Investment Banking 97- The use of purchase undertakings to buy back the interests of the
investors using a pre-agreed formula such that investors would neither
face any loss to their initial investment, nor receive any gains on that
investment.^1
The statement has allowed (subject to certain conditions) the use of
purchase undertakings where thesukukassets are “lease-to-own” contracts
where the exercise price equals the balance of rentals not yet paid, on the
basis that they can be treated as representing net value. However, it will be
interesting to see how this statement is interpreted by the Shari’a scholars
and the extent to which they feel bound to follow its provisions. It is likely
that Islamic investment bankers will need to carefully monitor the
implementation of this statement and will need to modifysukukstructures
accordingly.Selling of securities and packaging of
securities into Islamically-compliant products
To the extent that an Islamic investment bank becomes involved in selling
securities or wants to create, for example, a Shari’a-compliant equity fund,
it must satisfy itself that the securities are Shari’a-compliant. At a primary
level, therefore, the securities must not be involved in activities or relate to
products which are prohibited under the Shari’a. As such, holding shares in
companies that are involved in gambling, hotels (to the extent that they
have bars), pubs, pigfarming and defence industries would not be allowed.
It is also necessary to consider the revenue and assets of a company, to
see if they are Shari’a-compliant. The process of checking the Shari’a
compliance or otherwise of securities is usually referred to as “screening”(^1) The third paragraph provides, in part, as follows: “it is not permissible for the manager of thesukuk,
whether the manager acts asmudarib(investment manager), orsharik(partner), orwakil(agent) for
investment,, to undertake to offer loans tosukukholders, when actual earnings fall short of expected
earnings.” It is, however, permissible to set up reserves or to provide for the distribution of expected
earnings on account and also to obtain project financing on account of the sukuk holders.
(^2) The fourth paragraph states: “it is not permissible for themudarib(investment manager),sharik(partner),
orwakil(agent) to undertake {now} to re-purchase the assets fromsukukholders or from one who holds
them for its nominal value, when thesukukare extinguished at the end of its maturity. It is, however,
permissible to undertake the purchase on the basis of the net value of assets, its market value, fair value,
or a price to be agreed at the time of their actual purchase, in accordance with Article (3/1/6/2) of AAOIFI
Shari’a Standard (12) on Sharikah (Musharaka) and Modern Corporations, and Articles (2/2/1)and (2/2/2)
of the AAOIFI Shari’a Standard (5) on Guarantees. It is known that asukukmanager is a guarantor of the
capital, at its nominal value, in case of his negligent acts or omissions or his non-compliance with the
investor’s conditions, whether the manager is amudarib(investment manager),sharik(partner) orwakil
(agent) for investments. In case the assets ofsukuk al-musharaka,mudarabah,orwakalahfor investment
are of lesser value than the leased assets of “lease-to-own” contracts (ijarah muntahia bittamleek), then it
is permissible for thesukukmanager to undertake to purchase those assets – at the time thesukukare
extinguished – for the remaining rental value of the remaining assets; since it actually represents its net
value.”