Resolutions of the Securities Commission Shariah Advisory Council PDF

Resolutions of the Securities Commission Shariah Advisory Council Second Edition  Contents RESOLUTIONS OF THE SECURITIES COMMISSION SHARIAH ADVISORY COUNCIL SECOND EDITION i Resolutions of the Securities Commission Sharia...

Resolutions of the Securities Commission Shariah Advisory Council Second Edition  Contents RESOLUTIONS OF THE SECURITIES COMMISSION SHARIAH ADVISORY COUNCIL SECOND EDITION i Resolutions of the Securities Commission Shariah Advisory Council – Second Edition Securities Commission 3 Persiaran Bukit Kiara Bukit Kiara 50490 Kuala Lumpur Malaysia Tel: 03-6204 8000 Fax: 03-6201 1818 www.sc.com.my Copyright © Securities Commission All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (graphical, electronic, mechanical, photocopying, recording, taping or otherwise), without the prior written permission of the Securities Commission of Malaysia. First Edition 2002 Second Edition 2006 Second Edition, First Reprint 2007 Perpustakaan Negara Malaysia Cataloguing-in-Publication Data Resolutions of the Securities Commission Shariah Advisory Council ISBN 983-9386-60-3 1. Capital market--Malaysia. 2. Securities--Malaysia. 3. Investments (Islamic law)--Malaysia. I. Title. 332.0415088297 ii  Contents CONTENTS FOREWORD BY DATO’ ZARINAH ANWAR v FOREWORD BY DATUK SHEIKH GHAZALI vii HAJI ABDUL RAHMAN SHARIAH ADVISORY COUNCIL OF THE SECURITIES 1 COMMISSION RESEARCH METHODOLOGIES IN THE ISLAMIC 7 CAPITAL MARKET SOURCES AND RESEARCH MANHAJ IN THE ISLAMIC 8 CAPITAL MARKET PRINCIPLES OF MUAMALAT IN THE CAPITAL MARKET 13 MUSYARAKAH MUTANAQISAH 14 BAI` DAYN 16 BAI` `INAH 20 BAI` MA`DUM 23 BAI` WAFA’ 26 BAI` MUZAYADAH 29 SUFTAJAH 32 BAI` `URBUN 35 BAI` BIMA YANQATI` BIHI SI`R 37 KAFALAH ON MUDHARABAH CAPITAL 39 UJRAH FOR GUARANTEES 44 IBRA’ CLAUSE IN A DOCUMENT OF AGREEMENT 46 IQTA` 52 CAPITAL MARKET PRODUCTS ACCORDING TO ISLAMIC 59 JURISPRUDENCE iii Resolutions of the Securities Commission Shariah Advisory Council – Second Edition CALL WARRANTS 60 TRANSFERABLE SUBSCRIPTION RIGHTS (TSR) 64 ASSET SECURITISATION 67 REGULATED SHORT SELLING AND SECURITIES 71 BORROWING AND LENDING CRUDE PALM OIL FUTURES CONTRACT 75 COMPOSITE INDEX FUTURES CONTRACT 79 ISLAMIC BENCHMARK BOND 84 FINANCE LEASE AND OPERATING LEASE 89 PREFERENCE SHARES 92 CAPITAL MARKET ISSUES ACCORDING TO ISLAMIC 95 JURISPRUDENCE RIBA: PRINCIPLES AND DIVISION 96 GHARAR 100 GAMBLING 104 GHALAT 106 SPECULATION 109 QABADH 113 DHA` WA TA`AJJAL 119 `UMUM BALWA 123 TA`WIDH 125 HIBAH RUQBA 129 CONDITIONAL HIBAH 134 WHEN ISSUE PROCESS 136 PRICE FIXING BASED ON FORWARD PRICING 139 SHARIAH CRITERIA FOR LISTED SECURITIES 143 SHARIAH CRITERIA FOR LISTED SECURITIES 144 MIXED COMPANIES 150 IMAGE AS CRITERIA FOR LISTED SECURITIES 164 GLOSSARY 171 BIBLIOGRAPHY 177 iv  Foreword by the Chairman Securities Commission FOREWORD BY DATO’ ZARINAH ANWAR CHAIRMAN OF THE SECURITIES COMMISSION Assalamu’alaikum warahmatullahi wabarakatuh and warm greetings. I thank God almighty that this book on the Resolutions of the Securities Commission Shariah Advisory Council is now published to serve as a reading and reference material for those wishing to understand Shariah products and concepts applied in the Islamic capital market in this country. It cannot be denied that the Islamic capital market, which complements the Islamic banking system and Takaful in this country, is growing rapidly. This positive development began in the early 1990s when many corporate bodies used Islamic capital market instruments to fund their economic activities. Investors, too, began to show interest in investing in Shariah-compliant securities and Islamic unit trust funds. The issuance of private debt securities based on Shariah principles, too, began to gain acceptance and popularity in the country’s capital market. In this context, the Securities Commission (Commission), which is the regulatory and developmental body for the capital market, will continue to focus its efforts towards further developing the local Islamic capital market. The establishment of the Islamic Capital Market Department (ICMD) in the Commission and the Shariah Advisory Council (SAC) in 1996 is seen as the pioneering effort towards creating a more organised and efficient Islamic capital market. The SAC, assisted by the ICMD, is responsible for advising the Commission on issues related to the Islamic capital market to ensure its consistency with Islamic principles. The SAC analyses Shariah principles which can be used for introducing new Islamic capital market products and services, as well as evaluates existing conventional capital market instruments to determine the extent to which these instruments comply with Shariah principles. The SAC is also responsible for analysing specific issues that are v Resolutions of the Securities Commission Shariah Advisory Council related to the operation of the Islamic capital market to provide guidance and advice to investors, the government and industry. In addition, the Commission also emphasised the need to determine the Shariah-compliance status of listed companies on Bursa Malaysia and, as a result, the list of Shariah-compliant securities by the SAC is published twice a year to provide a guide to investors who wish to invest in investments which comply with Shariah principles. At the same time, the Commission also formulated short-term and long- term plans for the development of the Islamic capital market. The Capital Market Masterplan outlines the objectives in making Malaysia an international Islamic capital market centre. Thus, in order to achieve the objectives, comprehensive knowledge and education on Islamic capital market must be given attention to and nurtured in all investors, market intermediaries, the regulatory body and everyone directly involved in the Islamic capital market. The role of the Commission is not only restricted to regulatory oversight but also encompasses initiating developmental activities, and educating investors and the general public in developing the country’s capital market. In the context of the Islamic capital market, various efforts have been initiated by introducing investor education programmes, such as conducting seminars and workshops, as well as publishing reading materials. Thus, the publication of this book is part of the Commission’s continuous efforts to educate investors on all the resolutions adopted by the SAC in their series of meetings. All views of the Shariah are presented in a brief and simple manner so that it can easily be understood by all walks of life. In conclusion, I would like to thank the SAC, ICMD staff and everyone involved, directly and indirectly, in the production of this book. It is hoped that this book will be a useful guide to everyone and can help generate more intellectuals and investors who are knowledgeable and informed of the Islamic capital market. Wassalam. Dato’ Zarinah Anwar vi  Foreword by the Chairman Securities Commission FOREWORD BY DATUK SHEIKH GHAZALI HAJI ABDUL RAHMAN CHAIRMAN OF THE SECURITIES COMMISSION SHARIAH ADVISORY COUNCIL Assalamu’alaikum warahmatullahi wabarakatuh and all praises to Allah the great merciful and the great compassionate who has bestowed upon human beings the enlightenment and knowledge. Prayers to God and peace be bestowed on Prophet Mohamed s.a.w. After the publication of the Resolutions of the Securities Commission Shariah Advisory Council book in 2002, numerous comments and feedback were received. The second edition of this book is published to provide updates and the latest Shariah Advisory Council (SAC) resolutions for general information and reference. To develop an Islamic capital market is not an easy task. It requires an in- depth understanding of the operations of the current capital market and contemporary analyses to fulfil the present-day needs of Muslims who wish to participate in economic activities in accordance to Shariah principles. Members of the SAC who are well versed in the fields of muamalah and Islamic financial system have collaborated to resolve issues directly and indirectly related to the Islamic capital market. Collaborative efforts and ideas of people with different educational backgrounds have resulted in practical solutions for developing the Islamic capital market, in particular, and the country’s capital market, in general. It cannot be denied that there may be several SAC resolutions that differ from the opinions of Shariah experts in other countries. These variations exist due to the difference in time and place, and also divergence in needs and background of a country. If we look at the history of Islamic legislation development, such varied opinions with regards to certain principles are not uncommon among the founders. Even Imam Shafi`i, the founder of the Syafi`i Mazhab had two divergent opinions on a single particular issue depending vii Resolutions of the Securities Commission Shariah Advisory Council on whether it occurred in a different environment, background, time and place. Indeed, these differences in opinions should be seen as a blessing for Muslims because, whether consciously or not, they provide a way out for every problem and ensure that Shariah is able to satisfy the needs of local communities from different geographical locations and cultural backgrounds. What is needed is that we respect any opinion offered so long as it is based on Shariah arguments. Within the context of the Islamic capital market, differences in opinion among Shariah experts are those on matters involving peripheral issues and implementation of methodologies. These differences in opinions are not on fundamental matters that have to be strictly complied with in muamalah such as avoiding the practice of riba, cheating, gharar elements and other practices forbidden by Shariah. As such, the SAC hopes that these differences in opinion will not obstruct the development of the Islamic capital market in this country. As the national SAC for the country’s Islamic capital market, it is imperative for the SAC to accept only one practical view as the general and sole reference for implementing Islamic capital market activities. This will give rise to an Islamic capital market that is organised, uniform and accessible to all layers of society. This also helps reduce the community’s confusion over the various divergent opinions of the Shariah. Through the publication of this book, the SAC hopes to provide clarity on the resolutions and views of the SAC, as well as the arguments used as the basis for the formulation of such resolutions. Nevertheless, the SAC always welcomes views from all parties that would contribute towards a more robust and dynamic Islamic capital market. It is hoped that efforts made so far have met with Allah’s pleasure and to Allah we seek guidance and enlightenment. Wassalam. Datuk Sheikh Ghazali Haji Abdul Rahman viii  Shariah Advisory Council of the Securities Commission SHARIAH ADVISORY COUNCIL OF THE SECURITIES COMMISSION 1 Resolutions of the Securities Commission Shariah Advisory Council SHARIAH ADVISORY COUNCIL OF THE SECURITIES COMMISSION INTRODUCTION The Securities Commission (Commission) is a statutory body set up under the Securities Commission Act 1993 (SCA), reporting directly to the Minister of Finance. It is the sole regulatory body for the regulation and development of the capital market in Malaysia. It is directly responsible for the regulation and supervision of the activities of the market institutions, including the stock exchanges, clearing houses, and monitoring of licensees under the Securities Industry Act 1983 (SIA) and Futures Industry Act 1993 (FIA).1 The Commission, in developing the national capital market, has identified the development of the Islamic capital market as one of its main agendas.2 This agenda was later incorporated into the Malaysian Capital Market Masterplan, launched on 22 February 2001. One of the main objectives set by this plan is to establish Malaysia as an international Islamic capital market centre.3 1 Securities Commission Act 1993, section 15. 2 Refer to the Securities Commission Business Plan 1998–2000 which lists in its agenda, among others, the development of the equity market, streamlining the development of Islamic debt securities, developing Islamic investment group activities and introducing new Islamic capital market products. 3 In meeting the objective of establishing Malaysia as an international Islamic capital hub, a number of strategic initiatives were outlined as follows: Facilitate the development of various competitive products and services related to the Islamic capital market; Create an independent market to mobilise Islamic funds effectively; Ensure an appropriate and comprehensive accounting, tax and regulatory framework; and Enhance the international recognition of the Malaysian Islamic capital market. See Securities Commission, Capital Market Masterplan, February 2001, pp. 57, 108–114, 173–184. 2  Shariah Advisory Council of the Securities Commission The Commission has taken the following two approaches in meeting this objective: (a) Supply the necessary infrastructure for research, discussions and dialogues; and (b) Undertake specific efforts to develop and strengthen the market.4 Using these approaches, a dual market system will be created similar to the existing banking and insurance sectors. The Commission has taken numerous steps in priming the infrastructure for the development of the Islamic capital market. These include: (a) Establishing the Islamic Capital Market Department (ICMD, formerly known as Islamic Capital Market Unit); (b) Establishing the Islamic Instrument Study Group (IISG); and (c) Establishing the Shariah Advisory Council (SAC). The following is an elaboration of the above-mentioned measures. ISLAMIC CAPITAL MARKET DEPARTMENT In its effort to develop the Islamic capital market, the Commission established a department under the Market Policy and Development Division called the Islamic Capital Market Department (ICMD). Its responsibilities include conducting research and developing Islamic capital market products in the equity, debt and derivative sectors, as well as analysing the securities of listed companies. It employs full-time officers with Shariah education background, especially in the disciplines of fiqh muamalat (Islamic commercial law) and modern finance. The combination of professional personnel from these two different backgrounds is essential in creating a working group capable of meeting the set objectives.5 Its research findings are then presented to the SAC for approval. 4 Nik Ramlah Nik Mahmood, “Regulatory Framework and the Role of the Securities Commission in Developing the Islamic Capital Market”, National Conference on Islamic Banking and Investment”, Kuala Lumpur, 19 November 1996, p. 5. 5 Khairil Anuar Abdullah, “The Issues and Prospects of Establishing a Sound Islamic Capital Market”, Labuan International Summit on Islamic Financial and Investment Instruments, Financial Park Complex, Labuan, 16–18 June 1997, p. 5. 3 Resolutions of the Securities Commission Shariah Advisory Council ISLAMIC INSTRUMENT STUDY GROUP The Commission established the IISG in 1994 with a membership comprising Shariah consultants and corporate figures. The group discussed and made decisions on issues related to the Islamic capital market in Malaysia. Eight meetings were held throughout 1995–1996. The following is a list of the IISG members (from 1994 to 15 May 1996): (a) Dato’ Sheikh Azmi Ahmad; (b) Dato’ Mohd Khudzairi Dainuri; (c) Associate Prof Md Hashim Yahaya (now Datuk); (d) Dato’ Dr Abdul Halim Ismail; (e) Nor Mohamed Yakcop (now Tan Sri and Second Finance Minister); (f) Dr Abdullah Ibrahim; (g) Ustaz Hassan Ahmad (now Dato’); and (h) Ustaz Md Nurdin Ngadimon. SHARIAH ADVISORY COUNCIL The ICMD carries out research activities and functions as the secretariat to the IISG. The latter succeeded in exploring the foundation for developing an Islamic capital market in Malaysia. Thus, the Commission viewed that it was important for the IISG to expand its role, and consequently, it was upgraded to a more formal body called the SAC on 16 May 1996. Its establishment was endorsed by the Minister of Finance and it was given the mandate to ensure that the implementation of the Islamic capital market complied with Shariah principles. Its scope of jurisdiction is to advise the Commission on all matters related to the comprehensive development of the Islamic capital market and to function as a reference centre for all Islamic capital market issues.6 6 Nik Ramlah Nik Mahmood, “Regulatory Framework and the Role of the Securities Commission in Developing the Islamic Capital Market”, National Conference on Islamic Banking and Investment”, Kuala Lumpur, 19 November 1996, p. 5. 4  Shariah Advisory Council of the Securities Commission In introducing the Islamic capital market instruments, the SAC adopted two approaches. The first approach was to study the validity of conventional instruments used by the local capital market from the Shariah perspective. The study focused on the structure, mechanism and use of the instruments to ascertain whether they were against Shariah principles. The second approach entailed formulating and developing new financial instruments based on Shariah principles. The SAC is also responsible for issuing a list of Shariah-compliant securities (formerly known as list of Shariah-approved securities). Up to 28 October 2005, 857 securities were classified as Shariah-compliant securities by the SAC. This represented 85% of securities listed on Bursa Malaysia. The list is constantly updated and the Commission announces the updated list twice a year. It is essential for helping Muslim investors identify Shariah-compliant securities and at the same time, increase their confidence when making investments. The list of Shariah-compliant securities was used as the basis for developing the Shariah Index launched by Bursa Malaysia on 17 April 1999. With the launch, investors will be able to monitor the performance of their investments more efficiently and effectively. Although the SCA does not expressly state the formation of the SAC, section 16 of the SCA stipulates that the Commission has full jurisdiction in carrying out its duties based on securities laws. Moreover, section 18 of SCA specifies that the Commission is empowered to form a committee to help it carry out its duties based on the Act, and the Commission is also permitted to appoint anyone it deems fit to be a member of such a committee.7 Members of the SAC are appointed by the Commission once every two years. The table on page 6 lists past and present members of the SAC. 7 Securities Commission Act 1993. 5 Resolutions of the Securities Commission Shariah Advisory Council Members of the Securities Commission Shariah Advisory Council Name/ Designation 1996– 1998– 2000– 2002– 2004– 1998 2000 2002 2004 2006 1. Dato’ Sheikh Azmi Ahmad √ √ 2. Dato’ Dr Abdul Halim Ismail √ √ √ √ √ 3. Dato’ Dr Othman Ishak √ √ 4. Dato’ Dr Haron Din √ √ 5. Datuk Md Hashim Yahaya √ √ √ √ √ 6. Dato’ Hassan Ahmad √ √ √ √ √ 7. Dato’ Sheikh Ghazali Abdul √ √ √ √ Rahman 8. Dato’ Dr Abdul Monir Yaacob √ √ √ √ 9. Tan Sri Nor Mohamed Yakcop √ 10. Dr Mohd Daud Bakar √ √ √ √ √ 11. Associate Prof Dr Abdul Halim Muhammad √ √ √ 12. Dr Mohd Ali Baharum √ √ √ 6  Research Methodologies in the Islamic Capital Market RESEARCH METHODOLOGIES IN THE ISLAMIC CAPITAL MARKET 7 Resolutions of the Securities Commission Shariah Advisory Council SOURCES AND RESEARCH MANHAJ IN THE ISLAMIC CAPITAL MARKET RESOLUTION At its third meeting on 30 October 1996, the Shariah Advisory Council (SAC) discussed Shariah research guidelines in the capital market and passed a resolution to accept all sources and manhaj (methodology) of the esteemed Islamic jurists. These sources of research consist of primary and secondary sources adopted in Islamic jurisprudence. PRIMARY SOURCES The primary sources used by the SAC in conducting research on the capital market are the Quran and the Sunnah. This is based on the fact that Islam urges its followers to refer to these sources in solving problems that occur in their daily lives as commanded by Allah s.w.t. Allah s.w.t. said: Meaning: “O you who believe! Obey Allah s.w.t. and obey the Messenger, and those charged with authority among you. If you differ in anything among yourselves, refer it to Allah s.w.t. (Quran) and His Messenger (Sunnah).” (Surah al-Nisa’: 59) 8  Research Methodologies in the Islamic Capital Market Allah s.w.t. also said: Meaning: “So take what the Rasulullah s.a.w. (the Messenger) assigns to you, and deny yourselves that which he withholds from you.” (Surah al-Hasyr: 7) SECONDARY SOURCES AND RESEARCH MANHAJ Apart from the two primary sources i.e. the Quran and the Sunnah, the SAC also passed a resolution to use secondary sources and other Islamic jurisprudence manhaj, such as ijmak, qiyas, maslahah, istishsan, istishab, sadd zari`ah, `urf, maqasid syari`ah, siyasah syar`iyyah, ta’wil, istiqra’, talfiq and others which have already been applied in Islamic jurisprudence. This is based on a hadith (prophetic tradition) when the Prophet s.a.w. appointed Muaz as qadhi (judge) in Yaman. He had asked Muaz about certain important principles. He asked: “Muaz, what references do you use when you make a decision?”. Muaz replied that he would refer to the Quran. The Prophet s.a.w. then asked further: “What if the matter in question is not found in the Quran?”. To which Muaz replied that he would refer to any decision that had been made by the Prophet s.a.w. The Prophet s.a.w. asked again: “What if the matter had never been decided by me?”. Muaz then replied that he would apply ijtihad (reasoning of qualified scholars) using his own thinking and wisdom to come to a decision. The way Muaz handled the questions on making judgement received the blessings of the Prophet s.a.w. He then said: “Praise be to Allah s.w.t. for giving guidance to the Prophet s.a.w. and his representative (Muaz).”8 Thus, all matters relating to secondary sources are included in ijtihad, as stated in the hadith. Ijmak Ijmak means unanimous agreement among the mujtahidun (see Glossary) of the Muslim community on Shariah rulings imposed during a particular period after the death of the Prophet s.a.w.9 8 Hadith as narrated by Abu Daud and Tirmizi. 9 Abu Zuhrah, Usul al-Fiqh, Dar al-Fikr, Cairo, p. 185. 9 Resolutions of the Securities Commission Shariah Advisory Council Nevertheless, the extent of approval of a particular hukm (Shariah ruling) being categorised according to the ijmak is difficult to ascertain because of the wide territories covered by Islam and there are various trends of thoughts among Muslims. Thus, the majority of ulama’ (Islamic scholars) believe that ijmak only occurred during the time of the companions of the Prophet s.a.w. before they moved to other territories and that the claim of ijmak after that period is quite difficult to accept.10 Qiyas This refers to likening an original hukm having nas (explicit legal text) with a new matter having no nas but having the same illah (cause). Thus, Imam Syafi`i considered qiyas as the basis for ijtihad.11 It is regarded as a source of legislation which has significant contribution in solving new issues that have not been debated.12 Maslahah This means making a judgement based on the principle of general benefits on matters that have no clear nas from the Quran or the Sunnah.13 In general, Islamic jurisprudence applies the maslahah (public interest) in the implementation of a ruling. As such, for anything that is beneficial and necessary to the general public, it would establish dalil (indicative legal text) in the form of directives. However, for anything that is detrimental to the general public, Syara’ will establish dalil that prohibits its implementation.14 Istihsan This refers to disregarding a hukm that is backed by dalil and applying another hukm that is more convincing and stronger than the former, based on Syara’ dalil permitting the act in question.15 10 Abu Zuhrah, Usul al-Fiqh, pp. 188–189. 11 Abu Zuhrah, Usul al-Fiqh, p. 204. 12 Al-Zarqa’, Al-Madkhal al-Fiqhi al-Am, Dar al-Fiqh, Beirut, 1968, vol. 1, p. 68. 13 Al-Zarqa’, Al-Madkhal-al-Fiqhi, vol. 1, p. 90. 14 Izz al-Din bin Abd al-Salam, Qawa`id al-Ahkam, Dar al-Makrifah, Beirut, vol. 1, pp. 2–4. 15 Al-Zuhaili, Usul al-Fiqh al-Islami, Dar al-Fikr, Damascus, 1986, vol. 2, p. 738. Abu Zuhrah, Usul al-Fiqh, p. 245. Abdul Wahab Khallaf, Masadir al-Tasyri` al-Islami fi ma la Nassa fihi, Dar al-Qalam, Kuwait, 1982, p. 71. 10  Research Methodologies in the Islamic Capital Market Istishab This refers to the maintenance of the previous hukm as long as there is no other dalil that can change that particular hukm.16 Sadd Zari`ah This refers to the approach used to curtail anything that can cause a Muslim to do the forbidden. It is considered an early preventive measure to prevent a Muslim from doing what is forbidden by Allah s.w.t.17 `Urf This refers to the norms of the majority of a society whether applied in speech or deed.18 It is considered as ‘adat jama`iyyah (customs that are collectively acceptable) and can be used as a legal basis so long as it does not contradict the Syara’.19 In the context of the Islamic capital market, `urf tijari refers to customary practices in business that are considered a basis for guidance and hukm. Maqasid Shariah This refers to the desired objectives of the Shariah when determining a hukm aimed at protecting human maslahah.20 Siyasah Syar`iyyah This refers to the area in Islamic jurisprudence that explains rulings related to policies and approaches taken in organising the national administrative structure (and its people) in accordance with the spirit of the Shariah. It 16 Abu Zuhrah, Usul al-Fiqh, p. 276. 17 Abu Zuhrah, Usul al-Fiqh, p. 268. 18 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 131. 19 Al-Zuhaili, Usul al-Fiqh al-Islami , vol. 2, p. 828. 20 Ahmad al-Raisuni, Nazariyyah al-Maqasid ‘inda al-Imam al-Syatibi, The International Institute of Islamic Thought, Herndon, 1992, p. 7. 11 Resolutions of the Securities Commission Shariah Advisory Council covers the issues of central and regional administration, economy, judiciary, peace, international relations, etc.21 Ta’wil This refers to an effort to explain or interpret Syara’ principles through a dalil without being restricted by its literal meaning. The implicit meaning will be accepted if it is solidly backed by other dalil which explain what Syara’ requires the meaning to be.22 It is important because it touches on the extensive meaning of a dalil and understands the requirements of Syara’ for the dalil, because a dalil sometimes requires more than its literal meaning. In this case, it requires proof that a particular dalil has a meaning different from the literal meaning. Istiqra’ This refers to a thorough scrutiny of a matter before a conclusive hukm is made on the matter. This manhaj involves examining the applications of general dalil on the related branches of the hukm and subsequently making exceptions, if any.23 Talfiq This means introducing an approach that has never been used or discussed by past mujtahid.24 This manhaj will combine two or more opinions of the mazhab (school of thought) and derive a different opinion that has never been discussed by the previous mujtahid. 21 Wizarah al-Auqaf wa al-Syu’un al-Islamiyyah, Al-Mausu`ah al-Fiqhiyyah, Kuwait, 1990, vol. 25, pp. 294–310. Ahmad al-Husary, Al-Siyasah al-Iqtisodiyyah wa al-Nuzum al-Maliyyah fi al-Fiqh al-Islami, Maktabah al-Kulliyyat al-Azhariyyah, Cairo, p. 12. 22 Al-Duraini, Al-Manahij al-Usuliyyah, Muassasah al-Risalah, Damascus, p. 189. 23 Al-Mausu`ah al Fiqhiyyah, vol. 4, p. 77. Al-Zuhaili, Usul al-Fiqh al-Islami, vol. 2, p. 916. 24 Al-Zuhaili, Usul al-Fiqh al-Islami, vol. 2, p. 1143. 12  Principles of Muamalat in the Capital Market PRINCIPLES OF MUAMALAT IN THE CAPITAL MARKET 13 Resolutions of the Securities Commission Shariah Advisory Council MUSYARAKAH MUTANAQISAH RESOLUTION At its 7th meeting on 1 December 1995, the Islamic Instrument Study Group (IISG) passed a resolution to accept musyarakah mutanaqisah as a concept that can be used to develop instruments for an Islamic capital market. INTRODUCTION Another term for musyarakah mutanaqisah is musyarakah muntahiyah bi tamlik.25 It is a form of partnership contract whereby the financier allows his partner to buy assets in one payment or in instalments based on terms agreed by both parties.26 An illustration of musyarakah mutanaqisah in the capital market is: ABC company buys a building worth RM80 million and sells it to its customers for RM100 million based on the principle of bai` bithaman ajil (BBA) within 120 months. As ABC company requires liquidity, it can get the project investors involved by issuing sukuk27 based on musyarakah mutanaqisah. For that purpose, ABC company puts in its share (the smaller part, say 10%) in musyarakah mutanaqisah for the purchase of the building (which costs RM80 million). The investors hold the majority part (90%). ABC company 25 Muhammad Solah al-Sowi, Musykilah al-Istithmar fi al-Bunuk al-Islamiyyah, Dar al-Wafa, Cairo, 1990, pp. 619, 621. 26 Al-Sowi, Musykilah al-Istithmar, p. 619. 27 Sukuk is a form of financial note. Please refer to al-Mausu`ah al-Fiqhiyyah, vol. 27, p. 46. 14  Principles of Muamalat in the Capital Market will then buy back all the shares from the investors every month according to the amount and duration agreed upon i.e. 120 months. This will end at the point when ABC company owns all the shares. ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF MUSYARAKAH MUTANAQISAH Musyarakah mutanaqisah is a new instrument for musyarakah products and was introduced in Egypt.28 The majority of the current Islamic jurists are unanimous in accepting it as one of the instruments in the capital market.29 This is because it has features that do not contradict the nas and general principles of the Shariah. These features are as follows: (a) `Inan company (form of partnership, in which each partner contributes both capital and work); (b) Promise from the financial institution to sell its share of the company to its partners; and (c) The institution sells all of its shares to its partner fully or partially.30 28 Abd al-Sami` al-Misri, Al-Masraf al-Islami: ‘Ilmiyyan wa ‘Amaliyyan, Maktabah Wahbah, Cairo, 1988, pp. 69–70. 29 Dalil al-Fatawa al-Syar`iyyah fi al-A’mal al-Masrafiyyah, Markaz al-Iqtisad al-Islami, Cairo, 1989, pp. 66–67. 30 Al-Sowi, Musykilah al-Istithmar, pp. 619–627. 15 Resolutions of the Securities Commission Shariah Advisory Council BAI` DAYN RESOLUTION At its 2nd meeting on 21 August 1996, the Shariah Advisory Council (SAC) unanimously agreed to accept the principle of bai` dayn i.e. debt trading as one of the concepts for developing Islamic capital market instruments. This was based on the views of some of the Islamic jurists who allowed this concept subject to certain conditions. In the context of the capital market, these conditions are met when there is a transparent regulatory system which can safeguard the maslahah (interest) of the market participants. INTRODUCTION From the Islamic jurisprudence point of view, dayn encompasses a wide scope, including payment for product, qardh (loan) payment, mahr (dowry) payment before or after cohabitation, that is mahr which has not been given after the marriage `aqd (contract), rental, compensation for crime committed (arsy), compensation for damages, money to be paid for divorce (khulu`) and for purchase orders which have not yet arrived (muslam fih).31 In the context of the Islamic capital market, bai` dayn is the principle of selling the dayn which results from mu`awadhat maliyyah contracts (exchange contracts), such as murabahah, bai` bithaman ajil (BBA), ijarah, ijarah munthiyah bi tamlik, istisna` and others. 31 Wahbah Al-Zuhaili, Al-Fiqh al-Islami wa Adillatuhu, Dar al-Fikr, Damascus, 1989, vol. 4, p. 432. 16  Principles of Muamalat in the Capital Market ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF BAI` DAYN The bai` dayn principle has always been a point of contention among past and present Islamic jurists. However, there is no general nas or consensus (ijmak) among those who forbid it.32 In general, the majority of Islamic jurists are unanimous in allowing the activity of selling debts to the debtor.33 They only differ in opinion about selling the debt to a third party for the reason that the seller will not be able to deliver the sold item to the buyer. At its 8th meeting on 25 January 1996, the IISG identified the `illah (reason) for why some Islamic jurists do not allow bai` dayn. The `illah generally touches on the risks to the buyer, gharar,34 absence of qabadh35 and riba. Opinions of Past Islamic Jurists The Hanafi Mazhab looked at bai` dayn from the aspects of potential risks to the buyer, debtor, and the nature of the debt itself. They were unanimous in not permitting this instrument because the risks cannot be overcome in the context of debt selling. The debt is in the form of mal hukmi (intangible assets) and the debt buyer takes on a great risk because he cannot own the item bought and the seller cannot deliver the item sold.36 The Maliki Mazhab allowed debt selling to a third party subject to certain conditions to facilitate the use of this principle in the market. The conditions are as follows: (a) Expediting the payment of the purchase; (b) The debtor is present at the point of sale; (c) The debtor confirms the debt; 32 Ibnu Qayyim al-Jauziyyah, I`lam al-Muwaqqi`in, Dar al-Fikr, Beirut, vol. 1, p. 388. 33 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 433. 34 Please see the resolution on gharar for further explanation. 35 Qabadh means the control and ownership of the item bought. It depends a lot on `urf or the normal recognition of the local community. Please see the resolution on qabadh for further explanation. 36 Al-Kasani, Badai’i` al-Sana’i`, Dar al- Fikr, Beirut, vol. 5, p. 148. 17 Resolutions of the Securities Commission Shariah Advisory Council (d) The debtor belongs to the group that is bound by law so that he is able to redeem his debt; (e) Payment is not of the same type as dayn, and if it is so, the rate should be the same to avoid riba; (f) The debt cannot be created from the sale of currency (gold and silver) to be delivered in the future; (g) The dayn should be goods that are saleable, even before they are received. This is to ensure that the dayn is not of the food type which cannot be traded before the occurrence of qabadh; and (h) There should be no enmity between buyer and seller, which can create difficulties to the madin (debtor). The conditions set by the Maliki Mazhab can be divided into three categories:37 (a) To protect the rights of the debt buyer; (b) To avoid debt selling before qabadh; and (c) To avoid riba. The Syafi`i Mazhab was of the opinion that selling the debt to a third party was allowed if the dayn was mustaqir (guaranteed)38 and was sold in exchange for `ayn (goods) that must be delivered immediately. When the debt was sold, it should be paid in cash or tangible assets as agreed. Ibnu al-Qayyim was of the opinion that bai` dayn was permissible because there was no general nas or ijmak that prohibited it. What was stated was the prohibition of bai` kali’ bi kali’.39 37 Al-Dusuqi, Hasyiah al-Dusuqi ‘ala al-Syarh al-Kabir, Dar Ihya’ al-Kutub al-Arabiyyah, Cairo, vol. 3, p. 63. 38 Dayn mustaqir is redemption-guaranteed debts, e.g. compensation value of damages and properties of the debtor. Please refer to Al-Syirazi, Al-Muhazzab, Dar al-Fikr, Beirut, vol. 1, p. 262. 39 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 1, p. 388. Bai` kali’ bi kali’ is bai` nasi’ah bi nasi’ah which means a debt sale that is paid by debt. For example, one buys food on credit for two months. When the time comes, he should redeem his debt. However, he says to the seller: “I still have no food to pay my debt, so sell it to me for another period.” The seller then sells it to him for another period and increases the price. In this case, the buyer did not receive anything in exchange when being charged for extending the period of payment. 18  Principles of Muamalat in the Capital Market Results of the study showed that the main reason for the clash of opinions on bai` dayn among the past Islamic jurists centred on the ability of the seller to deliver the items sold. This was stated by Ibnu Taimiyyah himself and was also based on statements made in the great books of the four mazhab. The argument of the Islamic jurists that prohibited bai` dayn to a third party for fear that the buyer will have to bear great risks (Hanafi Mazhab) has some truth in it. This is especially true if there is an absence of supervision and control. In this context, the buyer’s maslahah should be safeguarded because he is the party that has to bear the risks of acquiring the debt sale while making the sale contract. In the Malaysian context, the debt securities instruments based on the principle of bai` dayn are regulated by Bank Negara Malaysia and the Commission to safeguard the rights of the parties involved in the contract. Therefore, the conditions set by the Maliki Mazhab and the fears of risks by the Hanafi Mazhab can be overcome by regulation and surveillance. Thus, it can thus be concluded that although there are differences in opinions on bai` dayn among the Hanafi and Maliki Mazhab, there is a convergence point which states that bai` dayn can be used if there is a regulatory system that protects the buyer’s maslahah in an economic system. The fifth condition set by Maliki Mazhab relates to the exchange of ribawi goods. In the context of the sale of securitised debt, the characteristics of securities differentiate it from currency, and hence, it is not bound by the conditions for exchanging goods. 19 Resolutions of the Securities Commission Shariah Advisory Council BAI` `INAH RESOLUTION The SAC, at its 5th meeting on 29 January 1997, passed a resolution that bai` `inah is a principle that is permissible in the Islamic capital market in Malaysia. INTRODUCTION Bai` `inah refers to trading whereby the seller sells his assets to the buyer at an agreed selling price to be paid by the buyer at a later date. After that, the buyer immediately sells back the assets to the seller at a cash price, lower than the agreed selling price. The majority of Islamic jurists state that there are three forms of trading40 categorised as bai` `inah, whereby it can be concluded that all the assets sold 40 Forms of bai` `inah are as follows: The seller sells a product to the buyer at a higher price on a deferred payment basis. After delivery to the buyer, the seller buys back the product in cash at a much lower price. A third party is involved, the seller sells a product that is delivered later on for, say RM200. After delivering it to the buyer, the buyer then sells it to a third party for a lower price, say RM100. The third party then resells it to the first party (original owner) for RM100. This means the original owner obtained RM100 from the trade. A man wants to borrow, say RM100. The creditor refuses to lend using the qardh principle. Instead he says: “I am not giving you qardh (loan) but I will sell you this shirt by deferred payment for RM100 although the market price is RM70.” This is to enable the buyer to sell it for RM70 at the market. When the buyer agrees, the trade is transacted. What happens is the shirt owner makes a profit of RM30 from the transaction because the buyer will pay him a deferred payment of RM100. 20  Principles of Muamalat in the Capital Market come from the financier. The financier will sell a product to the buyer at an agreed price to be paid later. The financier then immediately buys back the asset at a cash price lower than the deferred selling price.41 ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF BAI` INAH Opinions of Past Islamic Jurists Past Islamic jurists had differing views on determining the hukm on bai` `inah. The following were their views: The majority42 were of the opinion that bai` `inah was not permissible because it was the zari’ah (way) or hilah (legal excuse) to legitimise riba (usury). The Hanafi Mazhab was of the opinion that bai` `inah was permissible only if it involves a third party, which acts as an intermediary between the seller (creditor) and buyer (debtor). The Maliki and Hanbali Mazhab, on the other hand, rejected bai` `inah and considered it invalid. Their opinion was based on the principle of sadd zari’ah that aims to prevent practices that can lead to forbidden acts such as, in this case, riba. The basis for the opinion of the majority of the Islamic jurists was the hadith dialogue between Aishah and the slave Zaid bin al-Arqam which showed the prohibition of bai` `inah.43 They also held to the hadith of the Prophet s.a.w in which he warned that those who practised bai` `inah would suffer scorn.44 Please refer to Ibnu `Abidin, Hasyiah Rad al-Mukhtar, Dar al-Fikr, Beirut, 1992, vol. 5, pp. 273 & 325. Al-Syaukani, Nail al-Authar, Dar al-Fikr, Beirut, 1994, vol. 5, p. 294. Al-San’ani, Subul al-Salam, Dar al-Kitab al-Arabi, Beirut, 1987, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah li al-Amir bi al-Syira’, Maktabah Wahbah, Cairo, 1987, p. 64. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 466–467. 41 Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Syaukani, Nail al-Authar, vol. 5, p. 294. Al-San’ani, Subul al-Salam, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah, p. 64. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 466–467. 42 The Hanafi, Maliki and Hanbali Mazhab. 43 Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 5, pp. 273 & 325. Al-Shaukani, Nailul Authar, vol. 5, p. 294. Al-San’ani, Subul al-Salam, vol. 3, pp. 76–77. Yusuf al-Qaradhawi, Bai` al-Murabahah, p. 64. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 466–467. 44 Al-San`ani, Subul al-Salam, vol. 3, pp. 76–77. 21 Resolutions of the Securities Commission Shariah Advisory Council The Syafi`i and Zahiri Mazhab viewed bai` `inah as permissible. A contract was valued by what is disclosed and one’s niyyah (intention) was up to Allah s.w.t. to judge. They criticised the hadith used by the majority of the Islamic jurists as the basis for their argument, saying that it (the hadith) was weak and therefore could not be used as the basis for the hukm.45 From the study done on the opinions of past Islamic jurists on the issue of bai` `inah, the SAC decided to accept the opinions of the Syafi`i and Zahiri Mazhab in permitting bai` `inah. Therefore, it can be developed into a product for the Islamic capital market in Malaysia. When institutions or individuals are in need of capital for a specific purpose they can utilise this method of payment, using their assets as mortgage. As they still need the assets, this method allows them to liquidate without losing the asset. 45 Please refer to footnote no. 43 on page 21. 22  Principles of Muamalat in the Capital Market BAI` MA`DUM RESOLUTION The IISG and SAC discussed the bai` ma`dum issue in a series of meetings in 1995 and 1997 in relation to warrants and futures contracts on crude palm oil, and concluded that bai` ma`dum is permissible. INTRODUCTION According to the theory of contracts in the Islamic jurisprudence, one of the conditions is that the mahal al-`aqd or ma`qud alaih (objects in trade) to be traded must exist when the contract is being made.46 Purchase of an object that does not exist when the contract is being made is considered bai` ma`dum. ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF BAI` MA`DUM The bai` ma`dum issue was discussed by past Islamic jurists when they were debating on the condition of an object in a contract of sale. An in-depth study is necessary to look for the `illah (reason) for the prohibition of bai` ma`dum in a vast majority of past Islamic jurisprudence literature to ensure that no error is made when applying the prohibition rule in many modern business transactions. 46 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 172. 23 Resolutions of the Securities Commission Shariah Advisory Council Opinions of Past Islamic Jurists The Hanafi and Syafi`i Mazhab pronounced that the object of sale must be in existence at the time the contract is made. Otherwise, the contract will be deemed invalid because anything that is ma`dum cannot be owned. This was based on the prohibition by the Prophet s.a.w. on the sale of an unborn baby camel and a sale of a non-existing object. However, exemption was made to the salam, ijarah, musaqah and istisna` contracts based on the istihsan principle.47 The Maliki Mazhab echoed the opinion of the Hanafi and Syafi`i Mazhab regarding mu`awadhat maliyah (exchange contract), while for the tabarru`at (ownership contract on voluntary basis) such as hibah, they did not impose any condition for an existing object. What was important was that it was expected to exist in the future.48 The Hanbali Mazhab, on the other hand, did not stipulate this condition. What was important was that a contract did not contain elements of gharar, which is forbidden by Shariah. Ibnu Taimiyah and Ibnu Al-Qayyim analysed the question of bai` ma`dum and concluded a sale was forbidden not because of ma`dum during the contract making, but rather because of the existence of gharar, which is a forbidden element. This was based on two arguments:49 (a) Neither the Quran, the Sunnah nor the Prophet’s companions stated that bai` ma`dum was not permissible. There was, however, a hadith prohibiting the sale of certain goods with features that did not exist. The prohibition was also for goods that are available but simply did not exist at the point of trade. This showed that the prohibition was due to the existence of the gharar element in the trade. Gharar means the inability to deliver the goods sold regardless of whether they exist or not. An example is the sale of a runaway slave or an animal that ran loose. Although the goods exist, the seller is not able to deliver them to the buyer, despite the fact that it is his obligation to do so once the sale and purchase agreement is completed. This failure to fulfil his obligation implies the presence of the forbidden element of gharar; and 47 Al-Kasani, Bada’i` al-Sana’i`, vol. 5, pp. 138–139, Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 427–428. Ali al-Khafif, Ahkam al-Mu`amalat al-Syari`yyah, Dar al-Fikr al-Arabi, Cairo, pp. 230–231. 48 Al-Kasani, Badai’i` al-Sana’i`, vol. 5, pp. 138–139. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, pp. 427–428. Al-Khafif, Ahkam al-Mu`amalat al-Syar`iyyah, Dar al-Fikr al-Arabi, Cairo, pp. 230–231. 49 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 2, pp. 8–10. 24  Principles of Muamalat in the Capital Market (b) There are specific situations where bai` ma`dum is permissible by Syara’ and considered valid. An example is the sale of fruits and grains, which are about to mature. This is allowed by the Prophet s.a.w. This is considered bai` ma`dum because the buyer cannot take delivery of the goods and has to wait until the fruits or grains mature. The salam, istisna`, and ijarah contracts are other examples of bai` ma`dum which are permissible based on the principle of istihsan.50 All these examples show that selling something that has not yet existed or is not yet in the seller’s possession at the point of the sale transaction is not forbidden merely because of its ma`dum nature. Hence, the study shows that the `illah for the prohibition of bai` ma`dum is gharar51 and not the non-existence of goods. Gharar occurs when the seller is unable to deliver the objects for sale. 50 Istihsan means disregarding a ruling that has dalil over a matter and replacing it with a stronger ruling with dalil based on the Syara’. 51 Please refer to further explanation on bai` ma`dum in the SAC resolution on transferable subscription rights (TSR) and gharar. 25 Resolutions of the Securities Commission Shariah Advisory Council BAI` WAFA’ RESOLUTION At its 11th meeting on 26 November 1997, the SAC passed a resolution that bai` wafa’ is permissible under Islamic jurisprudence and can be developed as a principle for formulating products in an Islamic capital market. INTRODUCTION Bai` wafa’ is also known in other terms, such as bai` thanaya (Maliki Mazhab), bai` `uhdah (Syafi`i Mazhab), bai` amanah (Hanbali Mazhab) or bai` to`ah or bai` jaiz. The Hanafi book named it bai` mu`amalah.52 Section 118 of Majallah al-Ahkam al-`Adliyyah defined it as a sale with a condition that when the seller pays back the price of the goods sold, the buyer returns the goods to the seller.53 According to al-Zarqa’, it is ‘aqd tauthiqiy (security contract) in the form of a sale based on the fact that both parties to the contract have the right to reclaim the exchanged goods.54 This means that when there is a wafa’ sale, the seller has the right to reclaim the goods sold by paying the buyer the full price of the goods sold. It is called wafa’ because of the obligation to fulfil the condition in the contract, i.e. returning the goods sold when the seller decides to reclaim the goods by paying back the amount.55 52 Nazih Hammad, Mu`jam al-Mustalahat al-Iqtisodiyyah fi Lughah al-Fuqaha’, The International Institute of Islamic Thought, Herndon, 1993, p. 86. 53 Ali Haidar, Durar al-Hukkam, Dar al-Jil, Beirut, 1991, vol. 1, p. 111. 54 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 554. 55 Nazih Hammad, Mukjam al- Mustalahat al-Iqtisodiyyah fi Lughah al-Fuqaha’, p. 86. 26  Principles of Muamalat in the Capital Market The main features of bai` wafa’ include:56 (a) The seller and buyer can terminate the contract at any time; (b) The asset traded according to wafa’ is not an asset obtained through musya`;57 (c) The buyer can utilise and benefit from the property bought through wafa’; (d) The buyer will be liable if there is any damage caused to the property by his own carelessness and negligence; and (e) The buyer cannot transfer the right of ownership of the property to another person via a sale. However, there are some Hanafi Mazhab scholars who consider the transfer of ownership to a third party permissible on the condition that the asset can be reclaimed. Based on the above explanation, it can be concluded that the financier acts as the buyer of the asset from the individual who needs capital. These attributes also show the presence of rahn (pledge) characteristics in bai` wafa’ despite its execution as a form of sale. For that reason, Al-Zarqa’ in an analysis of the features of bai` wafa’ stated that it is a combination of rahn and bai` (sale). Thus, it is considered a contract in itself and not fully bound by bai` or rahn.58 To illustrate bai` wafa’: A sells a property to B on the condition that if A pays back the cost of the asset, B will return the asset to A. The price is fixed by both parties, and the buyer can use the asset and enjoy its benefits as long as he does not transfer the ownership right to a third party. To illustrate the application of bai` wafa’ in a capital market – ABC company gets a ship building contract and the order is estimated to be ready in two years. The company can issue sukuk using the bai` wafa’ principle by securitising the two-year dayn (debt). By issuing the sukuk, the company can obtain liquidity to run other projects using the existing capital. The sukuk issued is a joint funding effort by investors of the ship building project. When 56 Haidar, Durar al-Hukkam, vol. 1, pp. 432–433. 57 Musya’ refers to jointly-owned property. Please refer to Nazih Hammad, Mu`jam al-Mustalahat, p. 248. 58 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 544. Majallah Majma` al-Fiqh al-Islami, OIC, Jeddah, no. 7, vol. 3, p. 12. 27 Resolutions of the Securities Commission Shariah Advisory Council the project is completed, ABC will buy back the sukuk from the investors plus the profits, as agreed. For this type of sukuk, the profits are already known by the investors because the capital and costs have been determined. ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF BAI` WAFA’ Opinions of Past Islamic Jurists Past Islamic jurists were divided on determining the ruling on bai` wafa’. The Maliki and Hanbali Mazhab, and mutaqaddimun (the earlier generation) of the Hanafi and Syafi`i Mazhab considered bai` wafa’ as not permissible because trading is not the main purpose of the bai` wafa’ contract. They concluded that its main purpose is to legitimise riba which is forbidden.59 The mutaakhhirun (the later generation) of the Hanafi and Syafi`i Mazhab permitted bai` wafa’ on the grounds that it is an effort to prevent the occurrence of riba. They permitted it due to society’s demand and because it had become the social `urf in many places.60 Some of the Islamic jurists of the Hanafi Mazhab were of the opinion that both the seller and buyer can sell the wafa’ goods to a third party on the condition that both parties (seller and buyer) had agreed to the transaction of the other party.61 In fact, some Islamic jurists such as Al-Ba`lawi from the Syafi`i Mazhab and Al-Sadr al-Shahid Omar Adul Aziz and Al-Marghinani from the Hanafi Mazhab even permitted the buyer to sell the wafa’ goods to a third party without referring to the wafa’ seller.62 59 Yusuf Kamal, Fiqh Iqtisad al-Suq, Dar al-Wafa’, Cairo, 1996, p, 195. ’Ali al-Khafif, Ahkam al-Muamalat, p. 399. 60 Ba’alawi, Bughyah al-Mustarsyidin, Dar al-Ma’rifah, p. 133. Ibnu Nujaim, Al-Bahr al-Ra’iq, vol. 6, pp. 8–9. 61 Haidar, Durar al-Hukkam, vol. 1, p. 432. 62 Ba’alawi, Bughyah al-Mustarsyidin, p. 133. Ibnu Nujaim, Al-Bahr al Ra’iq, vol. 6, pp. 8–9. 28  Principles of Muamalat in the Capital Market BAI` MUZAYADAH RESOLUTION At its 10th meeting on 16–17 October 1997, the SAC discussed the concept of bai` muzayadah and passed a resolution that it was permissible according to Islamic jurisprudence. Thus, this concept can be used as a reference for developing an instrument in the Islamic capital market in Malaysia. INTRODUCTION Bai` muzayadah is the offering of goods for sale in a market by a seller with a number of interested buyers who compete to offer the highest price. This process ends with the seller selling the goods to the highest bidder. In other words, it is similar to an auction.63 Other names for this principle used by past Islamic jurists are bai` fuqara’, bai` man kasadat bidha`atuhu,64 bai` mahawij, and bai` mafalis.65 This concept is relevant to many issues in the Islamic capital market, especially those related to the behaviour of market participants profiteering from price differences. It is also used as an argument to permit speculation so long as it is not contrary to Shariah principles. 63 Nazih Hammad, Mu`jam al-Musthalahat, pp. 245–246. 64 Al-Hummam, Al-Fatawa al-Hindiyyah, Dar al-Fikr, Beirut, 1991, vol. 3, p. 210. 65 Nazih Hammad, Mu`jam al-Mustalahat, pp. 245–246. 29 Resolutions of the Securities Commission Shariah Advisory Council ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF BAI` MUZAYADAH Bai` muzayadah is a form of trading that has existed and been applied in the muamalat system for a long time. It was a topic of debate to determine its status among past Islamic jurists. Thus, in evaluating its status from the Shariah aspect, the opinions of the past Islamic jurists were studied. Athar as Basis The following are the athar (practice based on the Companions of the Prophet s.a.w.) supporting bai` muzayadah: (a) Imam Bukhari had written a specific topic on the concept and views of `Ata’ who said that bai` muzayadah was practised by society in the sale of war booty;66 and (b) Anas had reported the Prophet s.a.w. selling a carpet and a water vessel and was calling out for customers. A man offered to buy them for one dirham. The Prophet s.a.w. then asked for a higher bid. Another man offered two dirham and so the Prophet s.a.w. sold the wares to him.67 Opinions of Past Islamic Jurists There were two opinions of the Islamic jurists in determining the hukm of bai` muzayadah. The majority viewed it as permissible by Shariah, while the minority thought otherwise. The main reason for the difference in opinion was the interpretation of the hadith of the Prophet s.a.w., which prohibited bidding on another person’s bidding (saum ‘ala saum akhihi).68 66 Al-Bukhari, Al-Jami` al-Sahih, Dar Ibn Kathir, Beirut, 1987, vol. 2, p. 753. 67 Hadith as reported by al-Tirmizi and al-Nasa’i. Al-Tirmizi, Sunan al-Tirmizi, Dar Ihya’ al-Turath al-Arabi, Beirut, vol. 3, p. 522. Al-Nasa’i, Sunan al-Nasai’i, Maktabah al-Matbu’at al-Islamiyyah, 1986, vol. 7, p. 259 (hadith no. 4518). 68 Ibnu Rusyd, Bidayah al-Mujtahid, Dar al-Jil, Beirut, 1986, vol. 2, pp. 270–271. 30  Principles of Muamalat in the Capital Market Al-Kasani, a jurist of the Hanafi Mazhab, said that bai` muzayadah is not prohibited because the Prophet s.a.w. himself practised it.69 Ibnu Humam, another jurist of the Hanafi Mazhab, also permitted the principle using the same argument.70 Ibnu Juzaiy, a jurist of Maliki Mazhab permitted this principle because it is different from saum ’ala saum akhihi which is forbidden, and there is no element of unfairness in choosing goods.71 Ibnu Qudamah, a jurist of the Hanbali Mazhab, stated that bai` muzayadah is permitted accordingly to ijmak based on what was practised by the Prophet s.a.w.72 69 Al-Kasani, Bada’i al-Sana’i`, vol. 5, p. 232. 70 Ibnu Humam, Takmilah Fath al-Qadir, Dar al-Fikr, Beirut, vol. 6, p. 479. 71 Ibnu Juzay, Al-Qawanin al-Fiqhiyyah, Dar al-Qalam, Beirut, p.175. 72 Ibnu Qudamah, Al-Mughni, Dar al-Fikr, Beirut, 1994, vol. 4, p. 302. 31 Resolutions of the Securities Commission Shariah Advisory Council SUFTAJAH RESOLUTION The SAC had discussed this issue in a series of meetings and made a resolution to permit this concept as a way of risk management in the Islamic capital market. The features of this product do not contradict the Shariah principles and benefit both parties, the creditor and debtor. INTRODUCTION The word suftajah originated from the Persian language and has been adopted by the Arabs. It means a document written by a person to his representative or debtor instructing him to pay a certain sum of money to his creditor. There is little difference between its meaning in Arabic and its Islamic jurisprudence terminology, which is a credit instrument in the form of financial notes given to someone to enable the creditor to use it at another predetermined venue. The benefits given by the debtor using this method are from a risk management aspect. A creditor does not run the risk of losing money during his journey as he is only carrying suftajah notes.73 Among the applications of suftajah in a modern financial world is the process of money transfer, i.e. telegraphic transfer, traveller’s cheque and money order. In the context of the capital market, it is related to financial notes. 73 Nazih Hammad, Mu`jam al-Musthalahat, p. 154, Sa’di Abu Jaib, Al-Qamus al-Fiqhi, Dar al-Fikr, Damascus, 1988, p. 173. Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 5, p. 350. Al-Dusuqi, Hasyiah al-Dusuqi, vol. 3, p. 224. 32  Principles of Muamalat in the Capital Market ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF SUFTAJAH This concept is not new in financial risk management as seen in the writings of past Islamic jurists. From a study undertaken by the SAC, it was found that the concept was based on the following: Athar as Basis There are many narrations in al-Sunan al-Kubra by al-Baihaqi that showed that suftajah was practised by the companions of the Prophet s.a.w. and tabi`in (successors), such as Ali bin Abi Talib, Ibnu Abbas, Abdullah bin Zubair and Ibnu Sirin.74 Opinions of Past Islamic Jurists The Islamic jurists held opposing views on permitting suftajah to be used as a financial instrument because it contains elements of hawalah (debt assignment contract) and benefit. Generally, their views can be divided into two: Views Not Permitting Suftajah Those who held this view related the concept to elements of riba because of the increased value in the form of benefit for the creditor. There is a hadith of the Prophet s.a.w. that prohibited qardh which gives returns to the creditor in the form of profits. The hadith means: “Every qardh that benefits the creditor is riba.” Views Permitting Suftajah The Maliki Mazhab gave some flexibility in permitting this instrument in daily dealings, with a condition that dharurah (necessity) must exist whereby 74 Al-Baihaqi, Al-Sunan al-Kubra, vol. 5, p. 352. 33 Resolutions of the Securities Commission Shariah Advisory Council suftajah is used as an instrument to avoid the risk of losing money while travelling.75 Some jurists of the Hanbali Mazhab, such as Ibnu Taimiyah, Ibnu Qayyim and Ibnu Qudamah, were of the opinion that the instrument of suftajah does not contradict Shariah principles because its benefits are enjoyed by both creditor and debtor.76 75 Al-Dusuqi, Hasyiah al-Dusuqi, vol. 3, p. 225. Al-Khurasyi, Hasyiah al-Kurasyi, Dar al-Fikr, Beirut, vol. 4, p. 141. 76 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 1, p. 391. Ibnu Qudamah, Al-Mughni, vol. 4, pp. 390–391. 34  Principles of Muamalat in the Capital Market BAI` `URBUN RESOLUTION In its 13th meeting on 19 March 1998, in a discussion on composite index futures contract, the SAC passed a resolution permitting bai` `urbun from the Islamic jurisprudence perspective. INTRODUCTION It can be mentioned as `urbun, `arabun and `urban. It is a deposit given by the buyer to the seller in a buying and selling contract. If the sale proceeds, the deposit will be part of the price of the goods. Otherwise, it will be considered as hibah (gift) from the buyer to the seller.77 For example, A wishes to buy a car costing RM40,000 from XYZ Company. A is asked to pay `urbun of RM4,000 as booking fee, and there is a condition that this money will not be returned to him if he cancels the order. However, if he proceeds with the purchase, the deposit will be considered as part of the cost of the car. This means A needs to pay only RM36,000 for the balance. ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF BAI` `URBUN Based on a study done by the SAC, this concept is permissible from the Shariah perspective, based on the following arguments. 77 Nazih Hammad, Mu`jam al-Mustalahat, p. 196. Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 448. Al-Zarqa’, Al-Madhkal al-Fiqhi, vol. 1, p. 495. 35 Resolutions of the Securities Commission Shariah Advisory Council Opinions of Past Islamic Jurists Past Islamic jurists were divided on determining the ruling of bai` `urbun. The following is a summary of their opinions: The majority were of the opinion that bai` `urbun is not permissible as it contained elements of gharar, gambling and unlawful acquisition of property. They also discussed the prohibition of bai` `urbun by the Prophet s.a.w.78 Some tabi`in, among them, Mujahid, Ibnu Sirin, Nafi’ bin Haris, Zaid bin Aslam and the Hanbali Mazhab considered it permissible based on the practices of Saidina Omar Al-Khattab. He once appointed Nafi’ to be his representative to buy a house from Safwan bin Umaiyyah in Mecca to be converted into a prison. Safwan asked Omar for a deposit and laid down the condition that the deposit would be his if Omar terminated the contract. Omar agreed to the condition.79 This opinion was strengthened by Kadhi Shuraih who said that whoever caused ta`attul (delay) and intizar (waiting) had to pay compensation to the party affected by the termination of the contract.80 Although there were two opposing views to this method of trading, the SAC concluded that the concept of bai` `urbun is permissible and can be developed as an instrument in the Malaysian Islamic capital market. It has been a common practice in any society to pay a deposit in a business transaction so that the parties involved will not lose their rights within a certain given period. This does not contradict Shariah principles because it is `urf sahih to ensure the smooth running of a muamalah. Bai` `urbun is permissible because the hadith of the Prophet s.a.w. which indicates the prohibition is weak. 78 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 264. Al-Zuhaili, Al-Fiqh al-Islami, p. 449. 79 Ibnu Qudamah, Al-Mughni, vol. 4, pp. 312–313. 80 A-Zarqa’, Al-Madkhal al-Fiqhi, p. 496. 36  Principles of Muamalat in the Capital Market BAI` BIMA YANQATI` BIHI SI`R RESOLUTION At its 10th meeting on 16–17 October 1997 and 11th meeting on 26 November 1997, in discussing the issue of crude palm oil futures contract, the SAC passed a resolution permitting the concept of bai` bima yanqati` bihi si`r (BBMYS) which is in accordance with Islamic jurisprudence. INTRODUCTION BBMYS, as defined by Ibnu Qayyim is the practice of taking a certain amount of goods, such as bread, meat and oil from the seller by the buyer every day and paying for them at market price at year-end or month-end without fixing the price at the inception of the `aqd.81 This practice will not give rise to any dispute between buyer and seller because they have agreed on the method of payment and price determination. ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF BAI` BIMA YANQATI` BIHI SI`R The application of this principle in buying and selling is not something new. Past Islamic jurists had determined its status based on Shariah principles. The following sums up their opinions: Generally, there were two opinions on buying and selling using this principle. The first opinion came from the majority of Islamic jurists, who rejected it. 81 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, pp. 5–6. 37 Resolutions of the Securities Commission Shariah Advisory Council This was based on the existence of the element of jahalah (ignorance) in the price of the contract that rendered it invalid.82 The second opinion came from some Islamic jurists, such as Imam Ahmad bin Hanbal, Ibnu Taimiyyah, Ibnu al-Qayyim and the Hanbali Mazhab, who permitted this principle. Ibnu `Abidin of the Hanafi Mazhab also accepted it through a contract known as bai` istijrar. They permitted it because the price fixing method prevented any jahalah (ignorance) or dispute.83 The Hanbali Mazhab used qiyas84 in permitting BBMYS. According to them, this kind of buying and selling was similar to fixing the price according to mithl or market price which was already permitted by Syara’. Many existing business transactions are permitted based on the thaman al-mithl (market price) concept. This was further strengthened by the fact that there is no clear prohibition in the Quran, the Sunnah, or ijmak or the practices of the companions of the Prophet s.a.w. against this type of buying and selling. It is also a social practice that has been unanimously accepted as a facility.85 82 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, p. 8. 83 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, p. 8. Ibnu Tamiyyah, Al-`Uqud, Maktabah Ibnu Taimiyyah, Cairo, p. 223. Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 4, p. 516. 84 Qiyas refers to reconciling a new ruling and an existing one because they have the same `illah. Please refer to Al-Zuhaili, Usul al-Fiqh, vol. 1, p. 603. 85 Ibnu Qayyim, I`lam al-Muwaqqi`in, vol. 4, p. 8. Ibnu Taimiyyah, Al-`Uqud, Cairo, p. 223. Ibnu `Abidin, Hasyiah Rad al-Mukhtar, vol. 4, p. 516. 38  Principles of Muamalat in the Capital Market KAFALAH ON MUDHARABAH CAPITAL RESOLUTION The SAC at its 35th meeting held on 7 November 2001 resolved that a third- party guarantee on the capital invested based on the mudharabah principle is permissable. INTRODUCTION Kafalah generally means a guarantee. It is defined as a contract which combines one’s zimmah (liability) with another person’s zimmah.86 It is a contractual guarantee given by the guarantor to assume the responsibilities and obligations of the party being guaranteed on any claims arising thereof. This principle is also applied in loan guarantees whereby the guarantor assumes the liability of the debtor when the debtor fails to discharge his obligation. This is also known as dhaman.87 From the aspect of a contract’s objective, kafalah is included in the category of `uqud tauthiqat (contractual guarantee).88 However, from the aspect of tabadul huquq (transfer of rights), it conveys the meaning of tabarru` at the inception of the contract and mu`wadhat at the end.89 Generally, kafalah may be divided into two types: 86 Haidar, Durar al-Hukkam, vol. 1, p. 724. 87 Securities Commission, Guidelines on the Offering of Islamic Securities. 88 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 583. 89 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 579. 39 Resolutions of the Securities Commission Shariah Advisory Council (a) Kafalah bi mal is a guarantee to return an asset to its owner; and (b) Kafalah bi nafs is a guarantee to bring someone to a specific authority, such as the judiciary.90 As for this issue, the type of kafalah involved is the kafalah bi mal and it may be divided into three main categories, including: (a) Kafalah bi dayn is a guarantee for the repayment of another party’s loan obligation. It means that when a debtor fails to meet his obligation to repay a loan, then the guarantor will assume this obligation; (b) Kafalah bi `ayn or kafalah bi taslim is a guarantee of payment for an item or a guarantee of delivery in a transaction. For example, in a sale and purchase contract, the guarantor agrees to guarantee the delivery of the item to be sold to the purchaser. In the event the seller fails to honour his obligation according to the agreement, the guarantor will be responsible for the delivery; and (c) Kafalah bi darak is a guarantee that an asset is free from any encumbrances. This guarantee is specific for transactions that involve the transfer of titles or rights which ensures that an asset is free from any encumbrances. For example, if A claims and is able to prove that the item bought by B belongs to A, then it will be the guarantor’s responsibility to ensure that B gets back the value of his purchase which has been paid to the seller.91 Mudharabah is a contract which involves agreement between two parties, namely rabb mal (investor) who provides 100% of the fund, and mudharib (entrepreneur) who manages the project in accordance with Shariah principles. Any profit from this investment will be apportioned based on the preagreed ratio at the inception of the agreement. However, any losses will be fully borne by the rabb mal.92 90 Al-Zarqa’, Al-Makhal al-Fiqhi, vol. 1, p. 542. Haidar, Durar al-Hukkam, vol. 1, pp. 732–734. Ibnu Rusyd, Bidayah Al-Mujtahid, Beirut, vol. 2, p. 378. 91 Al-Zarqa’ Al-Madkhal al-Fiqhi, vol. 1, p. 542. Haidar, Durar al-Hukkam, vol. 1, pp. 732–734. 92 Securities Commission, Guidelines on the Offering of Islamic Securities. 40  Principles of Muamalat in the Capital Market ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF KAFALAH ON MUDHARABAH CAPITAL The Original Law on Guarantees for Mudharabah Capital According to the arguments of past Islamic jurisprudence, the jurists were unanimous in their opinion that when losses occur in a mudharabah contract, the loss is to be borne by the rabb mal and not the mudharib as the latter’s status is only amin (trustee). However, if it could be proven that the loss was clearly due to the mudharib’s negligence or intentional, then the mudharrib is to make good the capital to the investor.93 Past Islamic jurists were unanimously of the opinion that in a situation where a loss occurs on a mudharabah, a capital guarantee by the mudharib is not permissible. However, they have different opinions on the status of the contract. The Hanafi and Hanbali Mazhab were of the opinion that the contract is valid and the conditional guarantee should be nullified. The Maliki and Syafi’i Mazhab, however, were of the opinion that the mudharabah contract is immediately nullified if there is such a guarantee.94 Contemporary Islamic jurists have made studies on the acceptable level of capital in mudhrabah contracts that can be guaranteed according to the perspective of Islamic jurisprudence. The main issue of concern in relation to capital guarantee is whether the guarantee given will cause the mudharabah contract to be nullified since it violates the muqtadha `aqd (the main objective of a contract).95 They have submitted several solutions on mudharabah capital guarantee, including: (a) Third-party guarantee based on tabarru` (voluntarily given); (b) Third-party guarantee based on qardh (debts); 93 Al-Kasani, Badai’i` al-Sana’i`, vol. 6, p. 87. Al-Nawawi Al-Majmu` Syarh al-Muhazzab, Maktabah al- Irsyad, Jeddah, vol. 15, pp. 194–195, 198. Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, pp. 303, 305. Ibnu Qudamah, Al-Mughni, vol. 5, pp. 147–148, 192. Ibnu Najjar, Muntaha al-Iradat, vol. 1, pp. 460, 466. Ibnu Juzay, Al-Qawanin al-Fiqhiyyah, p. 186. 94 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 305. Ibnu Qudamah, Al-Mughni, vol. 5, p. 187. Ibnu Juzay, Al- Qawanin al-Fiqhiyyah, p. 186. 95 Dallah Al-Bakarah, Fatawa Nadawat al-Bakarah, Jeddah, 1995, p. 71. 41 Resolutions of the Securities Commission Shariah Advisory Council (c) Mudharib yudharib (the entrepreneur channels the investor’s capital to investing in a third party); and (d) Guarantee through special funds. Third-party Guarantee Based on Tabarru` The OIC Fiqh Academy96 discussed on the matter of issuance of Sanadat Muqaradhah and summarised that mudharib guarantee on capital and mudharabah profits are not permissible. However, the guarantee may be issued by a third party who has no connection whatsoever with the mudharib if it is done by way of tabarru` and is not included as a condition in the actual mudharabah contract sealed and signed by both parties.97 The Shariah Council for Accounting and Auditing Organization for Islamic Institutions (AAOIFI)98 allowed for third-party guarantees other than by mudharib or investment agent or business partner towards the liability of investment losses. However, this is on the provison that the guarantee given is not tied to the original mudharabah contract.99 The basis of their decision is tabarru` which is allowed by Shariah.100 Husain Hamid Hassan summarised the basis of the permissibility of third- party guarantees based on the views of the Maliki Mazhab which allow wa`d mulzim (promises that must be kept). It is further strengthened by maqasid Shariah (Shariah’s objective) which allows for such action.101 Third-party Guarantee Based on Qardh The Fatwa Council of Jordan legitimised third-party guarantees based on debts. This resolution was made as the basis in drafting section 12 of the Muqaradhah Act which pertains to the guarantee concerned.102 96 4th meeting on 6–11 February 1988. 97 Qararat wa Tausiyat Majma` al-Fiqh al-Islami, Dar al-Qalam, Damascus, 1998, pp. 69–71. 98 6th Meeting on 19–23 May 2001. 99 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Bahrain, 2001, p. 80. 100 AAOIFI, Al-Ma`ayir al-Syar`iyyah, Bahrain, 2001, p. 89. 101 OIC, Majallah Majma` al-Fiqh al-Islami, Jeddah, 1988, no. 4, vol. 3, p. 1875. 102 This section states that “The government guarantees the payment of sanadat muqaradhah upon maturity. This payment guarantee is in the form of interest-free qardh bestowed by the government for implemented projects”. Please refer to OIC, Majallah Majma` al-Fiqh al-Islami, no. 4, vol. 3, p. 1980. 42  Principles of Muamalat in the Capital Market However, the OIC Fiqh Academy, disagrees with the basis of third-party guarantees that are based on debt and resolved that third-party guarantees have to be in the form of tabarru`. Otherwise, the contract is deemed to be an interest-bearing debt which is not permissable. Mudharib Yudharib Past Islamic jurists also delved on the issue of mudharabah capital guarantee in the context of mudharib yudharib. The mudharib invests the capital received from rabb mal to another party. In other words, the mudharib acts as an intermediary between the first rabb mal and the actual entrepreneur. Wahbah al-Zuhaili summed up the views of past Islamic jurists on the issue of mudharib yudharib that all the four fiqh sects collectively agreed that the first mudharib shall be responsible for the liability of the guarantee (dhaman) if the capital is invested or handed over to another mudharib (third party).103 Generally, the mudharib yudharib concept is allowable. If it bears any profit, the profit should be distributed between the rabb mal and the first mudharib based on a preagreed rate and the balance is to be distributed between the first mudharib and the second mudharib.104 For financial institutions and companies that issue financial products based on mudharabah, the concept of mudharib yudharib may be applied if they invest part of the capital in other parties. If this happens, the financial institutions or companies should guarantee the capital based on the views of majority of Islamic jurists. Hence, in such a situation the interest of investors is guaranteed. Guarantee Through Special Funds Contemporary Islamic jurists also allow the channeling of a portion of mudharabah profits to a special fund created for the purpose of insuring against future losses. This may be done with the concurrence of investors.105 103 Al-Zuhaili, Al-Fiqh al-Islami, vol. 4, p. 860. 104 Ibnu Qudamah, Al-Mudghni, vol. 5, p. 163. 105 Qararat wa Tausiyyat Majma` al-Fiqh al-Islami, p. 70. 43 Resolutions of the Securities Commission Shariah Advisory Council UJRAH FOR GUARANTEES RESOLUTION The SAC, at its 36th meeting held on 6 February 2002, resolved that ujrah (fees) paid for third-party guarantees in mudharabah is allowable on the condition that the investor cannot claim for any repayment from the issuer should there be any losses incurred in the investment. The investor is also permitted to request for collateral from the issuer to cover against any likelihood of losses due to gross negligence by the issuer. INTRODUCTION Ujrah refers to rental or fees for usage of labour and benefits. In the current economic context, it may be applied to salaries, wages, fees, commission and the like.106 ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF UJRAH ON GUARANTEES Ujrah on Kafalah The majority of past Islamic jurists were of the view that the charging of fees on kafalah is not permissible. This view is based on the argument that a kafalah contract falls under `uqud tabarru`at which is voluntary and benevolent in nature. Hence, no fee is to be charged.107 106 Securities Commission, Guidelines on the Offering of Islamic Securities. 107 Al-Hattab, Mawahib al-Jalil, Beirut, Dar al-Fikr, 1992, vol. 5, pp. 111, 113. 44  Principles of Muamalat in the Capital Market Wahbah Al-Zuhaili was of the view that to charge ujrah on kafalah is permissible based on maslahah and society’s needs.108 Syeikh Ahmad Ali Abdullah was of the view that when there is a condition that the kafalah bears a fee, the said condition is considered valid. He also emphasised that kafalah contract is not qardh.109 He supported his views with qiyas, referring to fees that are permissible to be collected on utilising someone’s reputation and also on performing incantation using Quranic verses. Some of the past Islamic jurists allowed both situations and can be used as fees on the guarantee since it is similar from the aspect of work done.110 The OIC Fiqh Academy and the Shariah Council AAOIFI resolved that ujrah on kafalah/dhaman is not permissible. However, the guarantor may claim for actual expenses incurred on the guarantee.111 Imposition of Rahn (Collateral) on the Issuer Rahn is defined as the act of creating a valuable asset as collateral to amortise a debt in the event that the debtor fails to fulfil his obligations to the creditor.112 Hence, rahn may be requested as collateral from the issuer to be applied against a guarantee given by a third party. This permissibility is based on the resolution of the Fatwa Council of Jordan which views third-party guarantees in a muqaradhah contract as a form of qardh.113 As such, rahn may be imposed on each qardh. Since a third-party guarantee under this ruling is based on the fatwa in a form of qardh, no element of interest may be levied as this involves riba. The only costs allowed will be the actual expenses incurred by the creditor who in this context, is the guarantor.114 108 Al-Zuhaili, Al-Fiqh al-Islami, vol. 5, p. 161. 109 OIC, Majallah Majma` al-Fiqh al-Islami, Jeddah, 1986, no. 2, vol. 2, pp. 1146–1147. 110 OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 1134–1135. 111 OIC, Majallah Majma` al-Fiqh al-Islami, no. 2, vol. 2, pp. 1209–1210. AAOIFI, Al-Ma’ayir al-Syar’iyyah, Bahrain, 2002, pp. 75, 88. 112 Securities Commission, Guidelines on the Offering of Islamic Securities. 113 Please refer to section 12 of Muqaradhah Act, Jordan. 114 OIC, Majallah Majma` al-Fiqh al-Islami, no. 3, vol. 1, p. 305. 45 Resolutions of the Securities Commission Shariah Advisory Council IBRA’ CLAUSE IN A DOCUMENT OF AGREEMENT RESOLUTION The SAC at its 30th meeting on 8 November 2000 and its 45th meeting on 7 March 2003, discussed the usage of ibra’ (partial surrender of rights) in Islamic securities and resolved that: (a) Holders of Islamic securities may offer ibra’ to the issuer based on the application made by the issuer of the securities concerned; (b) The formula for the computation of early settlement may be stated as a guide to the issuer; and (c) The ibra’ (rebate) clause and the formula for the computation of early settlement may be stated in the main agreement of the Islamic securities contract which is based on `uqud mu`awadhat. However, the ibra’ clause in the main agreement shall be separated from the part related to the price of the transacted asset. The ibra’ clause shall only be stated under the section for mode of payment or settlement in the said agreement. INTRODUCTION Ibra’ refers to the act of surrendering one’s claims and rights, such as a creditor writing off the debts of a debtor. Ibra’ falls under uqud tabarru`at.115 Among the related Shariah issues in the discussion of ibra’ clause in Islamic securities contracts include: 115 Al-Zarqa’, Al-Madkhal al-Fiqhi, vol. 1, p. 579. 46  Principles of Muamalat in the Capital Market (a) Bai`atain fi bai`ah (two sales and purchase contracts in one transaction); (b) Safqatain fi safqah (two sales and purchase contracts in one transaction); (c) Combination of contracts in a form of mu`awadhah and tabarru`; (d) Bai` wa syart (conditional buying and selling); (e) Inclusion of conditions in the contract; (f) Dha` wa ta`ajjal; and (g) Maslahah. ARGUMENTS THAT SUPPORT THE PERMISSIBILITY OF IBRA’ The OIC Fiqh Academy116 deliberated on the issues of reduction of debts due to early settlement before the due date in bai` bi taqsit. They have resolved that reducing the debt in arrears due to early settlement whether at the request of the creditor or the debtor referred to as dha` wa ta`ajjal, is permissible by Shariah and does not include interest which is prohibited if it is not based on a prior agreement and only involves two parties that is the debtor and creditor. If it involves a third party, then it is not allowed as it falls under the law of hasm auraq tijariah (discounts on trade bills).117 Contemporary Islamic jurists are still discussing on the issue of amalgamating two or more contracts into one contract. This issue is included in the issue of `uqud mujtami`ah (amalgamation of contracts) which is categorised as `uqud mustajiddah (new contracts). Bai`atain fi Bai`ah Bai`atain fi bai`ah is included in prohibited sale and purchase transactions. The basis of the prohibition originates from the sayings of the Prophet s.a.w.: 116 The 7th conference at Jeddah on 9–14 May 1992. 117 OIC, Majallah Majma`al-Fiqh al-Islami, Jeddah, 1992, no. 7, vol. 2, pp. 217–218. 47 Resolutions of the Securities Commission Shariah Advisory Council Meaning: “That the Prophet s.a.w. disallowed two contracts of sale and purchase in one transaction.”118 In another saying, the Prophet s.a.w. declared: Meaning: “Whoever commits an act of two contracts in one transaction then there is the least between the two or interest.” The Islamic jurists were unanimous in declaring that bai`atain fi bai`ah is not allowed based on the above sayings, but they differ in their opinions in interpreting the forms of contracts and transactions which are included in the prohibition.119 Ibnu Rushd120 summarised the types of bai`atain fi bai`ah into three main categories: (a) Two items with two prices; (b) One item with two prices; and (c) Two items with one price. The Dallah al-Barakah Shariah Advisory Council interprets bai`atain fi bai`ah as the amalgamation between tabarru` and `iwadh. For example, A says to B: “Sell this item to me and I will provide the price of the item together with a gift”. This may also be construed as the sale and purchase of one item for two prices that is, deferred and cash, and sealed with a contract without determining the price agreed upon by the two parties to the contract. Sales and purchase contract cannot be amalgamated with several other contracts, such as musaqah, syarikah, ji`alah, marriage and qiradh.121 Nazih Hammad is of the opinion that bai` `inah is also another form of bai`atain fi bai`ah.122 118 Al-Syaukani, Nail al-Autar, vol. 5, p. 231. 119 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 194. 120 Ibnu Rusyd, Bidayah al-Mujtahid, vol. 2, p. 194. 121 Syarikat al-Barakah li al-Istithmar wa al-Tanmiyah, Fatawa Nadawat al-Barakah, Jeddah, 1997, p. 108. 122 Nazih Hammad, Al-‘Uqud al-Mustajiddah: Dhawabituha wa Namazij minha, Majallah Majma` al-Fiqh al-Islami, Jeddah OIC, no. 10, vol. 2, pp. 481–482. 48  Principles of Muamalat in the Capital Market Safqatain fi Safqah The basis for the prohibition of safqatain fi safqah is the sayings of the Prophet s.a.w: Meaning: “The Prophet s.a.w prohibited two contracts (sale and purchase) in one transaction.” In general, safqah refers to contracts and covers more than just sale and purchase contracts as it encompasses other contracts as well.123 Past Islamic jurists were of different opinions in the interpretation of the said sayings and the types of contracts prohibited by the Prophet s.a.w. The majority of the jurists were of the opinion that safqatain fi safqah refers to bai`atain fi bai`ah.124 Amalgamation of Mu`awadhah and Tabarru` Contemporary Islamic jurists discuss in general the law on the amalgamation of mu`awadhah and tabarru`.125 This is based on the views of past jurists in interpreting the sayings of the Prophet s.a.w: Meaning: “It is not allowable to combine debts with sale and purchase, two conditions in sale and purchase, taking a profit from an item which is not secured (occurrence of qabdh), and selling something which is not owned.”126 Some Islamic jurists do not allow the amalgamation between mu`awadhah and tabarru` type of contract. Ibn Taimiyah also held the same view 123 Al-Mausu`ah al-Fiqhiyyah, vol. 9, p. 266. 124 Al-Syaukani, Nail al-Autar, vol. 5, p. 232. Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2, p. 516. 125 Abd Sattar Abu Ghuddah, “Al-Tafahum al-Janibi fi Majal al-`Uqud”, Hawliyah al-Barakah, no. 2, Dec 2000, p. 30. 126 Al-Syaukani, Nail al-Autar, vol. 5, pp. 261–262. 49 Resolutions of the Securities Commission Shariah Advisory Council because tabarru` is done to facilitate transaction in a mu`awadhah way and not solely done voluntarily.127 The Hanbali Mazhab also prohibits this amalgamation based on qiyas of the Prophets s.a.w. on the prohibition of the amalgamation between bai` and qardh.128 Nazih Hammad was of the view that this qiyas cannot be the basis for the prohibition of the amalgamation between sale and purchase contracts and all contracts of the tabarru` type. This is because sale and purchase and hibah may be amalgamated into one contract.129 The Hanbali Mazhab is the most open of all sects in issues pertaining to the inclusion of conditions in a contract. However, they clearly do not allow the amalgamation of mu`awadhah and tabarru`. Bai` wa Syart Some Islamic jurists consider bai` wa syart as a prohibited contract as evidenced by the sayings of the Prophets s.a.w.: Meaning: “The Prophet s.a.w. prohibited conditional sale and purchase transactions.”130 However, the authenticity of these sayings is disputed by hadis experts because its isnad is disputed. This is further strengthened by examples of Islamic jurisprudence that allow conditional transactions as found in the scriptures of fiqh mu`tabar.131 Conditions in a Contract The inclusion of conditions in a contract is a muamalat issue referred to as “nazariyyah muqtadha `aqd” (purpose of contract theory). The Hanbali 127 Ahmad bin Taimiyah, Majmu` Fatawa, vol. 29, pp. 62–63. 128 Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2, p. 499. Abd Sattar Abu Ghuddah, Al-Tafahum al-Janibi fi Majal al-`Uqud, p.30. 129 Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2, p. 499. 130 Al-Syaukani, Nail al-Autar, vol. 5, p. 262. 131 Al-Syaukani, Nail al-Autar, vol. 5, p. 262. Nazih Hammad, Al-`Uqud al-Mustajiddah, no. 10, vol. 2, pp. 484–485. 50  Principles of Muamalat in the Capital Market Mazhab is regarded as the most open in the issue of muqtadha `aqd where they allow for the addition of a condition in a contract to safeguard the interest of the parties to the contract so long the condition does not contradict the Shariah prin