What is the Shari’a?
The Shari’a is a body of rules based upon the Quran. Complying with these rules forms the basis of modern Islamic finance.
In the Quran, there is a great amount of guidance as to how life should be lived, covering many topics. In relation to finance, some of the main rules can be summarized as:
- Transactions should not involve matters that are haram. This means avoiding forbidden activities such as making or trading in alcohol, prostitution, certain food products and so on.
- Transactions should avoid gharar, – which means that they need to be transparent, clear and simple. They should not involve deception, uncertainty or undue risk.
- Transactions should avoid riba. Riba, here means the levying of interest on a fixed and / or time-charged basis which is considered usury. Contracts based upon charging interest day-by-day typically ignore the principle that risks and rewards in business should be shared by the parties involved – including the financier.
- Money should not be used simply to make more money.
What does this mean in practice?
Islamic finance is not just a matter of charging fees instead of charging interest whilst still aiming to come to a similar economic result.
It is not a matter of changing the labels.
Transactions between a financier and traders (exporters, importers) are permitted. But these transactions need to be executed on a risk and reward sharing basis. This means that there is a working partnership between the financier and his clients and a focus on jointly-working towards generating value together which is then shared.
This is a philosophy not a matter of labels.
What does Shari’a compliant trade finance look like?
PrimaDollar’s trade finance products have been reviewed by Islamic scholars and found to be compliant with the principles of the Shari’a.
There are key features of our products that have led scholars to become comfortable with our approach:
- We use standard contracts which we do not amend. This means that there is a stable body of business that can be assessed and future business will be consistent with existing business.
- PrimaDollar and the exporter enter into a joint venture, working together using a musharaka structure to secure and collect the payment due from the buyer.
- PrimaDollar’s fees are capped at a low, fixed amount and any costs above this amount are borne absolutely by PrimaDollar without a right to recover from the exporter.
- The basis of charging is a fixed fee that is applied to the transaction without reference to floating interest rates or fluctuating account balances over time.
- In some situations, PrimaDollar will also purchase and sell the underlying goods as part of the trade relationship.
Shari’a compliance is not free
A financier working in compliance with Shari’a principles should accept that the economics of the business are different to the economics of a finance business that is run on a conventional basis. This comes from the requirement to share risks and rewards.
As evidenced above, PrimaDollar’s trade finance products are not the same as conventional solutions. Many of our clients proudly do not “borrow” and work only with Islamic financial institutions. PrimaDollar has also been able to work directly with banks to support their customers, including on a joint venture basis – read here about our relationship with Agrani Bank and with FSIBL in Bangladesh. FSIBL is an Islamic banking institution.
How can I find out more?
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