Wednesday, March 11, 2009

Conversations with an Academic

Assalamu 'alaikum,

Conversations with an Academic

Q) A Ruling of the Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI )Shariah Committee on 14th February 2008 says:

Not permissible to structure Purchase Undertaking for Client to purchase asset from Sukukholders at end of Sukuk at a price not equal to prevailing market price at that time..
Permissible to have Purchase Undertaking to purchase asset in the future at the prevailing market price then.

What led to the AAOIFI pronouncement? Why it was allowed before and then why such permission was then retracted?

A) The success of any Sukuk issue does not lie so much in the structure but on whether the market players will take it up. Most initial takers of the Sukuk will be people who are very much involved in conventional bonds. So they need to see terms they are familiar with. They are trained based on certain beliefs. They believed Conventional banking and bond are the only way to do things. Islamic Finance have aesthetic features they can't compute in their daily work and in the way they are trained. Thats the scenario faced by Sukuk arrangers, give the market the terms they want or their Sukuk will not have funders. This then gives rise to a new breed on the international scene whom I will call Sukuk Engineers. Their job is to draft Sukuk terms acceptable to the conventional market and then create a spin that will be believed by their Syariah Scholars. I have read many International Sukuk Info Memos where the operations of the terms and conditions are in direct contradiction with the Fatwa Chapter. However because the Scholars are not able to digest effectively whether the terms complies with their ruling plus the Sukuk Engineers verbosity that hides the contradictions, such glaring contradictions gets passed as Syariah compliant. This is quite apart from the obvious success of Sukuk engineers to get the declared approval of the Scholars. The classic example here would be the Musharaka Purchase Undertaking or the wa'd as you described. I'm no scholar but under what Fiqh ruling can you get your musyarakah business partner to buy your shares the moment the Musyarakah enters a loss or does not distribute dividends as promised? Justice Taqi Usmani directed his attention to a different aspect of Purchase Undertaking but the one I touched on is equally disturbing Syariah wise. The Justice Taqi Usmani ruling if I may described it as such prohibits assets being bought in a Musharakah Structure at a price fixed now. This a kiljoy to the Sukuk Engineers and their conventional supporters as this wa'd has been their way of guaranteeing the Sukukholders is returned their "principal amount". As Conventional Bondholders it is unthinkable for a structure not to have a guarantee that the exact "principal amount' will be returned at the end of the Sukuk.

This was allowed previously simply because the Scholars were bulldozed with the Sukuk Engineers verbosity they fail to clearly see the Syariah contradiction.It was subsequently retracted because I believed Justice Taqi Usmani who understands clearly have been losing much sleep over it. This brings into questions the quality of some of the Sukuk Scholars. We do not question their academic credentials but whether they are savvy enough to see through the spin.

Conversations with a business journalist

Q) More than 45 percent of sukuk issued last year were structured according to the ijara principle, Standard & Poor's said in a recent report. What is driving the popularity of the ijara sukuk? Do you expect a growing preference for ijara sukuk, on the part of investors and issuers, instead of other structures such as musharaka and mudaraba?

A) It would be nice to believe that the flight from musharaka and mudaraba sukuk to ijara sukuk comes from reasons other than the recent AAOIFI ruling. But we would be ignoring the truth if we conclude thats the reason. AAOIFI says in February 08 that no purchase can be made under a musharaka sukuk structure at a price fixed now but to take place in the future. All purchases must be done at the then prevailing market price. This kills the Musharaka Sukuk. The purchase at the end of the Musharaka is suppose to return the capital to the Sukukholders but AAOIFI now says it must be done at the prevailing market price. A real kiljoy that spoils the party. The Musharaka Sukukholders now have lost their guarantee that they will get their capital back, and at the exact amount they put in, in the first place. Ijara Sukuk is an exception to this AAOIFI ruling hence its current preponderance over the Musharaka Sukuk. Really those involved in Sukuk and Islamic Finance has really got to begin to grasp and believe in its objective and philosophy. Apart from that they need to understand the historical context of the growth of the world financing system, to be able to understand why they are doing Islamic Finance and when Islamic Finance came into the picture. Islamic Finance came into being 1400 years ago in the days of Prophet Muhammad pbuh and his companions. Soon after Islamic Finance was forgotten and not practised, to be replaced by the current interest based usury system. This conventional system developed unchallenged into what it is today. It has such a grip on people's minds they can't see it replaced by any other system, warts and all. If it were just warts we would not be too worried but it is really a cancerous system that sees no place for economic justice in banking transactions. Rules are so biassed in favour of the owner of money one would tend to believe it is divine to own money. Much hurt have been inflicted by the uncompromising intransingience of the owners of money.

An Islamic system reintroduced only in the 1970s seeks to replace this system with economic justice and fairness to all involved in banking and financing transactions. Premised much on equity it will also begin to remove the world from the perils of cyclical economic recessions. However until the players, including the sukuk players, understand this we will not see much headway. Tell me whats the fun of blunting Islamic principles to fit into the expectations of the entrenched conventional market, as what most current Sukuk structures are engineered to do? A gun without a trigger pin is not much of a weapon is it?

Note on the Writer.
Muhammad Zahid Abdul Aziz has 19 years of experience in Islamic Banking and Finance. Starting with Bank Islam Malaysia Bhd he quickly made his mark as a Sukuk pioneer in Malaysia. He left Bank Islam in 2000 to form an Islamic Capital Market Consultancy in Kuala Lumpur called Muamalah Financial Consulting. In mid 2006 he left for Riyadh as Resident Sukuk Consultant to Bank AlBilad, Saudi Arabia's second Islamic Bank. At the end of this month he will be returning to Malaysia to resume his position at Muamalah Financial Consulting. He may be contacted at


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