RESOLUTION NO. 30(5/4)

ON “MUQARADHA” BONDS AND INVESTMENT CERTIFICATES

Compiled By:
Prof. Dr. Mohd. Ma’sum Billah
masum2001@yahoo.com
masum@applied-islamicfinance.com
+6019-3699542

Quote -The Council of the Islamic Fiqh Academy, holding its Fourth Session, in Jeddah (Kingdom of Saudi Arabia) from 18 to 23 Jumada Thani 1408 H (February, 6 to 11, 1988),
Having consideredThe research papers submitted to the Academy on “Muqaradha Bonds and Investment Certificates”, which were summary to the conclusions of the seminar organized by the Academy, in cooperation with the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank, from 6 to 9 Muharram 1408 H (2-5 September 1987), in implementation of resolution no 10/3 adopted by the 3 rd session of the Council of the Academy, in which a number of members, experts and researchers from the institute and other scientific and economic centers participated;

Considering  the importance of this issue and the need to examine it further from all angles ;

Considering also that this formula is instrumental in promoting conditions for increasing public resources through a combination of capital and ventures ;

Having considered  the 10 recommendation made by the seminar and  discussed in the light of the research papers submitted in the seminar and other occasions;

RESOLVES

First:  From the point of “acceptable wording” by Shari’a for Muqaradha Certificates:

1.      Muqaradha Certificates are investment instruments which allocate the      Muqaradha capital (Mudharaba) by floating certificates, as an evidence of capital ownership, on the basis of shares of  equal value , registered in the name of their owners, as joint owners of shares in the venture capital or whatever shape it may take, in proportion to the each one’s share therein. It is preferable to call this investment instrument “Muqaradha Deed”.

2.      The formula acceptable by Shari’a, in general, for Muqaradha certificates, must consist of the following elements :

First element :

        The deed must represent a joint share in the project, for whose establishment  or financing it has been issued.  Ownership remains valid throughout the duration of the project from its beginning to its end.  It also confers all rights and privileges provided by Shari’a upon the owner over its property, e.g. sale, donation mortgage, inheritance, etc., bearing in mind that such certificates represent the Mudharaba capital.

Second element:

        The contract, with regard to a Muqaradha certificates, is concluded on the basis of terms defined in the prospectus, that offer is expressed by subscription and acceptance by approval of the issuing authority. The prospectus must provide all data required by Shari’a for the “Qirad” (Public Loan) contract (the Mudharaba), such as the nature of the capital, the distribution of profit and all other conditions related to the issue, which must be compatible with Shari’a.

Third element:

        The Muqaradha certificates must be negotiable at the end of the subscription period; since the Mudharib has authorized to do so once the certificates have been issued, taking into account the following rules prescribed by Shari'a:

A.      If the Qirad capital, collected from subscription prior to its use in the project, is still in the form of cash, negotiating Muqaradha certificates is considered an exchange of money with money, governed by Shari’a rules on money exchange.

B.      If the Qirad capital turns into debts, Mudharaba certificates should be negotiated according to the rules applied to loans.
C.      If the Qirad capital is converted into mixed assists, e.g. cash, debts, goods, benefits, Muqaradha certificates may be negotiated at the price agreed upon provided the major part of the capitol is in the form of goods and benefits; if it mainly consists of cash and debt, exchanging Muqaradha certificates must comply with Shari’a rules which will be indicated in an explanatory note to be prepared and submitted to the Academy at its next session.  Whatever the case may be, all exchanges must be registered according to recognized norms in the books of the issuing authority.

Fourth element:

        The one who receives the funds collected from the subscribers to the certificates, for investment in the proposed project, is called “Mudharib”; his ownership in the project is limited to the extent of his subscription.  Thus he is capital contributor in addition to his share in the profit, after it is actually generated in accordance with the terms in the prospectus.  The “Mudharib”s role in handling the subscribed funds and the project property, is that of a trustworthy person, who may not be held responsible unless his liabilities permitted under Shari’a rules.

3.      Taking into account the preceding rules of exchange, Muqaradha certificates may be exchanged in stock markets, if they are governed by the rules prescribed by Shari’a, in accordance with the principle of supply and demand, and subject to the approval of contracting parties.  They may also be negotiated if, at a given period of time, the issuing authority makes an announcement or an offer to the public, by virtue of which it pledges to purchase the said certificates, operation to be funded by the profits yielded by the Mudharaba at fixed price set by qualified experts in the light of conditions prevailing in the stock market and the financial status of the project.  A party other than the issuing authority, indicating its commitment to purchase the certificates using its own funds may also make an announcement.

4.      Neither the prospectus nor the Muqaradha deeds should contain a guarantee, from the manager of the funds, for the capital or a fixed profit or a profit based on a percentage of the capital.  If such clause is implied explicitly or implicitly, the guarantee condition is voided, and the Mudharib is entitled to profit equal to that of a similar Mudharaba.

5.      The prospectus or Muqaradha deed issued pursuant to it, should not contain any statement obligating a sale, even if conditional or related to future.  However the Muqaradha deed may include a promise to sell and, in such case, sale is effected only on a contract basis, at a price fixed by qualified experts and agreed upon by the two parties.
6.      The prospectus or Muqaradha deed  issued pursuant to it, should not contain any statement that the company has fixed in dividends. If such clause exists, the contract is null and void.

IN CONSEQUENCE :

A.      The prospectus or Muqaradha deed issued pursuant to it, may not stipulate payment of a specific amount to the shareholder or to the owner of the project;

B.      Only the profit is to be divided, as determined by applying rules of Shari’a; that is, an amount in excess of the capital, and not the revenue or the yield.  “Tandeed” (liquidation) or evaluation of the project in monetary terms determine the extent of profit. What is in excess of the capital after “Tandeed” or evaluation is the profit to be divided between the shareholders and the Mudharib, in accordance with the terms of the contract.
C.      The profit and loss account of the project must be published and under the control of shareholders.

7.      Profits are due when realized, and owned by liquidation or evaluation and become payable only upon distribution.  If the project produces revenues or yields, its yields may be distributed.  What is paid to the two parties to the contract before liquidation (Tandeed) or evaluation is considered a payment on account on the dividend.

8.      It is permitted by Shari’a to include, in the prospectus or the Muqaradha certificates, a clause stating that at the end of each period, a certain percentage shall be deducted either from the share of the shareholder in the dividend-if periodic Tandeed is carried out-or from their share in revenue or yields distributed on account, and deposited as special reserve for contingencies, such as loss of capital.

9.      There is nothing in Shari’a preventing the inclusion of a statement in the prospectus or the Muqaradha certificates, about a promise made by a third party, totally unrelated to the two parties to the contract, in terms of legal personality or financial status, to donate a specific amount, without any counter benefit to meet losses in a given project, provided such commitment is an independent one, not related to the Mudharaba contacts in the sense that the enforcement of the contract is not conditional to the fulfillment of the promise, or that the promise underlines the terms of the contract.  Hence, neither the shareholder not the Mudharib may invoke this clause to avoid the contract or renege on his commitment, alleging that said commitment made by the third party had been duly taken into consideration in the contract.

Second: The Council of the Academy considered four other formula proposed in the recommendations made by the above mentioned seminar.  They are listed as suggestions to be benefited from in setting up Waqfs (endowments) and its use or investment, without prejudice to the conditions incident to the continuity of the Waqf.  The proposed formula are:

A.Setting up a company between the Waqf, contributing its real estate, in one hand and financial contributors bringing in their money to strengthen the Waqf.

B.Propose Waqf real estate as assets to a business man using his own financial resources for the development of the Waqf, against a share in the revenue.

C. Setting up Waqf through manufacturing contracts concluded with Islamic Banks in return for a share in profits .

D. To rent the premises of the Waqf against a rental in kind, such as construction on the site only, or in addition to a small rental.

        The Council of the Academy approved this recommendation and concurred  with the seminar in the need for further research and study in this regard.  It requested the General Secretariat to look into the matter and identify other forms of investment, acceptable by Shari’a and organize a seminar to examine the proposed forms of investment and report to the Council about its findings, at its following session.

Verily, Allah is All-Knowing- Unquote

(Source: "Resolution and Recommendations of the Council of the Islamic Fiqh Academy (1985-2000)” , IRTI.)