Undertakings by Investment Managers. Dr. ÑAbdul SattÉr AbË Ghuddah. Head of the Unified SharÊÑah Board. Al-Barakah Banking Group

Transcription

1 Undertakings by Investment Managers by Dr. ÑAbdul SattÉr AbË Ghuddah Head of the Unified SharÊÑah Board Al-Barakah Banking Group A paper presented at the 31 st Dallah Al-Barakah Symposium

2 بسم هللا الرحمن الرحيم In the Name of Allah, the Most Compassionate, the Merciful All praise is due to Allah; and peace and blessing be upon our leader, MuÍammad, his family and all of his companions. This is a short paper regarding the subject of undertakings that the managers of investment operations issue for those who are involved in various investment vehicles like partnerships, muìérabah, wakélah bil istithmér (agency for investment), or ÎukËk and investment funds: i.e., which of those undertakings are permissible and which are not. [Particular attention is given to] the relationship between purchase undertakings at nominal value and guarantees against the risks faced by participants in these investment vehicles. It further discusses undertakings without purchase, such as subscription underwriting or buyback. 1 It also examines undertaking of the managers to lend money in case of liquidity shortfalls for paying dividends of ÎukËk or funds, and the undertaking of the takéful insurance company to cover a deficit in takéful funds. 2 And Allah guides to the straight path. 1 Editor s note: The pledge does not necessarily bind the provider to buy; he could fulfill the pledge by finding a third-party buyer. 2 Editor s note: It seems the author may have had this intention when he started writing the paper, but he may have run short of time and been unable to complete his original plan.

3 The meanings of tañahhud and iltizém: Undertakings of Investment Operations Managers The origin of tañahhud is Ñahd, which means securing and taking care of something. It is also used for an agreement that must be given consideration. 3 It differs from wañd (promise) in that Ñahd is a promise associated with a condition, such as if you do such-and-such, I will do suchand-such. 4 In other words, in a promise there is no pledge from the promisor to fulfill his promise, unlike tañahhud, which does carry the connotation of a pledge, so it is a binding promise that requires compensation in case of breach. IltizÉm means imposing a matter on oneself; either by one s own choice or because the SharÊÑah imposes it on him, so he commits himself to it in order to obey the command of the SharÊÑah. 5 Shaykh AÍmad IbrÉhÊm says: If the effective cause for a pledge exists whether voluntary or compulsory it creates a legal and SharÊÑah association between the obligor and obligee. The first will be the debtor and the latter the creditor with regard to the obligation. The right generated from the commitment given to the obligee is called a personal right of the obligee attached to the obligor s dhimmah 6. 7 The Ruling on a Pledge (TaÑahhud) A pledge like a binding promise must be fulfilled, according to the SharÊÑah, even if it is expressed by a wording other [than a derivative of Ñahd] that conveys the same meaning, such as I am committed to such-and-such. Shaykh AÍmad IbrÉhÊm says: The SharÊÑah principle is that the pronunciation of the word pledge, or what gives the same meaning, by one who is eligible to do so brings about its legal effects. 8 3 Al-JurjÉnÊ, al-tañrêfét, p Al-ÑAskarÊ, AbË HilÉl, al-furëq, p Shaykh AÍmad IbrÉhÊm, Mudhakkirah Mubtada ah fê al-iltizém, p Editor s note: dhimmah is sometimes translated as liability. Some scholars conceptualize it as an invisible receptacle for rights and responsibilities associated with each individual. 7 Ibid., p Shaykh AÍmad IbrÉhÊm, Majallat al- uqëq, Al-ÑUqËd wa al-shurëï wa al-khiyérét, p. 687.

4 [That is the case] whether the word pledge is used in the past tense, which by its nature confirms the commitment, 9 or it is used in the present tense and is accompanied by indications that affirm the commitment. 10 Even if the word pledge is used in the present tense without accompanying verbal indications, any mutual agreement before the pledge would have the effect of making fulfillment of the commitment binding. Similarly, the engagement of the promisee in a matter that he would not have engaged in if there had been no pledge would also create obligation, as does making the pledge contingent upon a condition. The latter is in accordance with the legal maxim, Promises in contingent forms are binding. Shaykh MuÎÏafÉ al-zarqé has proposed an amendment in order to include cases where the promisee could be deceived. His proposed maxim goes If the promise is issued in such a way that indicates [] to the promisee or indicates commitment, it becomes binding upon the promisor. 11 Relationship of the Promissor with the Guarantee: One of the linguistic meanings of guarantee (ÌamÉn) is financial undertaking. Among its technical SharÊÑah meanings is a pledge to compensate, which makes the person obliged to fulfill his promise financially or by an act. A guarantee results from different causes, including a contract such as surety or mortgage, or unjust possession, i.e. usurpation out of anger, or encroachment on entrusted things like loaned objects or deposits. There are contracts that accept a guarantee; those are exchange contracts; and there are contracts where a guarantee is inadmissible; those are trust contracts (ÑuqËd al-aménét), unless there is transgression, or dereliction, or a violation of terms. The latter includes contracts related to investment funds: partnerships, muìérabah, and agency for investment. The ruling on stipulating a guarantee in these contracts shall be discussed further. It might be said that a purchase undertaking is not a guarantee because it is linked to the continued existence of the subject matter; if the subject matter is destroyed, neither the effect nor 9 Editor s note: This is a feature of the Arabic language. 10 Al- aïïéb, TaÍrÊr al-kalém fi MasÉ il al-iltizém, Al-ZarqÉ, MuÎÏafÉ, Al-Madkhal al-fiqhê al-ñóm. Editor s note: There seems to be a missing word in the Arabic.

5 the object of the undertaking will exist; so from where has the meaning of guarantee been given to it? The answer is that a purchase undertaking (when given by someone from whom it is not valid) is an indirect guarantee. It is different from a direct guarantee, which is directly prohibited [by the texts], it being a pledge by someone to guarantee property against loss or damage, thereby protecting the owner from bearing it. An indirect guarantee also comprises protection, but it is restricted to the case where the subject continues to exist. It might happen that the subject remains without any physical diminishment or destruction, yet the value decreases nearly to zero, for instance, but the purchase undertaker will secure it by bearing partial or near-total loss. The situation in which the value of assets declines or changes is not a rare occurrence. It often happens that there is an undertaking to purchase ÎukËk assets for a certain price, and then the value decreases, especially when its term is long or at times of crisis. This is the reason why a purchase undertaking at nominal value is prohibited, except from a lessee who is neither the manager nor the issuer. Some respected researchers believe that the justification for purchasing at nominal value is the existence of the assets and [the fact] that, in case they are destroyed, the undertaking becomes invalid. However, this view does not take into account the situation in which the value declines despite the presence of the assets. This decline in value doesn t prevent the lessee from undertaking to purchase at nominal value because he will buy for the price (thaman) not for the value (qêmah), hence the change in value has no effect. Furthermore, providing a guarantee for something which is not allowed to be guaranteed is prohibited in the SharÊÑah, even if the trigger of the guarantee never happens. Likewise, it is prohibited to demand such a guarantee as a term in a contract. In case of a change to the assets, the following detailed rulings apply: If the change is a decrease in quantity or number, the undertaker has the right to withdraw his pledge because neither the commodity itself nor its quantity falls under a guarantee of absence of defects. If the change is the occurrence of a defect in the commodity (which is effective here because the assets are not yet in the possession of the promisee) or the discovery of

6 hidden defects, and the purchase undertaking was not linked to the absence of hidden defects, the promisee has no right to cancel the deal. (New defects also come under this rule since they are like hidden defects because the undertaker was not aware of them.) But if absence of defects is stipulated in the purchase undertaking, then the promisee has the right to either cancel the deal or claim compensation (for the value of the defect). The Price of the Purchase Undertaking in Case It Is Permissible or Prohibited The manager s issuance of a purchase undertaking to the investors in an investment vehicle results in their having a sale option. This option is merely the intention to enter into a bilateral contract. It does not give the recipient any financial right or the right to a utility for which compensation could be lawfully paid in consideration of it being wealth or a financial right. Accordingly, there is no justification for charging a price for the pledge; the manager should either issue it free of charge or he should not issue it at all. In terms of fiqh categorization, it is an option. A resolution regarding this was issued by the International Islamic Fiqh Academy; it mentioned the following: i- Forms of options contracts: What is meant by an option contract is compensation for a commitment to buy an item matching certain specifications or to sell it at a specified price within a certain period or at a particular time, either directly or through a body that guarantees the rights of both parties. ii- Its SharÊÑah Ruling: Option contracts (as they are practiced in the global financial markets) are new forms of contracts which do not come under any of the contracts named in the SharÊÑah. Since the subject of the contract is neither wealth, nor usufruct, nor a financial right for which compensation may be lawfully given, this contract is not permissible in the SharÊÑah.

7 And since it is not permissible to initiate these contracts, they are not allowed to be traded. 12 A Pledge Associated with a Counter-Pledge A pledge is a binding promise, as mentioned earlier. When one party gives a pledge to another, who gives a counter-pledge (that is also binding), the result is a binding bilateral promise, i.e. a pledge associated with a counter-pledge from the pledgee. A bilateral promise means both parties promise to conduct a disposal in the future. It requires one party to promise to buy something and the second party to promise to sell it to him. If the pledge is given by a single party, it is not considered a bilateral promise, even if it is associated with the acceptance of the promisee. That is because this acceptance is just an approval to benefit from this promise but not a promise to do something in exchange for it. If there is a promise to sell, the acceptance of this promise means the promisee has a right to either purchase it or not. However, if the promisee also makes a counter-promise to purchase, then each one of them is a promisor as well as a promisee, and this is a bilateral promise. A [unilateral] promise or bilateral promise can be either binding or nonbinding. If the promise is contingent, it becomes binding, according to the anafê madhhab. 13 The promise becomes binding, according the MÉlikÊs, if the promisor causes the promisee to engage in a matter which he would not have engaged in if his promise had not been made. This opinion has been confirmed and approved by many fatwés and decrees issued from the conferences and symposiums held on Islamic banking. 14 If a bilateral promise is free from circumstantial evidence as to whether it is binding or nonbinding, then it will be decided according to need. The anafê scholar QÉÌÊkhÉn says, Sometimes a bilateral promise can be binding; it may be made binding due to need. 12 Resolution No. 163 (1/7), SharÊÑah Standards (20), Item 5/2. 13 Ibn Nujaym, Zayn al-dên, Al-FawÉ id al-zayniyyah, p Decrees of the Second Conference on Islamic Banking, held in Kuwait.

8 The International Islamic Fiqh Academy has issued two resolutions: one confirming the permissibility of a promise binding on one party, and the second affirming the prohibition of a bilateral promise binding on both parties. It is mentioned in the resolution of the Academy that a bilateral promise is permissible in a murébaíah sale on the condition that it is nonbinding for one or both of the parties. However, if there is no option to forgo the transaction, it is not allowed because a binding bilateral promise in a murébaíah sale is similar to the sale transaction itself, and one of the conditions for the validity of a sale is that the seller must own the commodity being sold in order that no dispute arises. This is based on the prohibition by the Prophet (peace be upon him) of selling what one does not possess. 15 However, the Academy issued another resolution in which it made an exception for bilateral promises in some cases. The following is the text of the resolution: Resolution No. 157 (6/17) Regarding Bilateral Promise and Mutual Agreement in Contracts The Committee of the International Islamic Fiqh Academy of the Organization of Islamic Conference in its seventeenth session held in Amman (Hashemite Kingdom of Jordan) from 28 JumÉdÉ al-õlé until 2 JumÉdÉ al-ókhirah, 1427 AH, corresponding to June, After reviewing the research papers presented to the Academy on the topic of bilateral promise and mutual agreement in contracts, and having studied Resolution Nos. 40 and 41 (2/5 and 3/5) [regarding murébaíah and promise], and after listening to the discussion about them; the Committee has decided the following: First: The basic rule for bilateral promises is that they are binding from a religious point of view but not legally binding. 15 Resolution of the International Islamic Fiqh Academy, Nos. 40 & 41 (5/2 and 5/3).

9 Second: Bilateral promises for a contract used as a stratagem to [conduct a] ribé [transaction] like an agreement for ÑÊnah, or a bilateral promise to conduct a sale and a loan are prohibited in the SharÊÑah. Third: In some cases, a sale agreement cannot be concluded because the commodity is not in the possession of the seller while a general need exists to oblige both parties to implement the contract in the future, either by virtue of law or by other means or by recognized practices of international trade, like opening a letter of credit to import goods. In these cases it is permissible to make the bilateral promise binding on both parties, either by law or by mutual agreement through a clause in the agreement that will make the promise binding on both parties. Fourth: The binding bilateral promises mentioned in the case described in Article Three will not take the same ruling as a future sale. The ownership of the commodity being sold will not be transferred to the buyer, nor will the price become a debt owed by him, nor will the actual sale take place until the agreed-upon date by virtue of the offer and its acceptance. Fifth: If one of the parties in a bilateral promise breaches his promise in the cases mentioned in Item Three, he shall be legally compelled to fulfill the contract or to bear actual damages suffered by the other party due to his breach of promise (but not for the lost opportunity). 16 A Pledge of Donation to Redress the Loss in an Investment (A Third-Party Guarantee) The permissibility of this type of undertaking is mentioned in the resolution of the International Islamic Fiqh Academy with the conditions stipulated in the resolution. It is like a pledge to donate in order to cover a loss occurring for any reason. Calling it a guarantee (ÌamÉn) is not, strictly speaking, accurate because it is not the guarantee of a debt. The resolution states: There is nothing in the SharÊÑah that prevents the inclusion of a statement in the prospectus or in sukëk muqéraìah, about a promise made by a third party, totally unrelated to the two parties involved the contract in terms of legal personality and financial status, to donate a specific amount, without any counter-benefit, to meet 16 Resolutions of International Islamic Fiqh Academy, Resolution no. 157 (6/17).

10 the losses in a given project, provided such commitment is an independent one, not related to the muìérabah contract, in the sense that neither the enforcement of the contract nor its legal effects is conditional upon the fulfillment of the promise. Hence, neither the shareholders nor the muìérib may invoke this clause to avoid the contract or renege on their commitments, alleging that the said commitment made by a third party was taken into consideration in the contract. The resolution emphasizes that there should be no financial compensation for the pledge, along with other conditions whose importance is obvious for preventing the pledge from ending up on the fund manager, so that he will not become the guarantor against any loss. This resolution was the source for the following SharÊÑah standards: 17 - The Standard on Guarantees (No. 5) Item 7/6 - The MushÉrakah Standard (No. 12) Item 3/1/4/3 This kind of pledge has been applied in a number of investments related to public utilities; the pledges were issued by governments. It is also applicable in other areas, particularly in the investment of zakéh funds, endowments, and in the property of minors. An Undertaking in a Partnership A promise from one of the partners to buy the share of his partner; A promise from one of the two partners in mushérakah mutanéqiîah to buy the share of his partner; It is established in Islamic law that the hand of a partner (i.e., his authority of disposal) in the partnership property is the disposal of a trustee because he has obtained possession by the permission of the other partners. Thus, he shall not be held responsible for any damage or loss incurred to the property as long as it is not a result of his negligence or transgression or violation of the conditions. It must be made clear that there is no difference between the regular mushérakah and mushérakah mutanéqiîah when it comes to applicability of the rules of partnership. The only difference is that mushérakah is basically permanent, although the partners 17 Resolution no. 30 (5/4).

11 can jointly agree to terminate it, or one of them could stipulate the right to annul it if he chooses. However, mushérakah mutanéqiîah is designed to end up with the interested partner acquiring complete ownership in the future. Thus, what is true for one of them in terms of purchase undertaking applies to the other. The International Islamic Fiqh Academy has issued a resolution regarding the purchase promise in mushérakah mutanéqisah. The standards that govern the legitimacy of this promise are explained as follows: 1- There should be no promise by one of the parties to purchase the share of the other party for the price of that share at the time the partnership is established. That is because it would mean one of the partners is guaranteeing the share of his partner. Instead, the price of the share should be determined by the market value on the day of sale, or by what the two parties agree at the time of the sale. 2- There should be no condition that one of the two parties shall bear the insurance, maintenance, and other expenses. Instead, it must be divided according to the proportion of their shares. 3- The profits of the parties must be specified in proportion to their diffused (shé iñ) shares. It is not allowed to stipulate a fixed amount of profit or a fixed percentage of the amount of contribution. 4- The contracts and the pledges related to the mushérakah should be kept separated. 5- It is not allowed to stipulate that one party will have the right to recover his contribution (funding). 18 An Undertaking in MuÌÉrabah The promise made by the muìérib to purchase the assets of the muìérabah at the end of the period or in case of early termination: The muìérib is a trustee in the case of muìérabah and with regard to its assets because he disposes of them with the permission of their owner (the rabb al-mél). The intent behind the muìérabah is achievement of common benefit for the muìérib and for the rabb al-mél. The muìérib is, thus, like an agent. If the muìérib were the only one to get benefit, then the 18 Resolution No. 136 (2/15).

12 arrangement would be ÑÉriyah. 19 This is as long as the muìérib does not violate the conditions set by the capital provider; if he does, he shall be considered a usurper and be held liable. 20 This is regarding the responsibility of the muìérib regarding the capital of the muìérabah. As for the debts that arise from the muìérabah operations, a fatwé was issued in the ninth symposium of al-barakah, as follows: It is allowed for the bank that manages the operations on the basis of agency for a fee to stand surety for the debtors without stipulating this guarantee in the agency contract. However, if the bank is working on the basis of muìérabah or mushérakah, then it is not allowed for the bank to stand surety for the debtors for the sake of its partners, nor can the bank provide a guarantee against the fluctuation in currency exchange rates in order to enable its partners to recover their contributions. This is because it will lead to a guarantee by the partner or the muìérib of the capital of the rest of the partners or the capital providers, and this is prohibited in the SharÊÑah. 21 The promise to purchase the assets of the muìérabah at the end of the period, or in cases of violations by the muìérib, or if he wants to have early termination, is prohibited because it comes under the meaning of a guarantee (as discussed earlier). In case of partial loss or a decline in the value of the assets, [a purchase undertaking] is like a partial guarantee given by the muìérib for the benefit of the rabb al-mél. An Undertaking in Investment Agency The agent is a trustee (amên) because he represents the principal (muwakkil) in possessing and disposing of the property. The loss of the property (the subject of agency) in the hand of the agent is like its loss in hand of the muwakkil, the owner. Agency has the meaning of help and support for the muwakkil, and [making the agent provide a] guarantee contradicts that. However, 19 Editor s note: ÑÓriyah is a loan of a physical asset that is to be returned after using it. 20 Al-Durr al-mukhtér 4:484, KashÉf al-qinéñ 3:508, (quoted from al-mawsëñah al-fiqhiyyah, 28: It has a detailed treatment of the types of contractual and non-contractual violations. 21 FatwÉs of the Symposiums of al-barakah, No. 9/3.

13 the agent will be responsible if he is negligent, or violates the condition of the muwakkil, or if he goes against standard practice in case the agency contract was free from conditions. According to the majority of fuqahé, if the promise is to purchase at nominal value, then it is a guarantee which is prohibited in the SharÊÑah, even if it is stipulated. Therefore, the promise to purchase at nominal value comprises a partial guarantee in case of a decline in the value of the assets of the agency. However, a promise to purchase at market value or at a value agreed upon at the time of purchase is not prohibited. An Undertaking by the Investment Agent to Guarantee the Debts of Clients It was mentioned earlier that a fatwé (resolution) was issued in the ninth symposium of al- Barakah regarding a guarantee provided by the agent for the debts of clients, issued as a promise independent of the agency contract. The fatwé states: It is allowed for the bank that manages the operations on the basis of agency for a fee to stand surety for the debtors without stipulating this guarantee in the agency contract. In the same fatwé it is mentioned that this undertaking is prohibited in a muìérabah contract. 22 Furthermore, an item was issued in SharÑah Standards regarding guarantees that explains the conditions of this promise. It is as follows: It is not permissible to combine agency and guarantee in one contract because they conflict in nature. Moreover, stipulation of guarantee on the agent for investment will turn the process into an interest-based loan, since the capital is guaranteed in addition to the return of investment. But if a guarantee is not stipulated in the agency contract, and the agent provides a guarantee to his clients in a separate contract, he will become a guarantor in a different capacity from that of agent. In this case, such an agent will remain as guarantor even if he is discharged from acting as agent. 23 The same item is repeated in the SharÊÑah standard on agency. 22 Ibid. 23 SharÊÑah Standard No. 5 on Guarantees, Item 2/2/2, and SharÊÑah Standard No. 23 on Agency, Item 5/2.

14 An Undertaking from the ØukËk Issuer to Purchase the ØukËk If the ÎukËk issuer is also selling the assets of the ÎukËk, his promise to purchase them will either be at their nominal value, or market value, or a value agreed upon at the time of purchase. If the promise is to purchase them at their nominal value, and he himself is the seller of these assets, then it is not permissible. This is because it is a kind of ÑÊnah. However, if a period has passed after the issuance of ÎukËk in which the market price normally changes (a year or more), or the objects of these ÎukËk are changed, then he can buy them either upon the maturity of the ÎukËk or during the period, once the abovementioned elements occur that makes this contract different from ÑÊnah. However, if the issuer of the ÎukËk undertakes to buy them at market value or at a value agreed upon at the time of purchase, then the sale is permissible at any time. An Undertaking from the ØukËk Manager to Purchase the ØukËk Undertaking to purchase: The ÎukËk manager is either a muìérib who will have a portion of the profit or he is an agent getting a specific commission or a percentage from the price of the ÎukËk assets. It is prohibited in the SharÊÑah for the ÎukËk manager to pledge to purchase the ÎukËk at either nominal value or for a specific amount at the time of issuance or before the purchase. That is because it leads to a guarantee of the ÎukËk (even if it is just a possibility). This is in circumstances where the value of these assets declines from their nominal value or from that specified amount. Since it is not allowed for the manager to guarantee these ÎukËk, he is likewise not allowed to make a promise that will lead to the possibility of guaranteeing these assets. However, if he wishes to purchase them at market value or a value agreed to at the time of purchase, then it is permissible because the possibility of guaranteeing the ÎukËk no longer exists.

15 A Purchase Undertaking Issued by the Beneficiary of the ØukËk (Lessee) The lessee of the ÎukËk assets may be a party that is not involved in the issuance or the management [of the assets], or he may be the issuer of the ÎukËk or the manager: If a lessee who is neither the issuer nor the manager of the ÎukËk undertakes to purchase, it is permissible at any price including the nominal value. This is because he is not involved in the process of issuance and management. He can undertake to purchase for nominal value upon maturity of the ÎukËk at the end of its period or undertake to purchase during the period for any reason, such as the lessee s failure to fulfill the obligations of the leasing contract or to pay the installments, or he may wish to own the ÎukËk assets ahead of schedule. The statement issued by the SharÊÑah Council of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOFIFI) regarding ÎukËk clearly validates an undertaking by [such a] lessee to purchase the ÎukËk assets at their nominal value. If the lessee of the ÎukËk assets is the manager himself, then he is not allowed to undertake to purchase them except at market value or a price agreed to at the time of purchase. If the issuer of the ÎukËk is not also the manager, it is permissible for him to provide a purchase undertaking at any price. This is because the process of issuance is an organizational service; hence, the issuer is like an outsider; however, if he is also the ÎukËk manager, then the ruling on the manager will apply to him. A Buyback Undertaking from the Manager of a Fund or Investment ØukËk The fundamental advantage of investment vehicles is the possibility of substitution or buyback. However, substitution requires finding a willing replacement buyer at the desired time, which may and may not happen. It also requires reaching a price agreeable to both parties for taking over the exiting party s share.

16 Buyback, on the other hand, is considered stable because it is based on a standing offer to the partners to repurchase their shares (buyback). This offer may be available throughout the term of the investment vehicle, or it may be only for a specific time, or it may be available only up to a certain percentage, with the buyback being stopped when that limit is reached. The price of the buyback is set from the beginning. From a legal point of view, the buyback promise is permissible in the SharÊÑah because it is an offer that is binding upon its issuer based upon his appending it to a long or short term. This makes the offer continual, awaiting acceptance from the one to whom the offer is given. It was issued as an offer connected to time in terms of making it binding and making the contract session (majlis al-ñaqd) ongoing. However, it is not allowed to charge any fees for the buyback offer since it would be compensation for a willingness to contract, which is a matter already confirmed by both parties. So if one of them takes money for it, it will be considered consuming wealth unlawfully. The alternative is for the administration to add to the value while pricing the buyback (if they wish to do so); and this is subject to acceptance from the other party. The buyback may be at market value, which is absolutely permissible, no matter who issues the promise. Alternatively, it may be at nominal value; for this the rulings are detailed. FatwÉ 13/5 of the Al-Barakah symposiums was issued on this topic. It states: 1- In share offerings, whether for the purpose of investment or trading, some institutions have proposed an exit formula ending in buyback, with the intention of investment of the buyer s surplus liquidity and liquidity management for the seller, whether an individual or a company. It is agreed that the regulations for exit by replacement must be taken into account. Among the most important of them is that the company [whose shares are traded] must have actual activities and its assets in the form of tangible objects and usufruct must be more than its debts and cash The management of the company has the right to promise to execute buyback at market value with the procedural conditions that govern its practice. Exit by replacement can also be done at any price agreed upon at the time without commitment to the nominal value. This is the practice of those investment funds which are supervised by SharÊÑah supervisory boards. Some are of the opinion 24 See fatwé no () [sic] where it is stipulated that it is enough for the assets to be equivalent to the liabilities, not necessarily more. SharÊÑah Standard No. () [sic] approves the same on securities.

17 that the buyback promise makes the process like financing with a guarantee and that this is like stipulating the right of cancellation in a purchase contract. 3- The company management is not allowed to make a promise for buyback at nominal value. If it is made by a third party who is neither involved in management nor in investment, it is permissible on the condition that this promise is independent from any participation [in the investment]. This is in accordance with the resolution of the International Islamic Fiqh Academy (455 [sic], Article 7). Participation of Other Institutions in a Buyback Promise on Stocks and Shares FatwÉ 2/7 of Al-Barakah Symposiums was issued on this. It is as follows: Question: Is it permissible for an Islamic bank that has promised to purchase stocks or shares offered for sale to engage other Islamic banks and institutions to purchase these stocks and resell them to interested parties? FatwÉ: An Islamic bank that has given a general offer to purchase the stocks or shares offered may lawfully engage other Islamic banks and institutions in this offer with the same conditions, provided that the name of the bank or institution that has joined and any changes in the names of participants in this offer is announced. Praise be to Allah, the Lord of the Universe.