Understanding Islamic Finance - Doha Academy of Tertiary Studies

Financing Principles and Practices 375buy on an outright basis as two separate transactions. If the market is not liquid, the IB cansell the Sukuk to the central bank to obtain liquidity.If the IB requires financing without selling/purchasing Sukuk, it can do so by creating anasset pool of its Murabaha and Ijarah assets and invite other banks and NBFCs to invest inits pool. The share of Murabaha receivables should be less than 50 % of the total assets ofthe pool. At the time of maturity, the investing bank would redeem its investment and theIB would pay its share of profit.Liquidity needs can also be met by way of Parallel Salam contracts, in which case thepurchaser would pay the whole sale price in advance.The Tawarruq arrangement is also used by Islamic banks to place and obtain liquidity. Forthis purpose, an Islamic bank in need of funds and a surplus bank select any commodity/stocksof liquid nature (such as metals sold in the Commodity Exchange or blue chip stocks). TheIB purchases the commodity from another bank or any institution on credit (Murabaha) andafter taking delivery, sells it in the market at spot price. The process can be reversed ifthe Islamic bank has to place liquidity with any other bank. On the face of it, the processseems to be very simple; however, extreme care should be taken while undertaking suchtransactions and it should be ensured that the transaction does not become a mere exchangeof papers.The Tawarruq arrangement when used on the assets side gives a fixed guaranteed returnto the banks and can also be executed with conventional banks. Credit cards used by Islamicbanks in Malaysia are based on this concept combined with a buy-back arrangement. Themajority of the Sharī´ah scholars consider such cards non-Sharī´ah-compliant.The product “Commodity Murabaha” based on Tawarruq is used by a number of IFIsworking in the Middle East. However, it is considered a grey area and Islamic bankers needto realize that it should be used only in extreme cases to avoid interest where no other optionis available and even then under the guidance of the Sharī´ah board. Widespread use of suchproducts is harmful to the Islamic banking industry in the long run.14.4.5 Forward Contracts and Foreign Exchange DealingsIn a forward market, the currency or commodity is sold for a future date and delivery of thearticle as well as the currency is given on any future date. However, the specifications ofthe article, time and place of delivery, as well as the currency and amount, are all settled inadvance. So the seller is hedged against any fall in price of the commodity and the buyer isassured of the supply on time, as well as being covered against a possible increase in priceby the time he needs the commodity. But this feature of conventional Forex markets resultsin the creation of fictitious assets and exploitation of any of the parties. As deliberated uponin Chapters 3, 4 and 6, trading rules in respect of currencies are different from trading incommodities other than monetary units. The Sharī´ah rules for trading in currencies arebriefly given in the following paragraphs.Both parties to the exchange of currencies must take possession of the counter valuesbefore dispersing, such possession being either actual or constructive. If the currency onboth sides is the same, the counter values must be equal in amount, even if one of them is inpaper money and the other is in coin of the same country, like a note of five pounds for fivepound coins. The exchange would be simultaneous without any deferment clause regardingthe delivery of one or both counter values. Return-free loans based on Tabarru‘, which arenoncommutative contracts, are exempt from this general rule. Some of the implications ofthis rule of Islamic finance in respect of modern transactions are discussed below.