Author: Sherif Mustafa
Protection of Islamic Investments under Shariah Law
Capital is invested to receive a reasonable Return on Investment (RoI), but the unforeseen could cause Loss, Decrease or even Destruction of that Capital. Hence it becomes imperative that we seek protection or a guarantee to safeguard our Capital which is available whether you are Shariah-compliant or not. If you intend to conform to Shariah then you should read all the clauses and follow what is laid down without any deviation.
We reproduce below some of the clauses that you would need to adhere to, but you would still have to get more expert opinion before, during, and after any agreement, you would enter into. An investment for capital would generally entail Investors and an Investment Manager (Mudarib) there could be other parties who would help to protect and guarantee the Investment but they should adhere to the tenets of Shariah.
The following are guidelines to be followed by all who would be a part of that Investment and who would have and derive benefits and profits from that Investment. All parties or partners to the Investment and any foregoing agreement should follow the tents of Shariah if the agreement is to come under it.
The Difference between Protection and Guarantee of Capital
When Capital is invested, every available mechanism should be called upon to protect it, by the Investor and the Investment Manager (Mudarib). Guarantee on the other hand is the liability of the Capital against Loss, Decrease or destruction is borne by a Third Party to reimburse the capital or part of it to the Investor.
SHARIAH GUIDELINES
Shariah permits the protection of Capital, within its tenets. The Investment Manager (Mudarib) is bound and liable to use the specified Shariah guidelines to protect the capital against Loss, Decrease or Destruction. Loss of Capital, Depreciation, Inflation, or fluctuation of exchange rates or any other risks is available under Shariah compliant instruments. The Investment Manager (Mudarib) should ensure and endeavor to grow the Investment and protect it within the guidelines provided but may not be responsible for the affects of market forces unless he is held responsible for negligence.
Willful misconduct, negligence or breach of contract on the part of the Investment Manager (Mudarib), makes him liable for the Loss, decrease or Destruction of the Capital and if determined that the accrued profit is now also a part of the capital, that would be included too.
Shariah compliant to protect capital
There are ample and clearly defined mechanisms and instruments under Shariah to protect Capital and these guidelines should be followed and complied. The Investors should collectively bear the risks and losses if any, proportionate to their Investment and the Investment Manager (Mudarib) is liable only for willful misconduct, negligence or breach of conduct, provided every step was Shariah compliant in the process.
Islamic insurance or Takaful to cover the various risks the capital could endure is permitted and recognized under Shariah, which could be sought by the Investors or the Investment Manager (Mudarib) on their behalf. Islamic insurance or Takaful to protect imports, exports, leased assets or for that matter anything that could be covered under permissible Islamic insurance or Takaful is permitted.
A third party who could be a Government statutory body, institution, guardian or father with less than half ownership or relationship could intervene to indemnify the Investment Manager (Mudarib) in case of Loss, Decrease or Destruction of the Capital. A third party could also intervene to indemnify the Investment Manager (Mudarib) against willful misconduct, negligence or breach of conduct without any consideration received. Creating reserves to protect the Capital from external or internal forces should be from the Investor’s profits but not from the Investment Manager’s (Mudarib’s) profits.
Increasing and diversifying investment assets to receive an appropriate return and counter risks if any foreseen is permitted. Amalgamating assets, whether they are real estate, commodities, different currencies, financial assets like stocks or “Sukuk” are permitted.
Division of the whole or part of the capital to minimize risks, into accepted “Murabahah and “Musharakah” contracts, with third parties, with exemplary credit ratings are permitted. Division of the invested capital into “Ijarah” and “Musharakah” contracts with the former with good credit ratings of a combination of the principal amount and the rental amount, with the latter the other part. Divide the Capital into “Murabahah” and “Arboun” contracts with the first part with the former of the initial capital and profits and with the latter the purchased assets and new assets purchased, whilst observing Shariah relating to “Arboun”.
Obtaining security guarantees in Murahabah, Salam and Istisna’a to ensure debts are paid or sell as an option due to nonpayment.
Pursuing and obtaining any other Shariah permissible instruments and mechanisms, to protect the Capital from Loss, Decrease and Destruction. The Investors can direct the Investment Manager (Mudarib) to comply with any other Shariah mechanisms, guidelines and limitations.
Non-Shariah compliant to protect capital
Non complying Shariah instruments or mechanisms could not be used to protect the Capital and everything should be within the purview of the Shariah. Holding the Investment Manager (Mudarib) totally and completely responsible for all Loss, Decrease or Destruction is not permitted. Unconditional third party undertakings, out of the purview of the Shariah are not permitted to recover the capital.
Committing or obligating the Investment Manager to purchase the investment assets or a part of it, not conforming to the purview of the Shariah. Any type of undertaking by any third party, to guarantee the Capital for a fee, which is not in the purview of the Shariah. Protecting the Capital by other means which are not permissible under the Shariah, for the simple reason that it would not be within the tenets of Shariah.
Shariah Compliant Stocks – Step by Step Screening Process
Financial markets plays a vital role in contemporary economic systems by encouraging and allocating the savings of investors to invest in the stock market which helps economic development by transferring funds from categories, whether individuals or companies, which have financial surpluses and known as lenders to categories suffering from deficits and called borrowers. Stock market is divided into several sectors such as real estate, services, financing, insurance, petrochemicals, construction, transport, cement, industry, agriculture, hotels, tourism, communications, technology, retail and food. Companies shares are listed in stock exchange based on the sector to which the company activities belong; regardless of the compatibility of the activities of such companies with Shariah. Let’s learn how to screen Shariah compliant stocks.
Shariah Compliant Stocks require due care in the selection process. The Stock exchange clients vary based on their goals, there are investors who invest in companies shares which they believe in their success based on the strength of its financial position, level of profitability and reliance on several other financial indicators. They retain such shares for long periods, and usually ignore the daily price fluctuations of market prices. The other type of clients called speculators and they focus on seizing opportunities of short term price movements, unlike investors, to achieve quick gains regardless of company performance.
Although the primary goal from investment in shares, either for investors or speculators, is to maximize profits, preservation of capital and ensure a balance between liquidity and profitability, there are other targets for investors who want to buy and trade in Shariah compliant stocks represented in obeying God and his Messenger in a way serving individual and public interests by investing in legitimate activities (halal) only and avoid forbidden activities.
Accordingly, companies shares listed in stock exchange can be legitimately reclassified into three sections: the permissible companies, forbidden companies and mixed companies. Permissible companies defined as companies with documents stipulating to comply with the provisions of Shariah, or companies that actually apply all provisions of the Shariah although its documents do not actually stipulate the necessity to adhere to Shariah. Forbidden companies, their main purpose is to run illegitimate activities such as dealing in usury (riba) conventional banks, finance companies and traditional insurance companies; production, bottling and selling wines; trade in pork; nightclubs, drugs, gambling, sports betting, tobacco products and weapons. Mixed companies are established for legitimately permissible purposes, but they are dealing in usury with banks, either by borrowing or lending which resulting in mixing of permissible and forbidden operations. And despite the different opinions of Shariah scholars between permitting and prohibition of acquiring and trading shares of these companies, we will review the controls which regulate dealing with such kind of companies in case the investors or portfolio managers want to include the shares of such companies in the securities portfolio.
The bases of selecting mixed companies to acquire and trade its shares
An investor, broker, agent or portfolio manager can create a basket of companies shares that will be invested by doing a preliminary survey of financial market including various sectors to exclude “forbidden companies” of which activities and objectives are incompatible with Shariah and focus on “permissible companies”. Whereas, the shares of “mixed companies” shall be selected depending on “Financial Screening” which depends on analyzing the latest audited financial statements, in addition to reviewing the articles of association of the company based on financial papers Shariah standard of shares and bonds issued by Accounting and Auditing Organization for Islamic Financial Institutions in Bahrain “AAOIFI”. According to ” AAOIFI”, the following four controls shall be followed; (First) The articles of association of the company shall not stipulate, in company objectives, to deal in usury or trade in wines or pork products and similar forbidden activities; (Second) The total amounts borrowed by way of usury shall not exceed 30% of market capitalization of the corporation; (Third) The total amounts deposited by way of usury shall not exceed 30% of market capitalization of the corporation; (Fourth) Total forbidden income shall not exceed 5% of company total income.
Although relying on “AAOIFI” is prevalent, such percentages may vary occasionally based on doctrinal opinion issued by Shariah Supervisory Board of financial market or Islamic investment funds (Shariah Compliant Stocks). For example, the financial screening of Dow Jones Islamic Index depends on that the percentage of debts, cash and interest-bearing securities, accounts receivables (each separately) shall be less than 33% comparing to market capitalization. Individual investors can resort to the broker or portfolio manager to obtain a list of companies of which shares can be regularly acquired and traded, whether they are “permissible or mixed companies”.
Continuous Shariah Monitoring of Shariah compliant stocks
Investment in the financial markets generally and “mixed companies” particularly needs an effective control system and monitoring financial ratios, in addition to reviewing the articles of association of companies regularly, especially with quarterly profits announcement where permitting the investment in such companies does not mean necessarily that the company will continue to work within the permitted legitimate limit, as internal or external variations may happen leading to a change in company internal policies or processes resulting in exceeding the stated percentage. So as the investment in such companies will become forbidden according to Shariah. Positive critical changes can also happen in forbidden companies which may lead to its reclassification to be in the list of permissible or mixed companies. There is no doubt that the analysis of financial statements, company data and Board decisions require special skills and experiences in financial analysis which may not be available among the crowd of investors, in such case, the resort to the broker or portfolio manager will be the perfect solution to ensure remaining of mixed companies within Shariah permitted ratios and not changing the classification of “permissible companies” to “forbidden or mixed companies”. In case, it is assured that “mixed companies” are no longer within acceptable ratios during the holding period, such investment shall be left.
How to purify profits achieved from mixed companies shares
There are two methods to purify mixed companies shares; the first method purify the whole profit whether it is in the form of cash, bonus shares or profit achieved as a result of selling; the second way is to purify share annually.
The first method: The profit gained from share is purified in case of cash distribution by multiplying the value of profit distributed in cash by the purification percentage of profits. In case of bonus shares distribution, the value of the bounce shares shall be calculated and multiplied by the purification percentage of profits to get the amount to be disposed of. In case of purification due to selling of shares, investor shall determine the value of the achieved profits which is the difference between the sale value and purchase value; then the profit values are multiplied by the purification percentage to get the amount to be disposed of.
The second method: Purify the share annually from being doubtfully illegitimate (haram). Shares are calculated by multiplying the number of company shares, subject of purification, by the purification value of the share to get the amount to be disposed of.
Responsibility and Means of Illegitimate Money Disposal
Whereas, the illegitimate (haram) part of money may not be utilized in any way, i.e; to be deducted from Zakat or taxes owed to the State, it shall be disposed of and granting it in righteousness and goodness of the most benefiting work and most people need. If the financial institutions traded the shares for its interest, such institutions shall be responsible for disposing of the illegitimate (haram) income. In case of brokerage firms, brokers shall notify the investors and clients with purification value of profits achieved from cash distribution, bounce shares or shares selling, in addition to, purification value for a share. Some brokerage firms send investments account statement includes the purification amount for convenience of clients without any extra fees for the purpose of providing superior services of Shariah Compliant Stocks.
Future Outlook
Dubai steadily seeks to emphasize its position globally towards achieving the initiative “Dubai The Capital of Islamic Economy” launched by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President, Prime Minister and ruler of Dubai, at beginning of 2013, which leaded to a lot of achievements in the past period including the establishment of legitimate authority stipulating the standards of banking and financial systems in compliance with provisions of Shariah and supervising legitimate committees of banks and financial institutions in UAE. Dubai plays a pioneering role in leading global Islamic economy which enables the overcome of all obstacles and challenges facing investors in several financial markets either regionally or globally with regard to having a standardized reference for the legitimacy of “mixed companies” shares by issuing periodic bulletins specializing in companies quarterly assessment to measure their conformity with Shariah for all Shariah Compliant Stocks worlwide.
Shariah Compliance Challenges in Islamic Banking Windows
Tags: Shariah Compliant StocksWeb Traffic Generation Strategies for Islamic Financial Institutions
Website traffic is not just important for the popularity of the business but it is an opportunity for growth for Islamic financial institutions. You don’t need an impressive amount of visitors to your website to boast it to your competitors but to increase the number of your potential customers. Website traffic is important to share the message of your brand, to leave a good impression and to build long lasting relationships. Website traffic is also an important part of quality lead generation. Furthermore, it is a way to solve the problems of a customer and sell your product or service.
Impact of Website Traffic
- A large number of website visitors prove the credibility and reliability of your business
- Ensure that your website is generating quality leads and not bad traffic. Every visitor is not a part of good traffic and bad traffic can bring your business down
- Quality lead generation helps to increase your website conversion rate. Increasing website traffic gives you a better chance to convert customer curiosity into customer purchase.
Islamic Financial institutions like Islamic banks, Islamic finance companies and Takaful can also benefit from increased website traffic. Selling financial products and services is a bit harder than other normal products. It is common knowledge how difficult it is to get customers interested in insurance. Therefore, it is time that financial institutions start optimising their websites. Website traffic for financial institutions can be divided further into time spent on the website, website stickiness and mobile visits. Below is an illustration of most common traffic generation techniques for websites:
1. Pay Per View (PPV) vs. Pay Per Click (PPC)
PPV is a type of advertisement that displays only for a few seconds and you only pay when someone actually views it. They are used to create ad impressions to the website visitors. On the other hand, PPC is the advertisement for which you pay when someone clicks on them such as Google AdWords, Yahoo and Bing. Both PPV and PPC are good ways to interest your visitors.
2. Social Media
Social media is all the hype among people nowadays and that is a great opportunity for financial institutions to engage customers with their websites. You can promote yourself over social platforms like Facebook and Twitter and link back to your original website.
3. Display Ads
Display advertising includes banners and videos. These ads appear as sections on a website. They can be used as backlinks to your website to bring in a potential customer.
4.Content Ads
These are a type of text advertisement. You can display them beside relevant content that matches your website. This way you can target the right market and potential customers can find you easily.
5. Contextual Ads
Contextual ads can generate quality leads as they bring in customers that have a high chance to be interested in your service. These ads are showed to users according to their search history as they browse the internet and can be considered one of the best lead generation techniques for Islamic financial institutions.
Learn about Shariah Compliant Call Centers – Lessons For The Frontliners
Money Laundering in Shariah From Quran and Sunnah
Money laundering refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. Through the definition of money laundering, it is indicated that it is an act violating the ethics and human values that call for the Halal earning of money in non-compliance with the Holy Book of Allah “Qur’an” and the traditions of his Prophet-Peace be upon him. Therefore, it is deemed as a legal crime represented in the trial of making Haram “illegitimate” money as Halal “legitimate” money. There are many evidences from the Holy Qur’an and Sunna for the prohibition of this type of financial crimes.
There is no doubt that the money laundering negatively affects the economy and development and opens the door for the Haram money that is significantly related to illegal activities such as the drug trade, prostitution, arms trade, smuggling of goods, terrorist activities, counterfeiting or money stealing.
Money Laundering In the Holy Qur’an
(1) Suart al Baqarah – verse 188 “And do not consume one another’s wealth unjustly or send it [in bribery] to the rulers in order that [they might aid] you [to] consume a portion of the wealth of the people in sin, while you know [it is unlawful].” The verse stated expressly the prohibition of illegal earning of money such as bribery and theft.
(2) Suart Al Maidah – verse 2 “And cooperate in righteousness and piety, but do not cooperate in sin and aggression”. This verse refers to the prevention of cooperation with any individual trying to affect the society.
(3) Suart Al Araf – verse 157 “who enjoins upon them what is right and forbids them what is wrong and makes lawful for them the good things and prohibits for them the evil and relieves them of their burden and the shackles which were upon them”. This verse indicates that the money laundering is deemed as a prohibited earning of money.
(4) Suart Al Nisa – verse 29 “O you who have believed, do not consume one another’s wealth unjustly but only in lawful business by mutual consent”. The verse includes a general legislation prohibiting invalid treatment and the circumvention of people’s money through the injustice and monument.
Money Laundering in the Sunna:
(1) The prophet Mohammed (PBUH) has stated in his last sermon “Verily your blood, your property are as sacred and inviolable as the sacredness of this day of yours, in this month of yours, in this town of yours”. The Hadith refers to the preservation of Muslim’s money and the prohibition of illegal earning of which. In general, it includes all of financial and economic crimes, including the money laundering. (Reference : Sahih Muslim 1218)
(2) Reference to Sahih Al Bukhari No. 2059 – The prophet Mohammed (PBUH) said “A time will come when one will not care how one gains one’s money, legally or illegally”. The Hadith expects the future of corruption of consciences and immorality. Therefore, people became indifferent to the source of money, whether it is Halal or Haram.
Conclusion:
The money laundering is deemed as a legal crime and contrary to the Shariah. It is prohibited earning and all efforts should be unified for the prevention of such crime for its social, economic and political risks.
Tags: Money Laundering, Sharia, Shariah, Shariah compliant