Can a contractual partnership be entered into with a non-Muslim, or can non-Muslims enter into a Shariah compliant Musharakah among themselves?
Keeping the banking perspective in mind, let me expand the depth of the question to whether an Islamic bank can enter into a Musharakah agreement with a conventional bank or whether two conventional banks can enter into a Shariah compliant Musharakah agreement, or into any other Islamic financing and investment contract for that matter. Aren’t these questions stimulating and may have already creeped into the minds of some readers?
So be apprised that there is no Shariah restriction if a Muslim trades with a non-Muslim or invests with one. Similarly, an Islamic bank can enter into a Musharakah agreement with a conventional bank. Nevertheless, the following aspects must be kept in view for doing so:
a. The objective of the Musharakah agreement must not be to deal in goods or services which are repugnant to clearly laid-out Shariah principles on trade and investment. These have been explained a few times in ‘Back to Basics’ and are common knowledge.
b. There must be some sort of assurance that the money being invested in a Musharakah is not tainted, ie it is not stolen or earned through unfair means. Now this is a bit tricky. Imagine you are willing to take a non-Muslim investor and he likes your business plan and you are about to close the Musharakah deal with him.
Do you think you will be in a position at that stage to ask a sensitive question for him to prove that the equity he is about to inject is pure and clean? Of course not, since you do not want to jeopardize the entire effort you have put into convincing this investor.
So, what should you do? As for the origin and legality of funds, thanks to global regulations on anti-money laundering (AML), it has become much easier nowadays to be assured that these are legitimate, provided you do not accept cash and insist on a bank-to-bank transfer. In the olden times, it was safely assumed that the counterparty is investing clean money. This is based on the Islamic principle not to be suspicious of anyone since it is regarded as a sin. However, I imagine some rudimentary know-your-customer (KYC) process must have been in place.
Do you think the Shariah condition of pure money is applicable only when a Muslim is entering into a Musharakah agreement with a non-Muslim? Indeed not. This is applicable universally whether both parties are Muslim, one non-Muslim or both non-Muslims.
This Shariah condition also strongly brings to the fore that the elements of KYC and AML have been embedded in Islamic finance since the 7th century AD whereas the world has now learned their value and importance.
c. The non-Muslim person or conventional bank must provide assurance that it shall not seek to apply any Shariah repugnant condition or demand such as a prefixed return or guarantee for the capital from the counterparty and shall fully respect the principles of Shariah on the Musharakah even in difficult situations. This is very important in cases where consortium financing is carried out Islamically but the agent bank representing the group is a conventional financial institution. Equally, in a Sukuk transaction, if the mandated lead arranger bank is a conventional financial institution, it must be particularly ensured that the documentation has been reviewed and approved by a set of reputable Shariah scholars or a Shariah board and the movement of funds (subscription, allotment, periodic returns and redemption) must be in accordance with the established Shariah principles.
The annual external Shariah audit and certification mechanism for such transactions could be a reliable tool to reassure investors that they continue to earn Halal profits out of their investments. All of this should be equally applied in a situation where the client demands Islamic consortium financing but the syndicate does not include any Islamic bank as a member. A syndicated Musharakah transaction is usually hybrid in nature as Musharakah–Wakalah since the group needs to appoint one of the banks as the agent to execute the documentation with the obligor and to manage the flow of funds both ways during the entire tenure. Most of the time, the lead bank also acts as the agent bank since it was preferred by the client based on favorable commercial terms and trust level, but it is not always necessary.
Care must be taken while appointing an agent bank for making it as the paid agency where all consortium members contribute to pay the agency fee to the agent bank. This is because as per Shariah principles, the unpaid agency is revocable whereas the transaction of that magnitude must be established on firm irrevocable grounds. There is no Shariah restriction on the agency fee amount and payment whether it should be a one-time upfront payment or spread in phases. To conclude the subject, the Shariah principles — being pro-business — have the flexibility of allowing Musharakah with and among non-Muslims and with and between conventional banks, provided all Islamic financing principles on Musharakah are adhered to in letter and spirit.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: We shall continue our discussion on contractual partnerships for the next few weeks.