ISLAMIC FINANCE & SHARIAH LAW : A VIABLE ALTERNATIVE Dr Mohd Daud Bakar Managing Director

1. ISLAMIC FINANCE & SHARIAH LAW : A VIABLE ALTERNATIVE Dr Mohd Daud Bakar Managing Director Amanie Islamic Finance Consultancy and Education, LLC, DIFC www.amaniedubai.com

2. Islamic Finance and Shariah Law • Islamic finance is both an old and new phenomenon • It is an old phenomenon because it is based on the contracts which were in practice for the last 1,400 years ago • It is a new phenomenon because these contracts are structured in modern form and being presented by institutions which are both financial intermediary and licensed entities • The contracts and their inherent implications are always guided by the Shariah principles

3. Shariah Principles • Shariah principles are those Divide guidance which are embodied in the Qur'an and the Traditions of the Prophet Muhammad (PBUH) • Juristically speaking, these principles also include legal maxims and fatwas issued by the Muslim scholars based on their independent reasoning or Ijtihad • Guided by the Divide guidance, Shariah principles are also manifestation of the creative thinking of Muslim scholars throughout the history • However, there is no standard codification of Shariah principles either at each sovereign or global level(the case of Shamil Bank in English Court of Law and the case of MusharakahMutanaqisah in UAE laws) • Shariah standards in modern time could be represented by AAOIFI Shariah Standards or the respective fatwas issued by respective central banks, where relevant.

4. Is Islamic Finance Guided by Shariah Law a viable alternative? • It is clear that Islamic finance must invoke either trading or investment in real assets or economic activities. For a trading or investment activity to be compliant, it has not only to be transparent in terms of its underlying asset/service/project and its terms but it has also to be traceable at any point in time. A Sukuk instrument, for example, must be asset or project based which is transparent to the investors and the guarantors (if any) as well as traceable to all the stakeholders until it expires. Compare this with the toxic assets in mortgage loans and the Credit Default Swap (CDS) as the guarantee overlay to securities issued on the mortgage loans.

5. Is Islamic Finance Guided by Shariah Law a viable alternative? • The features of transparency and traceability, which are essentially due to the Shari’ah and religious requirements, have made Islamic finance not directly vulnerable to the global financial crisis as Islamic finance cannot deal with any financial deal which is ‘money for money’ that is not asset-based as well as not transparent and traceable. • However, Islamic finance, for all intents and purposes, is also vulnerable to global financial crisis due to non-performing financing or NPL due to its credit policies and prudential standards ( instead of Shari’ah main principles)

6. Amanie Islamic Finance Consultancy and Education, LLC, DIFC No. 44, Level 41,Emirates Towers, Syiekh Zayed Road Dubai, UAE Tel: +971 4 319 7688 www.amaniedubai.com Amanie Business Solutions, KL Suite 35.01 Level 35, Menara Ambank, No 8 Jalan Yap Kwan Seng 50450 Kuala Lumpur, Malaysia Tel: +603 2164 1651 www.amanie.com.my