Monday, September 9, 2013

BADLISYAH: Is debt trading in sukuk market allowed under Shariah?

We are just a few days before the start of Ramadhan when Muslims all over the world will be fasting to fulfill one of Islam’s five pillars of faith.

As I reflect upon the goodness of Ramadhan, I am reminded that it has always been a good month for sukuk issuance as we have seen more sukuk done in the Ramadhan month than in any other month of the year for the last 23 years. Well, at least in Malaysia.

Talking about sukuk, in 2011, I spoke at an international centre for education in Islamic finance (INCEIF) luncheon talk and was asked the reason why bai al dayn (trading of debt) in the sukuk market at a price other than par value is allowed under Shariah.

This is an old non-issue that many newcomers to Islamic finance keep asking and I thought I should immortalise my answer in this column as future reference or fodder for intellectual discussion.

My answer is simple — there is nothing in the Quran or legitimate Hadith that directly or expressly prohibits its undertaking. Therefore, it is permissible under Shariah ab initio. On top of this, the dissenting argument against such trade is indirect and weak.

As I have always said, Shariah is simple but we human beings always like to complicate it. We should remember that the fundamental workings of the Shariah principle of Muamalat under which Islamic finance is governed provides that EVERYTHING IS ALLOWED UNLESS THERE ARE CLEAR AND DIRECT EXPRESSED PROHIBITIONS (IN QURAN AND LEGITIMATE HADITH) THAT DISALLOWS THEM.

But why then do we still have dissension on bai al dayn at premium or discount under Shariah?

I would say, first and foremost, that the dissent is analogous in nature. The dissenters referred to an indirect Hadith, which says, “gold is to be paid by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, salt by salt — like for like, equal for equal, payment being made on the spot. If the species differ, sell as you wish provided that payment is made on the spot”, to say that it can’t be done as the basis for disallowing it although the Hadith does not mention anything about debt.

I can’t remember its origin but suffice to say that the referred Hadith is a strong legitimate Hadith under which there is an established consensus from qualified Shariah scholars that currency or cash must be traded on spot and at par value if they are traded using the same currency eg US dollar with US dollar. However, to rely on this Hadith, the dissenters are forced to categorise or equate debt as currency or cash.

To me one can by analogy explain the workings of a heart by using a pump but a heart can never be equated as a pump. The two may have partially similar workings but they are not the same. When it comes to debt, I do not think it is even right to apply analogy to explain its workings by using currency or cash. The partial similarity is negligible and irrelevant. Analogising and saying debt is currency or cash is to my mind an exercise of putting a square peg in a round hole and really stretching the imagination.

If we are to follow the dissenting arguments, then all Muslim entrepreneurs in the world will truly be lame ducks in monetising their business in the equity market. The reason for this is that all businesses have among its core assets in the form of debt (ie trade debtors) with some up to 90% of total asset. If debt is considered currency or cash then all Muslim entrepreneurs would be forced to sell the business that they have built for a lifetime only at par value or a potential buyer who is a Muslim can’t buy the business by discounting the asset value to maximise his profit from the purchase.

Aside from analogously equalising debt to currency or cash, the dissenters also opined that such an activity should be disallowed as it does not meet maqasid al shariah (objective of Shariah), which is to do good for all mankind and protect them from harm. I was stumped when I heard this argument (palm smacked on forehead).

Maqasid al shariah does not determine halal (permissible) or haram (impermissible) in Islam. It simply requires that in anything that we do, we do it in a manner that benefits mankind and protects them from harm.

In general, something may not necessarily meet the maqasid al shariah of a society but it is still permissible. An example is smoking cigarettes. There is nothing impermissible about it because there is nothing in Shariah that disallows it specifically but from maqasid al shariah perspective it should not be allowed because it can harm people’s health and economic well being.

Therefore, disallowing it is a matter of policy instead of Shariah per se.

The harm must be caused directly by the subject matter like cigarette smoking. The tobacco in cigarette is not harmful. Cigarette per se is harmful because of its chemical content.

Smoking it is even more harmful as it impacts others. Similarly debt is not harmful.

It is even a recognised component of Shariah. Debt trading is not harmful as it does not impact anyone else other than the traders doing the trading.

However, excessive debt taking may be harmful and this is relative to the capacity of each individual taking the debt.

All in all, many Hadith have directly and clearly expressed the need to avoid excessive debt but there is not one Hadith that directly and expressly prohibits debt trading at premium or discount.

I believe this to be the fact and we must, for the sake of the Ummah, move on from this non-issue. There are too many of us living in poverty, the world over, for us to be continuously distracted by it.

[Badlisyah Abdul Ghani is the ED and CEO of CIMB Islamic Bank Bhd. This column appeared in the 1 July 2013 issue of The Malaysian Reserve]