Understanding Islamic Finance - Doha Academy of Tertiary Studies

384 Understanding Islamic Finance14.5 ISLAMIC BANKS’ RELATIONSHIP WITH CONVENTIONALBANKSIslamic banks represent a link in the chain of the financial system. It seems inconceivable thatthey could operate totally in isolation, disregarding conventional banks on the basis of theprohibition of interest. An Islamic banking system set-up has been introduced in a numberof Muslim majority and Muslim minority countries. There is a lot of scope and also the needfor cooperation and business relationships between conventional and Islamic banks in manyareas, at national and international levels. This may be in respect of corresponding services,foreign trade financing and cofinancing of the projects. Temporary placement of funds witheach other (on a basis other than interest) is unavoidable for banks, and particularly forthe Islamic banks, to ensure an adequate supply of liquidity at the time of need. Exchangeof information between the two and training programmes for orientation of the banks’employees in the fields of feasibility studies, accounting, auditing, supervising, the latest ITand communication-related techniques are also very important areas of cooperation betweenthe conventional and Islamic banks. 714.6 FEE-BASED ISLAMIC BANKING SERVICES14.6.1 UnderwritingIn investment banking services, underwriting is an important function of banking and nonbankinginstitutions which yields fee-based income to the underwriters. In the Islamicframework, the underwriter shall bind himself to provide services of procuring the underwrittenamount of capital, for which he can charge a fee/commission. Accordingly, it shallbe entitled to charge an underwriting fee only in consideration of arranging procurementof the underwritten capital. Take-up commission by the underwriter for subscribing to anyunsubscribed amount of shares is not permissible. Shares to be subscribed by the underwritershall have to be at the offer price, as applicable to all other shareholders, without any increaseor decrease from the face value of such shares.The Council of the Islamic Fiqh of the OIC, in its seventh session (9–14th May, 1992)resolved that:“Underwriting is an agreement made upon establishment of a company with someone who undertakesto guarantee the sale of all or part of the shares issued, i.e. to subscribe to the shares that wouldremain unsubscribed by others. There is no Sharī´ah objection to this provided that the underwritersubscribes to the shares at nominal value without any compensation for the commitment per se,though he may receive compensation for services other than underwriting that he may have offered,such as preparation of studies or marketing of shares.”14.6.2 Letters of Guarantee (L/G)Jurists generally do not allow fees or remuneration based on guarantees. However, somejurists consider that the bank can take commission and fees, since a guarantee represents abunch of services including, Wakalah, against which banks can charge fees. Banks’ services7 For details, see Ayub, 2002, pp. 214–218.