Understanding Islamic Finance - Doha Academy of Tertiary Studies

454 Understanding Islamic Financecondition that the ratio of profit for a sleeping partner shall not be more than the ratio thatits capital has in the total capital.Contracts of agency (Wakalah) and suretyship (Kafalah) can also be combined with saleor lease contracts, with the condition that rights and liabilities arising from various contractsare taken as per their respective rules.Islamic banks can structure products by combining different modes, subject to the fulfilmentof their respective conditions. For example, they can combine Salam or Istisna‘a withMurabaha for preshipment export financing. Diminishing Musharakah is a combination ofShirkah and Ijarah added by an undertaking by one party to periodically sell/purchase theownership to/from the other partner. In all major contracts like Musharakah, Ijarah, Salam andIstisna‘a, Islamic banks enter into promise and agency contracts with the clients or any thirdparties. This is acceptable in Sharī´ah provided all agreements and accessory contracts areindependently enforceable with their implications. However, interdependent agreements orstipulations leading to uncertainty about rights and liabilities of the contracting parties cannotbe made.Taking Binding Promises from ClientsSome scholars have criticized Islamic banks for treating the “promise to purchase” by theclient as binding. But as it does not involve violation of any Sharī´ah principle, mainstreamIslamic finance theory has declared it binding, keeping in mind the practical problems infinalization of contracts (see Chapter 5, Section 5.6). Keeping in mind the intricacies ofpresent-day business, particularly when conducted by Islamic banks, contemporary scholarshave reached the consensus that promise by one party in economic/financial transactions isenforceable by law until and unless the promisor is not in a position to fulfil it on accountof any force majeure. If nonfulfilment is due to any wilful act of the promisor, he shall haveto make good the loss to the promisee.The rationale behind this consensus decision is that, in many cases, binding promisesbecome a genuine requirement, fulfilment of which does not amount to violation of anybasic Sharī´ah tenet. This has important implications for Islamic banks’ operations in respectof Murabaha to Purchase Orderer, Ijarah Muntahia-bi-Tamleek, Diminishing Musharakahand for the disposal of goods purchased by banks under Salam/Istisna‘a. As it does notcontradict any Nass (text) of the Qur´ān or Sunnah, it can be accepted on the principle ofIbāhatul Asliyah (all economic activities that are not prohibited are valid/permissible).17.4.4 Imposing Penalties on DefaultersImposing late payment penalties by Islamic banks is also subject to criticism. The argumentis that while the Holy Qur´ān recommends giving more time to debtors and even waivingthe debt, IFIs impose penalties on a percentage per annum basis. As a result, the cost offinancing for the clients is the same as in the case of conventional banks, or perhaps higher.Islamic banks should, therefore, give extra time without any extra charge.Default is one of the major challenges facing the financial industry across the globe. Theconventional system has a built-in tool for controlling default, as the defaulters are chargedinterest that becomes part of the income of the conventional financial institutions. IFIs havebeen allowed by the Sharī´ah scholars to charge penalties to defaulters in order to disciplinethem, but the penalty amount has to be spent on charity and cannot become part of theincome of the bank.