How do you eliminate Riba?
I had always wondered how a bond could be Islamic as the main feature of income generated from a bond is in the form of interest / riba. So the other day when I sent out Much Ado About Bonds, I was still slightly baffled about the concept, but knowing that more information was on the way, it sparked a little more investigating interest.
Today the Star Newspaper released news on the issuance of the Ijarah papers. Apparently these bonds are based on the Al-Ijarah concept where sale and leaseback is practised.
A little background on bonds first. Bonds fall under fixed income securities or debt securities as opposed to equities (which are traded on
Bursa Malaysia
As opposed to equities, which earn dividend, an investor in bonds or debt, earns interest. When we buy a share (equity), the dividend that is paid to us is based on the company’s performance. The higher the profit, the higher the payout on dividends. You are therefore, a shareholder of the company, anticipating risk as any company would do. To redeem shares, shareholders sell them in the market, and depending on the price (as compared to the price they purchase initially, either make a profit or a loss. If you do not sell, you remain a shareholder of the company and earn dividend at a pre-determined frequency, until the company, if ever, winds up.
If we purchase bonds, we will purchase at a given coupon price, and will be paid interest (percentage of the coupon value) on a regular basis, depending on the make-up of the bond. The bond also has a maturity date, where we are paid the back the face value of the bond. The interest rate is pre-determined. whether or not the company does well, we are still recipients of interest. When the bonds mature, we earn the face value of the bond and interest payments cease. We are known as a creditor, as if we lend money to the company.
The general rule is, the more debt a company issues, the higher the risk of bankruptcy, as you can see, interest payments are fixed, no matter how well the company performs. This is basically the same as the bonds issued by our central bank. We earn interest on conventional bonds.
The Al-Ijarah bonds issued by BNM, will have investors earning rental. How does this work?
(1) BNM issues the Sukuk Ijarah for investors to purchase.
(2) Investors purchase Sukuk Ijarah at the offer price
(3) Proceeds of the sale will be used to purchase assets for the central bank, which in turn generate income.
(4) Rental of these purchases will be paid to investors, who in fact, had lent to BNM to make these purchases.
(5) At maturity, investors sell their bonds back to BNM, at a pre-determined rate.
The purchase is there, the creditors and lending concepts exist, the maturity date is inherent: an exact replica of the conventional bond, all except, riba has been eliminated. Pure an utter genius!
The Ijarah bonds are being issued next Thursday. This may be an interesting investment for those with extra cash. L don’t think I’m one of them.
In Prophet Muhammad’s farewell sermon, he highlighted and reinforced what the Qur’an says on interest / riba, and warned his followers to stay away from the concept at all costs. Even one who assists in a contract that is riba-based has wronged this important concept of Islam. This has given me something to think about, working in an International Bank.
Salaam all, hope you think about the above and make the right investment decisions.
February 13th, 2006 at 8:39 pm
Wah! What an informative posts. See that you have mastered the skills for inserting the links! Keep it up!
February 13th, 2006 at 10:21 pm
Assalam.
in need of an opinion regarding one of the financial instruments so lavishly and ‘legally’ available in our country - the stock exchange.
my concern, as i have looooong wanted to solicit an expert opinion on only that i haven’t found just the proper channel to inquire, is pretty much related to the concept of ‘HALAL’ status awarded to some numerable companies listed on the main board. let us put aside all the issues regarding bonds or whatever there are such instances of monetary games schemes.
i must admit that the effort made by the government or the related regulatory body by far have been quite encouraging and laudable, in terms of putting in light the
‘commercializablity’ (phewh!) of those traded shares and funds in view of the viability and sanctity of islamic definition of ‘halalness’.
but, one pertinent point that keeps ricocheting in the labyrinth of my kepala otak is that, how are they supposed to be halal if these syariah-certified companies are on the same trading board with the non-syariah-certified? it’s like… they are all mingled up altogether - analogous to hatching eggs of different lays in one basket. one that smells would definitely contaminate the others. one very fact that i would vouch for is the halal status of each of the individual islamic-based funds, but do you not think that they are possibly, in fact, indeed mixed up, thus such halal funds get sort of, excuse my french but, DIRTIED when they are somehow traded, puchased or sold by one party or individual? bercampur-aduk gituu…
whatever happened to that part of islamic teaching that said if even one out of the whole bunch is h***m, then the whole bunch end up the same? err.. err.. deutsche bank tu ok ke??