Case Study 1

Move to Shariah based Financial Products

Saudi entrepreneur Mr Saleh Kamil, President of the Dallah AlBaraka and one of the pioneer of Islamic banking has called on the industry to go back and swing from Shariah compliant to Shariah based financial products. As he said:

What worries me in Islamic Banking today, it is that there are not many bankers and academics that understand the sprit and philosophy of fiqh-almuamlat. Our scholars tend to find tools in traditional banking. We think we are excellent. But what we want is to design instruments according to our Shariah and not the other way round.

Getting to heart of the problem can be easy, but daring to publicly admit it is not, especially if the heart of the problem is where you are coming from. And that precisely is what makes the difference!

Those who started the Islamic banking movement did not try to train the traditional bankers spirit and philosophy of Islamic Finance. Very well said indeed.

Source: Islamic Finance Blog, Sunday 20 May, 2006

Notes on the explanation on

Shariah based: Where the asset used in Islamic products are really transacted on, not only used as conduit to obtain the same result of the conventional products (indebtedness, proceeds, etc)

Example: Asset based securitisation

Shariah Compliant: Asset used may be utilised to reach the same effect like the conventional products

Examples:

Inah (a transaction whereby a person buys an asset/commodity from a seller on the basis of deferred payment, and sells it back to the same person), Bai' al-'Inah (Sale with Immediate Repurchase)

Ttawarruq (tawarruq is a financial instrument in which a buyer purchases a commodity from a seller on a deferred payment basis, and the buyer sells the same commodity to a third party on a spot payment basis (meaning that payment is made on the spot).

Waad (n Islamic finance, wa'ad, or promise, refers to an obligation issued by one counterparty, such as a potential purchaser or purchase orderer in murabaha transactions, to another, and whereby the promisor undertakes towards the promisee to proceed with the contract. Shari'a considers a promise as binding on the issuer unless an excuse (force majeure) comes forth and prevents fulfillment. In law, a promise is binding if it is pending on a cause and incurring the promisee costs and expenses.

For example, in murabaha to the purchase orderer, the promise of the purchase orderer may be binding or non-binding. Shari'a and mainstream modern Islamic finance practices grant the purchase orderer the option (khiyar) either to purchase the asset or reject it when offered thereto by the purchaser. However, some present-day shari'a scholars opine that the promise in this type of sale is binding on the purchase orderer.)

Such as Waad structured product linked to conventional index, ijarah sukuk (asset based), etc

Case Study Questions.

1. What do you understand Shariah compliant and Shariah based financial products? Explain . Do you think that Shariah compliant products may not be Shariah based.

2. Are Islamic banks currently innovators or imitators? Explain giving appropriate examples.

3. In your opinion what does Mr, Saleh Kamil means by the spirit and philosophy of Islamic finance.