I think it is a ruse to circumvent the Shariah. I also think it is a violation of transparency laws.
DR YAHIA ABDUL-RAHMAN
The remit of Shariah scholars is to read the legal documents governing Islamic financial transactions and ensure they conform to their interpretation of Shariah. Legal documents are formal, and indeed form and detail are important if gharar – contractual uncertainty – is to be avoided. Therefore form matters and should not be taken lightly. Some Islamic economists criticize Shariah compliant financial products as lacking substance as they merely mimic their conventional equivalents and are not distinctive in financial terms. Indeed they are regarded as involving hila, a device to ensure that the letter of Shariah is observed, without much difference in the practice. Although few can deny that it would be preferable to have distinctive risk and return characteristics for Shariah compliant products, this is neither a necessity nor indeed sufficient condition for Shariah acceptability. PROFESSOR RODNEY WILSON Director of Postgraduate Studies, Durham University
Islamic finance as currently practised is about virtually nothing other than “products that follow the form but violate the substance of the Shariah:” feats of financial legerdemain performed by banks for banks.
But strangely enough, it is through using new entities such as the US LLC and the UK LLP as special purpose vehicles that truly Shariah compliant products not only become possible, but virtually automatic.
If productive assets are held in an LLC or LLP “wrapper” and the asset’s production – or revenues from the sale of production – are shared between the provider and the user of capital, then the result is not only an arguably optimal enterprise model, but also “Musharakah.”
In most cases it probably would not even need a Shariah board to approve the model on a case-by-case basis – it is simply and intuitively obvious.
While this model does not involve credit institutions in manufacturing credit, as now, there is still a value-added role for investment institutions formerly known as banks in bringing together investors with investments in such entities.
CHRIS COOK: Principal Partnerships Consulting LLP
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