Understanding Islamic Finance - Doha Academy of Tertiary Studies

78 Understanding Islamic FinanceSecurity/CollateralIn all debt-creating modes, banks may ask the client to furnish security in the form of amortgage, a lien or a charge on any of his existing assets. In a forward purchase, bankscan ask the client to furnish security to ensure that he shall deliver the commodity on theagreed date. In PLS modes, the bank can also ask for security against the nonperformanceof the contract. But the bank is not entitled to enforce the collateral in the case of loss in thebusiness if loss has occurred without any misconduct or negligence on the part of the clientpartner.LiquidityThe feature of liquidity means the possibility or ease with which the bank can sellthe related assets to get cash when needed. As Murabaha receivables cannot be soldlike debt instruments are sold in conventional finance, they are considered non-liquidassets. The same is true of Salam and Istisna‘a. Assets or instruments representing assetsin Ijarah or sharing modes are liquid because the same can be sold in the secondarymarket.4.2.5 Valid Gains on InvestmentAll gains on investment or principal of a business are not prohibited. 4 On the basis of theoverall principles indicated by the Sharī´ah, scholars have identified methods of gainfuldeployment of surplus resources with the objective of enhancing their value. Profit hasbeen recognized as a “reward” of capital and Islam permits gainful deployment of surplusresources. The ex post profit, allowed by the Sharī´ah, symbolizes entrepreneurship and thecreation of additional wealth. However, along with the entitlement to profit, the liability ofrisk of loss rests with the capital itself; no other factor can be made to bear the burden ofthe loss on capital.Financial transactions, in order to be permissible and for the purpose of earning profit,should be associated with tangible real assets. In the Islamic framework, money itself is notrecognized as capital, and as such it cannot earn a profit in itself. The provider of funds is anentrepreneur as well. He will get a profit/loss for his capital and a wage/remuneration for hisentrepreneurship/labour. 5 If he does not manage the business himself and provides capitalto any other individual/group of individuals for any business, he will have a share in theprofit while the manager of the business will get “wages” in the form of a share in the profit.But if the business suffers a loss, the capital owner will bear the loss while the manager’slabour will go wasted. Thus, earning of profit, depending upon the outcome of the business,is permissible. Keeping in mind this principle, it can be said that one can earn profit on hisinvestment or financing but that has to be related to certain assets exposed to direct or indirectbusiness risk.4 Islam not only encourages investment for the purpose of gain but also considers the productive investment obligatory. The holyProphet is reported to have said: “He who sells a house [without need], but does not invest the proceeds in something similar, Godwill not bless the proceeds”. Caliph Umar used to say: “He who has wealth, let him develop it and he who has land let him cultivateit”. See Chapra, 1993, p. 98.5 Labour means both human bodily and mental exertion. Thus, entrepreneurship is not an independent factor of production.