Sharia Banking and the Financial Industry

The prohibition against trading debts at anything other than par is one of those rules that seems to be perplexing, to say the least. For example, I was recently approached by a lawyer whose client wanted to set up the following structure: the client wished to create a fund to purchase failing mortgages from US banks at a discount, then reduce the principal owed, and waive future interest prospectively for the borrowers. This would be profitable for the client because the banks are willing to sell the mortgages at a price so below par that he could substantially reduce the principal owing, waive future interest, and still profit, all the while reducing the borrowers debt load. Yet, were we to follow strictly the parameters of traditional Islamic law, this would not be a permissible structure because he cannot purchase the original obligations at a price other than par. More generally, If you are not an economist, but you can detect no principled distinction between a deferred sale with a mark-up and an unsecured loan at interest: they are economic equivalents; a merchant could lend you the cash price for his good and charge you an interest rate, or simply sell you the good over the same term at a mark-up to the cash price. It’s six of one, half-dozen of the other. Yet, there is no dispute that the credit sale at a markup is perfectly licit. Ultimately such prohibitions are in the character of prudential rather than principled prohibitions, i.e., intended to reduce the risk of excessive and unproductive debt, and as such, they are means, not ends in themselves. Today’s debt markets are infinitely more transparent than in the middle ages, where the sale of a debt was fraught with gharar and opportunities for outright fraud. In a well-functioning credit market, where trustworthy institutions maintain accurate records of all transfers of beneficial interests in debt instruments, these risks have been substantially mitigated. I don’t see why we would continue to insist that selling debt at a discount is prohibited.
Source : Mohammad Fadel

The Finance Ministry’s debt management office plans to introduce new sharia-compliant debt instruments, including project Islamic bonds (sukuk) designated for infrastructure projects and sharia short-term Treasury bills, according to an official.

Director of sharia financing policy at the Finance Ministry’s debt management office, Dahlan Siamat, said on Monday, 21 Februari 2011 that the ministry was still assessing two possibilities for project sukuk. In the first scheme, proceeds of the sukuk issuance would be used to fund infrastructure projects as planned in the state budget, while the second would finance underlying projects. The first one is the most feasible because it doesn’t need new authorization. Approval to issue T Bill has been given.

The ministry was also studying plans to introduce one-year sharia and regular T-bills to meet demands for short-term sharia notes and to help the liquidity management of sharia banks.

Incoming search terms:

• finance ministry office
• project on t-bills

The Organization of the Islamic Conference (OIC) on August 18, 2010 called on member states and the international community to deliver aid to Pakistan, which is grappling with devastating floods.

The OIC called in a statement for the “international community in general and Islamic world in particular, at the level of individuals and states, to provide urgent material and financial aid to Pakistan.” The appeal was issued at an emergency meeting for representatives of member states of the pan-Muslim organization. An OIC spokesman confirmed on Wednesday that the Islamic Development Bank has allocated $11.2 million for assistance to Pakistan. Oil-rich Saudi Arabia raised $20.5 million of aid on the first day of a national campaign, official SPA news said.The kingdom has also pledged to provide $100 million in government aid to Pakistan. Also on Tuesday, Kuwait’s cabinet announced a $5 million relief assistance donation.

Pakistan’s worst-ever humanitarian disaster has ravaged an area roughly the size of England, affected 20 million people, exacerbated a crippling energy crisis and raised fears of social unrest. OIC secretary general Ekmeleddin Ihsanoglu told the meeting that Pakistan’s plight is “very grave and unprecedented in modern history.” Ihsanoglu said after the current meeting that the OIC will hold a meeting in Pakistan for Islamic Red Crescent societies and relief bodies to coordinate aid. Floods have inflicted widespread damage on infrastructure, and destroyed electricity installations, roads and phone lines. The World Bank, which has announced a $900 million loan for Pakistan, in anticipation of the disaster’s economic impact.

Source : Agence France-Presse

Indonesia will cut its remaining 2010 debt issue by 26 percent, including scaling back a global sukuk, or Islamic bond, offering after lowering its deficit forecast in light of expected faster growth and stronger revenue. The move to trim Rp 15 trillion ($1.7 billion) off the Rp 58 trillion worth of debt still to be issued spurred longer-dated bond prices as investors bet the deficit cut could lead to a much-sought-after investment-grade credit rating.
Foreigners have bought a record amount of Indonesian bonds this year, drawn by the country’s robust economic growth, hopes of a credit upgrade and expectations that the rupiah will continue to appreciate. The government had a budget surplus in the first half, so it would be reluctant to push a huge global issue this year. The government has raised about Rp 120 trillion in bonds this year, or two-thirds of its original target of Rp 178 trillion.
Its higher-yielding local currency sukuk has seen less demand than conventional bonds, with the Finance Ministry again raising less-than-targeted in an auction on Tuesday because of fears the sukuk market lacks liquidity. The global sukuk will be downsized because up to now the government has still booked a budget surplus. Indonesia has cut its financing by about Rp 37 trillion ($4.1 billion) this year — a cut of 28 percent, including the debt issuance cut — because the government now expects a budget deficit of just 1.5 percent of GDP, versus an earlier projection of 2.1 percent. The cut is equivalent to 3.3 percent of its planned expenditure.