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Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein. (02-275)
Surat Al-'A`rāf (The Heights)
Indeed, those who deny Our verses and are arrogant toward them - the gates of Heaven will not be opened for them, nor will they enter Paradise until a camel enters into the eye of a needle. And thus do We recompense the criminals. (07-40)
Allah's Messenger Muhammad ( ) ملسو هيلع هللا ىلصsaid:
[Transmitted by Sahih Bukhari] Hadrat Umar mentioned the hadeeth of the Prophet Muhammad (Sal-allahu-alleihiwasallam): "The thing from which I fear for you the most is the knowledgeable hypocrite." Hadrat Umar was then asked: "How can a hypocrite be knowledgeable?" To which Hadrat Umar answered: "He speaks with wisdom but acts with injustice."
socialists. These Islamic banking divisions and Islamic banks are distributing interest (Riba) among their customers as Halal profit. gave rise to two super powers at odds with each other. what remains un-talked of is the collapse of an economic code which was governing the lives of millions of Muslims under Ottoman Caliphate2. Review reports of Islamic Banking Institutions (IBIs) issued by SBP have revealed the fact that IBIs are involved in interest based investment and financing1. Backdrop and Principles the past two centuries humanity has witnessed devastating wars and millions lost their lives in the name of ideologies primarily pertaining to the field of Economics. In . Analyzing the backdrop of these events establishes the fact that these wars were in fact the clash of capitalists. have turned a blind eye to this issue. Deposits collected under schemes of Halal Munafa are also being used for such impermissible activities in the name of Islam. These malicious investments include but not limited to: KSE100. Meanwhile top regulatory institutions. However. There are no separate records of deposits. IBIs are also secretly involved in Forex trading and expert professional have been haired to perform such tasks. 5 full Islamic banks are also operating in our country along with IBDs. First World War caused the demise of mighty Muslim Caliphate and Second World War. State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP). IBIs disburse Riba returns among clients after keeping their spread. such records have their separate identity in internal records but in consolidated statements these records are mingled with conventional commercial banking results. This is the reason IBIs. KSE30 common and preferred shares Pakistan Investment Bonds Sukuk bonds GOP treasury certificates and bonds Mutual funds Term Finance Certificates IBIs not only invest in such securities in their own capacity but also as part a consortium of conventional commercial banks. which to me was the continuity of first war. claiming to have investments and financing asset backed and in legitimate Shariah compliant businesses.Conventional commercial banks are opening their Islamic banking windows in Pakistan and in the past few years number of such Islamic Banking Divisions (IDBs) have swelled to 14. have never shown a loss or a negative return. Where as. investments and financing of so-called Islamic securities and transactions.However. fascists and communists to drive the world affairs in the direction dictated by their proponents and to establish the utopian state which they have envisioned. This calls for separate accounting and presentation standards of banking activities compliant with Shariah rules.
However. During the last quarter of the previous century Islamic Finance emerged as a ray of hope for Muslims across the globe. are strictly forbidden3. Contrary to the modern theories of economics Islam advocates the supremacy of labor over Money and excludes entrepreneurship from the list of factors of production proposed by classical and neo-classical economic theories. Moreover. This principle empowers labor and reinforces the idea of equality and brotherhood among humans. Which means money cannot be rented or leased and can only be rewarded in monetary terms if it changes its form and turns itself into capital. Since then this infant industry has witnessed a double digit growth. Progress numbers of IBIs are given below: . not money market returns. capital providers will have to bear the risk on pro rata basis. Whereas equity capital is at the mercy of corporate management for its returns and bears unlimited risk. Maysir). Islamic banking Practices Without bothering my reader with the history of Islamic banking in Pakistan and its evolution I will get straight to the meat of the story. money and capital cannot be treated as synonyms as per Islamic code. have nothing to do with the actual outcome of the business and virtually have no risk. Secondly. resembling to gambling (Gharar. Thus money becomes capital when it takes the shape of land. Along with this Islam proposes the distribution of gains of a business in a fair manner. Islamic principles clearly differentiate between assets backed investment and financial securities as derivatives of real assets. In modern economic practices providers of debt capital get a fixed or floating ( Interest Rate Corridor) returns (Riba). Now. Entrepreneurs are not the only risk takers. Before we dive into the practices of Islamic banking institutions let's have a brief look at the differences between prevalent western economic theory and its Islamic counterpart. Investments only in real assets are permissible and derivative securities have excessive risk. namely. which of course is limited to the share in the total equity. In Pakistan it has gained approximately 10% share of countries' banking sector since its beginning in 2002. The banks and financial institutions promoting the idea of Shariah Compliant investments and financing gained overnight popularity and Muslims looking for a change started transferring their monitory assets from conventional to Islamic institutions across the globe. Like Conventional Commercial Banking institutions promoting Shariah compliant financing and investment products collect deposits form clients and provide this money to business for short and long term financing needs and invest rest of the money in market traded securities. merchandise and reward for services hence entitled to a fair share of the profits and risks which may arise in a process of production. Neo-classical economics divides capital in two basic categories Debt and Equity.Muslims were disillusioned after the fall of caliphate and their very own economic system and in dire need of an alternative of the modern Riba based economic system reshaping their social fabric. Islamic banking Institutions (IBIs) are only allowed to invest in assets and distribute the returns generated by these assets among the providers of capital.
Source: SBP4 Source: SBP5 Among theses 19 IBIs only 5 banks are pure Islamic banks and 14 are independent IBDs of commercial banks chartered in Pakistan. .
as of March 2013.Source: SBP6 As the investments of IBIs show that 44% of deposits are concentrated in Federal Government securities. Source: Compiled by DMMD from SGLA Holdings data at PDO. June. denominated in PKR and different other currencies including US Dollar and Lira. 2013 . SBP BSC.
where as total Sukuk Bonds issued by GoP are worth Rs. as of June 2013. 4932 billion. 413 billion.Total banks & non-banks holdings of GoP securitiesare of Rs. By investing in Sukuk investors become owner of the assets equal to the proportion of their investment and become entitled to the proportionate share of the total returns of that asset or project. primarily KIBOR and LIBOR. usufruct and services or ( in the ownership of ) the assets of particular projects or special investment activity.2 billion. As per our premise in the introduction section for these Sukuk to be Shariah compliant cash flows from the project shall be distributed among the Sukuk investors on pro rata basis. 307 billion in GoP Sukuk bonds. 459. Let's have look what theses Sukuk bonds are.Total investment of scheduled banks in Sukuk bonds is Rs. This practice is not only unfair but also in direct collision with Maqasid-al-Shairah (Objectives of Shariah). IBIs have invested Rs. However. the closing of subscription and the employment of funds received for the purpose for which the Sukuk were issued"7. Although investments in KSE100 or 30 indices (Fully paid ordinay shares) are also debatable yet Sukuk investment is the area of primary importance where things get problematic. However. this is true after receipt of the value of the Sukuk . . however. Sukuk Bonds Sukuk are called investment Sukuk and are defined as: "Certificates of equal value representing undivided shares in ownership of tangible assets. theses Sukuk bear a floating rate of return dictated by money market instruments. Theses Sukuk represent undivided fractional share in an asset or project for example Motor way and Wapda Hydel Turbines.
Although principles dictate to distribute the proportionate net cash flows of the project among the investors yet the Kibor rate was used to price the investment which is a money market rate and all Islamic Scholars are of the this is Riba. The purpose of these Sukuk bonds was to raise money for capacity development at Mangal Dam and 10 hydel power generation turbines were purchased with the proceeds of the issue. Kibor KIBOR stands for Karachi Inter Bank Open-market Rate. denominated in PKR. and a Special Purpose Vehicle (SPV) was set up for this purpose namely WAPDA first Sukuk Company. floated Ijarah Sukuk bond. These bonds promised to pay 6month Kibor rate plus 35 basis points and these bonds were insured by the GoP. on January 06. worth Rs 8 billion. It's the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in . 2006. for seven years.Ijarah Sukuk Structure Details in Appendix-A WAPDA Ijarah Sukuk Example WAPDA.
in marketable size. Without Ijarah contract this whole Sukuk thing is mirror image of conventional bond in every aspect. WAPDA First Sukuk Copmpany was created just to enter into the said lease (Ijarah) contract with the Leasee (WAPDA). The most often quoted rate is for six month KIBOR.hallA fo ( ع ل يه و س لمUse of Libor. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year"8. other than this it had no other purpose. Ijarah Sukuk: The end result As we have discussed earlier that the pricing of Islamic Investment and Financing instruments must be in line with Maqasid-al-Shairah and such products shall not only be compliant with letter of the law but also with the spirit of the law. Libor "An interest rate at which banks can borrow funds. So. After this another company named WAPDA second Sukuk Company was created in 2007 for the second Sukuk issue. to circumvent the Shariah Law theses devilish men borrowed the idea of SPV from Enron to cheat their clients. In simple word a SPV is a paper company and under full control of the sponsor company. . This implies that the Ijarah contracts between WAPDA and these SPVs were blatant attempts to paper over the cracks in their practices and to defy the divine laws given to us by The True Prophet (هللا ىلص .the City of Karachi. The LIBOR is fixed on a daily basis by the British Bankers' Association. Money can be borrowed overnight or for a period of in excess of five years. They some how succeed in hiding behind "Ijarha" but couldn't find any doubious method of pricing this instrument and kept on using Kibor. '6 month KIBOR' tends to be used as a yardstick for lenders involved in high value transactions. from other banks in the London interbank market. Kibor as pricing benchmark rate and SPVs clearly manifest that the Ijarah (Rent. Members of Shariah compliance boards. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt"9. SPV "Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. Lease) contract is merely eyewash.
"10 Conclusion The Hadith of Allah's Messenger Muhammad () ص لى هللا ع ل يه و س لم. to do the same. as the IBIs claim to have Asset backed investments and possibility of Riba-al-Nasiah excluded. but this not the case. One thing must be clear in our minds that any investment or financing instrument which is priced using only (or in a mix) money market rates will be Haram. IBIs securities must be priced using factor prices recognized by Islam (Land. The much more serious issue is that these banks are giving HARAM returns and Force us to take it as Halal. Allah's Messenger said to eat Riba is to commit adultery to one's own mother. These Shariah Boards are the sinners and making the innocent masses. Since. the industry is in its initial stage of development. clearly elucidates the strategy of the enemy within our ranks and files. "Islamic banks should ideally have their own benchmark system for determination of profit. it would have its own benchmark. it is using the available benchmark for the banking industry.Islamic Bank professionals and SBP authorities are deceiving people of Pakistan in the name of Islam. Here we must not forget that the money market rate are said to be market determined but state banks and governments have ultrahigh control over the this process and these institutions set such rates (Libor and Kibor) arbitrarily to meet their own desired ends. Surat At-Tawbah . Labor and Capital). It is expected that once it is grown to a sizable level. Considering money as a factor of production and determination of reward of remaining factors solely on the bases of Libor and Kibor and not distributing net cash flows among investors of a project is Haram. who fell prey to their oily tongue. Such are the people about whom Allah's true Prophet( هيلع هللا ىلصtaht dias (و س لم they will follow the footsteps of the Jews. SBP acquiesce that such dubious practices are prevalent and happily accepted among players in Islamic Banking Industry. presented in the beginningof this report. Here is an excerpt from a document entitled FREQUENTLY ASKED QUESTIONS ISLAMIC BANKING. Which make its Riba-al-Nasiah and consequently 'Haram'(illegitimate). However. Such Ulama and banking professionals are a blot on the landscape and giving a bad name to the Ummah.
Nelson] .' The companions asked. they will resemble each other like one shoe in a pair resembles the other to the extent that if anyone among the Israelites has openly committed adultery to his mother there will be some who will do this in my Ummah as well. they obeyed.kcen sih no ssorc nedlog a htiw (ع ل يه و س لم After repeating the verse 31 of surah At-Tawba. 'Who are they O Messenger of Allah. but if they (the clerics) claimed something to be helal . there is no deity except Him.org.Kitabul Eeman) Adeyy b. Hatim relates that once he went to see the Prophet Mohammed (هللا ىلص . Tefsiru'l Quran p 10) Note: We will discuss the solution for this grave situation in a fortnight.they obeyed. the Prophet added: "They did not pray to them (the clerics). the son of Mary.permitted -. Exalted is He above whatever they associate with Him." This is how they made them (the clerics) their lords. 'They are those who will be like me and my companions. If they (the clerics) claimed something to be haram .forbidden .sbp.pdf 2) Economics As Religion: From Samuelson to Chicago and Beyond [Robert H.They have taken their scholars and monks as lords besides Allah. and [also] the Messiah.' Holy Prophet ص لى هللا ع ل يه و س لمsaid. (Tirmidi. And they were not commanded except to worship one God. __________ References: 1) http://www..dias eh "!lodi taht yawa hguorht yyedA" .' (Tirmidhi . (09-31) Abdullah bin Amarra relates that Allah's Messenger Muhammad (هيلع هللا ىلص ) و س لمsaid: 'Surely things will happen to my people as happened earlier to Israelites..pk/ibd/bulletin/2013/IBB-March-2013.
Credit Rating Agency provides necessary credit rating to the Sukuk 7.pdf * Manager Research and Development (Finance) asad.com/Term?term=LIBOR 9) http://www. 1 5) Ibid. Credit Enhancer provides additional liquidity or security enhancement to the Istisnaa asset for rating purposes 5. 1 7) Sharia Standards. SPV sub-contracts the construction to Contractor and Consultants 4.investopedia.org.sbp. Zohra Jabeen.firstname.lastname@example.org. 2007 4) Ibid. Sukuk subscription generates required cash proceeds valued USD 100m 10.asp 10) http://www.com/terms/s/spv. 1424-5H/2003-4 Accounting and Auditing Organization for Islamic Financial Institutions. 1 6) Ibid. Investors subscribe to Sukuk 9.com. Memoona Rauf Khan. 2.pk +92 0423-6282867 +92 0423-6282868 Appendix-A Structure Details: Originator intends to finance Forward Financing Ijarah Contract (or Ijarah Mawsufa Fi Zimmah) through Ijarah Sukuk (Pass-Through Sukuk) 1.3) "An Inquiry into the Usage of Real Assets in Islamic Transactions and Their Benchmarking.com/terms/l/libor. SPV packages the Istisnaa asset into Sukuk units for issuance to potential Investors 6. SPV disburses progress payments to Contractor and Consultants 11.pk/departments/ibd/FAQs. p298 8) http://www. Originator signs a forward Ijarah deal with its Customer.investopedia. Contractor delivers completed asset to Originator . SPV / Issuer issues Sukuk to Investors at fixed/floating profit rates 8.The Implications for Islamic Capital Markets".asp http://lexicon. Originator signs Istisnaa contract with SPV to construct the required asset for its Customer 3.
Originator sells the Ijarah asset to Customer and disburses the sale proceeds to SPV SPV redeems the Sukuk and disburses remaining cash back to Investors. Originator delivers completed asset to Customer 13. (Author of Appendix-A in unknown however details are fine) . SPV disburses contracted periodic distribution (or lease rentals) to Sukuk Investors 15. on lease expiry/termination date.12. Customer pays periodic instalments and Originator pass-through instalments to SPV 14. Being finance nature of Ijarah.
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