Saturday, April 05, 2008

Sheikh Usmani's opinion on sukuk

Sheikh Yusuf deLorenzo, a prominent Shari’ah scholar, translated the opinion of Sheikh Taqi Usmani on the permissibility of many forms of sukuk into English. One form of sukuk that Sheikh Usmani focused was the requirement that the underlying assets be purchased at face value, not market value, and also that payments to the sukuk holders be linked to an interest rate. The main problem with linking sukuk returns to the interest rate is that the structure forced the manager of the enterprise to make an interest-free loan to investors if profits fell below the benchmark interest rate that would be repaid when profits were higher or at the time of asset repurchase. Sheikh Usmani believes that instead of benchmarking payments to investors and managers of sukuk-financed enterprises, these payments should vary based on the profitability of the business.

Sheikh Usmani also presents a very interesting perspective on the development of Islamic finance that resembles conventional finance. The goal of building Islamic banks created the (undesirable from a Shari’ah perspective) necessity that products be Shari’ah-compliant versions of conventional products. However, this was supposed to be temporary. Sheikh Usmani writes:
“It was expected that Islamic banks would progress in time to genuine operations based on the objectives of an Islamic economic system and that they would distance themselves, even step by step, from what resembled interest-based enterprises. What is happening at the present time, however, is the opposite. Islamic financial institutions have now begun competing to present themselves with all of the same characteristics of the conventional, interest-based marketplace, and to offer new products that march backwards towards interest-based enterprises rather than away from these.”

The future of Islamic finance, in Sheikh Usmani’s view, is to focus on differentiating Islamic finance from conventional finance. Many involved in the industry, although not necessarily those whose livelihoods depend on fees for engineering Shari’ah-compliant versions of conventional financial products, would agree with Sheikh Usmani when he says, “It is now incumbent upon these Islamic banks and financial institutions to cooperate among themselves for the purpose of developing authentic products that are far removed from empty stratagems, free from all association with riba, and that aim to serve the higher purposes of Islamic law in the spheres of economics, development, and social justice.”

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