Understanding Islamic Finance - Doha Academy of Tertiary Studies

330 Understanding Islamic Financebecome void due to the element of interest. The case of qualification shares is, however,different, as it determines the minimum extent of attention and devotion of the directorswithout any preferential treatment in pecuniary entitlement.Underwriting is a crucial part of the business related to modern corporations. A shareholderor any third party can underwrite an issue of shares without any consideration. Theunderwriter will undertake, by an agreement at the time of incorporation of the companyor shares issue, to buy all or a part of the shares issue. It undertakes to buy the remainingshares at nominal value that are not subscribed through public or private placements. Theunderwriter can charge for services provided, other than the underwriting, such as conductingfeasibility studies or marketing the shares. 89The actual rules of modern corporate business require more detailed analysis.Shares/certificates are floated for raising liquid assets. Trading in assets that represent theunderlying assets is permissible as long as real assets and services constitute the majority ofthe total assets. As such, the instruments or shares represent only the money, they cannot betraded so long as the capital is in liquid form, i.e. in the form of cash raised or receivablesor advances due from others. This is because the shares represent pro rata ownership ofshareholders in the joint business/project. If the capital is still in liquid form, the shares maybe sold only at face value, otherwise it would mean that money is being exchanged for moremoney, which is Riba. However, when the raised money is employed in purchasing nonliquidassets, like land, buildings, machinery, raw material, furniture, etc., the shares/Musharakahcertificates will represent the holders’ proportionate ownership in these assets. In this case,it will be allowed by the Sharī´ah to sell these certificates in the secondary market for anyprice agreed upon between the parties, which may be more or less than the face value of theshares/certificates, because the subject matter of the sale is a share in the tangible assets andnot in money only; therefore, the certificate may be taken as any other commodity whichcan be sold with profit or at a loss.Another major feature of the present corporate structure is that running projects arenormally a mixture of liquid and tangible assets, e.g. in the form of raw material, fixed assets,inventory of finished goods, sales proceeds, receivables (that being debt is treated as liquid,like money), etc. The opinion of contemporary jurists regarding the Sharī´ah position oftrading in shares of entities having mixed liquid and nonliquid assets is different. Accordingto the classical jurists of the Shafi‘e school, combined assets of a business cannot be soldunless the tangible assets are separated and sold independently. Hanafi jurists, however, areof the view that a combination of liquid and tangible assets can be sold/purchased for anamount that is greater than the amount of liquid assets in the combined assets. They prescribeno specific proportion of tangible assets to qualify for permission of such a sale/purchase.However, most of the contemporary scholars, including those of the Shafi‘e school, haveallowed trading in the shares and certificates only if the nonliquid assets of the business aremore than 50 %, while some reduce this floor to 33 %.Other principles relating to stocks have been discussed in Chapter 8.12.7 MODERN APPLICATION OF THE CONCEPT OF SHIRKAHKeeping in mind the broad principles and the concept of Shirkah, Musharakah and Mudarabahcan be used for evolving a new system, both on the liabilities and assets sides of the financial89 AAOIFI, 2004–5a, Standard on Musharakah, clause 4/1/2/4; also at p. 223.