Islamic Finance - a Non-Muslim's Understanding
By SAW Ann Ping, CFA
Trade was the predominant business activity in the land during the Prophet’s time. With minimal infrastructure or capital intensive investments, the usual type of financing as we know it was not prevalent. Hence, there is not much precedence that can be used when it comes to structuring Islamic finance for the current times.
Popular instruments such as murabahah were not meant to be financing instruments on their own. Murabahah was meant to facilitate trade and as such, short term in nature. So how do we adapt and adopt Islamic finance in the current environment will all its complexities?
When it comes to money changing hands, the key question is motive. Are you lending money to help the person or are you investing for profit reasons? If it is the former, then it is due to the kindness of your heart to help. A return should not be asked or demanded, hence the only loan in Islamic finance is Qardh Hasan (benevolent loan). If it is the latter, then as a businessman who enjoys the fruits of the business, so must you be prepared to take the business loss.
If seen from this perspective, Mudharabah and Musyarakah are then generally accepted as the “pure” Islamic finance instruments.
The undisputed aspects of Islamic finance are the prohibition of riba and that any debt entered into by consenting adults must be documented, witnessed and repaid. Riba is prohibited on the grounds that it oppresses the one who borrows, having to pay the borrowing cost no matter what. (But remember, if the borrower has money and refuses to pay the lender, it is also an oppression, oppression of the lender). Hence, if the intention of the money-giver is to make money, imposing a fixed return that is independent of the performance of the business that he invests in, can be deemed to be akin to riba.
Shariah principles that have a fixed return such as Murabahah, Istisna’ and Ijarah have certain sets of conditions that must be met if they are not to be seen as riba.
The difficulties faced by Islamic finance practitioners in the modern world is to juggle the principles above and their respective conditions with commercial considerations from lenders and investors. In many situations, commercial needs overcame the Shariah element until only the form, not the substance is met. Bai Inah, arranged Tawarruq and even profit guarantees for partnership based structures resulted. So, is Shariah compatible with these commercial demands? The answer is yes.
The structures in the book, “The Islamic Finance and Sukuk Handbook – Where Shariah Meets Commercial Demands” attempts to show that. The book covers almost all financing situations including project finance, capital expansion, public good financing, joint venture financing, etc with explanations on meeting both Shariah and commercial demands. The book is written by practitioners for practitioners. It is out for pre-order. Please refer to the link www.sukukhandbook.wixsite.com/islamicfinancebook for orders and more information about the contents of the book.