Wa'd

Wa’d is a unilateral promise and is considered as a voluntary contract. Al-Zarqa’ opines that it does not convey any binding effect on the promisor hence they are not obliged to fulfil the promise and will not be liable in a case where they fail to fulfil the promise made to the promisee.

The BNM Shariah Council in its 49th meeting held on 28th April 2005 / 19th Rabiul Awal 1426 resolved that an Islamic banking institution is allowed to enter into forward foreign currency transaction based on unileteral binding promise (binding only on the promisor) and the compensation for breaching of promise could be implemented. This permissibility is only applicable for currency hedging purposes. Such a transaction may be arranged between the Islamic banking institution and its customers, or between the Islamic banking institutions, or between the Islamic banking institutions and conventional banking institutions.

The fatwa of Islamic Bank of Jordan (Jordan Islamic Bank, al-Fatawa al-Syar’iyyah, 2001, v2, p.29) states that the bilateral promise made in currency exchange where it bonds both parties to the contract, is generally prohibited (umum al-nahyi) as it amounts to bai` al-kali’ bi al-kali’ (sale of debt with debt). However, if the promise is made unilaterally i.e. binding only on one party who made the promise, then the transaction is allowed.

Ibn Hazm (Ibn Hazm, al-Muhalla, Dar al-Turath, Cairo, V.9, p.583) has also allowed the promise made to sell and purchase of currency with an agreed price on the same day followed by actual conclusion of the contract afterward. The parties is also given the choice to proceed or not to proceed with the agreement made and thus do not conclude the actual contract. This is permissible according to Ibn Hazm as the promise is not binding on the parties.

Having said all that, it is clear that Wa'd is a non-binding unilateral promise meaning that in the event the promisor decides to rescind the promise, the promisee is in no position to demand compensation. In reality however, most banks demand compensation for breach of promise. How is it non-binding then?

Standardisation of Shariah Rulings

Bank Negara Malaysia introduced the “Shariah Parameters” with the objective of providing a comprehensive understanding of the principles and basis of adopting Shariah contracts for Islamic finance products in order to standardise the Islamic finance practices. The parameters are designed to clarify concepts, principles and conditions of Shariah contracts and provide the basis for decisions on matters relating to conditions, mechanisms and implementation of Shariah contracts.

Standardisation does not mean restrictions. It simply means things are done in a more consistent manner, avoiding confusion and disputes. I would think reaching a consensus on Shariah rulings would not be such a big problem as many scholars are already sitting on committees in different “Shariah jurisdictions”,* which often come up with different fatwas/rulings.

Standardisation will also enable a better understanding of Shariah based finance among the newcomers to the industry. It will eliminate confusion and make it easier to grasp the principles that govern the industry. Documentation and structures will be more comprehendible and legal disputes can be settled in a more orderly and consistent manner.

Will standardisation create a straightjacket and stifle creativity? I doubt so. In fact it will enable creativity to be undertaken more systematically in the presence of consistent guidelines and parameters.

With this standardisation, a Shariah decision made in Bahrain, Abu Dhabi, Kuala Lumpur or even London will be understood, accepted and applicable globally. This will enhance the efficiency and effectiveness of the industry and hopefully will open up more avenues for innovation and growth.

Standardisation will eliminate the Malaysian standard, GCC standard etc. It will create just one global standard and that bodes well for the industry.

*By Shariah jurisdictions I mean Malaysia, GCC and Europe/North America where the fatwas tend to be different depending on the Mazhab and the scholars’ individual interpretation.

Two of a Kind

All of Malaysia’s anchor banks have Islamic subsidiaries. Three of the foreign conventional banks in Malaysia have Islamic subsidiaries. When BNM directed banks to set up stand alone subsidiaries in place of the Islamic windows, it effectively doubled the number of banks in Malaysia. The country’s sole building society is re-inventing themselves as an Islamic financial institution. A large co-cooperative bank “converted” to Islamic banking some years ago.

Call me a sceptic, an unbeliever but all I see from this is just increasing the number of banks instead of increasing the number of Islamic banks. Why do I say this?

First and foremost, the products are almost identical save for the name and legal documentation. Even the pricing is almost identical. How can that be? The objective of the financial products is the same, no argument about it but the means are not. It is ok to sell lemonade at the same price as beer but it is not possible to make lemonade using the same ingredients as beer.

Secondly, the Islamic subsidiaries are sometimes still treated like a window whereby they are not allowed to compete with the mother bank. What is the purpose of having a separate entity if it is not allowed to act independently? Some of the Islamic subsidiaries’ products are evaluated and approved by conventional mother bank’s product committee. This is akin to getting one’s product approved by a competitor!

Thirdly, the risks associated with Islamic banking are similar yet different from that of a conventional banking system. The fact is that the risks undertaken in a trade or partnership based transaction cannot be identical to that of a debt based transaction. But yet the credit and risk management process in some Islamic subsidiaries are undertaken by the conventional mother bank. Anomaly?

Ok, I’m a sceptic. Or maybe I just don’t see Shariah based banking the same way as the other bankers do. But I strongly believe that the same mindset and approach cannot be used to run distinctly different business models.