Halal Options for Investment

Halal Options for Investment

By Ayesha Ashraf Jangda – Section Head, Corporate Strategy and Business Planning at Bank Islami Pakistan Limited

Disclaimer: The writer is an Islamic banker by profession and, in this article, will be informing readers about the Shariah-compliant investment options available in Pakistan. It is advisable that readers review these options according to their own set of beliefs and unique financial situation.

According to Encyclopaedia Britannica, investment is “the process of exchanging income during one period of time for an asset that is expected to produce earning in future periods. Thus, consumption in current period is foregone, in order to obtain a greater return in future.”

An individual might have many goals, for which he/she makes investments that are short term (less than one year), medium term (more than one year but less than five years) or long term (more than five years). One of these goals can be to have regular income, especially if you are a retiree or a widow, for which the monthly profit schemes of banks and mutual funds would be more suitable. If you are young and can take risky investments, then you can invest inshares,which willprovide you with immediate capital gain and dividends. If you are middle aged and have a large sum of money at hand to buy property or real estate on installments, you can earn a hefty capital gain by selling it. If you are a businessman and hardly have money to spare, you can open a foreign currency savings’ account and earn from exchange gain. If you are a woman and are fond of wearing jewellery, then investment in gold jewellery or coins can be your option.

I will now talk about these investment avenues in detail. These are deemed by many to be the interim solutions until the world enforces an Islamic economic system, Insha’Allah.

Islamic Bank Accounts

There are many types of deposit accounts available in Islamic banks for investment purposes:

  • Current Account: It is a non-remunerative account, meaning it will not give you any profit but will only keep your money safe. You have the flexibility of withdrawing your money at any time you want through a cheque or an ATM card/transaction.
  • Saving Account: This account has the flexibility of withdrawals just like a current account but is a remunerative account. A nominal and varied profit is given by the Islamic bank at the end of each month.
  • Fixed or Term Account:The amount deposited in this account is invested for a particular period and cannot be withdrawn until the period ends. Pre-mature encashment or early redemption is allowed, but it reduces the profit rate of the period of investment. There are two types of such accounts:
    • Monthly Income Accounts – profit is given on monthly basis.
    • Maturity Profit Accounts – profit is given at the end of the period.

Saving and Fixed accounts taken by an Islamic bank are under the Mudarabatul Musharika basis, which means that the depositor becomes a partner of the bank by investing his/her money in the deposit pool of the Islamic bank. The deposit pool can either earn profit or face loss, which is shared among the participants of the deposit pool, according to their weightages.

Foreign Currency

Purchasing foreign currency in the form of US dollars, Euros or British pounds, is also an investment avenue. Islamic banks facilitate a foreign currency deposit account. To learn more about it, visit: http://www.forex.pk/open_market_rates.asp.

Islamic Mutual Funds

Another option for investing money is Islamic mutual funds. It is a joint pool where investors or certificate holders contribute their money for the purpose of investing in a profitable avenue. The profitable avenue can be Shariah-compliant shares, Sukuks (Islamic bonds), bank deposits or even real estate.

There are many types of mutual funds. The equity fund invests in Shariah-compliant shares listed in the stock market, while the growth fund invests in shares to earn capital gain. Income funds invest in shares of mature companies, in order to earn dividend or Sukuks, while the balanced fund invests in shares as well as Sukuks. For more details, you may visit: http://www.mufap.com.pk.

Gold Coins or Ornaments

Gold coins and jewellery have been considered to be sound avenues of investment since time immemorial. The best part is that you can wear them and still have an appreciated value over a period of one year.

Gold coins can be bought from brokerage houses that are registered by the National Mercantile Exchange (http://www.pmex.com.pk/products/gold.php) or any jeweller. The most important thing is to keep the purchasing slip, so that when you are selling it, you can calculate the capital appreciation that has occurred. Word of advice: keep all the gold ornaments in a locker in an Islamic bank or specialized safety lockers’ companies.

Shariah-compliant Shares

We do not live in a perfect, Riba-free, Islamic economy; therefore, scholars have devised certain conditions based on which investments in shares are considered Shariah-compliant. Some of these conditions are as follows:

  • The main business of the company does not violate the Shariah.
  • If the company deposits its surplus amount in an interest-bearing account, the income from that amount should be less than 5%.
  • If the company has interest-bearing investments, they should be less than 33%.
  • If the company has borrowed money on interest, the debt on total assets should be less than 40%.

For further details, visit: http://www.albalagh.net/Islamic_economics/finance.shtml and http://www.kse.com.pk/ => Market information => Market indices => KMI30.

Real Estate

Real estate remains one of the securest investment avenues that almost always provide a good return. Land, whether urban, agricultured, a house, an apartment or a shop, constitutes different types of property that can be invested in. Those who do not have a lump sum amount can buy it in installments from a reliable real estate developer, avail the house financing facility from an Islamic bank or buy with the help of a real estate agent. The investor can use the property for personal purposes, rent it or earn capital gain upon selling it.

To turn the wheels of an Islamic economy, one must neither hoard nor waste one’s wealth. It is most advisable to invest one’s surplus funds, not just for one’s own future prosperity but to uplift Shariah-compliant economies.

Reminder

We would like to inform the readers that many scholars have contradictory opinions on saving and term accounts of Islamic Banks. The Ulemas of Jamia Binoria, Jamia Farooqia, Jamia Ashrafia, Lahore etc do not approve of the products of Islamic banking. Their opinion has been published in book titled “Murwajah Islami Bankari” which can

be downloaded from

http://banuri.edu.pk/files/publications/MURRWAJAH%20ISLAMI%20BANKAARI.pdf

On the other hand, many scholars agree with the concept of Islamic banking in Pakistan and worldwide; they include Jamiatul Rasheed, Darul Uloom, Korangi and OIC Fiqh Academy, etc. A leading scholar in Pakistan on Islamic banking is Mufti Muhammad Taqi Usmani. He has written a comprehensive book that answers arguments against

interest-free banking and supports the practice of Islamic banking in Pakistan. This book is titled “Ghair Soodi Bankari” and can be downloaded from

http://www.4shared.com/get/ygsETJb4/Ghair_Soodi_Bankari_By_SHEIKH_.html

or purchased from Darul Ishat in Urdu Bazar.

Musharakah: Sharing Profits and Losses

Vol 1-Issue 2   Islamic FinanceWhat is Musharakah?

Musharakah means ‘sharing.’ The root of the word is Shirkah, which means ‘being a partner.’ Under Islamic law, Musharakah is a joint enterprise, formed for conducting business, in which all partners share the profit according to a specified ratio, while the loss is shared according to the ratio of the contribution.

Differences Between Interest-Based Financing and Musharakah

1. In interest-based financing, the financer predetermines a fixed rate of return on a loan, irrespective of the profit earned or loss suffered by the debtor. In Musharakah, the return is based on the actual profit earned by the joint venture.

2. If a Musharakah joint venture fails, the financier also suffers a loss. In a system based on interest, the financier secures himself against such an eventuality by fixing a rate of interest.

Basic Rules

Musharakah or Shirkat-ul-amwal is a relationship established by the parties through a mutual contract. Therefore, all the necessary ingredients of a valid contract must be present. For example, the parties should be capable of entering into a contract; the contract must take place with the free consent of the parties, without any duress, fraud, or misrepresentation. However, there are certain rules specifically related to a Musharakah contract.

Rules of Capital

The capital in a Musharakah agreement should be:

  • quantified (Ma’loom),
  • qsecified (Muta’aiyan),
  • not necessarily merged,
  • not necessarily in liquid form.

Management

Every partner has the right to manage the business as well as to work for it. However, the partners may agree upon a condition that the management would be carried out by one of them, and no other partner would work for the Musharakah. In such case, the ‘sleeping partner’ would be entitled to the profit only to the extent of his investment – the ratio of his profit would not exceed the ratio of his investment. However, if all partners agree to work for the joint venture, each one of them would be treated as the agent of the other in all matters of business.

Rules Regarding the Distribution of Profit and Loss

1. Profit:

  • The profit ratio of each partner must be determined proportionally to the actual profit of the business and not in proportion to the capital invested by him.
  • It is prohibited to set a fixed amount for any partner or attach any specific rate of profit to his investment.
  • It is allowed for both partners to agree on profit percentage according to their investment, no matter if both of them work or not.
  • If an investor is working, his profit share can be more than his capital investment, no matter if the other partner is working or not.

2. Loss:

  • Loss is distributed exactly according to the ratio of investment.

Termination of Musharakah

A Musharakah will stand terminated in the following cases:

1.  If the purpose of forming the business has been achieved. For example, if two persons had formed a partnership for a certain project, e.g., buying a specific quantity of cars in order to sell them, and the cars are purchased and sold with mutual investment, then the contract stands terminated.

2.  Every partner has the right to terminate the Musharakah at any time, after giving his partner a notice that will cause the Musharakah to end.

3.  In case of a death of any one of the partners or any partner becoming insane or incapable of carrying out commercial transactions, the Musharakah stands terminated.

Termination of Musharakah Without Closing the Business

If one of the partners wants termination of the Musharakah, while the other partner would like to continue with the business, a mutual agreement should take place. The partner interested in the business may purchase the share of the partner wishing to terminate his partnership.

(Courtesy: Meezan Bank’s Guide to Islamic Finance)

Islamic Finance and Banking: How It All Began

financeBackground of the system

The first experiment of Islamic banking started in1963, when Mit Ghamr Saving Bank began a project offering interest free banking in Egypt. The project was a success and led the bank to open four new branches by 1967. In the same year, eight new banks started offering interest free banking.

It was the Organization of Islamic Countries (OIC) summit in 1974, in Lahore, Pakistan that fostered the concept of an “Islamic bank” and recommended the creation of an Islamic Development Bank. There are estimated to be over 200 Islamic financial institutions all over the world. The industry is said to be growing at rate of 15% per annum. Not only do a number of Islamic countries such as, Kuwait, Dubai, Saudi Arabia, Iran, Malaysia, Brunei, Bangladesh and Pakistan have Islamic financial institutions, but many non-Muslim countries also house Islamic institutions. Some of these non-Muslim countries include USA, UK, Canada, Switzerland, Australia, and Sri Lanka. Major international conventional banks, such as Citibank, ANZ Grindlays, ABN Amro, HSBC, and Standard Chartered also have Islamic windows.

Islamic banking in Pakistan

Financial institutions in Pakistan seem to follow a cautious “wait and see” approach towards Islamic banking. A number of key players have obtained a license for conducting Islamic banking operations. These include: Meezan Bank Limited, Faysal Bank Limited, Al Baraka Islamic Bank and First Islamic Investment Bank. Meezan Bank is already operating as the first Islamic bank of Pakistan since May 1, 2002 when it acquired the Pakistani operations of Societe Generale. Other banks, including Habib Bank, Habib Bank AG Zurich, National Bank of Pakistan and United Bank Limited, are in the process of initiating Islamic banking products. Muslim Commercial Bank has already set up a dedicated Islamic banking branch.

Efforts towards establishing an Islamic economic system really took off after the Supreme Court’s judgment in the latter half of 1999, ordered the government to abolish the ‘interest-based system’ and establish an alternative Shariah-based system. For the launch of Islamic banking in the country, the State Bank of Pakistan (SBP) has given three options, i.e., to establish an independent Islamic bank, to establish subsidiaries of the existing banks or any commercial bank or to set up stand-alone branches. The stand-alone branches would have to carry business only in the Islamic banking area where both deposit and grant of loans would be according to Islamic injunctions. The development of Prudential Regulations for Islamic banking is already in process. The SBP is also working towards the establishment of an Islamic banking division. The launch of Islamic T-bills, known as Ijarah Sukook, is already under serious consideration in order to solve the liquidity problems of Islamic banks.

These instruments are being developed at a rapid pace. The huge market potential for Islamic products is proof of the fact that the efforts of these entities are bearing fruit. Moreover, while the current conventional financial system has had years to reach the maturity it enjoys now, a modern model of Islamic finance has only been developing over the past few decades.  As difficulties arise and are resolved, the industry is sure to ripen.

The Islamic Finance and Banking System

Image finance“O believers, fear Allah and give up what is due to you from the interest (usury), if you are true believers. If you do not do so, then take notice of war from Allah and His Messenger. But, if you repent, then you can have your principal. Neither should you commit injustice nor should you be subjected to it.” (Al-Baqarah 2:278-279)

Riba in the Bible

One would perhaps be a little surprised to learn that the commandment regarding the prohibition of usury (Riba) also occurs in the Bible.

“Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury.” (Deuteronomy 23:19)

Key aspects of Islamic Finance

Islamic finance is popularly understood as that mode of banking, in which interest or Riba is forbidden. Although this aspect forms the crux of Islamic finance, there are also various other principles, according to the Shariah, that form the basis of an Islamic banking system which are:

Making money from money is not permissible: One of the assumptions on which all theories of interest are based is that money is a commodity. It is therefore argued that money can be bought and sold; bought in the form of deposits and sold in the form of loans. This is just as if a merchant can sell his commodity for a higher price than his cost, he can also sell his money for a higher price than its face value. Islamic principles, however, do not accept this assumption. Islamic financial institutions must trade in “real” assets or services. Money and commodity have different characteristics and therefore, they are treated differently.

Gharar (Uncertainty) is prohibited: Under this prohibition any transaction entered into should be free from uncertainty and speculation. Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions. Thus, options, futures, and derivatives are considered un-Islamic and so are forward foreign exchange transactions because rates are determined by interest differentials.

Maisir (speculation or gambling) is not allowed: Transactions undertaken for purely speculative purposes are not allowed. Trading or investment transactions, which involve the risk of incurring losses as well as earning profits, do not fall under the definition of Maisir.

Investments should only support Halal activities: The Shariah does not permit Muslims to invest in any business or activity that involves the production of items or pursuit of activities that are considered to be Haram, or impermissible.

Role of a bank in the Islamic context

The functions of Islamic financial institutions can be divided into two parts: the safeguarding of deposits and the partnership of financial institutions with shareholders and depositors in profit-making ventures. Demand deposit facilities (called Amanah or Qard-Hasan deposits) are similar to safekeeping and transferable deposit functions performed in standard conventional banking. The Amanah or Qard-Hasan deposits pay no return and the financial institution is obligated to preserve the nominal value of the deposit.

The partnership activities of Islamic financial institutions have mixed features that include conventional bank intermediation, mutual funds or limited partnerships. To a large extent, Islamic financial institutions act as conventional intermediaries by issuing deposit-like instruments to the public in order to raise funds to finance commercial activities. The investments, many of which are negotiable and are known as “investment deposit certificates”, have properties similar to those of shares in a company or a mutual fund.