“LPPM”). This market is not connected to the LME but the Company
is a member of it.
Estimate of Total Traded Quantity
No exact estimate can be given for the total quantity that is traded
by the Company on daily basis. The quantity might vary between
what is owned by the Company and what it can buy through a wide-
spread network of brokers with whom the Company deals or other
commodity traders. However, it can be said that daily turnover of
metal trading in London OTC across many commodity classes is in
billions of dollars.
When the available quantity of LME metals does not suffice to
meet the needs of The Institution, then Platinum Group Metals are
transacted. In addition, the Company can also effect supply of
physical energy commodity such as cargos of crude oil at its clients’
discretion.
Pricing Mechanism of Metals
All transactions arranged for the Institution by the Company are
structured to ensure that the Institution is not, at any time, subjected
to any potential commodity price fluctuation risk. Either the
Company or Condor are able to hedge price fluctuation. The
Company offsets the cost of hedging in a number of ways including
the Commodity Administration Fee levied on the Institution. The
maximum period of price-stability that can be offered by the
Company for the institution is 7 business days. Should this period be
extended beyond 7 business days, this would be considered a futures
transaction which is contrary to Shari’a stipulation.
The Company as a Supplier
Whenever the Company sells the commodity to the Institution,
the Company will always sell on its own behalf i.e. as a principal and
not as a broker. It is important to note that both the Company and
Condor are physical merchant traders, not brokers, and both play a
Principal role in transactions arranged for the Institution. Should the
Company’s available quantity of commodity not suffice the
requirements of the Institution, the Company would purchase the
commodities from LME authorized brokers prior to selling them on
its own behalf to the Institution.
On the flip side, the Company may also buy the commodities
from the Institution on its own behalf.
In case the Company purchased the metal from an LME
authorized broker (or relevant market broker), then accounts are
settled through netting among the brokers and no money is paid to
the broker. Even in this case, trading of commodity is done on spot
basis.
 In case The Company sold a portion of the commodity to the
Institution then the same quantity of the metal should revert back to
The Company to close the loop and maintain its commodity
inventory. There is an arrangement between The Company and
Condor to carry out this. This does not matter whether the quantity
is related to a particular transaction or not. What matters the most is
that the same quantity of the commodity to revert back to The
Company. Usually, The Company debits the commodity account of
Condor held with the company.
Commission for Brokerage?
Whatever amount is billed by The Company to The Institution,
that amount is not a brokerage-fee, rather it is a charge for its cost,
effort, risk, storage and provision of service.
Allocation through Holding Certificate & Warrant No.
The internal policies of the Company clearly prohibit
involvement in any speculative trading such as futures. Hence the
Company does not trade in unallocated commodities. Even after
allocation, the Company does not transact in quantity which is
already allocated to the Customer.
These commodities are allocated through Holding Certificate and
Warrant Numbers. Both Warrant Numbers and Holding Certificate
can be issued on T.D. Referring to Warrant Numbers or Holding
Certificates, the Institution can identify and inspect the purchased
commodity.
Holding Certificate serves the purpose of allocation and
identification of the commodities and mentions the
warehouse/secure vault location. Those metals which are traded in
the non-LME market i.e. platinum, palladium and rhodium are
allocated directly through Holding Certificate. Numbering of
Holding Certificates for LME Metals is done by The Company
according to its own methodology. For platinum, palladium and
rhodium, allocation numbering is provided by the intermediary
from whom the commodity was bought, and the allocation reference
is passed on through the company sale to the Institution.
LME metals are allocated through Warrant Numbers. Holding
Certificate for LME metals represents a summary and abbreviation
of several warrant numbers.
Transfer of Ownership and Title
On The Trade Date (T.D):
• Exchange of Offer and Acceptance notices between the
Institution and the Company.
• The ownership of metals is transferred constructively from
The Company to The Institution. 1
• With constructive ownership the buyer has the right to sell
the purchased metals but does not have right to demand the
physical delivery since the Value Date has not arrived.
• The market convention is that all risks and rewards of
ownership of the commodity is transferred to the buyer.
On Value Date (VD)
• Can be the same day of TD or after that2.
• VD = SD
• The Institution has the right to demand physical delivery of
the commodity from the Company.
These metals are traded by the institution for immediate sale
although the market convention calls for 2 business days to
settlement.
Accounting Treatment and flow of cash
The Institution maintains “Commodity Account” with The
Company. This account is credited on T.D. This accounting
treatment reflects transfer of constructive ownership of the sold
commodity to the Institution.
When this commodity is further sold to Condor by the Institution
(on behalf of the third party) the Commodity Account is debited.
This serves the purpose of netting for the Institution and is
structured to ensure that the Institution is not taking inappropriate
exposure in its transactional settlements. Meanwhile the institution
internally debits and credits the Company’s account on value date
and offsets the two. This practice is followed by most Islamic
Financial Institutions. There are currently only 2 Islamic financial
institutions which demand outward payments to the Company and

1
Any type of confirmation (sent by The Company within 48 hours) is for
documentation purpose and transfer of constructive ownership does not depend on
issuance or receipt of such confirmation(s).
2
VD (or SD) may fall on the same of TD or even after that. The gap between TD
and VD can not exceed 7 days.
inward payments from Condor. Although this is always possible
such a process complicates the execution from operational side and
results in settlement risk issues and significant administrative cost
for the Institution. Also, there might be a foreign currency risk for
in-ward and out-ward payments.
Weekend Deals
For deals executed during or on weekends, the trading is done on
quantity available and owned by The Company. Deals are executed
on telephone and confirmed by e mail. On the following weekdays
the regular documents (like confirmations) are exchanged. End of
week reserves are limited and in case the available quantity falls short
of the requisite level of commodity demanded by The Institution
then the request for the trade is turned down. It is preferable to
inform The Company of the required quantity which is expected to
be traded during the coming weekend, so that requirement can be
met satisfactorily.
Relation with Condor Trade Ltd
Condor is an independent entity (as far as ownership is
concerned) of the Company. Condor was not established (or rather
"created") as an SPV to facilitate the commodity operations by the
Company. Condor is licensed to carry business activities, as it is the
case with DD&Co. Limited.
What happens to traded Commodities?
- The Company sells the commodity to the Institution on TD
- The Institutions sells the commodity on Murabaha to the
Customer
- The Customer appoints the Institution as its agent to sell it to
Condor
Condor may do any of the following:
- The commodity is sold in London metal markets through a
broker or intermediary.
- The commodity is sold to a broker (it may be the original broker
from whom the commodity was purchased by The Company but
Condor will not be in a position to know this) and Condor may
net payments against other market business.
- Sells the commodity to The Company on spot – the most
common practice.
- In some instances, the commodity is sold back to The Company
by The Institution (on behalf of its Customers). This is done to
reduce the amount paid as commission to The Company.

ZZZ
Trading in Common Stocks of
Companies with Mixed Activities
Prepared originally in Arabic by Dr. Abdul Bari Mashal
Issued by Fiqh Council of North America (FCNA)
English Translation by Dr. Yousuf Azim Siddiqi
===============================================
Published by Fiqh Council of North America (FCNA) on 2nd August 2023.
===============================================
All praise is to Allah alone, the Lord of the Worlds And may He send His best
benedictions upon our master Muhammad, his Kin and his Companions and grant
them ultimate peace
Background:
The Fiqh Council of North America (referred here as the “Council”) has
considered the Shariah-based rules of trading in the stocks of mixed companies in its
meeting held via Zoom communication on 22 Rabīʿ al-Thānī 1444 AH - November
16, 2022 AD., which are:
1. Firstly: The base rulings of the trading in stocks of joint-stock
companies:
1-1. As per Islamic jurisprudence, joint stock companies are subject
to the rulings of sharikat al-ʿanān (joint venture), and share
shall be recognized as a common share in the capital of the
company, and upon commencement of business, it shall be a
common share in the assets of the company and what it entails
in terms of rights upon conversion of cash to tangible assets,
benefits (usufructs), rights and debts (receivables). Stocks of
some companies are permitted, such as common stocks, are
those where profits and loss are shared, and some are
prohibited, such as preferred stocks because, in such stocks,
profits are shared and not losses.
1-2. Contemporary references and writings on Islamic
jurisprudence distinguish stock trading for one of two
purposes:
1-2-1. Buying stocks with the intent of investment, which refers to
purchasing stocks and retaining their ownership to obtain a
portion of the dividends distributed by the company at the
end of each financial period.
1-2-2. Buying stocks with the intent of trading, meaning to
purchase stocks to resell them to benefit from the differences
of price [movement].
1-3. Both are subject to the rules mentioned in this Pronouncement.
1-4. Stock trading can take several forms, including spot sale, which
is permitted [by the virtue of Shariah], and others like margin
trading, short sale, options, futures, and forward sale, which are
not permitted [by the virtue of Shariah], because they involve
ribā, uncertainty (gharar), and gambling (qimār). Also, forms
of nonpermitted transactions are stock borrowing or lending,
as the underlying assets of the share do not fulfil the criteria as
prescribed in the rulings of Islamic jurisprudence of these two
contracts, [i.e., lending (iqrāḍ) and leasing (ijārah)].
1-5. The permissibility of buying and selling stocks is not affected by
the inclusion of debts and money in the assets of the underlying
company because debts and money are secondary (ancillary –
tābiꜤ) to the main activity in the assets and benefits (usufructs),
and the ancillary is subject to the provisions applicable to the
primary and is not ruled on separately1. However, if at any time
the assets of the company turned entirely into debts, then the
provisions of debt trading must be followed. Likewise, if the
company's assets turned entirely into cash, as is the case when
the activity [of the company] commences, then it is required to
comply with the provisions of currency exchange (ṣarf) 2.
1-6. Joint-stock companies, in view of their core system and
underlying activities, are of three types:
1-6-1. Permissible companies: These are companies whose
purposes and activities are entirely Shariah compliant.
Examples include Islamic companies.

1
The ratiocination (taꜤlīl) will also include that that the cash available in the share
will be against part of the price, so that rules of currency exchange (ṣarf) will be
met as per an opinion of Ḥanafīs in the matter of (mudd against Ꜥajwa) and
(dirham against two dirahms).
2
Standard No. (21).
1-6-2. Forbidden companies: These are companies whose
purposes and activities are forbidden, and it is not
permissible to deal with their stocks at all on definite basis.
1-6-3. Mixed companies: These are companies whose basic
purposes and activities are permissible; however, they
sometimes deal with forbidden things and are therefore
subject to review here.
2. Secondly: The rule for trading with common stocks in mixed
companies
2-1. As a base proposition (al-aṣl), it is prohibited to trade in the
stocks of mixed companies, as resolved by the International
Islamic Fiqh Academy (Jeddah)1 and the Fiqh Council of the
Muslim World League (Makkah)2. If a person buys these stocks
without knowing that the company deals with ribā, and then
finds out, it is required for him to exit from holding such stocks.
This is due to the general evidence from Quran and Sunnah in
the prohibition of ribā, and because purchasing stocks of
companies trading with ribā, with the buyer knowing this,
means that the buyer himself participates in the dealing of ribā,
because the share represents a common part of the capital of
company, and the shareholder owns a common share in the
assets of the company. Therefore, [any amount of] money the
company lends with interest or borrows with interest, the
shareholder has a share in it, because those who carry out the
lending and borrowing with interest do so on his behalf, and the
deputation to carry out forbidden acts is not permitted3.
2-2. The Shariah Board of the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) has
come to the exception from the prohibition ruling, allowing
trading in the stocks of mixed companies with four conditions4:

1
Seventh Session, Resolution No. (63).
2
Fourteenth Session, Resolution No. (4).
3
Ibid.
4
Standard No. (21) Item (3), and the Standard relied on the exemption by applying
the principle of removal of hardship (rafꜤ al-ḥaraj), public necessity (ḥāja Ꜥāmma),
widespread affliction (Ꜥumūm al-balwā), compliance with rules of majority (al-
khathra), minority (al-qilla) and prevalence (al-ghalba), permissibility of dealing
with a party that has majority of Halal funds, and reliance on the issue of severance
of the transaction as per some scholars of Fiqh.
2-2-1. The first condition: That the company's core system does
not stipulate to serve purposes and carry activities that are
forbidden [by the virtue of Shariah].
2-2-2. The second condition: That most of its transactions are
permissible (ḥalāl), and the forbidden shall remain
forbidden even if it is small. This is verified by the following
conditions:
2-2-2-1. If the interest-based debt does not reach 30% of the market
value of the total stocks of the company.
2-2-2-2. If the interest-yielding deposits do not reach 30% of the
market value of the total stocks of the company.
2-2-2-3. If the income resulting from forbidden dealings, such as:
deposits in conventional banks or sale of forbidden items
(forbidden revenue), does not exceed 5% of the total
revenues of the company.
2-2-3. The third condition: The trader must purify his ownership
of these stocks by getting rid of the share's portion of the
non-permissible revenue1, whether the company realized
profits or not, and whether the company distributed
dividends or not. The non-permissible revenue for a single
share is calculated by dividing the non-permissible revenue
by the number of stocks of the company's capital as shown
in the last issued financial statements.
2-2-3-1. It is required to dispose of the non-permissible revenue that
appears in the financial statements for the trading period,
regardless of the amount, for whoever owned the underlying
share at the end of the period. If the share was sold before
that, there is no obligation to dispose2. In this case, the [new]
owner of the share bears [the responsibility] of the disposal
of the non-permissible revenue for the share for the entire
period covered by the financial statements. Some good
practices3 require purification to be mandatory for whoever
owned the share at any time during the financial period
covered by the financial statements, but to dispose of the

1
The non-permissible per share is calculated by dividing the non-permissible
revenue by the number of stocks in the underlying company.
2
As given in Standard No. (21), Item No. 3.
3
Bank AlBilad.
 non-permissible revenue for the share for the number of
days of his ownership of the share and not for the entire
period, which is an acknowledged opinion and was favored
in the discussions of the Council. The disposal of the non-
permissible revenue is carried out by disbursing it in Zakat,
charity, and public interests.
2-2-3-2. The trader can know these ratios by referring to the latest
published financial statements, and he can calculate it
himself or through available consultants and electronic
applications. Below is an example of calculating the amount
of purification according to the formula preferred by the
Council:
2-2-3-3. Assuming that the company's interest revenue for a year
(365 days) is $3650.
Then the daily share of the interest: 3650 ÷ 365 days = $10.
Assuming the number of stocks of the company's capital:
100 stocks, then the daily interest per share: 10 ÷ 100 = $0.1
per day.
Therefore, if a person owns 10 stocks for 10 days, the
amount of purification is calculated as follows: $0.1 (per
day) × 10 (stocks) × 10 (days) = 100 cents.
2-2-4. The fourth condition: The trading must not include any of
the prohibitions mentioned in the previous paragraph
(first).
3. The Opinion:
3-1. After discussion, the Council concluded the permissibility of
trading in the stocks of mixed companies as an exception with
the following conditions:
3-1-1. The core activity of the underlying company is not
forbidden.
3-1-2. Interest-bearing borrowings of the company are less than
30% of the market value of the company's total stocks.
3-1-3. Interest-yielding deposits of the company are less than 30%
of the market value of the company's total stocks.
3-1-4. The non-permissible revenue from interest income and sale
of forbidden items do not exceed 5% of the total revenues of
the company.
3-1-5. Trading is confined to common stocks.
3-1-6. Trading is confined to spot sale.
3-1-7. The trader shall dispose of the share's non-permissible
revenue for the number of days the share was owned as
clarified at the beginning of the pronouncement (second
paragraph).
3-1-8. The application of these rules refers to the latest published
financial statements of the underlying company.
3-1-9. The trader should make an effort to deal with companies
that are pure from prohibitions, if found.
All praise is to Allah alone, and may He send His benedictions upon our Prophet
Muhammad, his Kin and all his Companions.
This Pronouncement was prepared by Dr. Abdul Bari Mashal and
was endorsed at the meeting of the Fiqh Council of North America,
held on 15 Muḥarram 1445H, corresponding August 2, 2023.

ZZZ
Interest-bearing Student Loans in the
USA
English translation by Dr. Yousuf Azim Siddiqi
===============================================
This pronouncement was drafted in Arabic by Dr. Abdul Bari Meshaal and Dr. Yasser
Qadi, was translated from Arabic to English by Dr. Yousuf Azim Siddiqi, and it was
endorsed at Fiqh Council of North America’s meeting held on Muharram 15, 1445
AH – (corresponding August 2, 2023).
===============================================
All praise be to Allah, the Lord of all the worlds. Peace and blessings upon our
Prophet and our master Muhammad, all his family and his Companions.
The Fiqh Council of North America reviewed the preliminary
study on “The Ruling on Interest-bearing Student Loans in
America: Ascertainment of Ꜥillah (ratio decidendi) (taḥqīq al-
manāṭ) for opining permissibility for General Need (Ḥāja Ꜥāmma)
and Specific Necessity (ḍarūra khāṣṣa)”, at its meeting [held] in
Houston on Muḥarram 2-3, 1441 AH (corresponding September 1-
2, 2019), in which the following was stated:
Firstly: Types of student loans and scholarships:
The under-consideration loans are loans [obtained] for college
education, and for the lender they are of two types, i.e., federal and
private1.
Considering the subsidy, the federal loans are of two types: Direct
Subsidized Loans and Unsubsidized Loans.
In Direct Subsidized Loans, the student does not bear interest
during the grace period that includes the period of study and six
months after graduation, rather the government bears [the interest
expenses of such loans].

1
https://studentaid.gov/understand-aid/types/loans
https://studentaid.gov/understand-aid/types/loans/federal-vs-private
 In Unsubsidized Loans, interest is calculated from the first day of
loan disbursement, but it differs in terms of the grace period into
three types:
the first is without a grace period, and repayment begins during
the study period, which is referred as Direct PLUS Loan (Parent
Loans for Undergraduate Students).
The second has a grace period until graduation and 6 months
after graduation, and
the third, with a grace period until graduation only.
As for private loans, they are always interest-bearing and may be with
or without a grace period. Generally, interest rates on private student
loans are higher than federal loans.
In contrast to loans, there are non-refundable educational
scholarships. Students with outstanding merits, having low-income,
belonging to minorities, and the like, are entitled for such
scholarships which cover the entire educational fees or can be
arranged with subsidized loans at times. Such scholarships have
different sources that may be federal, university, or non-profit
organizations.
Second: The need for student loans and university scholarships
Studies indicate that:
- 38% of students graduate without loans, 75% of them are students
with outstanding merits,
- 47% of mathematics, statistics, economics, and philosophy
students graduate without loans,
- 24% of students in health education graduate without loans.
- 33% of those who physically attended their respective
universities, graduated without loans. 25% of those who attended
remotely graduated without loans.
- 87% of those who graduated with a bachelor's degree did it
without loans, and that done with the help of their families. 75%
of those who graduated without loans were from universities
where annual fees are less than $10,000.
- In general, the average income of Muslim community is close to
the average income of the American community.
Thirdly: The basic Shari’a ruling on borrowing against interest
It is prohibited (ḥarām) to borrow and lend against interest, as
the Almighty said: “But if you do not (give it up), then listen to the
declaration of war from Allah and His Messenger. However, if you
repent, yours is your principal. Neither wrong, nor be wronged”,
[2:278].
Jābir b. Abdullah narrated that: “Allah's Messenger (‫ )ﷺ‬cursed the
one who accepts usury, the one who gives it, the one who records it
and the two witnesses to it, saying, "They are all the same." [Reported
by Muslim].
Fourthly: The Shari’ah ruling on borrowing on interest due to
necessity
Necessity is envisaged in the case of the borrower and cannot be
envisaged in the case of the lender.
In the Resolution of the Islamic Research Academy (Cairo) Re.
prohibition of bank interest issued in 1385 AH (1965), it was resolved
that “Lending on interest is not permitted by virtue of the need (ḥāja)
or the necessity (ḍarrūra), and borrowing with interest is also
forbidden, and its sin is not exonerated, unless the necessity calls for
it1.
Allah the Almighty said: “He has but prohibited for you the
carrion, the blood, the flesh of swine and what has been invoked upon
with a name other than that of Allah. However, if anyone is compelled
by necessity - neither seeking pleasure, nor crossing the limit (of
necessity) - then, Allah is Most-Forgiving, Very-Merciful”.
Sheikh Al-SaꜤdī mentioned in his exegesis, (any one is compelled)
to consume something forbidden, so that he had to commit such a
thing by virtue of necessity. He would be afraid that he will be perish
if he has not consumed the prohibited item. In such a case, there is
no sin on him if he is not seeking pleasure, nor crossing the limit (of
necessity). This means that he does not consume the prohibited if he
is not compelled to do so, crosses the limit from Halal to Haram, or
consumes more than what is required by the virtue of necessity2.

1
The Arabic text:
,‫ واﻻﻗﱰاض ﺑﺎﻟﺮﺑﺎ ﺣﺮام ﻛﺬﻟﻚ وﻻ ﻳﺮﺗﻔﻊ إﺛﻤﻪ‬,‫"اﻹﻗﺮاض ﺑﺎﻟﺮﺑﺎ ﻻ ﺗﺒﻴﺤﻪ ﺣﺎﺟﺔ وﻻ ﺿﺮورة‬
."‫ وﻛﻞ ﻣﱰوك ﻟﺪﻳﻨﻪ ﰲ ﺗﻘﺪﻳﺮ ﺿﺮروﺗﻪ‬.‫إﻻ إذا دﻋﺖ إﻟﻴﻪ اﻟﻀﺮورة‬
2
Arabic text:
 In the context of specific necessity (ḍarūra khāṣṣa), there is the
state of general necessity (ḍarūra Ꜥāma) in which it is feared that all
people will perish if they do not eat what is forbidden. In this case, it
is permitted for them to consume to the extent of the need and not
only to the extent that will achieve repulsion of their perishing. That
is why it is called general need1. It is a case in which Imam Al-Juwaynī
(also known as Imām al-Haramayn) assumed that time is devoid of
Muftīs [the expert who can issue Fatwā] and the ones who transmit
the views of Fiqh schools, and he established the maxim which means
that the general need (ḥāja Ꜥāmma) operates in the same space as
necessity2.
Further, he added that if prohibited thing became widespread in
times or among people, so as people were not able to have access to
Halal, then it is permitted for them to take the prohibited thing up to
the extent of the need, because if an individual person did not take a
carrion to the extent of necessity, then he will be perished. However,
if all the people (i.e., the community) did not take up to the need then
all of them will perish.3 [Refer: Al-Ghayāthi, para. 738, 742].

‫ ﻓﻼ ﺟﻨﺎح‬-‫ﺑﺄن ﺣﻤﻠﺘﻪ اﻟﻀﺮورة وﺧﺎف إن ﻟﻢ ﻳﺄﻛﻞ أن ﻳﻬﻠﻚ‬- ‫"﴿َﻓَﻤِﻦ اْﺿُﻄّﺮ﴾ إﻟﻰ ﺷﻲء ﻣﻦ اﻟﻤﺤﺮﻣﺎت‬
,‫ وﻻ ﻣﺘﻌﱟﺪ اﻟﺤﻼل إﻟﻰ اﻟﺤﺮام‬,‫ إذا ﻟﻢ ﻳﺮد أﻛﻞ اﻟﻤﺤﺮم وﻫﻮ ﻏﻴﺮ ُﻣﻀﱠﻄﺮ‬:‫ أي‬,‫ﻳﺎ‬l‫ﻋﻠﻴﻪ إذا ﻟﻢ ﻳﻜﻦ ﺑﺎﻏًﻴﺎ أو ﻋﺎد‬
."‫ ﻓﻬﺬا اﻟﺬي ﺣﺮﻣﻪ اﷲ ﻣﻦ اﻟﻤﺒﺎﺣﺎت‬,‫أو ﻣﺘﺠﺎوٍز ﻟﻤﺎ زاد ﻋﻠﻰ ﻗﺪر اﻟﻀﺮورة‬
1
General necessity is called based on assessment of the event and would be called
general need based on the permissibility to consume up to the extent of the need and
not to keep barely alive (sadd al-ramaq) as the case with necessity.
2
Arabic text:
‫ َوَﻟْﻴَﺲ‬- ‫ﺲ َوَﻣﺎ َﺗْﺤِﻮﻳِﻪ اْﻷَْﻳِﺪي‬
ِ ِ‫ض اْﻟَﺤَﺮاُم ﻓِﻲ اْﻟَﻤَﻄﺎِﻋِﻢ َواْﻟَﻤَﻼﺑ‬
ِ ‫ َوَﻃﱠﺒَﻖ َﻃَﺒَﻖ اْﻷَْر‬,‫ﺐ ُﻛﱡﻠَﻬﺎ‬ ِ ِ
ُ ‫"وَﻓَﺴَﺪت اْﻟَﻤَﻜﺎﺳ‬
‫ف‬ِ ‫ واْﻟﺤﺎَﻟُﺔ َﻫِﺬِه َﻋَﻠﻰ اِﻻْﻧﻜَِﻔﺎ‬- ‫ َﻓَﻼ ﺳﺒِﻴَﻞ إَِﻟﻰ ﺣﻤِﻞ اْﻟَﺨْﻠِﻖ‬,‫ َﻓَﻠِﻮ اﱠﺗَﻔَﻖ ﻣﺎ وﺻْﻔﻨَﺎه‬- ‫ﺣْﻜﻢ َزﻣﺎﻧِﻨَﺎ ﺑِﺒِﻌﻴٍﺪ ﻣِﻦ َﻫَﺬا‬
َ َ ْ َ َ ُ َ َ َ ْ َ َ ُ ُ
."‫ َواﻟﱠﺘَﻌﱢﺮي َﻋِﻦ اْﻟﺒِﱠﺰِة‬,‫ت‬ِ ‫َﻋِﻦ اْﻷَْﻗﻮا‬
َ
3
Arabic text:
‫ﺐ اْﻟَﺤﱠﻼِل‬ ِ ‫ َوَﻟْﻢ َﻳِﺠُﺪوا إَِﻟﻰ َﻃَﻠ‬,‫َأﱠن اْﻟَﺤَﺮاَم إَِذا َﻃﱠﺒَﻖ اﻟﱠﺰَﻣﺎَن َوَأْﻫَﻠُﻪ‬: ‫"َﻓﺎْﻟَﻘْﻮُل اْﻟُﻤْﺠَﻤُﻞ ﻓِﻲ َذﻟ َِﻚ إَِﻟﻰ َأْن ُﻧَﻔﱢﺼَﻠُﻪ‬

‫ َوَﻻ ُﺗْﺸَﺘَﺮُط اﻟﱠﻀُﺮوَرُة اﱠﻟﺘِﻲ َﻧْﺮَﻋﺎَﻫﺎ ﻓِﻲ إِْﺣَﻼِل اْﻟَﻤْﻴَﺘِﺔ ﻓِﻲ ُﺣُﻘﻮِق‬,‫ َﻓَﻠُﻬْﻢ َأْن َﻳْﺄُﺧُﺬوا ﻣِﻨُْﻪ َﻗَﺪَر اْﻟَﺤﺎَﺟِﺔ‬,‫َﺳﺒِﻴًﻼ‬
‫ َﻓﺈِﱠن اْﻟَﻮاِﺣَﺪ‬,‫ ﻓِﻲ َﺣﱢﻖ اْﻟَﻮاِﺣِﺪ اْﻟُﻤْﻀَﻄﱢﺮ‬,‫س َﻛﺎﱠﻓًﺔ َﺗﻨِْﺰُل َﻣﻨِْﺰَﻟَﺔ اﻟﱠﻀُﺮوَرِة‬ ِ ‫ َﺑِﻞ اْﻟَﺤﺎَﺟُﺔ ﻓِﻲ َﺣﱢﻖ اﻟﻨﱠﺎ‬,‫س‬ ِ ‫آَﺣﺎِد اﻟﻨﱠﺎ‬

,‫ َوَﺗَﻌﱠﺪْوَﻫﺎ إَِﻟﻰ اﻟﱠﻀُﺮوَرِة‬,‫ َوَﻟْﻮ َﺻﺎَﺑَﺮ اﻟﻨﱠﺎُس َﺣﺎَﺟﺎﺗِِﻬْﻢ‬.‫ َﻟَﻬَﻠَﻚ‬,‫ َوَﻟْﻢ َﻳَﺘَﻌﺎَط اْﻟَﻤْﻴَﺘَﺔ‬,‫اْﻟُﻤْﻀَﻄﱠﺮ َﻟْﻮ َﺻﺎَﺑَﺮ َﺿُﺮوَرَﺗُﻪ‬
Fifthly: The Shari’a ruling on taking interest-bearing loan by
virtue of need
It is not permitted to borrow on interest by the virtue of need,
which is less than necessity, so it does not result in a confirmed
perishing, damage, or harm in the whole or some of the soul, but
rather the need results in difficulty and hardship.
As per Imām Al-ShāfiꜤī, none of the prohibited things will be
permitted by virtue of need unless there is a necessity to avoid
incurring damage to the self1. Al-Umm: 3/28.
The principle of prohibition does not apply on what Shari’ah has
permitted as an exception to the principle, such as fumigating a
container with silver, or wearing silk for scabies, because these are
provisions established by the Sharia.
This is the meaning intended by the maxim, “need operates in the
same space as necessity, whether it is general or specific”.
As per Sheikh Ahmad Al-Zarqā operating in the same as space as
necessity means that the same provision applies to it. Although the
prior’s provision continues, and the second one is timed which lasts
till the necessity lasts.2
This meaning was confirmed by Dr. Muhammad Al-Zuḥaylī that
what can be permitted by virtue of need should have an explicit text
(naṣṣ) which permits using it or transacting in it or could be a case
of no text was referred to it. However, there should not be any text
which prohibits using or consuming it or a thing like it.3

.‫ َﻣﺎ ﻓِﻲ َﺗَﻌﱢﺪي اﻟﱠﻀُﺮوَرِة ﻓِﻲ َﺣﱢﻖ اْﻵَﺣﺎِد‬,‫ف اْﻟَﻬَﻼِك‬

ِ ‫ َﻓِﻔﻲ َﺗﻌﱢﺪي اْﻟَﻜﺎﱠﻓِﺔ اْﻟﺤﺎﺟَﺔ ﻣِﻦ َﺧﻮ‬,‫َﻟﻬَﻠَﻚ اﻟﻨﱠﺎس َﻗﺎﻃِﺒًﺔ‬
ْ ْ َ َ َ َ ُ َ
."‫ َﺗْﺮُﺷُﺪوا‬,‫َﻓﺎْﻓَﻬُﻤﻮا‬
1
Arabic text:
‫" َوَﻣْﻦ اْﺣَﺘﺎَج إَﻟﻰ َﻗْﺴِﻢ َﺷْﻲٍء َﻟْﻢ َﻳْﺤُﻠْﻞ َﻟُﻪ ﺑِﺎْﻟَﺤﺎَﺟِﺔ َﻣﺎ َﻻ َﻳِﺤﱡﻞ َﻟُﻪ ﻓِﻲ َأْﺻﻠِِﻪ َوَﻟْﻴَﺲ َﻳِﺤﱡﻞ ﺑِﺎْﻟَﺤﺎَﺟِﺔ ُﻣَﺤﱠﺮٌم إﱠﻻ‬
‫ﺲ َﻓَﺄﱠﻣﺎ َﻏْﻴُﺮ َذﻟ َِﻚ َﻓَﻼ َأْﻋَﻠُﻤُﻪ َﻳِﺤﱡﻞ ﻟ َِﺤﺎَﺟٍﺔ َواْﻟَﺤﺎَﺟُﺔ ﻓِﻴِﻪ َوَﻏْﻴُﺮ اْﻟَﺤﺎَﺟِﺔ‬ ِ ‫ف َﺗَﻠ‬
ِ ‫ﻒ اﻟﻨﱠْﻔ‬ ِ ‫ت ﻣِﻦ َﺧﻮ‬
ْ ْ
ِ ‫ﻓِﻲ اﻟﱠﻀﺮورا‬
َ ُ
."‫َﺳَﻮاٌء‬
2
Arabic text:
‫ َوإِن اْﻓَﺘﺮَﻗﺎ ﻓِﻲ َﻛﻮن ﺣﻜﻢ اﻷوﻟﻰ ﻣﺴﺘﻤﺮًا َوﺣﻜﻢ اﻟﱠﺜﺎﻧَِﻴﺔ‬.‫"وﺗﻨﺰﻳﻠﻬﺎ ﻣﻨﺰَﻟﺔ اﻟﱠﻀُﺮوَرة ﻓِﻲ َﻛﻮَﳖﺎ ﺗﺜﺒﺖ ﺣﻜﻤﺎ‬
.(32/‫ )اﻟﻤﺎدة‬31 ‫ اﻟﻘﺎﻋﺪة‬:‫" ﺷﺮح اﻟﻘﻮاﻋﺪ اﻟﻔﻘﻬﻴﺔ‬.‫ﻣﻮﻗﺘ“ ﺑِﻤﱠﺪة ﻗﻴﺎم اﻟﱠﻀُﺮوَرة إِْذ اﻟﱠﻀُﺮوَرة ﺗﻘﺪر ﺑَِﻘﺪِرَﻫﺎ‬
3
Arabic text:
The opinion:
After discussion, the Council concluded the following:
First: The initial presumption is the prohibition of borrowing on
interest, except for necessity. The Fiqh Council is of the view that
higher education is a general necessity, and it is necessary for the
prevention of perishing and extreme weakness inflicting upon the
Muslim community in the USA. Specializations, for example but not
limited to, related to medical, media and education represent a
general need for the Muslim community in North America. Student
loans at the present time are among the necessary means to obtain
this university education. Accordingly, it is permitted, in the current
circumstances, for a Muslim student, if the need dictates for him, to
obtain a student loan to enrol or continue in university education, in
accordance with the rule of “the general need operates in the same
space as necessity,” for individual people, while adhering to the rules
of taking action upon necessity, which are:
1. That this done is after exhausting all the permissible means, such
as:
- family’s own abilities,
- combining part-time work and study for the student,
- student scholarships from universities, non-profit organizations,
and companies for the talented and the unable, and government-
supported loans.
2. The specialization should be what the Muslim community needs
as a whole or needed by the majority of Muslims, according to the
opinion of scholars and experts.
3. Borrowing should be up to the need, [and not taken beyond that].
4. The borrower should hasten in repaying the loan at the first
opportunity without delay, in order to get rid of interest-bearing
loans.
5. Refer to the experts of fatwas in applying this fatwa.
Second: by virtue of Shari’ah, it is required at the level of the
Muslim community in America and the organizations that represent

,‫ أو ﻟﻢ ﻳﺮد ﻓﻴﻪ ﺷﻲء ﻣﻨﻬﻤﺎ‬,‫ أو ﺗﻌﺎﻣﻞ‬,‫" واﻟﻈﺎﻫﺮ أن ﻣﺎ ﻳﺠﻮز ﻟﻠﺤﺎﺟﺔ إﻧﻤﺎ ﻳﻈﻬﺮ ﻓﻴﻤﺎ ورد ﻓﻴﻪ ﻧﺺ ﻳﺠﻮزه‬
‫ وﺟﻌﻞ ﻣﺎ ورد ﰲ ﻧﻈﻴﺮه‬,‫ وﻛﺎن ﻟﻪ ﻧﻈﻴﺮ ﰲ اﻟﺸﺮع ﻳﻤﻜﻦ إﻟﺤﺎﻗﻪ ﺑﻪ‬,‫وﻟﻜﻦ ﻟﻢ ﻳﺮد ﻓﻴﻪ ﻧﺺ ﻳﻤﻨﻌﻪ ﺑﺨﺼﻮﺻﻪ‬
.‫ اﻟﻘﻮاﻋﺪ اﻟﻔﻘﻬﻴﺔ وﺗﻄﺒﻴﻘﺎﲥﺎ ﰲ اﻟﻤﺬاﻫﺐ اﻷرﺑﻌﺔ‬."‫واردا ﻓﻴﻪ‬
the community to establish financial funds for the provision of
scholarships, aid, and Shari’ah compliant student loans for the
underprivileged members of the Muslim community. The able-
bodied members of the community and the students who have
benefited from student loans after joining their work must support
these funds and provide personal initiatives to adopt the community
members in the disciplines needed by the Muslim community in
America, so that the community, as a whole, will dispense with the
need for interest-based student loans.
Third: This fatwa ceases to be in force if the reasons for the
general need are no longer in existence at the community level,
according to the assessment of scholars and experts, such as if the
community suffices with the specializations that were needed or
found sufficient solutions in the permissible alternatives for
[interest-based] financing.

All praise be to Allah, the Lord of all the worlds. Peace and blessings upon our
Prophet and our master Muhammad, all his family and his Companions.

ZZZ
Shari’a Compliant Solutions for Service
Financing
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 7th September 2020.
===============================================
1. Background:
1.1. An Islamic bank/window based in [•] (the “Financial
Institution” or “FI”) is looking for a Shari’a compliant financing
solutions to finance various services such as education, travel or
health treatment (the “Service(s)”) offered by multiple service
providers (the “Service Provider”) for FI’s customer (the
“Customer”) on a short-term facility of [•] years (the “Facility
Tenure”).
1.2. FI is willing to offer financing of the Service for a profit rate of
[•] % (the “Profit Rate”).
2. Shari’a Opinion:
2.1. Overall, the Service is an intangible asset which can be
transacted under Shari’a and classified as māl. However, it
should be ensured that the Service is not related to a non-Shari’a
compliant activity, for example, education of non-Shari’a
compliant courses (such as music or dancing) or entry ticket to
a casino or naturist beaches. Hence, the Service is treated under
Shari’a screenings of physical and tangible goods.
2.2. Considering the Shari’a recognition of the Service, it can be
financed based on Murabaha as well. However, there are two
general requirements of the Murabaha contract:
a) the subject of the contract should be specific (referred in
Shari’a as mu’ayyan) with no chances of dispute or conflict
between the agreed upon and the delivered object. This could
 be not possible to adhere to since FI might not be in
possession of the service when it wants to sign the financing
contract of the Service.
b) The contract of Murabaha is executed between the FI and the
Customer post acquiring the subject of the contract. This
could not be possible to adhere to since FI might want to sign
the financing contract with the Customer before acquiring it.
2.3. Considering the general background given above, it is suggested
to adopt a solution of Service Ijarah, which works in the
following way.
3. Service Ijarah
3.1. As per the solution of Service Ijarah, FI will acquire ownership
of the Service which represent usufructuary rights offered by the
Service Provider (e.g. a travel agency, hospital or educational
institution).
3.2. In terms of the existence of the leased service, the Ijarah can be
any of the following:
a) Ijarah Mu’ayyana: which is the leasing of specific services.
In such an Ijarah, the requirements for executing the
contract are very much similar to the standard Murabaha in
terms of taking possession of the subject of contract and
following a sequence of execution.
b) Ijarah Muṣūfa bi Dhima (“Forward Ijarah”): which is an
agreement to lease a described service without specifying a
particular one. Hence the contract of leasing can be
executed before taking possession of the Service by the
lessor. However, the lessor will be entitled to the rent once
the Service was duly delivered.
It is suggested to apply Forward Ijarah for financing the Services.

The Modus Operandi is given below:

 Ijarah of
Services
Shari'a/Credit
Screening
Application of
Finance
Price
Quotation

4. Price Quotation:
4.1. The Customer acquires a price quotation of the Service (the
“Price Quotation”) from the Service Provider addressed to the
FI. Although this could be the ideal case, it would be no Shari’a
violation if the Price Quotation was not issued in favour of the
FI. Getting the Price Quotation addressed to the FI will endorse
the fact that there is no prior contractual arrangement between
the Service Provider and the Customer.
5. Application of Finance:
5.1. The Customer approaches the FI to apply for financing of the
Service wherein he submits the Price Quotation (as given by 2.6)
and provides the necessary demographic information.
5.2. The Customer also signs an undertaking to enter into Ijarah
contract once the FI offers the Service to the Customer (the
“Ijarah Undertaking”).
6. Shari’a/Credit Screening:
6.1. The FI goes through Customer’s application and regularly
evaluates his/her creditworthiness as followed for personal
finance.
6.2. From Shari’a perspective, the following should be ensured:
a) Compliance of the Service: The Service should comply
with Shari’a requirements as given in the Point 2.1 above.
b) Delivery of the Service: The Service Provider has not
already delivered the Service to the Customer. In case the
Service was partially provided, then the financing by the
FI can be offered only for the underdelivered portion. For
example, if the Service is related to three education years
and one year has already lapsed, then Forward Ijarah can
be executed only for the remaining two years.
c) Down Payment: the FI should check if any amount paid
 by the Customer to the Service Provider before
approaching FI (the “Down Payment”).
As per Shari’a, the Down Payment should be treated in
any of the following ways:
i. To notify the Service Provider that the Down Payment
is part of the price to be paid by the FI under the LPO
(see below). This is the most likely scenario.
ii. To notify the Customer that the financing of the
Service will be reduced by the portion not included in
the Down Payment.
iii. To notify the Customer that FI and the Customer will
be will entering into partnership arrangements.
7. Ijarah of Service:
7.1. Based on the Shari’a Screening, the FI agrees with the Customer
to sign the Ijarah agreement (“Forward Ijarah Agreement”).
Since it is the Forward Ijarah, so it is permissible for the FI to
execute Ijarah agreement before acquiring ownership and
possession of the Service. It will be stated that Forward Ijarah
Agreement will be effective from the date when the FI will
deliver the Service to the Customer (the “Actual Delivery
Date”).
7.2. The Forward Ijarah Agreement will contain the full description
of the Service which leaves no room for any contractual
ambiguity.
7.3. Semi-variable Returns: the FI may change the Profit Rate for the
subsequent periods of Service, which was not utilized by the
Customer. For example, during the first year of education, the
FI may agree with the Customer to revise the Profit Rate for the
second year of schooling. Once the respective lease period
commences, then no change in the Profit Rate is acceptable.
Similarly, no change in the Profit Rate of travel financing is
possible once the customer has used the travel tickets.
7.4. Rent Entitlement: under the Forward Ijarah Agreement, the FI
(as the lessor) will be entitled to the rent upon the Actual
Delivery Date. However, the entitlement could be on a bullet
term or gradual basis. Hence the FI may state in the Forward
Ijarah Agreement that the aggregate rent (as stated in the
agreement) is for the first period of the leasing period of the
 Service. For example, if the stay was for six months, then the
Customer is bound to pay the rent from day one of the Ijarah
rental periods. In this way, Service Ijarah will be treated,
accounting wise, in a manner similar to Murabaha receivables.
8. Issuance of the LPO:
8.1. The FI acquires the Service by issuing the LPO addressed to the
Service Provider.
8.2. The Service Provider shall offer the Service to the Customer on
a proposed date (the “Proposed Delivery Date”).
8.3. The LPO will contain a notice of delivering the Service to the
Customer (“Delivery Note”). Hence the tickets, for example,
will be issued by the Service Provider in favour of the Customer
and he would be receiving the same direction.
9. Delivery of the Services:
9.1. On signing the LPO, the FI allows the Customer to make use of
the Service in fulfilment of the Forward Ijarah Agreement
signed between the FI and the Customer.
9.2. From the Actual Delivery Date onwards, the FI (being the
lessor) is entitled to receive the rent as agreed with the Customer
(being the lessee). In case the Service was not delivered, then the
FI has no right to claim the rent.
9.3. In case any issues arise in terms of the Service delivered by the
Service Provider, then the FI remains liable to provide an
alternative service (as agreed in the Forward Ijarah Agreement)
to the Customer since in a contract of a Muṣūfa bi Dhima
(specified-cum-unidentified), it is not allowed for the seller or
the lessor to waive the warranty. To address this Shari’a
requirement, the FI may authorize the Customer to pursue any
disputes directly with the Service Provider on behalf of FI.

ZZZ
A solution proposed for Murabaha
Roll-over
Dr. Yousuf Azim Siddiqi
===============================================
Written on 25th April 2021, and remained unpublished, although parts of it were
reused in Author’s Arabic writings.
===============================================
Background:
1. An Islamic financial institution [•] (“IFI”) usually extends to its
clients (the “Client”) Murabaha-based facilities either on the
basis of syndicated facilities or bilateral deals (“Murabaha
Facility(ies)”).
2. The purpose of Murabaha Facilities is to provide liquidity
financing to the Client, either through LME commodities or
Nasdaq certificates (“Underlying Assets”) against a) the required
liquidity amount (the “Murabaha Cost”), and b) an agreed upon
profit payable by the Client to the IFI (“Murabaha Profits”). The
sum of Murabaha Cost and Murabaha Profit would be the
Murabaha price payable by the Client (the “Murabaha Price”)
3. The Client and IFI agree to execute Murabaha Facility in multiple
transactions (the “Rollover”) which are meant to adjust the
Murabaha Profit linked to an agreed upon benchmark (“Profit
Benchmark”) that is usually LIBOR or any known benchmark
agreed by the relevant parties.
4. On the start of Murabaha Facility (the “Drawdown Date”), the
IFI and the Client enter into the first transaction of Murabaha
(the “Base Murabaha”) that will generate liquidity required by
the Client and would be liable to pay the Murabaha Price at the
maturity of Base Murabaha ("First Murabaha Maturity”).
5. The IFI and the Client agree on the First Murabaha Maturity
(“First Rollover Date”) to enter into Rollover so the proceeds will
 automatically settle the Murabaha Cost outstanding as per the
Base Murabaha (“First Murabaha Rollover”), and the Client is
supposed to pay Murabaha Price consisting of outstanding
Murabaha Cost and Murabaha Profit linked to current Profit
Benchmark. The same exercise will continue and repeated after
every 3 months.
6. It was evident that pursuant to AAOIFI Shari’ah Standard No.
(59): Sale of Debt, the practice, as highlighted in Point (5), is not
fully compliant to Shari’ah. Hence, the IFI is supposed to provide
a window for the Client between realization of liquidity as per the
First Murabaha Rollover and settlement of Base Murabaha.
7. The following solution is suggested to address the Shari’a
violation by ensuring compliance with Shari’a.
Tawliah Sale with Multiple Sale Transaction
a. Tawliah Sale
8. On the Drawdown Date, the IFI and the Client will enter into
Tawliah sale of the Underlying Assets (“Tawliah Sale”) so that the
subject of sale is sold by the IFI at par with no profit charged
(“Tawliah Price”). After 3 months from the Drawdown Date
(“First Tawliah Maturity”), part of Tawliah Price is payable (the
“Tawliah Due Amount”). If the Client pays part or full of the Due
Tawliah Amount (the “Tawliah Settled Amount”), then the
Tawliah Price will be deducted by the Tawliah Settled Amount
which results in the outstanding of the Tawliah Price (“Tawliah
Outstanding Amount”). Two business days following the First
Tawliah Maturity, the IFI has the option to extend the maturity
of the outstanding Tawliah Price for another 3 months (“First
Tawliah Extension”) or to call off the facility upon its discretion.
However, once extension is given, then IFI is obliged by it unless
there is a Credit Event. Upon extension, the Client will be payable
to pay the net of Tawliah Price and Due Tawliah Amount
b. Promise to Sell
9. On the Drawdown Date, IFI will provide a promise to sell the
Underlying Asset after 3 months (“Promise to Spot Sale/PSS”).
In the PSS, it will be indicated that the Underlying Asset will be
sold for the sum of a) nominal amount representing the cost of
the Underlying Asset (“Spot Sale Cost”), and b) markup as
determined by the contracting parties (“Spot Sale Profit”). The
 sum of the Spot Sale Cost and the Spot Sale Profit will be would
be the spot price payable by the Client (“Spot Sale Price”).
c. Spot Sale
10. On the First Tawliah Maturity, the Client will request IFI to sell
the Underlying Asset pursuant to the Promise to Spot Sale. IFI
shall sell the Underlying Asset on spot (the “Spot Sale”) after
acquiring for Spot Sale Cost, and then sell it to the Client for the
Spot Sale Price. It is likely that Spot Sale Profit will be determined
based on the current Tawliah Outstanding Amount.
d. Spot Purchase
11. Upon execution of the Spot Sale, the Client has the option to sell
the Underlying Asset purchased pursuant to Spot Sale to a) a third
party and realize the amount as per the mutual agreement, or b)
IFI for an amount equal to Spot Sale Cost (“Spot Purchase
Price”).
12. Spot Sale Price, payable to IFI, could be more than Spot Purchase
Price, payable to the Customer, despite the bilateral nature of the
transaction and this shall not constitute In’ah Sale because its spot
sale against spot purchase with no deferment in the settlement.
13. The net of Spot Sale Price and the Spot Purchase Price will be Spot
Sale Price which is payable by the Client to IFI.
Conclusion
14. It is envisaged that the above solution of multiple sale
transaction(s) (“MST”) would address the Shari’a concerns which
are prevalent in the standard roll-over of Murabaha Facilities with
automatic settlement of the existing debt. One of the main
reasons of viability of this solution is that there is no roll-over of
any outstanding debt against profit charging. Every time, the
Tawliah Outstanding Amount is deferred for next 3 months.
15. It is worth noting that if the Client defaults, then IFI has no right
to claim profits of future MSTs, and the IFI’s claim will be
confined to Tawliah Outstanding Amount and any amount
outstanding on Spot Sale Price, if any.
Appendix A: Illustration in Figures
Particular e.g. From To Note
Drawdown Date (T+0)
Tawliah Price AED 1 Client IFI - The Client receives
Billion liquidity upon sell
 the Underlying Asset
to third party.
- Tawliah Due
Amount to be paid
T+90.

First Tawliah Maturity (T+90)

Tawliah Due AED 100 Client IFI - The Client is
Amount M supposed to pay
part of Tawliah
Price
Tawliah Settled AED 100 Client IFI - The amount
Amount M actually paid by the
Client.
Tawliah AED 900 Client IFI - The amount to be
Outstanding M paid by the Client
Amount on the next
Maturity.
Spot Sale (T+92)
Spot Sale AED 10 IFI Supplier - The amount paid by
Cost M IFI to acquire the
Underlying Asset to
be sold to the Client
on Spot Sale.
Spot Sale AED 20 Client IFI - = Spot Sale Cost
Price M (AED 10M) + Spot
Sale Profit (AED
10M) (to be
calculated based on
the Tawliah
Outstanding
Amount)
- Price payable by the
Client to IFI on spot.
Spot Purchase (D+92)
Spot Purchase AED 10 M IFI Client - Price payable by IFI
Price to the Client on
spot.
Square-off (D+92)
Sale price to AED 10 Supplier IFI - Price payable by
supplier M supplier of the
Underlying Asset to
IFI on spot.

ZZZ
Buy Now Pay Later (BNPL): A Shari’a
Perspective
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 9th February 2024.
===============================================
Introduction
If you use online platforms to purchase goods and services, you'll
find two payment options at the checkout: either immediate
payment (the most-likely choice) or "Buy Now, Pay Later," which is
the subject of this discussion. Recently, Shari’a compliant solutions
have emerged in the online shopping space. In this short write-up,
we will explore this mechanism from a technical, financial, and then
its Shari’a characterization.
1. Technical Overview
The mechanism of “Buy Now, Pay Later" is a short-term financing
method, mostly referred by its abbreviation "BNPL". Globally,
companies like Affirm in the United States, After-pay in Australia,
and Klarna in Sweden dominate the BNPL market by having one-
two-third share of the global market. In recent times, some local or
regional companies offering this service have emerged in the Arab
world.
1.1. Purpose of the Mechanism
The purpose of this mechanism is to ease the financial burden on
consumers. If a consumer wants to buy a refrigerator for $ 900, it
may be difficult for the consumer to pay the full amount in one go.
However, if the amount is divided into 3 or 6 monthly payments, the
financial burden becomes more manageable.
1.2. Similar Solutions
1.2.1. Easy Payment Plan (EPP)
 BNPL mechanism differs from the "Easy Payment Plan" (or more
commonly referred as EPP) in that the latter is based on the
cardholder's commitment to pay a specified amount of the limit of
the credit card or the covered card within an agreed-upon period. In
exchange, the card issuer may forgo or lower the monthly profits or
charge a one-time fee. EPP involves making instalments of the debt
owed to the credit card issuer or the instalment of the cover amount
required on a covered card. While the EPP allows cardholders to pay
their debt in instalments after the transaction, this feature is not
present in the BNPL mechanism.
1.2.2. Instalment Sales
The "Instalment Sales", or as referred in Fiqh as bayꜤ taqsīṭ,
offered by sellers differs from the BNPL mechanism. Under
Instalment Sales, the buyer can pay the price in instalments, with
specified instalment amounts and due dates agreed upon. This
instalment payment makes the unpaid price a debt owed by the
buyer. The parties involved in this transaction are the seller on credit
and the buyer on credit. The Instalment Sale aligns with the BNPL
mechanism in that consumers can choose to pay the price in
instalments. However, it differs in that Instalment Sale involves two
parties: the seller and the buyer on credit, while BNPL involves three
parties: the seller, the consumer, and the BNPL provider.
1.3. Modus Operandi
1.3.1. For the Consumer (the Cardholder):
The modus operandi of BNPL involves the BNPL provider and
the consumer (the cardholder) as follows:
a. When the cardholder reaches the payment stage, he can choose
the BNPL option offered by the BNPL provider. The cardholder
is required to provide his basic information as well as the details
of the credit or covered card he possesses, and the analysis of
this information results in a soft credit check.
b. If this stage is successfully completed, the cardholder can receive
the goods or services he chose to purchase or request their
delivery.
c. The periodic or monthly instalments will be deducted from the
cardholder's account on specified dates. For example, if the
price of the refrigerator is $ 900, and the cardholder chooses a
3-month option, $ 300 will be deducted from the cardholder's
 account on specified dates. Paying the price in instalments will
not impose any financial burden on the cardholder, as the
company providing the BNPL service or the card issuer will not
charge any interest or administrative fees.
d. In case the cardholder delays in paying the instalment on time,
the BNPL provider will charge a late fee or a charitable amount
will be donated.
1.3.2. For the Service Provider Company and the Seller:
If we assume that the BNPL provider offering BNPL does not
charge fees from the consumer, and the selling party does not
increase the price of the sold goods or services, why then would the
BNPL provider want to engage in these activities? Therefore, we need
to consider the business and financial mechanism that connects the
BNPL provider and the selling party.
a. The BNPL provider will enter into a memorandum of
understanding with the selling party that outlines the important
implementation matters related to the transaction.
b. After seven days from the transaction date, the BNPL provider
will pay an agreed-upon amount to the selling party. For
example, if the instalment amount is $ 900 (to be paid in three
periodic instalments), the BNPL provider will pay $ 800 to the
selling party.
c. On specified dates, the cardholder will pay the required
amounts on the scheduled payment dates, thus results in the
extinguishment of the debt. The BNPL provider has the claim
of the entire amounts received from the consumer on the
specified dates.
2. Shari’a Characterization
Before expressing an opinion or issuing a Shari’a ruling regarding
the aforementioned mechanism, we must carry out the Shari’a
characterization of the modus operandi.
2.1. Sale of Debt
According to Step (b), mentioned in point (1-3-2), if the amounts
paid by the BNPL provider is for acquiring the unpaid debt (i.e.,
amounts of deferred instalment), then this falls under the category of
sale of debt (bayꜤ al-dayn) from the selling party to the BNPL
provider. As the transaction occurs at a price lower than the nominal
value of the debt, this is known as debt discounting in financial
terms. Under this purchase, if the cardholder fails to make periodic
payments, due to card closure for some reason, the BNPL provider
cannot demand from the selling party the amount paid on the
seventh day of the transaction, as per Step (b) given in (1-3-2).
And according to Step (c) mentioned in point (1-3-2), if the
transaction involves the sale of debt, then the increase obtained on
the periodic payment dates from the amount paid on the seventh day
will be for the BNPL provider. For example, if the BNPL provider
paid $ 800 to the selling party on the seventh day of the transaction,
and the total amount it received at the end of the service period was
$ 900, then the company owns the increase (which is $ 100) because
it owns the entire debt.
2.2. Interest-Free Loan
If the BNPL provider does not own the unpaid debt – where the
selling party continues to bear the risk of non-payment or credit risks
– and it is required for the selling party to return what was received
on the seventh day of the transaction, then the amount paid by the
BNPL provider to the selling party shall constitute an interest-free
loan.
The BNPL provider does not bear any risks of non-payment in
this case, and it does not deserve the increase obtained from the
principal amount of the interest-free loan.
2.3. Service Agency
If the BNPL provider wishes to collect the increase on the loan
amount without interest, then the increase represents the service fee.
Hence, pursuant to the service agency agreement, the company acts
as a service agent, and the selling party is the principal. The company
collects the amounts through its platform on the periodic payment
dates and remits them to the selling party. These amounts extinguish
(settles) the principal of interest-free loan, and whatever surplus is
agent’s fee (e.g., if the amount of periodic instalments is $ 900, and
the BNPL provider lent $ 800 to the selling party, so the service fee is
$ 100). The fee is usually a percentage of the loan amount, and not a
fixed amount, unless the amount of purchase was too small.
If the transaction involves an interest-free loan, the risks of non-
payment are borne by the selling party, unless the selling party
stipulates imposition of liability (taḍmīn) upon the service agent. In
this case, if the cardholder defaults or the card is closed, the service
agent is liable for the unrecovered amount, and it is not the
responsibility of the selling party to return what was paid to them on
the seventh day of the transaction.
3. Shari’a Opinion
Considering the foregoing, the Shari’a opinion is as follows:
3.1. Debt Sale
If the amount paid by the BNPL provider to the seller on the
seventh day from the transaction date is for the purchase of unpaid
amounts, i.e., selling debt at a discount, and the risks of non-payment
are transferred to the BNPL provider, then this transaction is
prohibited by the virtue of Shari’a because it falls under the category
of ribā al-faḍl (riba of excess) and ribā al-nasā’ (ribā of delay). It is
stated in s. (5/1) of AAOIFI Shari’ah Standard No. (59): Sale of Debt:
"It is not permitted to sell a monetary debt against cash or for a
monetary debt". Therefore, monetary debt in this context refers to the
unpaid instalment amounts, and the money refers to what was paid
by the BNPL provider. The ruling does not vary whether the debt is
purchased (e.g., $ 900) at nominal value (e.g., $ 900) or for less (e.g.,
$ 800) or more (e.g., 1000 dinars).
3.2. Interest-Free Loan
If the amount paid by the BNPL provider is an interest-free loan,
the initial proposition (al-aṣl) is the permissibility of interest-free
loan transaction between the two parties. However, the mentioned
scenario does not only involve a loan, as the BNPL provider does not
actually benefit from lending to the sellers without incorporating
another structure with it. Therefore, the scenario combines a loan
contract with agency, which is known as "bay' wa salaf " (sale and
loan). Imam Ibn al-Qayyim stated: "Combining a loan and sale is
prohibited because it carries the means to riba in loans, by taking
more than what was given". Dr. Nazīh Ḥammād also added in his
book on composite contracts: "There is no difference of opinion
(khilāf) among scholars that the ruling of its prohibition and vitiation
applies to the combining of a loan with Salam sale, loan with currency
exchange, and loan with Ijarah (leasing) because they all involve
concurrent sales with a loan." (Al-ꜤUqūd al-Murakkaba, pg. 14).
However, combining them is permitted if there is no mean to riba by
avoiding favouritism (muḥāba), so it is permitted for the service
agent to lend the principal if the agency fee is equivalent to the
standard rate. The agency contract should be separate from the loan
contract, so if one contract is breached, the other remains valid in full
force. This occurrence is unlikely, as the standard fee for collecting
this amount through the platform does not exceed a few riyals or
dirhams and is not a significant percentage of the amount paid,
regardless of whether the amount increases or decreases.
In the structure of lending and agency, it is invalid for the agent
to assume the risks of non-payment. The agent is only liable in case
of misappropriation, negligence, violation of conditions, and terms.
Therefore, if the cardholder defaults on the payment, the selling
party must refund the $ 800 borrowed on the seventh day of the
transaction, and the seller must pay the agreed-upon agency fee,
subject to the conditions mentioned in point number (2). If the agent
committed misappropriation or was negligent, he should bear the
risks of non-payment of the $ 800.
3.3. Rectifying the Shari’ah Defect
The Shari’ah defect can be rectified through various ways given
below.
3.3.1. Instalment Sale Solution
The transaction can be structured on the basis of an instalment
sale. The seller must sell the goods or services to the BNPL provider
at a price equal to the nominal value, after deducting the amount
taken as a fee or charges (for example, if the goods are priced at $
900, and the expected charges are $ 100, then the price would be $
800). After the purchase is completed, the BNPL provider can sell the
goods or services to the cardholder at a deferred and instalment-
based price on specific dates.
The goods or services may be specific (identified) or specified-
cum-unidentified (mawsūfa fi dhimma). If the goods are identified
through physical possession, indication, or custody, then the
provisions of the general sale and the instalment sale shall apply
accordingly. Hence, the BNPL provider is not permitted to sell to the
cardholder before acquiring ownership of the goods or services that
are intended for purchase by the cardholder. If the goods are not
specific but have specified specifications, and upon delivery the
appropriation (identification) of the goods takes place, then such a
sale is governed by the provisions of sale of specified-cum-
unidentified, whether it is Salam or Istisna’, shall apply.
 In most e-commerce transactions, the buyer does not take
possession upon completion of the transaction, and the subject of the
contract is not specific (identified). Instead, the parties agree on
specified specifications, avoiding any incognizance leading to
dispute. In such cases, the seller may conclude the sale contract
before acquiring or taking possession of the good or entering into a
sale contract at parallel level or earlier. Hence, if the cardholder
wishes to purchase a refrigerator, the BNPL provider (acting as the
Istisna seller) can conclude an instalment sale contract based on
Istisna with the cardholder (acting as the Istisna’ buyer) before the
BNPL provider concludes the base Istisna’ contract with the selling
party (acting as the Istisna seller in a parallel Istisna). Deferment or
expediating the Istisna’ price is permitted as agreed by both parties,
as stated in s. (3/2/2) of AAOIFI Shari’a Standard No. (11) Istisna
and Parallel Istisna: (It is permitted to defer the price of Istisna, or to
divide it into known instalments for specified terms).
However, a technical issue may arise if the specified-cum-
unidentified goods in the contract are not suitable for workmanship
(ṣanꜤa). In such cases, as an initial proposition, the sale is governed
by the provisions of Salam sale, which requires expediting payment
of the price and not delaying it beyond a maximum of three days
from the contract date. Hence, if the cardholder purchases an online
purchase of fruits and vegetables and wishes to avail BNPL option so
he is required to pay the price immediately to the BNPL provider,
and in exchange the BNPL provider must pay the price in full to the
selling party. This mean impermissibility of making instalments of
Salam price, as mentioned in s. (3/1/3) of AAOIFI Shari’ah Standard
No. (10): Salam and Parallel Salam: (It is required to take possession
of the capital of Salam in the contract meeting, and it is permitted to
delay it for two or three days at most, even with a condition).
Nevertheless, there is a juristic solution mentioned in the books
of jurisprudence for cases that require immediate possession at the
time of the contract. It allows the buyer to provide the price in
advance based on a promise to purchase, and the sale is concluded
upon the actual delivery. What the seller receives in advance is held
in trust, and upon delivery, possession of the price is flipped from the
trust-based possession to ownership possession. Under this solution,
the sale with instalment payments can be concluded for specific
goods upon delivery. The issue lies in the promise to purchase in this
scenario where the promise should be unilaterally binding upon the
promisor, and it should not be bilaterally binding upon both the
parties. What happens in e-commerce is a bilateral binding promise
upon both the parties and an arrangement of bilateral binding
promise on the sale of a specific subject of sale is not permitted.
And perhaps the possible solution for such goods that is non-
manufacturable is the sale of Tawrīd. By use of tawrīd over here, it is
not mean procurement of goods or services at regular intervals, as
usually mentioned in the resolutions of collective ijtihād by Fiqh
academies, but rather it refers to what is mentioned in the definition
by the esteemed Dr. Abdul Wahab Abu Sulaiman: (A contract on a
permissible specified-cum-unidentified corporeal property, defined by
certain characteristics, for a deferred known price to a known time),
(see: Fiqh al-MuꜤāmalāt al-Ḥadītha; pg. 90 On this basis, the
instalment sale contract for these goods can be construed as sale of
Tawrīd with a deferral of both considerations
Whether the subject of sale is specific or specified-cum-
unidentified (either in Istisna’ or Tawrīd), it requires there should be
no absence of assumption of the risk (i.e., the physical risks of the
goods or services), rather the risk should transfer from the seller to
the BNPL provider, and then to the cardholder. It is not permitted if
the risk directly transfers from the selling party to the cardholder.
Upon completion of both legs of the transaction, the selling party is
entitled to receive the price on the seventh day of the transaction, and
the amounts collected during the periodic repayment period belong
to the BNPL provider.
Regarding services that are not identified (i.e., specified-cum-
unidentified), the matter is much simpler because the BNPL provider
and the consumer can enter into Forward Ijarah where contractual
restriction does not exist as the way of Salam sale.
3.3.2. Commodity-based Debt Trading
The transaction can be structured based on the commodity-based
debt trading (in Arabic: tadāwul al-silaꜤī lil-duyūn). After completing
the usual transaction between the selling party and the cardholder,
on the seventh day of the transaction, the BNPL provider offers a
tradable commodity to the selling party, with its price equivalent to
the value of the unpaid debt, i.e., the amounts of the periodic
instalments. With this structure, the BNPL provider will not bear any
real (corporeal) risks of the goods or service sold to the consumer on
the first day of the transaction, and it does not require involving the
BNPL provider in the deal concluded on the transaction date. Also,
the selling party will not bear any risks of non-payment after
completing the transaction of commodity-based debt trading.
It is permitted to carry commodity-based debt trading according
to the resolution of the Islamic Fiqh Academy in Makkah and as per
s. (5/2) of AAOIFI Shariah Standard No. (59): Sale of Debt, which
states: "It is permitted to sell a monetary debt for a commodity with
spot delivery." The excess amount collected over the amount paid on
the seventh day of the transaction shall belong to the debt owner, i.e.,
the BNPL provider.
3.3.3. Commodity Murabaha Solution
If the BNPL provider wants to have the right of recourse to the
selling party in case the cardholder fails to pay, the transaction can
be structured based on Murabaha with deferred payment and the
assignment of rights. Thus, a Murabaha transaction is concluded on
a spot commodity between the selling party (as the buyer in
Murabaha) and the BNPL provider (as the seller in Murabaha) on
the seventh day of the transaction, with its cost equal to the amount
intended to be paid to the selling party. The selling party then assigns
the BNPL provider to the unpaid instalments. For example, if the
value of the deferred instalments is $ 900, the BNPL provider will sell
to the selling party a spot commodity with the purchase cost of $ 800,
for a total price equivalent to $ 900. To secure the payment of the
price, the selling party assigns the company to the unpaid
instalments, and the receipt of the amounts will be considered as
paying the due price under the Murabaha contract concluded on the
seventh day of the transaction between the BNPL provider and the
selling party. If the cardholder fails to pay the instalment, the BNPL
provider has the right of recourse to the selling party to receive what
is short of the unpaid Murabaha price.
Whether applying the commodity-based debt trading or the
commodity Murabaha, it is necessary to observe the provisions and
rules of the commodities sold for Tawarruq and obtaining liquidity,
as stated in AAOIFI Shari’ah Standard No. (30): Tawarruq.
3.4. An Increase over the Debt Amount
 Any increase the BNPL provider takes over the agreed-upon
periodic instalment amount constitutes a form of penalty for delay,
which is a form of ribā of debts (ribā al-duyūn) that is prohibited by
the virtue of Sharia. The same ruling applies if the selling party
increases the monthly instalment amount due to delay in settling the
payments. However, if the increase is taken and spent on charitable
causes on behalf of the cardholder, then such a treatment is
permitted, as stated in s. (5/6) of AAOIFI Shari’ah Standard No. (8):
Murabaha: "It is permitted that the contract of Murabaha stipulates
an undertaking by the buyer customer to pay an amount or a
percentage of the debt, on the basis of undertaking to charity in the
event of delay on his part in settling the instalments on their scheduled
dates". If there are direct actual costs, the BNPL provider or the
selling party is entitled to deduct them from the paid amount, and
the remainder is spent on charitable causes, without benefiting from
the amount.
3.5. Role of the Cardholder in the Transaction
If the transaction is not structured according to the Shariah
guidelines mentioned in Point No. (3) of this paper, it seems that the
cardholder's participation in the transaction by requesting
instalment payments constitutes direct cooperation to the BNPL
provider for earning from ribā (interest-based earning). Therefore,
the consumer should avoid this solution unless he reviews a certified
Shari’a pronouncement (i.e., Fatwa) that clearly outlines the
mechanism of the BNPL provider's dealings with the consumer and,
more importantly, its dealings with the selling party. It should
explicitly mention the methods of profiting from the service to avoid
any suspicion (shubha).

ZZZ
Rent-Now-Pay-Later (RNPL): A Shari’a
Perspective & Alternatives
Dr. Yousuf Azim Siddiqi
===============================================
Published on Author’s LinkedIn page on 4th March 2025.
===============================================
Background
In the recent years across the world, Fintech solutions for
deferred payment have emerged in non-banking industry.
One of the most famous ones is Buy-Now-Pay-Later (BNPL)
wherein mainly the consumers were able to acquire a desired asset
and pay an advance (or a nominal) amount to acquire the underlying
asset with an agreement to pay the price on deferred payment to the
seller. There would be a service provider of BNPL that would pay the
net outstanding amount (after deducting its fee) to the seller and in
return claims the full outstanding price from the consumer.
BNPL was subject of Shari’a study and consideration. I have
written down a LinkedIn paper titled: (Buy Now Pay Later - A Shari’a
Perspective).
Later, Islamic Economics Form, a world renowned What’s App
group, issued a joint statement wherein it was concluded that the
current forms BNPL are not Shari’a compliant by stating: (the
transaction in its current form contradicts the principles of Shari’ah,
and it is not permitted for anyone to enter into it or assist in it).
With passage of time, different forms of deferred payment have
emerged. One of the features remained common among all the
solutions: ease of payment for the consumer.
One of such solutions is Rent-Now-Pay-Later (RNPL) which can
be also referred as Lease-Now-Pay-Later (LNPL) or Book-Now-Pay-
Later.
 Globally, there are two major firms in this field: Flex and
Domuso. Regionally, some of the emerging players are Keyper,
Rently, ezy and Prypco.
What makes RNPL different from the standard BNPL model
(related to buying goods) that the BNPL serves as a zero-rate
financing tool for the consumer, but it generates returns from the fee
model with the merchant.
On the other hand, under the RNPL model, it could be both ways.
Hence, the lessee (i.e., the consumer) might be in need of cash to
regularize his cashflows. Or the lessor (i.e., the vendor) may want to
turn his property into more leasable by offering a solution of deferred
payment for the lessee with no additional payment.
In this short-write-up, we shall present both the options and the
Shari’a alternatives that can be applied.
Scenario (A): The Lessee wants to regularize his cashflow
Imagine a scenario, the lessee (i.e., the consumer) signed (or
finalized) an agreement to lease a property from a landlord for an
annual rent of AED 100,000/- to be paid in (1) one or maximum (2)
two instalments. The consumer does not have enough cash flow to
make the payment in lumpsum or in 2 instalments. In the absence of
RNPL, the consumer will either lose the property leasing option or
struggle to manage funds privately.
Under the RNPL scheme, the consumer simply logs into the
RNPL website and enters the amount of rental and the number of
instalments he shall be paying. The amount to be paid to the RNPL
provider is always more than the amount to be paid by the RNPL
provider to the landlord of the consumer. Hence, if the consumer
was supposed to pay 2 instalments to the landlord, then the excess
amount charged to the consumer in this case will be more than if the
consumer is supposed to pay 6 instalments. It means, a longer gap
implies higher cost of fund for the consumer.
From Shari’a perspective, the lease arrangement between the
landlord and the consumer is independent from any arrangements
made by the consumer to secure the funds due from him. Further,
the additional amount charged by the RNPL provider over the
original amount paid by the RNPL provider to the landlord is
actually a form of interest that is referred in Shari’a as riba of loans,
where the lender (i.e., the RNPL provider) agrees to recover from the
borrower (i.e., the consumer) more than the loaned amount.
Certainly, this form of riba that is prohibited by all means as per
Shari’a.
RNPL provider may provide any of the following alternatives to
the prevailing Shari’a non-compliant mode of financing.
Solution (A-1): Lease and Sub-lease
RNPL provider may enter into the lease arrangement that is
existing between the consumer and the landlord, in the following
way:
1. The consumer approaches the RNPL provider for financing
of rental amount due.
2. RNPL signs a tripartite agreement with the landlord and the
consumer. Pursuant to the agreement, the existing lease
between the landlord and the consumer is revoked.
Simultaneously, a new lease arrangement replaces the
revoked lease so that the RNPL provider is the new lessee of
the tenant for a rent of AED 100,000/- to be paid in one
instalment.
3. RNPL provider subleases the property to the consumer for a
higher rent (i.e., AED 107,000/-) to be paid in 2-3
instalments.
Some of the key features of this solution:
1- The RNPL provider has to sign cancelation contract between
the landlord and the consumer.
2- A fresh lease is signed between the RNPL provider and the
landlord.
3- In case of any damage or loss of the usufruct, RNPL provider
is liable in front of the consumer, and simply the liability
cannot be passed directly to the landlord.
Solution (A-2): Tawarruq Financing
RNPL provider may simply generate cash from a Shari’a
compliant mode of investment, and the consumer is liable to pay the
profit over the facility, in the following way:
1. The consumer approaches the RNPL provider for financing
of rental amount due.
2. RNPL identifies any Shari’a compliant asset that has high
liquidity with no or low-price volatility (e.g., LME metals in
 the OTC, National Bonds certificates, Nasdaq certificates,
shares, etc.) (“Shari’a Asset”).
3. RNPL provider buys Shari’a Asset for a value equal to the
annual rent to be paid by the consumer to the landlord. In
the above example, RNPL provider buys Shari’a Asset worth
of AED 100,000/- from its supplier.
4. Upon acquiring the Shari’a asset, the RNPL provider sells the
Shari’a Assets to the consumer on Murabaha basis where the
sale profit and the cost of purchasing (acquiring) the Shari’a
asset is disclosed to the consumer. Pursuant to the terms of
payment, the consumer agrees to pay the Murabaha Price
(e.g., 100,000 + 7,000) in a specified number of installments.
5. Once Murabaha is executed, the consumer is free to dispose
the Shari’a Asset as he wishes. Most probably, the consumer
shall sell the Shari’a Asset, and the liquidity generated is used
to pay the landlord in a lumpsum payment.
Some of the features of this solutions:
1. The RNPL provider does not have to revoke or amend any
existing legal arrangement between the consumer and the
landlord.
2. The RNPL shall have no liability towards to the consumer in
relation to suitability of the leased asset. The entire liability
rests with the landlord.
3. The amount of profit is fixed and guaranteed from the date
of transaction and does not depend on the performance of
any underlying asset.
Scenario (B): The Lessor wants to expand his business
Imagine a scenario, the landlord is not able to lease his entire
building because most of the lessees want to pay the annual rent in 8
or 12 instalments. This is not a favourable business proposition for
the lessor.
Hence, the RNPL provider enters the picture and have an
agreement with the landlord, so that the RNPL provider pays the
amount promptly to the landlord but deducts a service fee charged
to the landlord. The RNPL provider recovers the regular rent from
the consumer (with no hike) in 8 or 12 instalments. So, if the annual
rent was AED 100,000/-, the consumer ends up paying 8 instalments
with each one valuing AED 12,500/-. However, the landlord receives
net of rental receivable (i.e., the amount agreed by RNPL provider to
pay on behalf of the consumer) and fee payable (by the landlord to
the RNPL provider). Hence, if the fee was 0.5% per month, then the
landlord will receive AED 94,000 (=AED 100,000 – 6000).
From Shari’a perspective, the above arrangement is akin to
conventional BNPL wherein a BNPL provider agrees to pay the sale
price to the merchant within 5-7 days but charges a fee to the
merchant and in return recovers the full price from the consumer.
Certainly, this is Shari’a non-compliant because it is a profit
generating loan for the RNPL provider.
RNPL may provide any of the following alternatives to the
prevailing Shari’a non-compliant mode of financing.
Solution (B-1): Lease and Sub-lease
RNPL provider may be part of the lease arrangement between the
consumer and the landlord, in the following way:
1. Upon finalization of contract terms and condition, the
consumer approaches the RNPL provider for deferring the
rental amount into 12 monthly instalments instead of 1 or 2
instalments.
2. RNPL providers leases the property from the landlord for a
rent amount which is equal to net of rent receivable and fee
payable. In the above example, the rent amount shall be AED
94,000/.
3. RNPL provider subleases the property to the consumer for a
higher rent (i.e., AED 100,000/-) to be paid in 12 instalments.
Some of the features in this solution:
1- RNPL provider holds liability for the leased asset, and simply
the liability cannot be passed directly to the landlord.
Solution (B-2): Commodity Trading of Debt
RNPL provider may simply acquire the outstanding debt owed to
the landlord and charge a profit, in the following way:
1. Once the lease contracts are executed, with the option of
RNPL, between the consumer and the landlords (who are
already listed with the RNPL), the list is generated on the
next day and sent to the RNPL provider. Let’s say, the total
value of RNPL transactions was AED 5 million. Each
transaction valuing AED 100,000/-.
 2. RNPL provider purchases any Shari’a Asset [as defined in
Step (2) or (A-2) for a value equal to net of rent receivable
and fee payable. In the above example, the amount shall be
AED 94,000/.
3. RNPL provider sells Shari’a Asset to the landlord against
transfer of rent receivables from the landlord to the RNPL
provider. With such a conveyance, the credit risk of the
receivables transfers to the RNPL provider.
4. Once sale of Shari’a Asset takes place, the landlord is free to
dispose the Shari’a Asset as he wishes. Most probably, the
landlord shall sell the Shari’a Asset and generate immediate
liquidity (in the above example it will be AED 94,000/).
5. RNPL will be entitled for the instalments paid by the
consumer and shall recover in aggregate AED 100,000/-.
Some of the features in this solution:
1- RNPL provider holds no liability for the leased asset.
2- RNPL provider assumes risk of the receivable once the debt
trading takes place against Shari’a Asset.

ZZZ
Dynamism of Wakala investment in
Islamic treasury
Dr. Yousuf Azim Siddiqi
===============================================
Published in Islamic Finance News (IFN) on 25th November 2015.
===============================================
Over a period of four decades, offerings of the Islamic banking industry have evolved
from a set of substitutes to conventional products to a reality of infusion of Islamic
jurisprudence requirements with modern banking needs OR YOUSUF AZIM
SIDDIQI gives an update of Islamic treasury, particularly Wakala investment.
Historically, financings of Islamic banking were mostly based on
asset trading or leasing wherein the financial obligor is looking to
source Shariah compliant financing to acquire an asset for his
personal usage. Products like auto Murabaha, goods Murabaha and
property Ijarah were the shining stars which aptly met customers'
requirements.
Although the challenge faced by Islamic banks in creating retail
and corporate structures was big, but it was immense and mind-
taxing when it came to treasury, money markets, investments and
fixed income instruments. The commendable efforts by Shariah
scholars across the world have opened new avenues for promoting
new products and suggesting bespoke solutions.
The biggest challenge for the industry was to create solutions, ana
even standardized products, to meet customers' liquidity
requirements. Since earning money on money without the backing
of assets, efforts or services is not permissible as per Shariah, so
commodity Murabaha, which despite being legally risky and
operationally lengthy, was looked upon as a blue-eyed solution by
most of the practitioners of Islamic treasury.
In the coming years, Islamic treasury discovered a new solution
of Wakala investment whereupon excess liquidity can be placed with
a financial institution which has to manage the funds in accordance
with Shariah through placing it in profit-generating Shariah
compliant assets.
Wakala investment is operationally easier than commodity
Murabaha because it involves no acquisition of underlying assets and
the subsequent sale and purchase and then realization of funds.
Rather, Wakala investment is based on the investor bank's offer to
invest and the investee bank's acceptance to invest and funds are
transferred.
It also did not consist of taking risks in unrelated assets like metals
or pearls. Rather, the investor bank takes the risk of financial assets
managed by the investee bank.
Now comes the question which has confused many practitioners:
Where to invest? In a traditional investment agency, the investor
hands over funds to the agent (investee), who Invests them on behalf
of the investor in different profit-yielding commercial activities. For
example, A, being an investing agent, will buy cars with funds
provided by B, being an investor. And subsequently, A will sell these
cars over a period of time and hand over the realized profits to the
investor against an agreed upon fee to the agent. This implies that
funds start generating revenues only when they are duly deployed.
Also, the investor cannot claim the investment amount if it was
payable by a third party (i.e., buyer of the car). Due to complications
in the banking business, a traditional investment agency cannot
function as a day-to-day money market product.
Alternatively, in Wakala investment, used in Islamic treasury, the
investor buys a common share of existing profit-generating assets of
the investee bank.
And it is also agreed that the investee bank has to manage the
same in accordance with Wakala investment conditions. For this, it
should be ensured that the Islamic bank's balance sheet has sufficient
existing financings such as Ijarah, Musharaka and real estate which
will constitute the portfolio of the Wakala investment. It should be
ensured that the assets of the Wakala investment are fully Shariah
compliant. Hence, a Wakala investment cannot be placed with a
conventional bank which does not have enough sufficient Shariah
compliant assets to back the principal amount of Wakala.
 Wakala investment is a time-bound arrangement which
facilitates the smooth exit of the investor through re-purchasing of
the Wakala assets by the investee agent. The exit price can be a result
of multiple factors (time, market rate of financing, amount, etc). The
investor can request for an early exit from Wakala investment against
a pre-agreed formula or against a fair value of the Wakala assets.
In Wakala investment, the investor places funds with the investee
against an expected rate of profit. In cases where the actual profits
are higher than the expected rate, then the investor receives the
expected profit amount, and the remaining is the investee's incentive.
On the other hand, if actual profits were lower than expected
profits, then the investor receives the actual profit and no incentive
is given to the investee Besides incentives, the investee is entitled to
receive a fee which a flat amount or a percentage of the principal
amount.
Since Wakala investment represents Shariah compliant tradable
assets, it is permitted for the investor, being the principal and owner
of the asset, to sell his Wakala investment to a third party on a
premium or discount. Hence, Wakala investment can be an open
avenue for a Shariah compliant range of derivative products which
serve the goals of the Islamic economy in a controlled and non-
speculative way.
The concept of trading the underlying Wakala investment was
innovatively applied by Emirates Islamic and NASDAQ Dubai
through developing the NASDAQ Murabaha Platform which has
proved to be one of the most efficient liquidity management
solutions in the Islamic banking industry. The overall size of the
platform is RM2.3 billion (US$523.44 million).

ZZZ
Wakala-based Nasdaq Certificates:
Shari’a Compliant Liquidity Solution
Dr. Yousuf Azim Siddiqi
===============================================
A paper on the idea on utilizing the concept of Wakala investment for liquidity
management in Tawarruq-based transaction, instead of metals or shares. Submitted
for publication in 2016 to a journal but never published.
===============================================
Introduction
Since 1975, Islamic banks were, up to large extend, successful in
meeting their customers’ various needs and demands. The scope of
products varied from simple plain vanilla products of retail, SME,
corporate to highly complex and articulated products offered to
treasury, financial institutions and government entities.
At the inception of Islamic banking, products such as auto-
finance and goods finance addressed customers’ basic product
appetite. With complexity in the over-all economic cycles, more
products were rolled out such as home-finance, credit cards and
education financing. On the larger scale, Islamic banks were
successful to offer Shari’a compliant Sukuk which were a good
substitute of conventional bonds. Since Islamic banking advocated
asset-backed financing so various mercantile contracts (like sale,
lease, agency, partnership) were the primary point of reference. All
such products were aimed to acquire an asset and or a service for the
benefit or demand of the customer. Although operational changes,
for Shari’a compliant execution, were needed but over-all the Islamic
products were efficient when it comes to their end utility. For
example, auto Murabaha helped the customer of an Islamic bank to
acquire a vehicle in a fashion which was different but somehow less
tedious for the end consumer. Similarly, Islamic banks’ mortgage
solutions were preferred by customers because the Islamic bank was
not charging any rent without leasing a delivered and completed
property. Some products and services were offered without backing
of an underlying asset. But such products were either marginalized
or very small in numbers.
Having said that, Islamic banks did face some serious challenges
when it came to conceptualization of some products such as credit
cards and liquidity management solutions. Structures such as Qard
Hasan with Ijarah of services, and Murabaha based Covered Card
were useful attempt to provide solutions to credit cards. However,
the fact remained that suggesting solutions to provide liquidity in
compliance with Shari’a remained a difficult task for Islamic banks.
Liquidity Generation in Shari’a
As it is given, Islamic banking mostly uses mercantile contracts
for entertaining different customers’ financing needs. Also, Islamic
banks, as a core principle, cannot consider cash as a profit generating
asset which can produce more cash without exerting efforts on it (like
deploying it in a partnership or service arrangement) or converting
it to a physical asset (or service) and then selling (or leasing) the same
on profit. This made the task of suggesting liquidity solutions were
difficult. Thoughts of using the standard Islamic banking products
(where the customer goes ahead and liquidates the financed asset)
were ruled out. This has 2- fold risk:
a. Price Risk: once the customers buy the asset then there are many
chances for price volatility going against customer’s
expectation. You buy a car for USD 100,000 on auto Murabaha
but by the time you sell it there are chances that price goes down,
for example, to USD 90,000. And the customer ends up paying
profit on USD 100,000 although he received lesser amount.
b. Liquidity risk: once the customer buys the asset then there are
many chances that no one would be ready to buy it from him.
This is referred as risk of liquidity.
In Islamic financial jurisprudence, liquidity can be generated
through 2 contracts: Qard Hasan (i.e. interest free loan) or Hiba (i.e.
gift). Since both these contracts have limited, or negligible,
application in the business of banking so different arrangements are
always sought after. In Islamic financial jurisprudence, we can find
traces of complex arrangements of liquidity generation and
monetization like Bai Wafa, Bai In’ah and Tawarruq. And as per
AAOIFI’s Shari’a Standard No. (30), Tawarruq was defined as:
“the process of purchasing a commodity for a deferred price
determined through Musawwmah (Bargaining) or Murabaha (Mark-
up Sale), and selling to the a third party for a spot price so as to obtain
cash.”
Solutions of Tawarruq
In the early 21st century, Islamic banks started exploring different
ways to execute Tawarruq because it was one of such arrangements
which were neither controversial (like Bai In’ah or Bai Wafa) nor
irrelevant (like Murabaha of semi-fixed assets). It was ensured that
while applying Tawarruq basic Shari’a rules are clearly observed, for
example, a subject of sale should be duly allocated, no Murabaha is
executed unless the seller acquires the subject of sale and customer’s
account is not credit with cash unless his commodity is duly sold to
a third party.
In this regard, commodity Tawarruq was introduced to Islamic
banks in the Middle East. Mostly the commodity brokers (e.g.,
Richmond or Engelhard) or principal sellers (e.g. DD&Co) were in
the UK because world’s biggest commodity markets exist over there.
As per the international commodity Murabaha structure, it was
proposed that Islamic banks will buy a commodity from the
commodity supplier and then sell it to the customer (i.e. the liquidity
seeker) on Murabaha basis. Then the customer would appoint the
Islamic bank as an agent to sell the purchased commodities to a third
party (which was usually Condor Trade in DD&Co’s deals). Since
transactions were routed through OTC of London Metal Exchange
so pricing was stable and not subject to sudden price risk fluctuation.
Also routing the transaction outside the conventional exchange
ensured that subject commodities were physical as well as allocated
and not part of conventional futures and options contracts.
Appointing Islamic banks as agents to sell by the customer, it helped
the metal suppliers to deal with one party and not to get into
individual or multiple KYC exercise. Also, it helped to close the loop
and keep the cycle cash- free where sold metals can be used for
similar deals. Although physical delivery was offered as a
hypothetical option but it was almost impossible due to high delivery
charges. Tawarruq arrangement through Murabaha of international
commodities (described as Organized Tawarruq in OIC Fiqh
Academy’s Resolution in its 17th Session in 2009) was one of the
most discussed issues of Islamic finance wherein dozens of articles
and books were written to highlight modus operandi as well as
Shari’a implications of the current offering. In response to this,
modification efforts were made to launch local commodities as base
of Murabaha which is part of Tawarruq arrangement. In the UAE,
Dubai Multi Commodity Center (DMCC) launched online
Tawarruq transaction using local commodities and oil. Similarly, in
Malaysia, palm oil was used as a medium of commodity Tawarruq.
Despite all the efforts taken in this regard, it is certain that
commodities are physical assets which might fail to entertain all the
demands made by the Islamic banking industry. Hence efforts were
made soon to launch Murabaha of shares. as per this arrangement,
the Islamic bank would buy Shari’a compliant shares and then sell it
to the customer on Murabaha basis. The shares are transferred to
customer’s custody account held with a broker, so the customer is
free to hold or sell the shares as per his own decision and there is no
need of appointing the Islamic bank as an agent to liquidate the
shares. Also, the market of financial securities has more depth and
variety. Although it seems to be a semi-perfect solution (since its free
from shortcomings of Organized Tawarruq) but it failed to have
market beyond retail and SME customers. The main reason was the
risk of price volatility since the customer buys shares price risk then
there were chances of facing liquidity risk wherein the customer will
be sitting on shares which are difficult to be off-loaded for any
prospect buyer. Some UAE Islamic banks (like Al Hilal Bank, Dubai
Islamic Bank and ADIB) further modified the arrangement of
Tawarruq on financial securities by introducing Murabaha of
Mudaraba Certificates which are investment units issued by the
National Bonds Inc. (UAE) and price of each unit is AED 10/-. One
of the shortcomings of this solution was close-ended market of the
certificates wherein the buyer cannot off-load his certificates with
any party other than the Issuer (i.e. National Bonds).
Wakala Certificates = Securitization + Tawarruq
In 2014, Nasdaq Dubai, the renowned exchange, announced
launch of Nasdaq Murabaha platform. It is a combination of
securitization and classical Tawarruq. The platform started with size
of USD 500 Million and it is continuing and achieving major success.
In this paper, we will be sharing the idea of Wakala Certificates which
can be introduced and functional as follows:
Parties to the Wakala Certificates:
To execute a Murabaha of Wakala Certificates, the following
parties are involved:
a. Wakil: is, usually, the Islamic bank which manages the
programme and acts as a market-maker. At the time of issuance,
the Wakil sells the underlying Shari’a compliant assets to the
Issuer which in return appoints the Wakil as an investment
agent to manage the underlying assets of the Wakala Certificates
in accordance with Wakala Investment arrangement.
b. Issuer: is an SPV which buys the underlying assets from the
Wakil and creates a trust over the underlying assets through
issuance of trust certificates.
c. Certificateholder: any party (either individual or corporation)
which owns the Wakala Certificates at a particular time.
d. Financier: a financial or commercial institution which buys
Wakala Certificates from the Issuer/Wakil and then sells them
to its prospect customer on Murabaha basis.
e. Obligor: an individual or corporation which is willing to avail
short-term financing from the Financier against sale of Wakala
Certificates.
Stages of Wakala Certificates:
1- Asset Allocation:
At first, the Wakil which is willing to create Wakala Certificate
must allocate the underlying assets which have to Shari’a compliant
assets and have fair value equal to the aggregate face value of the
Wakala Certificates. The Wakil can source the underlying assets
from the proprietary pool of the Wakil. It will be ensured that, at
least, 51% of the allocated assets are tangible assets like ownership
interest in a leased asset or equity owned by the Wakil.
2- Sale of Assets:
Once the underlying assets are duly allocated then Wakil may sell
them, pursuant to sale and purchase agreement, to the Issuer (as
purchaser) which agrees to securitize the purchased assets and
convert them to trust certificates in the form of Wakala Certificates.
The Wakil will forge all of its direct ownership rights in the
underlying assets and will assume trust rights in the underlying asset
through owning trust certificates of Wakala.
3- Wakala Investment:
Investment agent to manage the underlying asset based on the
arrangement of Wakala investment.
Usually, in the Wakala-based deposits, Islamic banks charge a
nominal amount as Wakala fee which could be RM 100/- against the
expected rate of Wakala profit of, for example, 2% of the Wakala
principal. However, to ensure less operational complexity, the
expected rate of Wakala profit (payable to the Certificateholder) will
be equal to the rate of Wakala fee (payable to the Wakil).
Since its Wakala investment and not service agency so the Wakil
(as investment agent) will be managing the portfolio of the
underlying assets on proactive basis and ensure that interests of the
Certificateholders are protected. It will be ensured that no guarantee
will be extended from the Wakil to avoid any sort of comprise on the
Shari’a requirements of the investment Wakala. The Wakil will
extend a purchase undertaking where it undertakes to buy back the
Wakala Certificates from the Certificateholder for an exercise price
equal to the fair value of the underlying assets.
4- Murabaha Sale:
Once the Financier (i.e. conventional bank, Islamic bank or
Islamic window) wants to acquire a Shari’a compliant asset (in other
cases shares or commodity) then it approaches the Wakil for a spot
sale of the Wakala certificates. The Wakil (who holds the Wakala
Certificates) can pass on the Wakala Certificates to any party for an
agreed upon price. It is expected that the Islamic bank will offer the
Wakala Certificates to the Financier for a price equal to the face value
of the Certificates. Any risk associated with the Wakala Certificates
or the underlying assets of the same will be transferred from the
Wakil to the Financier. Since Wakala Certificates will be listed
electronically so transfer happens fast and immediate without delay
and documentary evidence can be provided to reflect the activity of
the Wakala Certificates.
Once the sale is duly completed then the Financier has the right
to hold or sell the Wakala Certificates to any party of its choice. The
Financier can sell the Wakala Certificates to the Obligor on
Murabaha with deferred payment basis. Upon signing the
Murabaha, the Financier will instruct the broker to transfer the
Wakala Certificates from its custody account to the custody account
of the Obligor who will be obliged to pay off the Murabaha price
irrespective of his decision to hold or liquidate the Wakala
Certificates.
Once the Wakala Certificates are transferred to Obligor’s custody
account then he is free to make an informed decision of either
holding the Wakala Certificates or off- loading them for quick
liquidity generation. The Obligor is under no obligation to sell them
as the case with many organized Tawarruq solutions. Also he is not
subjected to huge financial loss in case he prefers to test Shari’a
compatibility of the Wakala Certificates. Any decision taken will
have no influence or involvement of the Financier or the Wakil.
Hence, the Obligor will neither appoint the Wakil or the Financier
as his agent to sell-off nor a messenger. In this way, one of the major
Shari’a concerns in organized Tawarruq are addressed wherein the
Financier assists the Obligor to liquidate the purchased commodity.
To avoid In’ah sale, it should be ensured that the Obligor cannot
sell back the Wakala Certificates to the Financier on a spot price less
than the deferred Murabaha price. The Obligor may sell the Wakala
Certificates to the Wakil for a redemption price equal to the fair-
value of the underlying asset of the Wakala Certificates. This way the
Wakil will act as market maker and Wakala Certificates will remain
liquid all the time.
Financier or the Wakil) for the price mutually agreed between the
Obligor and the prospect buyer. However, to avoid risk of price
volatility, it should be ensured that the bid and offer prices of the
Wakala Certificates on the electronic platform are not more than the
fair value of the underlying assets of the Wakala Certificates. Hence
no events of speculation or hoarding can exploit such certificates.
Strategic Assessment
Wakala Certificates could be a revolutionized liquidity
management solution in Islamic banks. However, it is apt to study,
its strengths and opportunities as well as weaknesses and threats.
One of the biggest strengths of the Murabaha of Wakala
Certificates that it addresses all the Shari’a requirements of classical
Tawarruq to get rid of organized Tawarruq. Hence the Obligor does
not appoint the Financier as his agent to off-load the purchased
certificates. Since the certificates could be listed on the exchange so
it can be done at much ease than bilateral transactions where KYC of
each individual or corporate entity is a cumbersome issue. On the
business side, the Wakala Certificates have 100% liquidity since the
Wakil will be ever ready to buy back the Wakala Certificates.
However, considering the requirements of AAOIFI’s 2007 statement
of no-guarantee from the agent, the same will be addressed through
stating that strike price in case of Islamic bank acting as market
maker will not be more than the fair value of the certificates. On the
risk side, the Wakala Certificates represent a common ownership in
a giant portfolio of financial assets (like Ijarah financing, Murabaha
receivables, bank-owned private equity etc.). Financial institutions
(like the Wakil and the Financier) will be more familiar to risk profile
of such assets then physical commodity located in faraway locations
or in a local container which are difficult to be financially assessed or
physically accessed.
Now let’s, consider the limitations and weaknesses of the Wakala
Certificates. First, the Wakil (acting as investment agent and market
maker) cannot use these certificates in transactions where it will sell
them on Murabaha with deferred payment. In a tripartite Murabaha,
the Financer must acquire an asset and disclose its cost of actual
acquisition (which includes price paid to the original vendor and any
direct costs borne by the financier). In the Wakala Certificates, the
Wakil need to apply Musawama sale. Moreover, Murabaha seller on
credit cannot buy back from its obligor what sold on Murabaha with
deferred payment. Another limitation, the Wakil cannot entertain
requests for sale of Wakala certificates beyond the value of the
available certificates in the platform. For example, if the aggregate
face value of the Wakala Certificates is RM 500 million then any
request for sourcing certificates worth RM 700 Million needs to be
turned down. Moreover, if certificates are withheld with the Obligor
or the Financiers then the Wakil cannot manage customer
expectations beyond the available number of certificates held with it.
Another limitation could arise if the Wakil decides to participate in
a syndicated Murabaha deal. In such a case, Islamic banks might be
subjected to In’ah sale since it will buy back the portion sold to the
Obligor for a spot price less than the deferred price agreed in the
Murabaha contract.
 Over-all it is expected that adoption of Wakala Certificates in the
Murabaha-based liquidity financing could be a breakthrough
solution which will assist Islamic banks to use a more stringent
Shari’a compliant instrument with better customer experience and
wiser risk management in terms of the underlying asset.

ZZZ
The Islamic Mortgage Options in the
USA: Revisiting the Concerns
Originally in Arabic by: Dr. Abdulbari Mashal
English Abridgment by: Dr. Yousuf Azim Siddiqi
===============================================
A detailed paper was originally presented in Arabic by Dr. Abdulbari Mashal at Fiqh
Council of North America (FCNA)’s General Body Virtual Meeting (held on 19th –
20th September 2020).
===============================================
Introduction
For the past 20 years, the USA has the chance to experience the
presence of Islamic mortgages. Despite such an extended period,
there seems to be a gap between the desired conviction by the
Muslim community and the product offering made by these financial
institutions.
The paper aims to address the concerns related to Islamic
mortgage in the USA, with reference made to the application in line
with Islamic principles. Also, the paper highlights practical solutions,
whether in terms of rate of financing or quality of the service. The
base hypothesis that there is no conflict between compliance with
Islamic principles and the efficiency of the products and services. It
is morally unacceptable to offer lower quality products against higher
pricing, which could be looked at as a misuse of the religious
sentiments of the Muslim community. The paper relies on the
author’s experience in Islamic financing besides his study of the
applications in the USA.
The Surrounding Environment
Currently, the world economy is controlled by a capitalist system
that promotes personal greed at the cost of society. The system has a
prevalence of ribā (interest-based lending), allowing dealing with
Islamically impermissible items such as liquor and pig, allowing
gambling, and in many cases, sale of debts, options, futures, Credit
Default Swaps, etc.
If we follow the trend, it is evident that some efforts are made to
control and arrest such a kind of greed and unguided thirst for
wealth. The pressure is built up by society which results in some
positive change. Still, eventually, it fades with time, and we are back
to the same adversities. Further, the legal framework shall allow such
transactions as they are permitted according to the current laws.
Islamic finance is part of a system of values and tools acceptable
to the religion of Islam. Its birth took place in capitalist systems,
which did not provide sufficient protection, whether in legal or
legislation levels. Such a scenario pushed experts to develop products
and services which shall be doable in these systems and ensure
avoiding dealing with ribā in all the circumstances. It could be
possible that, in the later stages, more complex products and
solutions could be launched.
Applications of Islamic Mortgage Financing in the USA
Islamic finance institutions in the USA, (such as UIF, LARIBA,
Guidance, Devon) usually offer four types of financing: i) Murabaha
to the Purchase Order, ii) Lease Ending with Ownership, iii)
Diminishing Partnership, and iv) Diminishing Partnership in the
Usufruct. All these modes of mortgage financing rely on the
principles and rulings of Islamic jurisprudence. Some contemporary
aspects and assessments were taken into consideration to protect the
rights of the stakeholders. This includes, for example, acting upon a
binding promise to protect the promisee from a breach of the
promisor. Overall, all these modes of financing aim to enable the
customer to own a property in line with Islamic principles and
values.
a. Murabaha to the Purchase Order
It’s a case where the financing institution purchases the property
from the seller, then sells it to the customer for a Murabaha price,
which is made of a) the cost of purchase (the principal amount) and
b) the profit amount (= rate of financing x the principal amount).
Upon execution of Murabaha, the aggregate price will be debt, which
cannot be increased at a later stage even if agreed by the parties.
b. Ijarah Ending with Ownership
 Under Ijarah financing, the property is sold against a nominal
price by the financing institution to the customer when he regularly
pays all the instalments of a long-term lease. The regular instalments
and down payment consist of a) the principal amount (i.e., the
amount paid by the financing institution to the original seller), and
b) the profit amount which is referred as Ijarah rental (i.e., the
margin on the principal amount).
c. Diminishing Partnership
Under a diminishing partnership, the financing institution and
the customer jointly acquire the property. Both of them own a
common share against their monetary contribution at the time of
deal initiation. Gradually, the financing institution sells part(s) of its
portion to the customer who pays instalments consisting of a) the
principal amount (i.e., the purchase price for the portion purchased
from the financing institution), and b) the profit amount (i.e., rent
for the portion still owned by the financing institution).
d. Diminishing Partnership in the Usufruct
The structure is the same as the Diminishing Partnership.
However, the customer pays regular instalments to acquire a portion
of the usufruct (i.e., the right to use a corporeal property) owned by
the financing institution.
Relationship between Islamic financing institutions & GSEs
Mortgage institutions have limited ability to provide financing
to all their customers. Hence, to achieve business expansion and
growth within a specified period, some public government-
sponsored enterprises (GSEs), like Freddie Mac and Fannie Mae,
which buy those loans having good credit ratings against a cash price
less than the present book value of these debts. The GSEs securitize
these loans and trade them via investment funds, which are owned
by the GSEs. This kind of arrangement seems to be inevitable to
achieve growth and provide liquidity for mortgage institutions.
Islamic Jurisprudence View
The sale of debts via this arrangement is discounting of loans that
is a form of ribā prohibited in Islam.
Islamic financial institutions, which are fully compliant to Islamic
principles, should observe Islamic principles in all their dealings.
Some of the possible are given below.
 Outright Sale: if the subject of financing is Ijarah or Diminishing
Musharaka, then it is acceptable from an Islamic perspective to
transfer the contracts to GSE against a price lower than the present
value of the facility because the facility represents ownership of the
financing institution in a real estate (i.e., corporeal property).
Investment Agency: if the subject of financing would be
Murabaha or Diminishing Musharaka in a usufruct, then an outright
sale is not permissible as per Islamic teachings. It would be suggested
in such cases to seek initial approval from GSE for the proposed
amounts of financing. The financing institution shall act as an
investment agent, whereas GSE will serve as an investor. Financing
institutions will be entitled to a fee. The GSE will bear any risk during
the facility's tenure.
To summarize, dealing with GSE, like Freddie Mac and Fannie
Mae, is not prohibited as per Islamic principles provided the
arrangement and its contract are acceptable by the norms of Islamic
jurisprudence.
Overpricing of Islamic financing
It was observed in many parts of the world, not only in the USA,
that Islamic financiers increase their rate of financing, and the excuse
was abiding by the procedures prescribed by the Islamic
jurisprudence. However, this attitude disappeared in due course of
time when competitors joined the market. Although Islamic
jurisprudence does not have, in the normal circumstances, any
provisions for statuary pricing but exploiting the customers, who are
looking for solutions in line with their religious preferences, is
against the trading norms of Islam. This would be a form of distress
sale. Further, it was observed that in some instances, the customers
were asked to bear unnecessary additional costs and expenses as an
Islamic or legal requirement. In contrast, such amounts were not
necessary, and more straightforward arrangements could have
adopted. One such example was putting the requirement of
establishing LCC in a Diminishing Partnership deal, which inflates
the monthly instalments by USD 15 to USD 40.
Prepayment of Debt
Most Islamic jurists prohibit an agreement to extend a mandatory
discount by the creditor for the prepayment of debt. However, as per
Ibn ꜤĀbidīn (d. 1836), an obligatory discount is permissible in a
credit sale. Despite a heterogeneous stand, Islamic financing
institutions cannot exploit the customers by claiming the profits for
future years, which may even adversely impact the goodwill of
Islamic institutions among the Muslim community.
This issue does not arise in Murabaha financing because, in the
USA, the creditor cannot claim future profits of the debt.
However, in Ijarah deals, it’s an not early settlement. Instead, it is
a case of early purchase. Hence, it would be considerate and
thoughtful of the Islamic financing institutions not to sell the subject
property to the customer for a price higher than the outstanding
principal amount.
Similarly, in Diminishing Partnership, it will not be a case of early
settlement, rather it would a case of early termination of the
partnership arrangement wherein one partner (i.e., the customer)
acquires the partnership asset (i.e., the property) for a mutually
agreed price. Same as the case with Ijarah, the Islamic financing
institution are encouraged not to claim, for early termination of the
partnership a sale price which is more than the outstanding principal
amount.
Delay in Settlement
Sometimes customers of Islamic financing institutions delay
settling their dues as per the agreement of the Islamic mortgage. This
delay might be a result of insolvency, which is determined by the
court of law. In such a case, the Islamic financing institution should
cooperate with the customer’s financial difficulties and extend him
time to settle his obligation as the things would ease on him rather
than imposing fines for the delay on the settlement.
On the other hand, the delay would be a result of financial
procrastination. In such a case, an Islamic financing institution may
refer to the courts of law to claim their financial rights. However, in
this case, the Islamic financing institutions are not permitted, as per
Islamic principles, to claim any amount more than a) the
outstanding financing amount, and b) amounts of direct and actual
damage. Any amount received, which was above this amount, would
be disbursed for charitable purposes with no direct or indirect
benefit for the Islamic financial institutions.
In case the deal was based on Murabaha or Diminishing
Partnership of the usufruct, then the treatment, by the court of law,
will be like the conventional mortgage. Hence, the Islamic financing
institution may reach out to the courts, and either the customer
agrees to amicable handover of the property to the Islamic financing
institution, or the law takes its due course of action.
In case the deal was based on Ijarah, then Islamic financing
institutions may trigger the acceleration clause wherein the future
instalments of Ijarah become due as a part of the sale price to the
customer according to the purchase undertaking by the customer.
In case the deal was based on Diminishing Partnership, so Islamic
financing institutions have two options if the customer is unable to
pay his instalments on time. Firstly, the institution may sell off the
property in the market, and both the parties receive their respective
shares in the proceeds of the sale based on the last ownership
holding. Also, the customer would be liable to pay the market rental
for the months he could not pay the rent. Secondly, the bank may
exercise the acceleration clause, which will imply that the subject of
the partnership will be sold to the customer for a price equal to the
outstanding amount of the facility.
The question arises that why Islamic financial institutions aim to
convert their Ijarah or partnership rights to a sale obligation. The
answer is the legal proceedings to recover your rights (as an owner
of a leased asset or a partner) would attract higher costs against the
simple procedure and more economical way of recovering the debt
due as per Murabaha or sale upon default.
Using Conventional Terminology or Documentation
It was observed that Islamic financing institutions obtain from
the customer promissory notes, which come in a standardized
format that contains sometimes conventional terminologies like
interest or loan. Considering the purpose of signing these documents
is to avail tax exemptions and benefits, so the use of such words does
not impact the actual transaction, which is based on Islamic
documentation.
Also, to protect its rights, some Islamic financing institution gets
pledge documents signed despite its ownership of the asset as per the
Islamic documentation. Again, these arrangements do not affect the
essence of the transaction, and it only assists the financier in
mitigating the risk of default.
Ownership and Possession
 Islamic financing institutions should own the subject property
when selling it or claiming its rental. Moreover, the property should
be possessed by the institution in a way recognized as per the Islamic
jurisprudence. These requirements differentiate a sale and lease
contracts from a ribā-based transaction. The Quran says: “That is
because they have said: “Sale is but like riba”, while Allah has
permitted sale, and prohibited riba.” [Quran; 2:275]. Some
similarities between a sale-based financing and an interest-based
financing does not imply that there are no differences at all.
Although, Islamic financing institutions are encouraged to
mitigate the risk to protect the interests of all the stakeholders, but it
is not allowed to completely nullify the risk. Otherwise, it will be a
case of a simulated sale contract. There are different forms to
mitigate the risk of the transaction like:
- purchasing the house from the original seller with a condition to
rescind the sale contract if the customer did not honour his
commitment,
- shortening the period of taking the risk of ownership by quickly
signing the Murabaha contracts with no delay after purchasing
the property.
- obtaining property insurance to protect from any loss or damage.
- Appointing the customer as an agent to purchase the property to
avoid double taxation but ensuring that the Islamic financing
institution takes the risk despite the legal title being registered in
the name of the customer.
Wisdom vs. Legal Effect
Considering the highlighted similarities between Islamic
financing and conventional facilities, especially in terms of credit
risk, legal proceedings, and recovery process, some people raise a
concern that what’s the wisdom of prohibiting interest-bearing
facilities in Islamic teachings when the result is similar to Islamic
facilities i.e., owning the house for living.
Firstly, we need to consider that the legal effect for a financing
compliant with Islamic teachings would be different from a
conventional financing. The financing, that’s acceptable to Islamic
teachings, would be based on sale or lease contracts, whereas the
interest-based financing would be ribā which is an act against
religious teachings. Hence, the rulings in Islamic jurisprudence go in
line with the legal effect, which in the case of interest-bearing
facilities is the lender’s claim of an amount in addition to the loan.
Further, the wisdom behind prohibiting interest is to remove
injustice in the financial transactions. The lender earns extra returns
without assuming any risk of assets, contributing by his labour, or
entering into a business venture. Although, if we are not able to
figure out the wisdom, due to our limited assessment, so it may not
impact the ruling of prohibition as per Islamic teachings.
Shari’a Governance
All the solutions for financing applied by Islamic financing
companies in the USA should refer to an Islamic authority that
endorses the compliance of these companies with rulings and
principles of Islam jurisprudence. This could be in the form of an
expert in Islamic law, an Islamic committee, or benchmarking
standards issued by AAOIFI (Bahrain). However, the presence of
such an authority is not sufficient; rather, the Islamic financing
institution should have a regular audit on its products and services
to ensure compliance with Islamic teachings and rulings. The reports
should be made available on the institution’s website as well.
Some Islamic financing institution in the USA have that level of
awareness and do not confine to obtaining an Islamic
pronouncement or appointment of a committee of Islamic scholars;
rather, they ensure to have a regular audit report which is made
available on the website. Although such institutions are, at present,
only two. We hope in the future more shall follow suit, and the social-
cum-financial awareness among the Muslim community will direct
more institutions to have an annual Islamic audit report.
Dealing with Islamic financing Institutions in the USA
We encourage Muslims in the USA to deal with Islamic financing
institutions. There are no valid grounds to propagate an opinion of
prohibiting to deal with any of these institutions or claiming that
their products are against Islamic teachings. Despite that, we
encourage, as given above, Islamic financing institutions to have
regular audit reports conforming their compliance with Islamic
teachings and principles which form the DNA of their existence.
Further, this should be considered as a rightful demand by the
Muslim community.
Conclusion
1. Islamic financing institutions should avoid any practices which
may give wrong signals to the Muslim communities, whether in
terms of exploitive pricing, burdening the customer with
additional cost (incorporating LCC), the process of early
settlement, or delay in payment. Overall, the product offering
should be competitive with conventional counterparts.
2. Islamic financing institutions should declare their reference point
for review of their transactions from an Islamic perspective.
Awareness among the Muslim community in the USA will raise
the level of governance in such institutions.
3. Dealings with Freddie Mac and Fannie Mae should comply with
the rulings of Islamic jurisprudence either based on investment
agency arrangement (for debt-based financing like Murabaha) or
outright sale (for Ijarah or Diminishing Partnership).
4. Some of the differentiating points between Islamic financing and
conventional facilities are ownership and risk-bearing. Islamic
financing institutions may endeavour to mitigate the risk but
cannot nullify the risk to earn non-compliant profits. Further,
looking at the result of the deal (i.e. owning a house for living)
does not imply that there are no real differences between a sale-
based financing and interest-based loan.

ZZZ
Subordinating Tier-I Sukuks against
Standard Deposits: juristic assessment
of current offerings
Originally in Arabic by: Dr. Osaid Kailani
English Abridgment by: Dr. Yousuf Azim Siddiqi
===============================================
The original working paper (in Arabic) was presented on 30th October 2015, in the 10th
Conference organized by Dirasat under the sponsorship of Rakyat Bank (Malaysia).
===============================================
Introduction
Tier –I Sukuks are the most recent entrant in the field of Sukuk
innovation which aims to fulfil and address different goals such as:
a)- betterment of the financial capability and efficiency of the obligor
bank and b)- enabling the obligor bank to honour its obligations in
a better way. This will certainly have better results for the financial
institutions to make them better equipped to face financial crises like
the ones happened in the recent years.
It is evident, over number of experiences and years, that
introduction of Tier-I Sukuks was not a result of natural growth and
stage-wise development of Islamic banking industry. Rather these
instruments played a role to accommodate and address the reality as
created by regulatory bodies focusing on conventional banks which
are dealing with borrowing and lending money on interest. And it is
very natural that requirements imposed by Tier-I Sukuks had raised
some Shari’a concerns and issues which will be addressed in this
paper.
Any business organization manages funds for running its
business through a)- capital contribution by the shareholders; and
b)- short term and long-term credit and debt facilities extended by
third parties. Further capital is divided into the following
classification:
1- Tier 1 Capital: which includes common equity and additional
capital.
2- Tier II Capital: which includes secondary capital.
To classify any liquidity instrument as additional capital it should
have some features of paid-up capital contributed by organization’s
shareholders. By having some of such features, this instrument
would be a hybrid instrument of common features of original capital
along with features of standard liabilities and obligations due from
the Bank. One of such pre-requisites is instrument’s perpetuity
which implies that this instrument should continue till the bank
ceases its operations and the instrument-holders do not have a right
to ask for its liquidation or pre-settlement. Although the bank may
have the right to pre-settle after five years provided certain
conditions are met. Also, at the time of bank’s liquidation, claims of
the instrument-holder should be subordinated against standard debt
and credit facility owed by the bank. And the level of subordination
should be at par with shareholders of the bank. Basel-III has
categorially stated while referring to additional capital liquidity
instrument that it has to be: “subordinated to depositors, general
creditors and subordinated debt1 of the bank”.
Preferential Rights of the Depositors:
Basel-III has not defined the depositors and it did not shed light
on the nature of the relationship between the depositors and the
bank. Although there is no doubt that by referring to depositors, the
standard regulatory authority refers to the general understanding as
applied in the conventional banking which includes all kinds of the
accountholders whether their relationship with the bank was based
on borrowing against interest (like saving and term-deposits) or
without interest (like current account). It is also worth mentioning
that whatever preferential treatment is extended to the depositors is
confined to their entitlement as per the original deposit agreement
executed between them and the bank. Hence the bank should look at
the agreement to figure out the exact amount which needs to be paid
to the depositors. And settlement of this liability should be given, at

1
what is meant by subordinated debt of the bank is bank’s Tier-II Capital.
the time of liquidation, preference over instruments of Tier-1 capital.
For instance, if a person opens an account with a conventional bank
and deposits $ 1000/- and later on instructs the same bank to pay a
third party $200 which was duly carried by the Bank, then in case of
liquidation, the depositor has no claim of more than $ 800*/-. Hence
Basel-III does not, necessarily, require guaranteeing the deposit (as a
preferential treatment over subordinated Tier-1 Capital) by
overlooking the original contracts between the bank and the
depositor. The ultimate preference what is imposed by the regulatory
standards is to subordinate the Tier-1 capital instruments against
claim preference given to the depositors. And any argument that
conditions of the deposit agreements are of little relevance should be
considered as the one which has neither legal, logical nor practical
grounds.
Basics of Mudaraba:
Mudaraba is a special form of partnership where one party
(known as “Rab Al Mal”) contributes 100% of capital (the
“Mudaraba Capital”) against 100% of management extended by the
other party (known as “Mudarib”). As per Shari’a, the Mudarib
cannot guarantee a fixed amount of profits to Rab Al Mal. In case
Mudarib has shown negligence, misconduct or non-abidance to the
original terms and conditions of the Mudaraba (“Mudarib
Negligence”) and Mudaraba suffers a loss then Rab-Al-Mal is
entitled to receive back Mudaraba Capital with no right over any
anticipated, expected or market-rate of profits.
In case there was an event of loss, then Rab al Mal is entitled to
ask the Mudarib for burden of proof which satisfies the Rab Al Mal
that actually the loss was result of genuine reasons and not due to
Mudarib Negligence.
As per recent discussions held in various Islamic juristic
roundtables, it was concluded that the burden of proof that there was
no Mudarib Negligence can be transferred to the Mudarib which
does not amount to capital guarantee by the Mudarib favouring the
Rab Al Mal.
Features of Shari’a Structures used in Tier-1 Sukuks:
1. In 2012, Abu Dhabi Islamic Bank (“ADIB”) has pioneered the
Sukuk innovation by introducing ADIB Capital Invest 1 which
were world’s first Tier-1 Sukuks issued on the basis of Mudaraba
 which was acceptable by the Central Bank as well as law firms.
According to this structure, ADIB (as Mudarib) was allowed to
mingle the capital of Mudaraba (raised through Tier-1 Sukuk
issuance) along with its own capital while stating that Muaraba
capital is invested in bank’s general pool of fund as equity. And
once funds of Mudaraba are invested together with bank’s own
funds then a relationship of Musharaka (i.e. partnership) is
created where Mudaraba partnership is entitled to rights and
obligations of the general pool of bank’s funds on pro-rata basis.1
2. Capital of Mudaraba is not guaranteed by the Mudarib (i.e.
ADIB/the Islamic bank). Hence the Islamic bank does not make
good any loss in the capital of Mudaraba unless and until it was
Mudarib Negligence.
3. As it was earlier highlighted, that Basel-III refers to the depositors
as accountholders irrespective of their specific account types.
Hence in Islamic banks, the term depositor will cover
accountholders of current, saving and term deposits without
distinguishing among their respective rights and claims against
Tier-1 Sukuk holders.
It is assumed from Shari’a perspective that account opening
conditions of these accounts should be in line with Shari’a
requirements specific to each offering. Hence current accounts
are based on Qard Hassan (interest-free loan) where the
accountholder acts as a lender, and the Islamic bank is a
borrower. As far as saving/term deposits (“Investment
Deposits”) are concerned so these are based on
Mudaraba/Wakala Investment where the accountholder is

1
Alternatively, Musharaka (partnership arrangement) can be applied from the
beginning where Sukuk-holders become partners to bank’s equity since issuance of
Tier-1 Sukuk. This was proposed in the Revised Capital Adequacy standard issued
by Islamic Financial Services Board: “Subject to Shari’ah approval, an IIFS may issue
Mushārakah Sukūk (with the underlying assets as the whole business of the bank) that
are able to absorb losses to qualify for inclusion in AT1 capital. 12 In these
Mushārakah Sukūk, the Sukūk holders are partners with the common shareholders in
the equity capital of the IIFS, as per the terms of the Mushārakah agreement, and thus
fully share the risks and rewards of the IIFS’s operations.” Although it is worth
mentioning that as of date, this structure is not tested so far from legal perspective.
However, structuring Tier-1 Sukuks based on Mudaraba or Musharaka will make
them perpetual.
 investor (i.e. Rab-al-Mal/Principal) and bank’s shareholders act
as Mudarib/Wakil. Hence in the Mudaraba or Wakala
Investment arrangements, the Bank (whether Mudarib or
Investment Agent) do not guarantee the loss in the principal
invested by the depositor unless and until it was Mudarib
Negligence. In case the bank is guaranteeing loss of the capital in
all the circumstances, whether as a mutually agreed-condition or
as a requirement of regulatory authorities or court of law, then
this an evident and prevalent Shari’a violation which should be
corrected while issuing Tier-1 Sukuks.
4. As per Tier-1 Sukuks based on Mudaraba, the Islamic bank (as
Mudarib) is permitted to mingle the Sukuk proceeds (i.e.
Mudaraba capital) with its own capital and then invest the same
in bank’s existing general pool of funds as equity.
General Pool of Assets:
Prior to Issuance of Tier-1 Sukuks:
The below image will highlight the parties (and their respective
relationships) which are related to Islamic bank’s general pool of
Shari’a compliant assets and liabilities (“General Pool”) prior to
issuance of Tier-1 Sukuks:

Figure 1: Parties of General Pool prior to Sukuk Issuance

Post Issuance of Tier-1 Sukuks:
 Once Mudaraba-based Tier-1 Sukuks are issued where Sukuk
holders contribute funds on the basis of Mudaraba then the situation
would be as follows:

Factors of Liquidation:
Any Islamic bank could be subjected to liquidation due to any of
the following reasons:
1. Business Factors: which refers to all the factors beyond
reasonable and direct control of the Islamic bank. For example,
sudden regulatory restrictions, economic downturn, huge
defaults etc.
2. Negligence Factors: which refers to all the factors where Mudarib
Negligence led to huge losses and eventually liquidation of the
bank.
Subordination in case of Business Factors:
In case liquidation of the Islamic bank was due to Business
Factors with no Mudarib Negligence then investment deposit-
holders as well as Tier-1 Sukuk-holders should bear the loss. And
post settling all the liabilities from the general pool of funds (which
includes investments deposits as well as Tier-1 Sukuks), the
remaining assets (cash or kind) will be the rightful claim for both the
parties.
Hence the recovery will be as follows:
1- The depositors (as described by Basel-III) will be paid at first. This
depends on their terms and conditions with the Islamic bank’s
General Pool. Hence the available items of the General Pool will
be liquidated, and current account deposits are paid off fully
without any deduction.
2- Then investment deposits are paid off after settling their
respective loss in their Mudaraba or Wakala arrangements.
3- In case assets of New Musharaka (created between the
shareholders and Tier-1 Sukuk-holders) are insufficient to pay off
current account deposits then the deficit cannot be netted off
from the rights of investment deposits-holder because current
account deposits are interest free loans extended by its depositors
to the New Musharaka. Hence investment deposit-holders should
not be obliged to pay off such loans.
4- Post settling current and investment deposits, if any funds are
available in the general pool, then Tier-1 Sukuk-holders are paid
as per the terms and conditions of Mudaraba between the Islamic
bank and the Sukuk-holders which would be an amount equal to
the original Sukuk proceeds minus the loss and the extra
compensation to the current accountholders extended from the
new Musharaka.
5- Post settling to Tier-1 Sukuk-holders, if any funds are available in
the general pool, then the shareholders will be entitled for the
same. And in case any funds are remaining post paying to the
shareholders then those will be excess overpaid up capital or
equity.
Illustrative Example:
Total Assets of the General Pool of Funds= $ 600/-
which are distributed as follows:
$ 100 Current Account Deposits
$ 100 Investment Deposits
$ 200 Tier 1 Sukuk Proceeds
$ 200 Paid Up Capital
In case there was liquidation and the actual loss suffered by the
General Pool was 50% which resulted into the residual value of the
pool being $ 300 then all parties will get the following:
Account/Party Original Claim Settled
Deposit
Current Account Deposits $ 100 $ 100
because funds of these account are
guaranteed.
Investment Deposits $ 100 $ 50
because they accountholders will
bear the loss of Mudaraba which was
50%.

Tier-1 Sukuk $ 200 $ 75

because they will bear the loss
(=$100) along with compensation to
current accountholders ($ 25).
Shareholders $ 200 $ 75
because they will bear the loss
(=$100) along with compensation to
current accountholders ($ 25).
1. It is evident as per the above distribution that there was “payment
preference” and not “claim preference” which implies that the
Islamic bank cannot make good the loss of investment deposit-
holders or Tier-1 Sukuk-holders. And in case the loss was
compensated then it will be a case “claim preference” which is
objectionable from Shari’a perspective. As per the Shari’a
Resolution No. (2-2012/3/1) issued by ADIB’s Shari’a Executive
Committee, it was resolved that in case of loss then assets of
General Pool should be distributed among holders of Mudaraba
deposits, Tier-1 Sukuk-holders and bank’s shareholders without
giving claim preference to one party.
2. In case assets of General Pool are insufficient to settle all the
current account balances then it would be similar to the case of
limited liability partnership which has no Shari’a issues.
3. It cannot be claimed that Basel-III requires all the deposits to be
treated on similar grounds in terms of claim preference. Rather it
requires to give preference as per the agreed upon rights and
obligation of the respective account opening terms and
conditions. Moreover, Basel-III cannot alter the Shari’a
arrangement between the investment depositors and the Islamic
 bank since the court of law does not consider such deposits as
loans.
Subordination in case of Negligence Factors:
In case liquidation of the Islamic bank was due to Mudarib
Negligence hen the Islamic bank should compensate the loss in
principal amount to the investment deposit holders as well as
compensating Tier-1 Sukuk-holders.
Hence the recovery will be as follows:
1- Firstly, all types of depositors (whether to current or investment
deposits) are paid off their respective outstanding principal
amounts. In case the available funds are not sufficient then New
Musharaka will pay off the deficit.
2- Post settling the current and investment deposits if any funds are
available in the General Pool, then Tier-1 Sukuk-holders are paid
off their outstanding principal of Mudaraba.
3- Post settling to Tier-1 Sukuk-holders if any funds are available in
the General Pool, then the shareholders will be entitled for the
same. And in case any funds are remaining post paying to the
shareholders then those will excess overpaid up capital or equity.
Illustrative Example:
Total Assets of the General Pool of Funds= $ 600/-
which are distributed as follows:
$ 100 Current Account Deposits
$ 100 Investment Deposits
$ 200 Tier 1 Sukuk Proceeds
$ 200 Paid Up Capital
In case there was liquidation and the actual loss suffered by the
General Pool was 50% which resulted into the residual value of the
pool being $ 300 then all parties will get the following:

Account/Party Original Claim Settled

Deposit
Current Account $ 100 $ 100
Deposits because funds of these account are
guaranteed.
Investment Deposits $ 100 $ 100
because the accountholders will bear no
loss of Mudaraba (50%) since the loss
was due to Islamic bank.
 Tier-1 Sukuk $ 200 $ 100
because they will bear no loss and have
the full right over all the remaining
assets. In case $ 200 was remaining then
Sukuk-holders would have received the
same amount.
Shareholders $ 200 $0
because they will bear the loss (=$300)
which includes compensation to current
accountholders ($ 50), investment
deposit-holders ($ 50) and Tier-1 Sukuk-
holders ($100).
1. It is evident as per the above distribution that there was claim
preference, as per Basel-3, since there was Negligence Factor
which made the outstanding principal balances of the deposits as
debt on the New Musharaka and made the outstanding Sukuk
proceeds as debt to recovered from the bank.
2. In case assets of General Pool (or specially the shareholders’
funds) are insufficient to meet all the above obligations then this
would be in line with limited liability company rulings.
Conclusion:
1- In case there was loss due to Business Reasons and the investment
accountholder are bearing the loss so it will be Shari’a violation to
contractual terms and conditions stipulated by the UAE Central
Bank and approved by the Shari’a Coordination Committee of
the Fatwa and Shari’a Supervisory Boards of the UAE.
2- As per the Union Civil Transactions Law No. 5 (1985), it is stated
that Mudarib or partner do not guarantee unless and until there
was negligence from Mudarib side. Any condition in
contradiction to the same will be void. Hence it is not permitted
legally to agree on something against the general law.
3- As per the bankruptcy rulings as defined in the Union
Commercial Transactions Law of the UAE, it was stated that a
normal lender cannot be preferred over the other lenders without
preference or partiality. And the same helps in implementing
Shari’a rulings which were mentioned for treating the case of
liquidation of an Islamic bank which has issued Tier-1 Sukuks.
4- To ensure that the amounts paid to the investment
accountholders at the time of liquidation are their rights as per
the terms and conditions of Mudaraba and not Mudaraba
 capitals, it was mentioned in the prospectus of ADIB Tier 1
Capital Sukuk that depositors would have preference over their
rightful claims which will be, certainly, decided as per the
agreements executed with the Islamic bank. Such an addition was
accepted to the law firms and was not objected by the UAE
Central Bank as well.
5- Whatever was mentioned above has no legal precedent and was
not tested judicially either in local, regional or international
courts. And it is based on legal-cum-Shari’a understanding of
current scenarios. And Islamic banks should review the terms and
conditions of account and deposits opening to ensure it reflects
the same treatment.
6- In the New Musharaka, the Islamic bank acts as Mudarib (jointly
with Tier-1 Sukuk-holders) on behalf of investment
accountholders. In case there is a loss then burden of proof can
be transferred to the Islamic bank (acting as Mudarib) where it
has to proof that loss was not due to its fault. In case burden of
proof was not given then loss in the capital should be
compensated. However, terms and conditions of investment
deposit should reflect the same. As per ADIB’s Third Juristic
Conference held on 20th January 2010 it was concluded that
transferring the burden of proof should be looked upon
differently from an open-ended guarantee extended by the Wakil
or the Mudarib where it guarantees the opportunity loss along
with the capital invested which is contrary to the Islamic legal
maxim of “kharāj bi ḍamān” which means who bears the risk
reaps the profits.

ZZZ
Great Minds
Mufti Taqi Usmani: An Introduction
Dr. Yousuf Azim Siddiqi
===============================================
Appeared as introduction to Author’s book: Shari’a Provisions of Sale Contract in
Islamic Banking, published by Kanz Publishers in 2024.
===============================================
Muftī Taqi Usmani
Sheikh Muftī Justice (R) Mohammad Taqi Usmani (referred in
this study as “Muftī Taqi”) is a well-recognized personality in the
Islamic world due to his decades’ long contribution in various fields
of Islamic sciences. He was born in Deoband, a small town in North
India, on 3rd October 1943. His father was Sh. Muḥmmad ShafīꜤ
ꜤUthmānī who was a well-known muftī in Dār al-ꜤUlūm Deoband, a
renowned Islamic seminary. After India’s independence from the
British state, Muftī Taqi migrated with his family to Pakistan and
settled in Karachi. His early education in India started at home under
the guidance of his aunt Amat al-Ḥannān who taught him basic of
Arabic words to enable him reading Quranic verses. Later days, he
joined formal Islamic education in 1953 at Jamia Darul Uloom
Karachi, and received education from Muftī Walī Ḥasan, Mulana
Akbar ꜤAlī, Mulana Nūr Aḥmad, Sheikh Salīm Allah Khān and Muftī
Rashīd Aḥmad Ludhyānwī. After completion of the traditional
Islamic studies, he joined Karachi University and received M.A.
(master’s in arts) in Economics & Politics in 1964, followed by LLB
in 1967.
After completing his Islamic and modern education, Muftī Taqi
joined his alma matar and started teaching Islamic books besides
providing responses to the pronouncement submitted to Dār al-Iftā’
(the Fatwā unit) of Dār al-ꜤUlūm Karachi. In 1981, the Government
of Pakistan appointed him as judge to the Federal
Shariat Court of Pakistan (Islamabad). During his tenure, he issued
landmark legal rulings on matters of immense importance. This
includes his rulings on the law of contract, rajam (punishment of
stoning a married person who commits the act of fornication) and
photography. On 23rd December 1999, he issued a detailed ruling on
prohibiting interest from the banking system in Pakistan. The ruling
was published as Historic Judgment on Interest. Later, it was
translated by IRTI’s research team to Arabic1.
Muftī Taqi is a vivid writer who has written contribution in many
fields of Islamic sciences, and his original writings can be found in 3
languages: Arabic, Urdu and English. In the field of Quranic studies,
he authored ꜤUlūm al-Quran, in Urdu, which explains different
sciences and branches of scholarship related to study of Quran. He
even translated Quran to English under the title The Noble Quran.
Similarly, he authored a 3-volume Quranic exegesis (tafsīr) in Urdu
called Tawḍīḥ al-Quran.
In the field of Ḥadīth, he authored several books. The most
prominent one is Takmilat Fatḥ al-Mulhim which is a 6-volume
commentary on Ṣaḥīḥ Muslim and completes the part which was left
by Shabbīr Aḥmad ꜤUthmānī. Similarly, his class-room lessons on
the initial parts of Sunan al-Tirmidhī were compiled and edited in 3-
volumes by Rashīd Ashraf Sayfī and released in Urdu as Dars-e-
Tirmidhī. Further, Muḥammad Abdullah Mayman complied the
remaining parts of Sunan al-Tirmidhī and was released in 2-volumes
as Taqrīr Tirmidhī in Urdu. His lessons on Ṣaḥīḥ al-Bukhārī were
compiled and edited by Muḥammad Anwar Husayn in released in
Urdu as a 7-volume book known as InꜤām al-Bārī.
In the field of Islamic jurisprudence (fiqh) and Islamic law, Muftī
Taqi wrote several books. While serving as judge to the Federal
Shariat Court of Pakistan (FSC), his detailed judgments were
published in Urdu in a 2-volume book called ꜤAdālatī Fayṣalay
which included judgements on various matters related to day-to-day
life. Also, his detailed judgement on prohibiting interest (as a form
of ribā) was published as a book in English entitled The Historic
Judgment on Interest. While serving as Muftī for several decades,
Muftī Taqi received thousands of questions. Muftī Taqi’s response to
all these queries were compiled by Muḥammad Zubayr Ḥaqq Nawāz

1
Ḥakīm Luqmān, Muḥammad Taqī al-ꜤUthmānī, (Damascus: Dār al-Qalam, 2002).
in a 4-volume book in Urdu entitled Fatāwā ꜤUthmānī. Similarly,
Muftī Taqi was invited by fiqh academies to write scholarly papers
on matters that require collective ijtihād. His Arabic papers were
compiled in a 2-volume book entitled Buḥūth fī Qaḍāyā Fiqhiyyah
MuꜤāṣirah.
In the field of Islamic banking and commercial transactions,
Muftī Taqi wrote some of the books which became references on this
topic. Hence, he wrote An Introduction to Islamic Finance, in
English. The book was translated to Arabic by ꜤUmar Aḥmad
Kashkār and released with title Muqaddim fī al-Tamwīl al-Islāmī.
Also, the book was translated to Urdu by Muḥammad Zāhid. After
working for a decade, Muftī Taqi released in Arabic a book dedicated
to Islamic rulings related to the sale contract entitled Fiqh al-BuyūꜤ.
The book is a 2-volume book which presented rulings of Four
Schools of jurisprudence besides presenting the contemporary
practices and legal stand on select matters. In 2008, Muftī Taqi wrote
a detailed book in Urdu responding to myths and allegations made
against Islamic banking with title Ghayr Sūdī Bankārī. In 2010, Muftī
Taqi was invited by the World Economic Forum to present a
perspective of Islamic economy. He wrote a detailed paper entitled
Post Crises Reforms: Some Points to Ponder. The paper was later
translated by ꜤAbd al-Ḥaī Chitrali to Arabic and published as Asbāb
al-Azmah al-Māliyyah wa ꜤIlājuhā.
Muftī Taqi has several writings in Urdu on Islamic history and
biographic introduction of Muslim personalities and stalwarts, such
as Ḥaḍrath MuꜤāwiyah® aur Tārikhī Ḥaqā’iq [MuꜤāwiyah® and
historical facts], Meray Wālid [my father], and Nuqūsh Raftagān
[marks of those goneby]. Also, he complied his travelogue in 3 books:
Jahān-e-Dīdā, Duniyā Meray Āgay, and Safar-darr-Safar.
His diversified educational qualification helped him to
understand matters related to Shari’a, as well as legal system and even
envisage economic implications and commercial aspects of the
transactions. He was chosen to be member (and often chairman) of
Shari’a Supervisory Boards of various Islamic banks. Owing to his
extensive contribution to the field of Islamic finance, he was
appointed as the chairman of the Shari’ah Committee of AAOIFI
(Bahrain) which comprises of the most prominent global Shari’a
scholars in the field of Islamic banking and finance.
 Muftī Taqi can be classified as an influencer in the Islamic finance
industry due to a) his presence in various Shari’a supervisory boards
and his current role as Chairman of AAOIFI Shari’ah Board; b) his
scholarly writings which are a well-received reference on this topic
and c) impact of his statement on the overall the industry as it
happened in 2008 when the Sukuk industry aligned itself to his
observations.
Sale Contract in Islamic Banking
Based on IFSB’s Risk Sharing Working paper1, it is evident that
the financings based on the sale contract constitute 74.1% of
aggregate financing offered by IFIs. The forms of sale contract are
either Murabaha, Commodity Murabaha, Bai Bithaman Ajil, Salam,
or Istisna’.
Muftī Taqi has number of scholarly writings on the contract of
sale. He has written a two-volume book in Arabic entitled Fiqh al-
BuyuꜤ, released in 2016, dealing with different rulings on the contract
of sale with references to laws of England and sometimes to the
French and other international laws. Also, he has written An
Introduction to Islamic Finance, published in 1998, which dealt with
Murabaha, Istisna’ and Salam. Muftī Taqi addressed different rulings
of sale while commenting on the books of Ḥadīth like Ṣaḥīḥ al-
Bukhārī, Ṣaḥīḥ Muslim, Sunan Tirmidī. Also, he presented a draft of
sale of goods act in compliance with Islamic fiqh, and it was
published separately in India under the title Ṣīghah Muqtaraḥa li-
Qānūn al-BayꜤ al-Islāmī. Muftī Taqi responded to hundreds of
Shari’a pronouncements in Urdu, Arabic and Persian pertaining to
the sale contract. These fatāwā were published in the fourth volume
of his book Fatāwā Usmani.
Prior Studies
Writings of Muftī Taqi were subject of PhD thesis and Masters’
dissertations.
Zunayda Marzūqī conducted her PhD thesis on the methodology
followed by Mufī Taqi in his commentary on Ṣaḥīḥ Muslim. The
study focused on those Ḥadīths which are related to financial
transactions. The research carved out the main aspects of the

1
IFSB, IFSB Risk Sharing Report, (Kuala Lumpur: IFSB), Retrieved February 15,
2020, https://www.ifsb.org/press_full.php?id=477&submit=more
approach followed by Muftī Taqi by explaining the ambiguous words
and discussing about name of the narrators in a sanad of Ḥadīth. The
study also found how the author correlates the quotes of Ḥadīth with
contemporary issues like ownership of land or ribā matters1.
Zunayda Marzūqī et al. studied the efforts made by Muftī Taqi in
refuting shubhāt or doubts and mis-grounded conceit which are
related to ribā. The study focused on Takmilat Fatḥ al-Mulhim. The
study highlighted that Muftī Taqi refuted various conceits like
meaning of the word ribā, prohibition in case of excessiveness,
permission for investment loans etc. It was concluded that while
Muftī Taqi tries to refute these allegations and misconceptions by
referring to texts of Ḥadīth, but he also refers to texts of holy books
of other religions. This is an indicative of his command over other
sources as well2.
Muṣṭafā Jihād conducted a master’s dissertation on Muftī Taqi’s
juristic efforts in the field of banking deposits and Sukuks. The study
relied mainly on the Arabic book Buḥūth fī Qaḍāya Fiqhiyyah
MuꜤāṣirah with some references to Fiqh al-BuyuꜤ as well as Takmilat
Fatḥ al-Mulhim. It was concluded that deposits placed with
conventional banks are generally a loan-based contract. It would be
prohibited (ḥarām) to place fund with conventional bank unless and
until the person was compelled to do so wherein all the interest or
benefits gained from such deposits shall be disbursed to charitable
causes like building schools and hospitals3.
Shifā Dhiyāb and Muṣṭafā Jihād studied the approach followed
by Muftī Taqi the juristic adaptation (takyīf fiqhī) of deposits placed
with conventional banks. The study relied on the Arabic book
written by Muftī Taqi called Buḥūth fī Qaḍāya Fiqhiyyah MuꜤāṣirah.

1
Zunayda bint Muḥammad Marzūqī, “Al-Shaykh Muḥammad Taqī ꜤUthmānī:
Manhajuh wa Afkāruh fī Sharḥ Aḥādīth al-MuꜤāmalāt al-Māliyyah fī Kitābih
Takmilat Fatḥ al-Mulhim bi Sharḥ Ṣaḥīḥ al-Imām Muslim,” (Ph.D. thesis,
International Islamic University Malaysia, 2016).
2
Zunaydā bint Muḥammad Marzūqī, Suyūṭī ꜤAbd al-Mannās and Muḥammad Abū
al-Layth al-Khayr Ābādī, “Radd al-Shubahāt Ḥawl al-Ribā Ꜥand al-Shaykh
Muḥammad Taqī ꜤUthmānī fī Kitābih Takmilat Fatḥ al-Mulhim bi Sharḥ Ṣaḥīḥ
al-Imām Muslim”, Islam in Asia, vol. 14, no. 1 (2017): 64-83.
3
Muṣṭafā Jihād, “Al-Shaykh Muḥammad Taqī ꜤUthmānī wa Juhūduh al-Fiqhiyyah,”
(Master thesis, University of Samarra, 2015).
The study concluded that Muftī Taqi considers balances available in
the current account as a loan. Further, it is permitted to deposit in
the current account of conventional bank because it cannot be
ascertained if the funds will be used in lending money on ribā. On
the other hand, he prohibits placing interest-bearing deposit with
conventional banks. The services offered by conventional bank for
the lockers are basically based on the lease contract1.
Issa Khan from the University of Malaya (Malaysia) completed
his master’s dissertation on the study of the juristic methodology of
Sh. Muftī Taqi in his Arabic book: Buḥūth fī Qaḍāyā Fiqhiyyah
MuꜤāṣirah. The study was limited to one particular source in Arabic,
confined to juristic analysis and no study of the actual banking or
business implication and it was prior to release of 2nd edition of the
book.
The author presented the contemporary methodology followed
by Muftī Taqi while making commentary on Ḥadīths related to the
book of sale in Ṣaḥīḥ al-Bukhārī. The study focused on Muftī Taqi’s
Urdu book named InꜤām al-Bārī with particular reference to book of
sale (kitāb al-buyuꜤ). The study highlighted Muftī Taqi’s
methodology in addressing the unprecedent matters (nāzila) and
modern-day solutions. Also, the study highlighted how Muftī Taqi
tries to correlate between the things by giving related and real-life
examples and illustrations. Further, the study highlighted matters
where Muftī Taqi exhibited his deep understanding of modern
system while talking about rulings given in a particular Ḥadīth like
currency system and prizes distributed via lucky draw2.
Yousuf Siddiqi and Aznan Hasan presented in their study the
methodology followed by Muftī Taqi in presenting and addressing
unprecedented financial issues such sale on instalments, sale of

1
Shifā Dhiyāb ꜤUbayd and Muṣṭafā Khālid Jihād, “Al-Takyīf al-Fiqhī fī al-Bunūk al-
Taqlīdiya Ꜥand al-Shaykh Muḥammad Taqī ꜤUthmānī”, Majallat Surra Mann
Ra’ā, vol. 12, no. 44 (2016): 313-342.
2
Yousuf Azim Siddiqi. (2019, November). Al-Manhaj al-ꜤAṣrī fī Sharḥ Aḥādīth
Kitāb al-BuyūꜤ fī Ṣaḥīḥ al-Bukhārī: Kitāb InꜤām al-Bārī lil-Shaykh Muḥammad
Taqī al-ꜤUthmānī Namūdhajan. Paper presented at The Annual Global
Conference on Prophetic Sunnah organized by Selangor International Islamic
University College (KUIS), Malaysia.
newspapers with images, sale of products containing alcohol and
dealing in modern day currency notes1.
Yousuf Siddiqi, the author, presented various pronouncements
issued by scholars of Indian subcontinent over unprecedented
financial matters. The book included more than 25 fatwā issued by
Muftī Taqi in his Urdu book Fatāwā ꜤUthmānī. Some of the
pronouncements included very common matters like subscription to
newspaper which required juristic deliberation and discussion based
on classical rulings. Further, there were rulings related to complex
financial transactions such as syndications based on Istisna’2.
Despite the academic focus given to contributions of Muftī Taqi,
there were very few studies which were critical about his juristic
standpoint. Hence, Muftī ꜤAbd al-Wāḥid criticised the views and
opinions of Muftī Taqi on Islamic banking products. This included
limited liability company, Takaful system of insurance, credit cards
and prizes distributed by commercial entities. Further, in particular
reference to Islamic banking some matters, the author was critical
about opinions of Muftī Taqi on matters related to linking the profit
rate to an index, financial penalty and calculation of profits in
Muḍāraba on the basis of daily products3. Although, such doubts
were responded by Muftī Taqi in his Urdu book which came out in
20094. Rafīq al-Maṣrī was critical of Muftī Taqi in presenting the
ruling on sale at the market price5.

ZZZ

1
Yousuf Azim Siddiqi and Aznan Hasan, “Manhaj al-Muftī Muḥammad Taqī
ꜤUthmānī fī IstꜤrāḍ al-Nawāzil al-Maliyyah: Kitāb al-BuyūꜤ fī Ṣaḥīḥ al-Bukhārī
Namūdhajan”, Islam in Asia, vol. 17, no. 2 (2020): 67-89.
2
Yousuf Azim Siddiqi, Al-Fatāwā al-Hindiyyah al-MuꜤāṣirah fī Nawāzil al-
MuꜤāmalāt al-Māliyyah, (Beirut: Kanz Nāshirūn, 2020).
3
Muftī ꜤAbd al-Wāḥid, Jadīd MaꜤāshī Masā’il aur Ḥaḍrat Mawlānā Taqī ꜤUthmānī
kay Dalā’il kā Jā’izah, (Karachi: Majlis Nashrīyāt Islam, 2008).
4
Muhammad Taqi Usmani, Ghayr Sūdī Baynkārī, (Karachi: Quranic Studies
Publisher, 2016).
5
Rafīq Yūnus al-Maṣrī, Al-Iqtiṣād wa al-Akhlāq, (Damascus: Dār al-Qalam, 2007),
54-55.
Alternative Commercial and
Operational Solutions in Islamic
Banking: The Contribution of Mufti
Taqi Usmani
Dr. Yousuf Azim Siddiqi | Dr. Aznan Hasan | Dr. Rusni Hassan
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Published on 13th March 2021 as part of lecture notes of the International
Conference on Business and Technology, titled: The Importance of New Technologies
and Entrepreneurship in Business Development: In The Context of Economic
Diversity in Developing Countries.
===============================================
Abstract. Shari’a compliance remains one of the main features in all the
products and services offered by Islamic banking institutions. Muftī Taqi
Usmani (b. 1943) is a world-renowned figure in Islamic banking due to his
crucial position as Chairman of the Shari’ah Board (Bahrain). He has
contributed to Islamic banking through his advanced writings and
addressing vital issues of global interest in the industry.
Using qualitative methodology, this study examines the
alternative solutions that were suggested by Muftī Taqi to various
financing solutions, which are deemed to be not acceptable as per the
classical view of Islamic jurists. His efforts contribute immensely to
providing solutions to the financing institutions. The paper divided
the suggested solutions into five categories: formation of the
contract, contracting parties, subject of the sale, price, and risk
management. There were more than 15 solutions suggested by Muftī
Taqi, and two-third of them were workable, and the rest were
challenging against the original conventional solutions. Future
studies could expand their scope into other areas of contributions as
well.
Keywords: Islamic Banking, Banking Products, Taqī Usmanī.
1. Introduction
Compliance with Shari’a is the core feature of any product or
service offered by the Islamic bank. As structuring new product and
financing solutions is of considerable importance, it's important to
have Shari’a solutions to rulings deemed prohibited or unacceptable
to Shari’a or views of Islamic jurists. While examining the writings
of Muftī Muhammad Taqi Usmani, it was observed that when
addressing sale-based financings, he makes an effort to provide
Shari’a alternatives to what seems to be a commercial or operational
hurdle. The solutions provided need to be free from Shari’a issues
and, at the same time, they should be effective as an alternative, if not
mimic, to the conventional product or process. Muftī Taqi is a
known figure in the Islamic finance industry related to promoting
the Shari’a aspect for the past half a century. He is the Chairman of
the Shari’a Board of AAOIFI, a global standard-setting body based
in Bahrain.
Considering Islamic banking, it would be a huge challenge if
commercial products and their operational processes are not
workable due to classical rulings or views of Islamic jurists. Hence,
this constitutes a problem statement of the study. Further, despite
the important position of Mufti Taqi, no study shows the banking
implication of his contribution to Islamic banking. Hence, this poses
a research gap. The study examined the writings of Muftī Taqi in
three languages, Arabic, English, and Urdu, which poses as one of
the earliest efforts and contributions in this regard.
The study has divided the findings based on the general scope
intending to drive the proposed solution's effectiveness against the
original product, which was not acceptable as per Shari’a.
2. Mufti Taqi Usmani
Muftī Taqi Usmani is a world-renowned Islamic jurist born in
Deoband (India) on 3rd October 1943. His father was Muḥammad
ShafīꜤ ꜤUthmānī who a famous Muftī and jurist of his time. In his
childhood days, Muftī Taqi migrated from India to Pakistan and
settled in Karachi. He graduated in classical Islamic sciences from
Dar al-‘Ulūm Karachi, an Islamic seminary established by his father.
After that, he joined Karachi University and received a master’s
degree in economics and politics in 1964, followed by LLB in 1967.
He joined Dar al-ꜤUlūm Karachi and started teaching books of
classical Islamic sciences besides serving as Muftī at Dār al-Iftā’. Due
to his reputation as an Islamic jurist and understanding of legal
systems, Pakistan’s Government appointed him as Judge to the
Shariat Appellate Bench of the Supreme Court (Islamabad). During
his tenure, he issued some of the important Shari’a rulings, which
were even later published as a part of a 3-volume book called ꜤAdālatī
Fayṣalay (in Urdu). In 1999, he issued a detailed judgment on
prohibiting interest from Pakistan’s banking system, and it was
published as Historic Judgement on Interest (Ḥakīm, 2002). Muftī
Taqi wrote books in three languages, English, Arabic, and Urdu. His
interest area was over Quranic studies, Ḥadīth, Islamic
jurisprudence, Islamic banking, and Islamic history (Siddiqi &
Hasan, 2020). His writings were analysed and studied under master’s
and PhD dissertations in the Arab world and Malaysia. ꜤUbayd
analysed Muftī Taqi’s juristic accommodation (takīf al-fiqhī) of
conventional banking deposits and found that he considers current
accounts as Qarḍ. In contrast, the arrangement of the safe locker is
of the Ijarah type. Further, as per Muftī Taqi, it was prohibited to
place funds with conventional banks even if the person aims to use it
in charitable causes (ꜤUbady, 2016).
Similarly, Jihād studied, in his master’s dissertation, the view of
Muftī Taqi about deposits as well as Sukuk and even suggested to
expand the area of research concerning Muftī Taqi’s contribution
(Jihād, 2015). While making commentary on Ḥadīths related to
financial transactions in his book Fatḥ al-Mulhim, Muftī Taqi
addressed contemporary matters like financial securities as well as
the sale of rights uncommon to bygone days (Zunayda, 2016).
3. Comparative Analysis of Suggested Solutions
Solutions to Contract Formation
Contract formation (inꜤiqād al-Ꜥaqd) means forming the contract
by competent contracting parties who exchanged a duly valid offer
and acceptance. Once the contract is formed, then it's binding on the
contracting parties. The Shari’a issues which arise at the stage of
contract formation are often related to the terms of the offer and
acceptance rather than other aspects of the contract.
Contingent Sale.
 A contingent sale is a sale, which is not a definite one. It may
happen and may not happen depending on some event (Aiyar, 1997).
Hence, a buyer buys goods from the seller, but they agree to make
the sale contingent upon a future event. In Islamic law, it is an
agreed-upon view that the sale cannot be suspended (taꜤlīq) on a
future date or event so that the buyer cannot say that the sale of this
subject of sale is effective from a future date or an event. This view
was adopted by Mālikīs (Al-Qarāfī, 2008), Ḥanbalīs (Ibn Qudāma,
2010), ShāfiꜤīs (Al-Nawawī, 1991). Muftī Taqi highlighted that the
same prohibition applicable to contingent sale applies to a modern
type of provisions called suspensive conditions or resolutive
conditions. Under the suspensive sale, the contracting parties' rights
remain suspended until a future date or event, for example, receiving
a government permit or clearance within 30 days from executing of
sale. On the other hand, under a resolutive condition, the sale
contract automatically gets terminated or cancelled if any event has
occurred like sales tax is levied by the regulators (Usmani, 2018). The
main Shari’a concern in all these solutions that ownership remains
in a suspended mode after executing the sale of a specific asset or
property.
Muftī Taqi suggested the sale solution with condition option
(khiyār al-sharṭ) wherein the sale contract is immediate. Still, one of
the contracting parties, or both, may have the option to rescind the
contract at a later stage. The ownership under the sale with condition
option transfers immediately from the seller to the buyer upon an
acceptance being made to the offer by one of the parties. The party
that holds the condition option may, or may not, rescind the contract
with no automatic effect of cancelling the contract due to an event or
not (Usmani, 2018).
By comparing both the solutions, it is evident that the buyer
under the sale with option will bear the risk during the option period,
which is not the case with contingent sale wherein ownership
remains with the seller, for cases like suspensive conditions, and with
the buyer, for cases like resolutive condition. Hence, the alternative
solution of sale with condition option is workable but has a certain
consideration for the risk during the option.
Inferior Settlement in Istisna.
 Under the Istisna contract, a manufacturable subject of sale
should be delivered by the seller on a future date to the buyer. If the
delivered subject of sale was as per the requirement, then the buyer
has an option to rescind the sale due to non-conformity (Ottoman,
2011).
Muftī Taqi suggested that if the delivered Istisna asset was inferior
in quality, the seller might offer to sell the Istisna asset to the Istisna
buyer against a reduction in the Istisna price (Usmani, 2018). The
given solution will be workable for the Istisna buyer to obtain the
Istisna asset with no obligation of sale rescission and save the Istisna
seller from the loss incurred due to rescission.
Return of Goods if No Sale Takes Place.
Muftī Taqi highlighted that the merchants might buy goods from
a supplier of goods in some cases but would like to stipulate a
condition of having a contingent sale if no one buys the goods from
the merchant buyer (Usmani, 2018).
Muftī Taqi suggested two solutions for this. Firstly, the merchant
might be appointed as a supplier’s broker against a fee. Hence, if the
merchant could not sell the goods, then the goods can be returned to
the supplier. Secondly, the merchant may stipulate sale on condition
option where the sale can be rescinded within a specified period
despite the sale being immediate, and the ownership has transferred
to the merchant buyer upon acquiring supplier's goods (Usmani,
2018).
The suggested solution of agency fee could have the same risk as
the sale with the resale condition. From a commercial perspective, it
will function differently because the merchant might want to earn a
profit, which is not shared with the supplier who agreed to take back
the unsold goods. On the other hand, the sale with a condition option
is more suitable to the conventional form of returning the goods if
no sale takes place because it has some risk and meets the commercial
outcome.
Sale with Promise to Sell
During the medieval ages, Muslims in Central Asia have come up
with a liquidity solution called bayʿ al-wafā wherein the liquidity
seeker sells his property for spot cash price with the condition that
whenever the price is returned to the buyer, then the property is
returned to the seller (Al Zarqā, 1999). It was resolved by the
International Islamic Fiqh Academy (Jeddah) that such an
arrangement is prohibited (IIFA, 2003).
Muftī Taqi suggested an alternative solution to the prohibited
bayꜤ al-wafā. As per the solution, the contracting parties may enter
into a sale with a promise to sell wherein the subject of sale will be
sold by the owner with a promise from the buyer to sell it back to the
original owner when he settles the price.
The solution works similar to bayꜥ al-wafā, but the sale in the
suggested solution is absolute, and the risk is borne by the buyer (i.e.,
the liquidity provider).
Solutions to Contracting Parties
Government Import License.
A license can be defined as “formal authority to do something that
would be otherwise unlawful” (Oxford, 2015). As per Muftī Taqi, as a
principle, placing restrictions is not advisable but if there was a need,
then regulating the commerce through licensing is acceptable.
Hence, the sale of licenses is permitted according to him (Usmani,
2018). Similarly, AAOIFI permitted the sale of affectation right (ḥaq
al-akhtiṣāṣ), which covers the sale of license as well (AAOIFI, 2015).
As per KFH, it is impermissible to ask for consideration against
passing the license to another party if it was not allowed by the
government. It was also seen as permissible to buy a commercial
license, but the financier should abstain from doing so because the
Commerce Ministry prohibits doing so (KFH, 2014). Muftī Taqi
highlighted that if the government authorities do not allow the sale
of the license, the license holder may enter into agency arrangement.
There were two solutions suggested to make use of a license without
violating the government norms.
As per the first solution, the license holder appoints the importer
as his agent to import, then he sells the imported goods on profit
(Usmani, 2018). This implies that the license holder takes the sale's
liability until the delivery takes place, unless and until there was
misconduct or negligence from the importer.
As per the second solution, the license holder is appointed as the
importer’s agent to import against a fee. Due to the agency
arrangement, any liability arising out of the sale contract (that was
executed between the license holder and the supplier) will be borne
by the importer, being the principal buyer (Usmani, 2018). The
second solution is closer to the sale of license in terms of risk borne
by the parties. Hence, the second solution is workable because it
meets the commercial outcome with a similar risk profile.
Solutions to Subject of Sale
Sale of Prohibited Shares.
Shares represent the holder’s interest in and liability to a company
(Oxford, 2015). Hence, shares represent the company’s assets as well
as liabilities. Some companies have a mixed portfolio of Shari’a
compliant as well as non-compliant assets. As per AAOIFI, it is
permissible to purchase shares of such entities provided a) the
impermissible assets are small in portion and do not constitute the
core offering or activity of the business, and b) returns from
impermissible assets should not be more than 5%, which need to be
disbursed to charity (AAOIFI, 2015). Muftī Taqī believes that a
Muslim cannot purchase shares of a hotel, restaurant, or airlines that
are selling wine and pork besides selling and offering permissible
products and services. This comes in line with the share being a
common share of entities’ entire assets (Usmani, 2018).
Muftī Taqī even suggested a way-out for a Muslim who owns
impermissible assets and then repents his previous decision. The
investor can sell his shares to a non-Muslim wherein a common
share of fixed assets in the entity are sold for an agreed-upon price
(Usmani, 2018).
The suggested solution seems workable for offloading the shares
of mixed business entities. Still, it might be challenging when a) the
entity has no fixed assets, or b) the investor base eligible to buy these
shares are small in number.
Sale of Water in Ponds.
The majority of Ḥanafīs considered water in ponds as a right that
is ancillary to a corporeal property and not a subject of ownership
which can be separately sold (Al Shawkānī, 2007). However, Abū
Yūsuf did not allow the sale of water sourced from a pond due to
ignorance in quantity to be sold (Abū Yūsuf, 1979). Muftī Taqi
suggested if a meter was fixed for the sale of water sourced from
ponds or wills, then such a sale will be permissible because it removes
the ambiguity in the quantity purchased by the buyer (Usmani,
2018). It is evident that the suggested solution is workable; besides, it
avoids any dispute due to ambiguity in the quantity of the subject of
sale.
Financing Purchase of Vehicle.
Usually, Islamic banks finance vehicles on Murabaha basis. Muftī
Taqi suggested that Islamic banks may finance vehicles' purchase on
Istisna basis, which is a sale of any manufacturable item. It should be
ensured that the vehicle is not specific. In the sale contract, the
Islamic bank shall act as Istisna seller, and the customer is the Istisna
buyer on deferred payment (Usmani, 2018). The given solution is
workable from an operational perspective because a Murabaha
contract cannot be formed before owning the car. In contrast, an
Istisna sale can be formed between the Islamic bank and the
customer, and then a parallel Istisna might be formed. The solution
might be challenging because Islamic banks cannot sell the vehicle
on Istisna with an absolution basis, although such a condition is
acceptable in the Murabaha sale contract. Hence, the product has its
benefits as well as limitations.
Negotiable Assets for Liquidity.
Muftī Taqi suggested to create a pool of negotiable assets out of
SharīꜤah compliant financings offered by Islamic banks (e.g., Ijarah
and Musharaka), then the same can be securitized and traded among
Islamic banks for the liquidity purpose against the net present value
of the underlying assets (Usmani, 2018). A similar solution was
advised by the Shari’ah Committee of Bank Negara Malaysia to use
the Mudaraba interbank investment, Ijarah Sukuk, or SharīꜤah
compliant shares as the underlying asset of Tawarruq or deferred
payment sale transaction (BNM, 2010). The given solutions are
workable and can be used for liquidity management besides being an
alternative to international commodity Murabaha and other types of
Tawarruq.
Solution to the Price
Financing for Usance LC Importer.
Muftī Taqi highlighted the case of Usance LC, where the bank, as
LC Issuing Bank, is supposed to settle the value of the LC in foreign
currency post expiry of the usance period. Hence, the bank delivers
the goods upon arrival and clearance of documents, but the actual
cost that will be paid to the exporter will be ascertained at the end of
the usance period (Usmani, 2018).
 Muftī Taqi suggested to enter into Murabaha in foreign currency
so that the customer will bear the risk of currency fluctuation. Hence
Islamic banks will be liable to pay in the same currency of the
Murabaha contract. For example, if LC was issued in US Dollars,
then the bank (as LC Issuing Bank) will not enter into Murabaha in
a local currency other than USD; instead, it will enter into Murabaha
in US Dollars (Usmani, 2018). NCB has suggested another solution
wherein the Murabaha with LC customer is made in a local currency.
Still, the bank enters into a promise to buy currency at a future date
(i.e., the expiry of the usance period) to mitigate the risk of currency
fluctuation (NCB, 2015). The solution of Muftī Taqi requires
mitigation of currency fluctuation as it was suggested aptly by the
NCB.
Further, Muftī Taqi suggested to apply Musāwama in the Usance
LC and sell the LC goods for a price with in-built consideration of
any change in the foreign currency rates (Usmani, 2018). The
solution might be challenging while deciding upon the Musāwama
price because the currency rates might go further up, which will
adversely impact the bank or be gone, impacting the customer.
Solutions to Risk of Products
Long-position in Salam.
When an Islamic bank finances liquidity requirement of its
customer using Salam financing, then on the transaction date, the
customer receives the principal amount (i.e., the funding) and, in
return, has to deliver a commodity or a corporeal property on the
Salam delivery date. As per (AAOIFI,015), (IIFI, 2003), and (ABBG,
2006), Salam asset cannot be sold before its delivery. Muftī Taqi
suggested variant solutions deal with the bank’s long position in the
Salam asset (Usmani, 2018).
Muftī Taqi suggested creating a Salam desk by the Islamic bank,
which purchases agricultural goods from the farmers on a Salam
basis, then sells these products, via this desk, to those parties that
want to purchase the agricultural products on spot basis (Usmani,
2004). The given solution addresses the chances of holding the Salam
goods upon the delivery. The solution could be challenging since it
requires a market understanding of selling the products on the spot
once delivered for a price that generates profits.
 Muftī Taqi suggested that Islamic banks (as Salam buyers) may
enter into a parallel arrangement of selling assets with descriptions
of Salam assets to another party against a promise to purchase from
it (Usmani, 2018). The given solution will avoid having a long
position once the Salam asset is delivered to the Islamic bank by its
customer. The solution might be challenging because it requires a
third party (other than Salam seller or Salam buyer), ready to buy the
goods.
Credit Monitoring System.
While addressing the issue of loss due to the Murabaha
customers' default, Muftī Taqi advised that Islamic banks should
develop an interbank monitoring system that will keep track of
timely payments of instalments by Islamic bank’s customers.
Defaulting customers would be deprived of facilities in the future
(Usmani, 2004). The solution will be workable because it mitigates
the risk of default, but it is challenging because it requires system
development which is pan-organization.
Overall Outcomes

Figure 2: The Outcome of Alternative Solutions

The alternative solutions, as suggested by Muftī Taqi in different
areas of Islamic financing facilities based on the sale contract, could
be either classified as a) workable alternative which largely have
similar risk profile, application or has an existing demand for it, or
b) challenging alternative which is despite being Shari’a solution and
alternative but comes with higher risks or has different market appeal
against the conventional product.
Conclusion.
Muftī Taqi is a renowned Shari’a scholar who contributed for the
past many decades to the development of Islamic banking. While
going through his writings, it was evident that he endeavours to
suggest Shari’a compliant solutions to matters which are non-
compliant to Shari’a. This study focused on development related to
contract formation, contracting parties, subject of a sale, price of the
subject of the sale, and risk management of the products.
It was evident that 15 different solutions were suggested by Muftī
Taqi, which contribute to Islamic banking products' commercial and
operational aspects. Most of these products can be classified as a
workable alternative with a close resemblance in the product offering
and customer expectation. However, three products could be
challenging in nature due to implementation and different profiling.
The overall good performance by Mufti Taqi could be attributed to
the fact to his deep knowledge of Islamic jurisprudence besides the
study of law and vast experience in applied Shari’a advisory.
It is suggested to conduct similar studies on the contributions of
other renowned Shari’a scholars. Also, it is advised to study the work
of Muftī Taqi concerning other types of facilities, which are based on
Musharaka and Ijarah. The overall outcomes (see 3.6) show the
significance of presenting alternative solutions from Shari’a
perspective. Hence, the solution cannot be only Shari’a compliant
rather, and it should be workable and less challenging. Hence, the
outcome on the side of risk, marketability of the product, the legal
obligation will determine whether the product can be classified as
workable or challenging.
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ZZZ
A Mentor of the Industry
Dr. Yousuf Azim Siddiqi
===============================================
Published in I-FIKR digest in 2020.
===============================================
On 20th August 2020, the day marked as start of a new year in the
Hijrah calendar (1442H), the Islamic banking fraternity was shocked
to receive the sad news of the demise of our beloved Sheikh Dr.
Hussein Hamid Hassan. He was the mentor of my mentors, a
polymath, and profound jurist. He breathed his last in his home
country Egypt. The same Egypt that produced Mufti Muhammad
Khatir (1913-2004) and Dr. Ahmad Elnaggar, who were one of the
most prominent pioneers of Islamic banking since its inception.
Dr. Hussein was born on 25th July 1932 in Beni Suef (Egypt). He
studied Law and Economics and then pursued his interest in
studying Shari’a. Afterwards, he headed to the USA to receive a
Diploma in Comparative Law from the International Institute of
Comparative Law (New York). He returned to Egypt to earn a
doctorate in Fiqh & Islamic Jurisprudence in 1965. He served as
Manager of the Fiqh stalwart Dr. Muhammad Abū Zahra’s office.
Dr. Hussein was known for his various contributions in the field
of Islamic banking, but his contributions were equally enormous in
the field of education and Islamic codification. He supervised the
first PhD thesis in Saudi Arabia, which was about the lease of services
provided by humans, (Al-Ijārah al-Wāridā Ꜥlā Āmal al-Insān) which
was prepared by Dr. Sharaf b. Ali al-Sharif in the Department of
Higher Studies of Shari’a at King Abdul Aziz University (Jeddah)
around 1977. Dr. Hussein was one of the founders of the
International Islamic University (Islamabad). He stayed there for 14
years to lay down strong foundations of the institution. One of his
most prominent students was Professor Dr. Imran Ahsan Khan
Nyazee (b. 1945) who moved from an inspiring law career to pursue
Islamic studies under the tutelage of Dr. Hussein. Further, he
followed his mentor’s path and received post-graduate degrees from
the USA and returned to Pakistan to be the mentor of a new
generation of Islamic law experts once Dr. Hussein left the
University.
Dr. Hussein’s name was evident in the field of Islamic codification
when he assisted governments in drafting laws and constitutions.
Even he was instrumental in developing supervisory policies and
guidelines released by stock exchanges in different parts of the world.
Dr. Hussein was a vivid author, as I recollect from his books,
Naẓariya al-Maṣlaḥa fī al-Fiqh al-Islāmī and Madkhal li Dirāsat al-
Fiqh al-Islāmī, which was recently published by Dar Al Fath
(Jordan). The full list of his books can be found on his Arabic page
in Wikipedia. He had authored more than 400 research papers which
were presented in various conferences and published in different
journals and magazines.
I met Dr. Hussein for the first time in December 2006 in Bahrain
during AAOIFI’s Shari’a conference. I could feel his scholarly
generosity through information sharing and clarifying to someone,
like me, who is an infant to the industry. Afterwards, I met him in a
Shari’a meeting in 2008 in Dubai. We were supposed to present a
structured financing product based on UAE National Bonds. What
has attracted me was his eagerness to respond to questions of those
who could not understand his side of ijtihād or his individualized
fiqh opinions. In the coming years, we had many glorious chances to
benefit from Dr. Hussein’s expertise. What took by surprise was his
determination to review lengthy documents, hearing to the
presented queries from all the aspects and providing a response with
utmost detail and meticulousness. I remember in one of the
meetings, which included representatives from various Islamic
banks, that Dr. Hussein entered the room with documents, which
were sent late in the night. Still, all of them were personally reviewed
by him as his handwritten remarks could be seen. Dr. Hussein would
not hesitate to enrich others with his verbal, written and moral
guidance.
 Dr. Hussein was a renowned fiqh scholar who had opinions
which were the result of his individualized ijtihād. He was always
defended his stand with scholarly courage and juristic bravery. Some
of his positions included a) prohibition of organized banking
Tawarruq for the retail customers, b) undertaking to buy back
Mudaraba/Wakala Sukuk at face value, c) combination of the loan
with the agency for a fee, d) application of Sharkit al-Milk in financial
securities which are structured on Sharikat al-ꜤAqd, and, more
recently, e) allowing the increase of the Murabaha profit rate during
Covid-19 crises. Despite this kind of juristic heterogeneity, I always
experienced utmost mutual respect among the Shari’a scholars of
Islamic banking. I always looked at Sheikh as a mentor of my
mentors in Islamic banking.
We could feel the supervisory vacuum, which is created by the sad
departure of Dr. Hussein, if we realized how he was speaking in the
conferences, answering reporters, reviewing complicated structures
or, even, addressing official bodies.
As they say, a star has gone far away, and darkness spread in the
nights. Till the next star emerges in the galaxy of Islamic banking, I
shall continue to narrate the great endeavour made by Dr. Hussein
Hamid Hassan in serving the industry as a Shari’a supervisor.

With Love and Gratitude,

Your Students’ Student

ZZZ