Legal Aspects of Islamic Banking and Sharia Compliant Investments

Legal Aspects of Islamic Banking and Sharia compliant Investments Dr. Thomas Wülfing Senior Partner WZR WZR-Group WZR-Group WZR Lehmweg 17 20251 Hamburg Tel: +49 40 480 63 63-0 Fax: +49 40 480 63 63-94 Contents I. Introduction II. Sharia-Principles III. Development and certification of Sharia compliant financial products IV. Islamic Banking 1. Financing 2. Bank accounts and cards V. Sharia compliant Investments 1. Sukuk – Islamic Bonds 2. Stocks 3. Islamic Funds VI. Islamic Insurance – Takaful VII. Islamic Finance in times of global economic crisis © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 2 I. Introduction 1. Islamic law Sharia (Islamic law) Islamic Koran Sunna (Holy Scripture of Islam) (contains all passed on messages and conducts of the prophet Mohammed) fiqh  islamic jurisprudence ijma  legally effective consensus between Sharia-scholars © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 3 I. Introduction 2. History and relevance of Islamic Finance 6th Century AD:  practise of first islamic financial instruments 1963 - 1967 in Mit Ghamr (Egypt):  first interest-free bank (founder Ahmed Al-Najjar) (founder: 1975:  foundation of the first Islamic bank (Dubai Islamic Bank)  and of a supranational bank (Islamic Development Bank) © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 4 I. Introduction 2. History and relevance of Islamic Finance 1979 – 1985:  Islamization of the entire financial system in Pakistan 1983/1984:  legal obligation for Banks in Iran an Sudan to respect Sharia-principles Today:  growth rates of 15-20% p. year  about 350 Islamic banks  about 800 Billion US-Dollar managed Dollar © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 5 II. Sharia-Principles 1. Riba Sura 2  Verse 275: „Those who devour Riba will not stand except as stand one whom the Evil one by this touch hath driven to madness. That is because they say: Trade is like Riba. But Allah hath permitted trade and forbidden Riba. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat are companions of the fire: they will abide therein (for ever) ever).“  Verse 276: „ Allah will deprive Riba of all blessing, but will give increase for deeds of charity: for he loveth not creatures ungreatful and wicked.“  Verse 278: O you who believe, be afraid of Allah and give up what remains from Riba, if you are really believers.“ © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 6 II. Sharia-Principles 1. Riba  different interpretation of Riba: • absolute prohibition of interest or only ban on usury ? • what about default interest ?  prevailing opinion among Sharia-Scholars absolute interest prohibition Scholars: © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 7 II. Sharia-Principles 1. Riba  different practise in Muslim countries countries:  complete takeover of an Islamic banking system in Iran and Sudan  a dual financial system in all other Muslim countries exists: • Islamic and conventional banks under the same legislation (e.g. Egypt, Saudi-Arabia) • Islamic and conventional banks under a seperate legislation (e.g. Malaysia)  example: United Arab Emirates • maximum interest rate for commercial loans: 12% • also applies to default interest  practise of Islamic Banks today: no interest © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 8 II. Sharia-Principles 1. Riba  prohibition of interest in christianity: the Gospel of Luke (6,35): „Give a loan, but don‘t expect benefits thereof“  today: corollary of the prohibition of interest in christianity: • prohibition of compounded interest § 248 German Civil Code interest: • also: §§ 138, 242 German Civil Code Thomas von Aquin: „Money cannot bear money“ © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 9 II. Sharia-Principles 2. Gharar  no incertitude, risk or speculation  but a certain amount of Gharar is allowed allowed: succesful economic activity and trading is not possible without taking business risks  the sale of goods, which are not in one‘s own possession yet, is strictly not allowed (forbidden: „Short-Selling“)  a contract is not admissible, when • the commitment of one party of the contract is uncertain or depends on external circumstances, which are difficult to pre-estimate estimate • the delivery of the goods cannot be guaranteed with certainty • the future payment is uncertain  „no risk shifting instead of risk sharing“  Relevance for Islamic Banking: especially derivatives business © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 10 II. Sharia-Principles 3. Maysir and Qimar Sura 2  Verse 219: „They ask you about wine and gambling. Say: In them is a great sin and benefit for the men. But the sin of them is greater than the benefit‘…“ Sura 5  Verse 90: „O you who believe, intoxicants, and gambling, and the altars of idols, and the games of chance are abominations of the devil; you shall avoid them that you may succeed.“ Sura 5  Verse 91: „The devil wants to provoke animosity and hatred among you through intoxicants and gambling, and to distract you from remembering Allah, and from observing the prayers. Will you then refrain?“ © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 11 II. Sharia-Priciples 3. Maysir and Qimar  both expressions stand for Gambling  all businesses are not allowed, which include a definite profit for one side and a definite loss for the other side  consequences for share-transactions ? transactions  relevance for Islamic banking: derivatives business  relevance for insurance business: not allowed to make a „bet“ that the policy holder will or will not survive the contract period © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 12 II. Sharia-Priciples 4. Haram – social and ethical terms  No investments in: • Alcohol (additional problem: Hotels) • Pork • Conventional financial services (Banks, insurance company) • Weapons or armaments • Entertainment (casinos, bets, gambling; pornography) • Advertising • controversial: tobacco-products  No investments into companies which have a high debt equity ratio because of the risk of an imbalance between investor and company  If it‘s not „haram“ (forbidden), it is „halal (not explicit forbidden and therefore halal“ basically allowed) © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 13 III. Development and Certification of Sharia Sharia-compliant Financial Products Sharia-Board 3 – 5 Sharia-scholars „religious supervisory board“ they have the right to issue their own law interpretations and opinions by fatwa they decisions of the Sharia-Board are binding for the business of the Islamic Board financial institutes complete independence of other entities of the Islamic financial institute complete © WZR Legal Aspects of Islamic Banking and Sharia compliant Investments 14 III.