Dr. Muddassir Siddiqui
President & CEO
Shariah Path Consultants
Session II: Islamic Banking and Finance in Oman: Present
Status and Future Trends
Oman Second Islamic Banking & Finance Conference
‫بسم هللا الرحمن الرحيم‬
The Royal Decree 69/2012
a road map to Islamic banking in Oman
Muddassir Siddiqui
President ShariahPath Consultants, LLC, USA
Oman Second Banking and
Islamic finance conference
Muscat, March 17-18, 2013
Started late but came strong
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Comprehensive GCC Regulations
CBO - a serious participant
What strikes is the spirit of the law:
A yearning to project a credible image by:
– Enforcing Strict Shari’ah governance rules to:
• avoid conflict of interest
• Provide adequacy in the Shari'ah supervision
– Restricting the use of certain products (Tawarruq) to:
• Avoid Shari’ah compliance risks and credibility deficit
• Central Shari’ah Board working with the CBO
Treat the cause -not just the
symptoms - Tawarruq
• Tawarruq is a symptom – the cause is the use of trade contracts to
disguise the financing at LIBOR.
• Can not lend at interest. Solution buy and sell at a markup. Use prevalent
interest rates (LIBOR) for markup and call interest a “profit”
• Remove all commercial risks from the trade contracts to make it
acceptable to regulators. OCC rulings. Found Murabaha, Ijarah
functionally equivalent to conventional loan (1995)
• Use the substance of the engineered contracts for tax - deemed interest.
• Pattern: All trade contracts, murabaha, Ijarah muntahia bi al-tamleek,
Ijaraha mausufah fi al-zimmah, musharakah mutanaqasah, istisna’a wa
istisna’a muwazi, mudarabah investment accounts, wakah istithmar,
tawarruq, lead to financing benchmarked to prevalent interest rate.
• Reverse engineered conventional contracts
• Cause of many conflicts and tensions.
Credibility deficit
• Qatar Financial Center Authority Report (2013). Most transactions that
are undertaken in Islamic finance seek to achieve the economic outcomes
which are similar to the economic outcomes achieved by conventional
finance. However, to achieve these economic outcomes the Islamic finance
transactions typically require more component steps than do the
equivalent conventional finance transactions”.
• Tax relief: “Any reference in this act to interest shall apply … to gains or
profits received and expenses incurred, in lieu of interest in transactions
conducted in accordance with the principles of syariah”. Income Tax Act
1967, Malaysia
• The main tool of IF today is organized tawarruq. Yet, it is condemned by
the Islamic Fiqh Academy of OIC and Rabita as ‫التحايل علي الربا‬
disguised loan at interest
• Shamil Case – English Court (2004)
• The defendant defaulted and alleged “the agreements were
unlawful, invalid and unenforceable under the principles of the
Sharia in that, despite their form as Morabaha Agreements …
(which would be enforceable if they were a true reflection of the
underlying transaction) the transactions were in truth disguised
loans at interest. As such amounted to unlawful agreements to pay
Riba and were thus void and/or unenforceable“.
• TID v. Blom – English Court (2009)
• ”The defendant defaulted and alleged the wakala agreement was
repugnant to the Shari’ah. The court observed “The results of those
rather complicated and sophisticated provisions was that any
deposit would be at the specified rate of return, let us say for
argument's sake 5 per cent. It could not be less than 5 per cent. It
could not be more than 5 per cent“. ”One finds, a device to enable
what would at least to some eyes appear to be the payment of
interest under another guise, that is at least an indirect practice of
a non-Sharia compliant activity“
Encourages Forum Shopping
• Saudi Board of Grievances - Decision no 21/d/tj/1429
• The outcome can be very different
• Purchase and sale of precious metals agreement
between and bank and its customer.
• “In considering the nature of the relation between the
Plaintiff and the Defendant, the Second Circuit found
that the Plaintiff considers the agreement with the
Defendant to be a "Commercial Agency for Trading,"
while the Defendant considers it a "Loan and Credit
Facilities" type of relation. However, the Circuit is
concerned about the substance, not the title, even if
the substance that it finds does not match either of the
titles suggested by the parties”.
• The Board found it to be a commercial dispute.
Leads to Re-characterization
• The Court of First Instance – Dubai
• Is the lease to own contract a lease contract or instalment
sale and purchase contract.
• “The court concludes from the foregoing, the Defendant's
application for financing the purchase of the property and
not renting it, the issue of the approval to such application,
making the lease contract, the undertakings of sale and
purchase … and the intention of the parties from that the
proper characterization of the contractual relation between
them is that it is a sale contract.
• The court disregarded the titles and ruled on substance
Sustainability?
• Transactional costs
• Liabilities exposure to both IFIs and customers
• Conflict with other laws; bankruptcy; Consumer
protection.
• Early payment discount
• IFI protection. Contractor abandons, IFI liable
• Mismatch between the contract and commercial
intention of the IFI and customer
• What is the solution
Royal Decree 69/2012
• For the reason listed above CBs are hesitant to allow IF and Banking
• When allowed, the CBs only allow the use of modern IF contracts. The
permission is not an unrestricted license to engage in full mudarabah and
musharakah and other trading activities.
• Article 124. Without prejudice to the restrictions set by the Board of
Governors, the banks licensed to practice Islamic banking shall in the
context of such practice, conduct all transactions …
• A) accepting deposits …
• b) financing and investing in Mudaraba , Musharaka , Murabaha , ljara ,
Salam, Istisna or Qard Hassan and other Shariaᾴ formulas.
• c) …
• What is the long term solution?
The Alternative
• The main issues which need to be decided are:
– The status of fixed return with capital guarantee under the
Shari’ah. Is it always prohibited?
– If not, identify the difference between a halal and Haram
FRCG
– Look into the rules of various forms of Islamic finances
– Compare when FRCG is allowed and when it is prohibited
– Example: Compare Credit sale with markup (CSM) with
mudarabah
• Ask why fixed return with capital guarantee in Credit
Sale with Markup is halal but forbidden in
mudarabah?
Extract the Reason ‫استنباط العلة‬
• Extract THE GOLDEN RULES.
• It appears ‫و هللا اعلم‬
– THE SHARI’AH RULES PROHIBIT A FINANCIER FROM CHARGING A FIXED RETURN WITH
CAPITAL GUARANTEE, WHEN THE RECEIVER OF THE FINANCE IS ASKED TO PAY A
CONSIDERATION FOR AN SPECULATED BENEFIT WHICH MAY AND MAY NOT OCCUR.
– THE SHARI’AH RULES PERMIT A FINANCIER TO CHARGE A FIXED RETURN WITH CAPITAL
GUARANTEE WHEN THE USUFRUST (( ‫المنفعة‬ACCRUING TO THE RECEIVER OF THE
FINANCING IS CERTAIN AND MEASUREABLE.
• THE CONSIDERATION OF THE USUFRUCT MUST BE MEASURED BY THE
VALUE OF THE USUFRUCT AND NOT BY THE TIME VALUE OF MONEY
• In trade contracts, the prohibition is based on ‫غرر‬and not on riba.
• Consideration for the usufruct is permitted in Shari’ah (rent)
• Consideration for time value of money is not permitted in Shari’ah
• How to apply these principles in Islamic banking
How to apply these rules
• Have two separate contracts. No need for dressing up.
– A loan contract between the IFI with markup for the USUFRUCT and not based
on LIBOR
– A sale contract between the true owner and IFI customer for the sale, lease
etc. of the asset which is the source of the ‫منفعة‬
– Tie both contracts together. Financing to be an integral part of sale.
• Accept that the fixed return with capital guarantee is permissible when
the financing confers on the borrower a certain and measureable benefit
• Be clear about the principles, transparent in its application and consistent
with its implication
• Do away with fictitious contracts and fictitious structures
The result
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Clarity of the Shari’ah principles
Clarity in their applications
Harmony between form and substance
Harmony between rhetoric and actions
Less step contracts, Less costs, Less risks to both the
IFIs and their customers
• Easy to adjudicate and enforce contracts
• A dynamic Shari’ah Board at the CBO is must to work
together with the CBO
• Understand the facts ‫الواقع‬and apply the rule which
suits it.
‫الحكم علي شيئ فرع من تصوره‬
‫مقاصد الشريعة‬Shari’ah Objectives
‫والشريعة مبناها وأساسها يقوم على الحكم ومصالح العباد في المعاش‬: (‫قال ابن القيم رحمه هللا‬
‫وحكمة كلها فكل مسألة خرجت عن‬, ‫ومصالح كلها‬, ‫ورحمة كلها‬, ‫وهي عدل كلها‬, ‫والمعاد‬
‫وعن الحكمة إلى‬, ‫وعن المصلحة إلى المفسدة‬, ‫وعن الرحمة إلى ضدها‬, ‫العدل إلى الجور‬
. ‫فليست من الشريعة وإن دخلت فيها بالتأويل‬, ‫البعث‬
Al-Imam ibn al Qayyim states in A’alam al-Muwaqq’in ‘an Rabb al’alamin
“The foundation and components of the Shari’ah are fostered for the
benefits to the people in this world and in the Hereafter. Shari’ah is the
ultimate source of justice and compassion; it is all gains and all
wisdom. Any matter which deviates from justice to oppression, from
mercy to its opposite, from benefit to harm and from judiciousness to
nonsense; it is not from Shari’ah, even if it is implanted in it by
construction”.
• I pray that Oman lead the path ‫من المخارج الي المقاصد‬
Thank you
Shaikh Muddassir Siddiqui
President/CEO ShariahPath Consultants, LLC
muddassir.siddiqui@shariahpath.com
• Shaikh Muddassir Siddiqui is uniquely qualified both as a Shari’ah scholar
and as a U.S. trained attorney. In 2010 Thomson Reuters wrote: “Shaikh
Muddassir Siddiqui is "one of the industry’s most articulate practitioners,
and one whose experience as both a lawyer and Shariah scholar puts him
in rare company”. In 2011, Islamic Finance News poll recognized Shaikh
Muddassir as one of the Leading Lawyers in Islamic Finance. Shaikh
Muddassir is a member of the AAOIFI Shari'ah Standards Committee; the
Fiqh Council of North America and a Research Fellow at the International
Shari’ah Research Academy for Islamic Finance, in Malaysia. Shaikh
Muddassir is a member of New York Bar and Registered Foreign Lawyer
with the Solicitors Regulation Authority (SRA), in the U.K. He has extensive
experience in advising on transactions involving Shari’ah-compliant
financing.