SHARIAsource

This fatwa was drafted in response to an Indonesian government request for an explanation on flexibility in the publication and management of a government-sanctioned State Shari'a Security on Agency. It defines a State Shari'a Security on Agency (Surat Berharga Syariah Negara Wakalah) as a state shari'a security published in accordance with shari'a principles, as evidence of partial ownership of assets in an investment activity managed by a publishing company as an agent of the holder of the state shari'a security. The fatwa permits the government to publish a state shari'a security directly or via a publishing company. If a publishing company is elected, it must declare that it is acting as a representative of the holder of the state shari'a security, for the purposes of managing profits resulting from the publication of a state shari'a security. Publishing companies must also publish agency state shari'a securities and can guarantee investors.

This fatwa acknowledges a lack of means available to assist shari'a financial institutions (Lembaga Keuangan Syariah) that encounter liquidity problems because of gaps in time between funds accumulated in the short term, and funds distributed in the medium-long term.

The fatwa defines a shari'a security repurchase agreement (Repo SBS) as the sale of a shari'a security by a shari'a financial institution to another shari'a financial institution, or to a conventional institution, and vice-versa, on the condition that the seller will repurchase it (and the purchaser will resell it). It mandates that a Repo SBS transaction is to be executed in this way: as an al-bai' ma'a al-wa'd bi al-syira.

This fatwa acknowledges that society and shari'a financial institutions would benefit from an explanation on the transfer of murabahah financing (customer debts or accounts payable) between shari'a financial institutions. The fatwa outlines three contractual options for transferring murabahah financing debts:

1. Akad Hawalah bil Ujrah: a promissory note with a financial incentive for the party assuming the debt;
2. Akad Ijarah Muntahiyah bi Al-Tamlik: financing that uses a rental agreement accompanied by an undertaking to transfer ownership of a rental item to the party renting at the conclusion of the term of the rental agreement;
3. Akad Musyarakah Muntanaqishah: where the capital of one investor in a musyarakah financing agreement is inadequate because their portion has been purchased by another party incrementally.

In regards to a party seeking to transfer accounts payable pursuant to a murabahah agreement, a party may do so in exchange for an item of good value (tsaman), but not a good sum of money (tsaman) because this constitutes bai' al-dain al-mu'ajjal li ghair al-madin bi tsaman hall (selling accounts payable that are not yet due to someone other than the debtor for a cash price).

This fatwa acknowledges that undertakings often form part of a financial and business transaction, and that the shari'a financial industry, as well as society in general, would benefit from an explanation of contractual obligations in shari'a financial and business transactions.

The fatwa states that such undertakings are binding and enforceable, provided the following conditions are met:

1. The party making the undertaking (wa'id) has legal standing (ahliyyat al-wujub wa al-ada');
2. In the event an undertaking is made by a party without legal standing, the validity of the undertaking depends on the permission granted by their guardian; and
3. The wa'id must have the ability and authority to make an undertaking (mau'ud bih).

Moreover, that:

1. the undertaking (wa'd) must be in writing in a contractual agreement;
2. the undertaking must be related to something that must be met or implemented by the person to whom the undertaking is made (mau'ud);
3. the thing promised (mau'ud bih) may not conflict with shari'a;
4. the contents of point 2 may also not conflict with shari'a; and
5. the mau'ud must already have met or implemented the condition in point 2.

This fatwa acknowledges the reality that shari'a financial institutions may need to request advance payments from customers to assure themselves during the execution of a murabahah financial agreement. The fatwa states that in order to prevent loss on the part of one of the parties, as well as to ensure shari'a-compliance, a set of guidelines for shari'a financial institutions are required.

More specifically, the fatwa permits a shari'a financial institution to receive an advance payment from a customer, on the condition that the parties agree to the sum of money. The monies can then be used in the event the customer terminates the agreement or the shari'a financial institution incurs some other form of financial damages.

This fatwa acknowledges shari'a bank account financing (Pembiayaan Rekening Koran Syariah - PRKS) as a form of financing based on shari'a principles. It acknowledges the partnership involved in creating such an agreement, as well as how profits and losses are borne by the parties to the agreement, pursuant to an agreed-upon ratio. In the event of a dispute, and assuming initial deliberative measures prove unsuccessful, the parties to such an agreement are to resolve that dispute before a religious court or the Shari'a Arbitration Body (Badan Arbitrasi Syariah).

This fatwa mandates that a party seeking to execute an al-Ijarah al-Muntahiah bi al-Tamlik agreement must first execute an Ijarah agreement, noting that an agreement to transfer ownership, either via a sale-purchase agreement or a gift, can only be executed after the Ijarah term has come to an end.

This fatwa permits and defines shari'a multi-benefit vouchers as commercial vouchers offered to consumers to obtain access to shari'a-friendly multimedia education and entertainment (edutainment), as well as other benefits, such as:

1. long-term investment savings to encourage consumers to retain shari'a financial services;
2. discounted halal products; and
3. raffled bonus rewards.

This fatwa permits the payment of shari'a-friendly retirement/pension annuities.

This fatwa acknowledges that network marketing and multi-level marketing are sales methods already adopted by society. Accordingly, in order to prevent such modes of sale from causing societal damage, a shari'a-friendly mode of multi-level marketing is necessary. The fatwa defines shari'a multi-level direct sales as a mode of selling goods or services via a marketing network from individuals and corporations to other individuals and corporations. Among the many conditions it sets, the fatwa mandates that goods and services sold via multi-level marketing must be real, may not be haram (forbidden), or used for a haram purpose, may not be subject to excessive mark-ups and interest.

This fatwa defines a sale and lease back as the sale and purchase of an asset, followed by the purchaser then leasing the asset to the vendor. It also states that such an arrangement is permissble at law.

This fatwa applies to those shari'a banking customers who default on contractual repayments. It notes that customers who default because of a force majeure may not be sanctioned, however, those who default for other reasons within their control may incur a financial sanction. The fatwa states that such sanctions are based on the principle of ta'zir, that being a sanction with the intent of ensuring the customer is more disciplined in executing their contractual obligations.

This fatwa borrows the definition of 'mutual fund' (reksa dana) from Law No. 8 of 1995 on Capital Market, defining it as:

'... a container used to collect funds from society financiers to be reinvested in a securities portfolio by an Investment Manager.'

The fatwa qualifies that there are many components of a conventional mutual fund that contravene Islamic shari'a, from a contractual perspective, as well as from investment and profit-distribution perspectives.

Among other points, the fatwa stipulates that mutual funds may not be used to invest in non-halal investments, such as gambling enterprises, conventional financial institutes that rely on interest-bearing banking activities, non-halal food and beverage distributors and producers, and insider trading. Profits must also be divided proportionally to financiers.

This fatwa acknowledges the Indonesian public's need for financial insurance, but notes that shari'a-friendly insurance agreements must not contain anything that is deliberately misleading, or that pertains to gambling, interest (riba), mistreatment, bribery, non-halal items or immorality.

The fatwa stipulates that two types of contract between a customer and insurance-provider are permissible:

1. tijarah (mudharabah - sale-purchase), whereby the insurance-provider acts as a manager and the customer is the policy-holder; and
2. tabarru' (hibah - gift), whereby a customer provides a bequest to be used to assist another affected customer.

The fatwa also stipulates that a tijarah agreement may be amended to become a tabarru' agreement if the party whose rights are denied voluntarily relinquishes those rights, thereby absolving the party who is yet to execute their obligations. A tabarru' agreement, however, may not be amended to become a tijarah agreement.

This fatwa defines a parallel istishna' sale-purchase agreement as an istishna' agreement between a customer and a shari'a financial institute where, in order to meet its obligations to the customer, the shari'a financial institute sub-contracts those obligations out to another party. Despite the sub-contracting arrangement, the shari'a financial institute remains liable to the customer for the fulfilment of the terms of the agreement.

The fatwa permits the execution of such agreements provided the following conditions are met:

1. the conditions of the first istishna' agreement are in no way contingent on those of the second agreement;
2. the shari'a financial institute is not permitted to glean the margin during construction from the customer because such a practice is contrary to shari'a principles; and
3. all conditions that apply to istishna' agreements apply to parallel istishna' agreements.

This fatwa acknowledges that the murabahah agreements facilitated by shari'a financial institutes are generally repaid in instalments within a term agreed upon by the shari'a financial institute and customer. In the event that a customer repays their arrears within the agreed upon term or sooner, customers often request that their shari'a financial institute provide them with a discount on the total amount owing. The fatwa permits the provision of such a discount, acknowledging that it is permissible in Islam. How much of a discount the shari'a financial institute grants, however, is at the institute's discretion.

This fatwa defines shari'a bank account financing as the financing of a bank account purusant to shari'a principles. Such an account is financed via an agreement or commitment by a shari'a financial institute to a customer to implement something (wa'd) and the transferral of authority from the shari'a financial institute to that customer to conduct a transaction pursuant to the wishes of the customer (wakalah). This entails either the purchasing of something sought by the customer and sold in a murabahah fashion to the customer, or the hiring of an object or service sought by the customer and rented to that customer. The quantum of the profit requested by the shari'a financial institute is provided for in the agreement between the parties.

This fatwa permits shari'a financial institutes financing the hajj for its customers to obtain a service dividend (ujrah) pursuant to the principle of al-Ijarah, per Fatwa No. 9 of 2000 on Ijarah Financing. If necessary, a shari'a financial institute can also provide a customer with an advanced payment to finance their hajj, pursuant to the prinipcle of al-Qardh, per Fatwa No. 19 of 2001 on al-Qardh. Such an advanced payment, however, may not be made a condition of such an agreement. Moreover, the quantum of the al-Ijarah dividend may not be based on the al-Qardh advanced payment given by the shari'a financial institute to the customer.

This fatwa acknowledges that shari'a banks can experience a lack of liquidity due to either a difference in timeframe between receipt and depositing of funds, or collated funds not yet being able to be distributed to the relevant parties. Therefore, the fatwa states that, in order to improve fund management efficiency, banks that conduct activities pursuant to shari'a principles require an interbank financial market.

The fatwa specifies that an interbank financial market based on shari'a principles is one that conducts inter-participant short-term financial transactional activities based on shari'a principles. Eligible participants are shari'a banks as lenders or borrowers, or conventional banks as lenders.

Contracts that may be used in interbank financial markets based on shari'a principles are:

1. Mudharabah (Muqaradhah)/Qiradh;
2. Musyarakah;
3. Qardh;
4. Wadi'ah; and
5. Al-Sharf.

This fatwa states that interest-bearing interbank investment certificates are contrary to shari'a. Investment certificates based on a Mudharabah agreement (Sertifikat Investasi Mudharabah Antarbank - Interbank Mudharabah Investment Certificate), however, are not. An Interbank Mudharabah Investment Certificate may only change hands once after it has been purchased. Interbank Mudharabah Investment Certificate transactors may be:

1. shari'a banks as lenders and borrowers; and
2. conventional banks as lenders.