Sukuk and Screening of Stocks - Essay Example

The challenge lies in adapting instruments such a Sukuk in these mediums without compromising on the dictates of the Shariah. Of all the financial certificates transacted in banks outside the Islamic world, bonds are most amenable to the requisites of Shariah. Already many Islamic banks are issuing a variety of Sukuk (not all of which are Shariah compliant); but the best option of satisfying Islamic principles while also being able to integrate into global markets is through Sukuks issued as bonds.

Presently Islamic banks employ three mechanisms to showcase the compatibility of their Sukuks with conventional bonds. Firstly, the bond holders' ownership of Enterprise Assets clearly distinguish these Sukuks from interest-based bonds. The second mechanism is the distribution of profits generated by these enterprises at fixed percentages as per prevailing interest rates. The third mechanism is the assurance of capital protection, meaning that at least the principal will be returned to the investor.

In order for these Sukuk's to be Shariah compliant they have to answer some key questions. First, is the stipulated amount “in excess of the price of interest for the manager of the enterprise under the pretense that this is an incentive for good management?” Also, will the manager purchase the assets that is nominated in the Sukuk at its face value and not at its going-rate in the markets at the time of its redemption? If the answer to any such question is in the negative then the Sukuk is considered to have breached the Shariah rules.

In this respect the guidelines and deliberations given by the Shariah committee is a useful resource. Author Muhammad Taqi Usmani goes on to talk about how many banks in the Islamic world have failed in upkeeping the tradition of Shariah in order to attract investors. Presently there are loopholes in the system, exploiting which bank managers project a Sukuk as genuinely Shariah compliant, whereas in reality they are only nominally so. It is imperative that managers do not indulge in such practices.

The paper prepared by Nizam Yaquby titled 'Participation and Trading in Equities of Companies whose Main Business is Primarily Lawful But Fraught With Some Prohibited Transaction' highlights some of the tendencies on part of Islamic banks to neglect Shariah mandates in their pursuit for greater revenues. The ubiquitousness of Joint Stock Companies and the dealing of their stocks by banks throws open several dilemmas. With the Internet making purchase, holding and selling of such stocks quite easy, many banks in the Islamic world are indirectly trading in financial instruments that do not conform to the Shariah code.

Trading in stocks of Joint Stock Companies, also called Public Limited Companies, has elicited mixed reactions among Islamic scholars. One group views this practice as permissible provided “that the profits earned should be purged from unlawful gains”; while the other group finds it objectionable. Citing several legal maxims, scholars have either supported or opposed this practice. Some of these maxims are “The General need Takes the rule of specific Necessity; Mixture of Negligible Unlawful Part with Lawful Major Part; Majority Has the Ruling of the Whole, or the Majority Counts ; and What is Inescapable is tolerable”