 |
Prof. Dr.Masum Billah |
UNDERSTANDING OF ISLAMIC WEALTH MANAGEMENT
By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542
INTRODUCTION
Islamic asset management is an action to provide Shari'a-compliant investment structures such as through the Islamic Financial instruments and Islamic funds. This is involves the innovative approaches taken by banks, asset managers, Sharia’ scholars, service partners and distribution partners. Many business activities such as advising retail, high net worth, corporate or sovereign investors, including on equity investments, sukuk, real estate investments, takaful and alternative investment vehicles are highly handled within the Islamic framework, which is based on the Islamic asset management.
It is because managing asset in Islamic manner will certainly avoid the interest-based activities that are free from riba. This is in accordance to the Islamic business dealing principles that is based on the primary sources of Al-Quran and As-Sunnah. As the Quran says:
Verily, We have sent down to you (O Muhammad SAW) the Book (this Qur'ân) for mankind in truth. So whosoever accepts the guidance, it is only for his ownself, and whosoever goes astray, he goes astray only for his (own) loss. And you (O Muhammad SAW) are not a Wakîl (trustee or disposer of affairs, or keeper) over them.
(Surah Al-Zumar: Ayah 41)
In addition, this paper will explain some of the widely exercised Islamic instruments in managing asset with the effective example of the related established organizations throughout the world that used those instruments efficiently in their daily business activities.
Components of Islamic Asset management
Islamic Financial Instruments
Islamic asset management deals with the concept of Islamic Financing. The concept involves the Islamic Financial Instruments such as cost-plus financing (murabaha), profit-sharing (mudaraba), leasing (ijara), partnership (musharaka), and forward sale (bay' salam). These instruments acts as the efficient Islamic asset management and serve as the basic building blocks for developing a wide array of more complex financial instruments, suggesting that there is great potential for financial innovation and expansion in Islamic financial markets. The explanation of those mentioned financial instruments are as below:
- Trade with markup or cost-plus sale (murabaha) is one of the most widely used instruments for short-term financing. The proportion of Islamic financial transactions that is considered as cost-plus sales is about 75 percent. It is based on the traditional notion of purchase finance. In this transaction the seller informs the buyer of his cost of acquiring or producing the product and then a margin or a mark-up is negotiated between the buyer and the seller.
- Leasing (ijara) isanother popular instrument with a proportion for about 10 percent of Islamic financial transactions. It is designed for financing vehicles, machinery, equipment, and aircraft. Different forms of leasing are permissible, including leases where a portion of the installment payment goes toward the final purchase (with the transfer of ownership to the lessee).
- Profit-sharing agreement (mudaraba). It is a unique form of joint venture capital transaction. According to it, an entity contributes all the capital and the other party contributes the expertise and or labor. In return, both parties agree to share any realized profits. The owner of capital assumes any potential losses as part of the risk. Hence, it is suitable for trade activities as its maturity structure ranges from short to medium term.
- Equity participation (musharaka). This is similar to a classical joint venture. Both entrepreneur and investor contribute to the capital (assets, technical and managerial expertise, working capital, etc.) of the operation in varying degrees and agree to share the returns (as well as the risks) in proportions agreed to in advance. Traditionally, this form of transaction has been used for financing fixed assets and working capital of medium- and long-term duration.
- Sales contracts. Deferred-payment sale (bay' mu'ajjal) and deferred-delivery sale (bay'salam) contracts, in addition to spot sales, are used for conducting credit sales. In a deferred-payment sale, delivery of the product is taken on the spot but delivery of the payment is delayed for an agreed period. Payment can be made in a lump sum or in installments.
These a non-interest-bearing loans which the Quran exhorts Muslims to make available to those who need them. And if there is an existence of interest (riba) in any transaction, then Allah will certainly punished those people involved to it in the hereafter.
As the Quran mentions that,
Allah hath blighted riba (usury) and made almsgiving fruitful. Allah loveth not the impious and guilty.
( Surah Al-Baqarah: Ayah 276)
And of their taking riba (usury) when they were forbidden it, and of their devouring people’s wealth by false pretences. We have prepared for those of them who disbelieve a painful doom
(Surah Al-Imran: Ayah 130)
In addition, a deferred-delivery sale is similar to a forward contract where delivery of the product is in the future in exchange for payment on the spot market.
Islamic Funds
Islamic funds, with a current market size of $1 billion, represent the initial application of securitization. The main purpose of securitization is to contribute in higher liquidity-enhancing instruments in order to promote large segment of potential investors. There are three types of Islamic funds: equity, commodity, and leasing.
- Equity funds , the largest share of the Islamic funds market, are the same as conventional mutual funds but with an Islamic touch that requires a unique "filtration" process to select appropriate shares and ensures that the mode, operation, and capital structure of each business the fund invests in are compatible with Islamic law, eliminating companies engaged in prohibited activities and those whose capital structure relies heavily on debt financing (to avoid dealing with interest). For this reason, companies with a negligible level of debt financing (10 percent or less) may be selected, provided that the debt does not remain a permanent feature of the capital structure. The future of Islamic equity funds is bright because of a new wave of privatization in Muslim countries such as Egypt and Jordan, and in high-growth Islamic countries such as Indonesia and Malaysia.
- Commodity and leasing funds are other forms of Islamic funds. Commodity funds invest in base metals. Leasing funds pool auto, equipment, and aircraft leases and issue tradable certificates backed by the leases.
Application of SecuritizationEmerging Islamic funds |
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Fund |
Type |
Year launched |
Financial institution |
Size (million dollars) |
IIBU Fund II Plc |
Leasing |
1994 |
United Bank of Kuwait |
51.5 |
Faysal Saudi Real Estate Fund |
|
1995 |
Faysal Islamic Bank of Bahrain |
27.0 |
GCC Trading Fund |
|
1996 |
Faysal Islamic Bank of Bahrain |
10.0 |
Oasis International Equity Fund |
Equity |
1996 |
Robert Fleming & Co. ( United Kingdom) |
16.6 |
Faisal Finance Real Estate Income Fund II |
Real estate |
1996 |
Faisal Finance ( Switzerland) S.A. |
100.0 |
Unit Investment Fund (all tranches) |
Income/mudaraba syndication |
1996 |
Islamic Development Bank ( Saudi Arabia) |
500.0 |
Al Safwa International Equity Fund |
Equity unit trust |
1996 |
Al-Tawfeed Company for Investment Funds Ltd.. |
27.0 |
Ibn Khaldun International Equity Fund |
Equity |
1996 |
PFM Group ( United Kingdom) |
25.0 |
Adil Islamic Growth Fund |
Equity |
1996 |
Faisal Finance ( Switzerland) S.A. |
10.0 |
Source: Islamic Banker, 199596, various issues. |
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Objectives and Purpose of Islamic Asset Management
The objectives and purposes of Islamic asset management are:
- The need for fostering the well being of the peoples of the Muslim countries for example Malaysia, on the basis of Islamic principles and ideals and a practical expression of the unity and solidatary of the Muslim ummah.
- The need for mutual financial and economic co-operation among the Muslim countries in the economic, social and other fields of activity
- The need for mobilizing financial and other resources both from within and outside the countries and for promoting domestic savings and investment and a greater flow of development funds
- To foster economic development and social progress of Muslim communities individually as well as jointly in accordance with the principles of Shariah.
- To establish and operate special funds for specific purpose including a fund for assistance to Muslim communities.
- To operate trust funds
Bai’ al Inah
Bai’ al inah refers to trading when a seller sells an asset to a buyer by deferred price. Then the buyer sells back the asset for cash price.
Forms of Bai’ al Inah:
- The seller sells to the buyer a higher price to be paid later. After delivery to the buyer, the seller buys in cash at much lower price.
- A third party is involved whereby the seller sells a product that is delivered later on for say RM200. After delivering it to the buyer, he sells it to the third party for a lower price, say RM100. The latter than resells it to the first party (original owner) for RM100. This means the original owner obtained RM100 from the trade.
Arguments That Support the Permissibility of Bai’ al Inah
Opinions of Past Islamic Jurists
Past Islamic jurist had differing views on determining the hukm on Bai’ al Inah. The following are their views:
- The majority; Hanafi, Maliki and Hanbali mazhab were of the opinion that Bai’ al Inah was not permissible because it was the zariah (way) or hilah (legal excuse) to legitimize riba (usury).
- The Hanafi mazhab was on the opinion that Bai’ al inah was permissible only if it involves a third party, which acts as an intermediary between the seller (creditor) and the buyer (debtor).
- The Maliki and Hanbali mazhab, on the other hand rejected Bai’ al Inah and considered it invalid. Their opinion was based on the opinion that aimed at preventing practices that could lead to forbidden acts, in this case, riba.
- The basis for the opinion of the majority of the Islamic jurists was the hadith dialogue between Aishah and Zaid Al-Arqam which showed the prohibition of Bai; al Inah. They also held to the Prophet SAW in which he warned that those who practiced Bai’ al Inah would suffer scorn.
- The Shafie and Zahiri mazhab viewed Bai’ al Inah as permissible. A contract was valued by what is disclosed and one’s intention was up to Allah SWT to judge. They criticized the hadith used by the majority of the Islamic jurist as the basis for their argument, saying that the hadith was weak and therefore cannot be used.
Bai’ ad Dayn
Bai’ ad dayn is the principle selling the dayn (encompasses a wide scope, e.g: payment for product, qardh (loan) etc.) which result from the exchange contract such as murabahah , bai’nithamanin ajil, ijarah, istisna’ ad others.
Arguments That Support the Permissibility of Bai’ ad Dayn.
This principle is an issue that always been an argument among past and present Islamic jurist. However, there is no general nas or consensus (ijma’) among those who forbid it.
In general the majority of Islamic jurist are unanimous in allowing the activity of selling debts to the debtor.
Opinions of Past Islamic Jurists
The Hanafi mazhab looked at bai’ad dayn from aspect of potential risks to the buyer, debtor, and the nature of the debt itself. They were unanimous in not permitting this instrument because the risk cannot be overcome in the context of debt selling. The debt is in form of mal hukmi (intangible asset) and the buyer takes on a great risk because he cannot own the item bought and the seller cannot deliver the item sold.
The Maliki mazhab had 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:
- Expediting the payment of the purchase
- The debtor is present at the place of sale
- The debtor belongs to the group that is bound by law so that he is able to redeem his debt.
- Payment is not of the same type as dayn, and if it is so, the rate should be the same to avoid riba.
- The debt cannot be created from the sale of currency (gold and silver) to be delivered in the future
- The dayn should be no enmity between buyer and seller, which can create difficulties to the debtor.
The conditions set by Maliki mazhab were divided into three categories.
- To protect the rights of the debt buyer
- To avoid debt selling before qabadh
- To avoid riba
The Shafie mazhab was on opinion that selling the debt to a third party was allowed if the dayn was guaranteed and was sold in exchange for goods that must be delivered immediately. When the debt was sold, it should be paid cash or tangible asset as agreed.
Conclusion
In a nutshell, it can be concluded that, Islamic asset management is an action to provide Shari'a-compliant investment structures such as through the Islamic Financial instruments and Islamic funds. Business activities such as real estate investment, takaful, high net worth etc are highly handled based on the Islamic asset management. Some of the Islamic financial instrument that has been discussed are murabaha, leasing (ijarah), mudaraba, musharaka, sales contract etc. There are three kind of Islamic fund; equity, commodity and leasing. Also has been stated are the objectives and purposes of Islamic asset management and Bai’ al Inah and Bai’ ad dayn.