Understanding Islamic Finance - Doha Academy of Tertiary Studies

An Appraisal of Common Criticism 451earning rental or profit. As discussed in Chapters 4 and 5, they have to virtually purchase acommodity, take it into ownership and possession, necessarily implying transfer of ownershiprisk to them; only then are they entitled to earn a profit by selling it onward. After executionof the sale, asset risk is transferred to the clients, who are bound to pay the price at thesettled time. In Salam, the bank has to take delivery of the goods purchased in advance,irrespective of a fall or rise in their price. In Istisna‘a, the manufacturer delivers the asset tothe bank along with all asset-related and market risks. In Ijarah, ownership of leased assetsremains with the banks and according to well-established rules of the Sharī´ah, risk alsoremains with them.Islamic banks, however, do not and cannot maintain inventory of all the goods they tradein; they are not grocery stores. Neither is it a Sharī´ah requirement that a person shouldnecessarily place the wares on counters of a store before selling it onward. The procedurethat IFIs may purchase the goods for onward sale upon requisition of the clients is based onvery common real sector business practice and, therefore, is acceptable from the Sharī´ahangle. Accordingly, the Sharī´ah Standard on Murabaha prepared by the AAOIFI has beennamed the Standard on Murabaha to Purchase Orderer.Making the client an agent for the purchase or sale of goods by Islamic banks is alsoaccepted in the Sharī´ah without any difference of opinion. Goods held by an agent are inthe risk of the principal so long as any negligence or breach of trust on the part of the agentis not proved. It seems to be preferable that Islamic banks establish some asset managementor trading companies that may maintain inventories of the commonly required goods andassets for undertaking merchant banking; but it is neither possible to keep inventory of allthe goods and brands of goods required by the clients, nor is it a Sharī´ah condition for thegenuine business of trade and Ijarah.Taking Security/Collateral and DocumentationAnother objection raised is that Islamic banks, like their counterparts in the conventionalsystem, take collateral/security in all financing, also including Musharakah/Mudarabah.A related objection is that Islamic banks ask for too much documentation. It is misunderstoodthat IFIs should facilitate their clients on the assets side without any requirement of collateral.In principle, this objection is baseless. Islamic banks are commercial institutions; they cantake pledge/collateral to the level of their satisfaction for recovery of their receivables. 7As IFIs deal in goods and create receivables, they need collateral and also documentationmore than the conventional institutions need. The Holy Qur´ān and Sunnah emphasizedocumentation, transparency and collateral in all credit transactions, as we have discussedin detail in Chapter 7. The Holy Qur´ān enjoins one to write down and take witnesses inall transactions that involve credit one way or another. Similarly, the holy Prophet (pbuh)encouraged disclosure of all features of goods being traded and the competitive environmentin which people get sufficient information about the goods and their prices in the market.Hence, in all debt-creating modes, banks may ask the client to furnish security in the formof a mortgage, a lien or a charge on any of his assets. In forward purchase, banks can askthe client to furnish security to ensure that he shall deliver the commodity on the agreeddate. In PLS modes as well, the bank can ask for a guarantee against negligence or breachof the contract; but the bank will not be entitled to enforce the collateral if a loss in the7 Wilson, 2002, pp. 210, 211.