Riyadh, Asharq Al-Awsat- Religious rulings issued by the jurisprudential authorities of some of Islamic and conventional banks, which offer Islamic products, are causing confusion among investors and dividing them along the multiple lines of these fatwas.
An example of this confusion is witnessed in some of the stocks circulated in the Saudi market mostly passed on by individual investors. At a time when public offering raised by Saudi companies is proliferating, shares are being categorized into haram [religiously prohibited] shares, [religiously] permitted shares, and mixed shares (a mixture of permitted and questionable shares).
Despite the importance of building investor confidence in the capital market, particularly in light of the exceptional performance of Saudi macroeconomic indicators for over three or four consecutive years, the conflicting fatwas issued by jurisprudential authorities with regards to the permission and prohibition of the shares of some companies are causing a degree of chaos and uncertainty within the market.
When a company raises an initial public offering [IPO], individual investors normally start questioning whether subscription in that particular company would be halal or haram. Is it pure or mixed? The situation is similar when it comes to banks and the extent to which they abide by the standards set by the Accounting and Auditing Organization for Islamic Financial Institutions [AAIOFI]. According to economic expert Dr. Sayed Bashir, in the wake of the collapse of the stock market in February 2006, the Saudi Capital Market Authority [CMA] strove to restore confidence. By taking several measures to increase market depth, including the approval of a large number of new IPOs (around 27 were put forward in 2007 alone), the number of listed companies in the Saudi capital market rose from 86 companies at the end of 2006 to more than 100 companies at present.
In addition, government shares were excluded from the circulation index, sectors were put to order, and the free index was launched. There is a dire need to increase the level of transparency and disclosure of the performance of shareholding companies, which will ultimately educate and raise the awareness of investors.
In the eyes of Mohammed bin Hamad al Afaliq, a banker and the director of a Sharia monitoring body in one of the Saudi banks, these questions and discussions are vital to installing a culture of dialogue and respect for differing viewpoints. However, it can potentially turn negative if it spirals into a vicious circle of arguments by non-specialists.
This controversy could partially be resolved, according to al Afaliq, if companies replace prohibited usury loans with Shariah-compliant facilities. This will diminish the number of prohibited companies, if not eradicate them in the near future, especially that the debate is confined to the jurisprudential criteria of mixed shares and making the profiteers liable for purifying the returns. Al Afaliq further explains that although the AAIOFI has set criteria for legitimate shares, the criteria for mixed shares differ from one bank to another. Surprisingly, each bank has its own criteria, which would differ from other banks (even when the shares of a particular company are going into the funds of another bank), in spite of the fact that they are all regulated by the same jurisprudential authority. So, how could this situation be untangled?
Banks, rightfully, attempt to influence jurisprudential authorities to sanction their preferred set of criteria, according to al Afaliq. But, it would be more reasonable also if the clerics gave member banks enough time to implement the change because immediate implementations could lead to more harm than reform.
The jurisprudential authorities of banks may disagree on the legitimacy of particular shares. Following any of the opinions of these authorities is acceptable, as long as the opinion has been formed by knowledgeable clerics. Religiously, only the state has the upper hand in resolving the disagreement, as the protector of the economy, through the Saudi Arabian Monetary Agency [SAMA]. However, SAMA should only do that through a supreme jurisprudential authority with the technical specialization in the matter in hand to determine the criteria of shares and implement it universally on all banks to bring order to Islamic banking practice.
Abdul Rahman al Jadaan, a director of jurisprudence review in one of the Saudi banks, agrees with al Afaliq’s analysis on the differing views of jurisprudential bodies in Islamic banks on the doctrinal level, especially when it comes to mixed corporate shares for specific projects.
Those corporations with mixed shares, al Jadaan elaborates, probably have taken loans with interest from traditional banks, which may be prohibited. Those who prohibit it based their judgment on the principle of prohibiting all transactions that are tapped by usury. While those who sanction it have set controls, which if not followed, would render those shares prohibited.
One of the most important controls agreed upon is a condition to dispose of any prohibited revenue by the owner of the share (through the process of purification), whether it is an investor or a trader. Any benefit gained in any way from this prohibited revenue is impermissible.
According to al Jadaan, there are various opinions and interpretations of the conditions for “purification”, which are related to the ratio of the prohibited elements to the total assets and revenues of the company, in addition to disclosure and vigilance in the process of purification. The sanctioning of mixed shares is only permissible if individuals and institutions follow the conditions for purification set by knowledgeable clerics. The degree to which individuals will follow these conditions is left to their due diligence and their understanding of the issues. However, with regards to banks and corporations claiming to be Sharia compliant and entrusted with Muslim capital, the liability is twofold because they have a responsibility towards developing and supporting Islamic banking, as well as towards the individuals who trusted their Islamic credentials. Nevertheless, al Jadaan believes that some Islamic banks are complacent when it comes to purification and seek ways to go evade these conditions, despite purification being the seminal factor distinguishing between halal and haram. This could potentially be detrimental if jurisprudence authorities put an end to these pretexts, halting Muslim investment in these companies.
These funds, according to al Jadaan, will face a number of challenges, including the differing criteria and controls for purification. This will allow for interpretations for companies that would alter their financial lists to become permissible.
The varying mechanisms of purification may also open the door for manipulation by financial institutions that may include “purified” sums in their disposable profits. In addition to weak internal oversight, as most of these financial institutions joined the Islamic banking sector recently; they do not have competent monitoring jurisprudence bodies, and even when they do, they are not well established.