According to the question, the contract between Nima government and APC provides that APC funds the port’s construction on the condition that the ownership of the port once completed

 

, will be transferred to partnership owned equally (50% – 50%) between the two parties. In other words, Nima owns the port while APC finances it till completion. Once completed, the port will be owned in a partnership relation between the two parties. These facts give two directions.

The first option is that the contract might be considered “ Restricted Mudaraba ” in which APC is the investor who has the capital and financing the construction of the port “rabb al-maal”. While Nima government is the “mudaraib/the managing partner” who would manage the construction of the port and supervise it. However, it is mentioned in the question that APC will build the port and initially operate it –which would likely weaken the classification of the contract as “mudarabah” since no labor or management shared by Nima. It is restricted because it is formed for a specific business and that is the construction of the port and limited by time which is the completion of the construction. It is also limited in place which is a port in Nima. (see: Thomas & Thofeek). However, it does not justify the (50%-50%) ownership of the project and Nima participates nothing in it, which leads to more accurate discerption of the contract and that is “ Musharaka ”.

It seems that the contract is “ Diminishing Musharaka/ Decilining-balancing partnership ” by “Shrikatul ‘aqd” as the contract indicates the condition of the (50%-50%) ownership between the parties once the port is complete, which is a declining-balance partnership comprises a contract of property ownership as Nima owns the port. However, the situation between Nima and APC is quite similar to build-operate-transfer (BOT) projects that was used in Istanbul, Malaysia and Iran, in which Musharaka projects certificates are issued and indicate a pro rata share in project’s ownership, just like the situation in Nima case. (see: Thomas & Thofeek, page 57).

The 10 years’ duration of ownership does not cause any problem in the contract itself, however, it says that the all profits will be shared between Nima and APC, while losses will be borne entirely by the Nima government. According to Islamic Law, each partner must bear its liability of losses according to their contributed capitals (see: Iqbal and Mirakhor, page 92).

However, in Iqbal and Mirkhaor- page 92 it says that “if a party has not invested any capital in the partnership – which is the case for Nima-, they are not liable for the loss” and “the capital investment – which APC did- is subject to the risk of loss of capital, but any investment of labor or time –which Nima did by managing the project- is limited to the loss of the time invested and the loss of capital is nor required to be shared by such partner”.

In Nyazee, page 71, the principal provides that “wealth is a basis for entitlement to profit along with a corresponding liability for bearing loss”. This principle is applied in the entire Islamic law of contract.

This means that APC condition is illegal in Islamic law since they are the capital investor and the liability of loss in capital applies on them not on Nima. In addition, in contract partnership, profits per partner may be greater or less than proportionate to capital contribution plus work, however, the liability for loss may not be altered contractually. And that what APC did in the contract. It could be said that if Nima made that condition to itself as the losses would be borne by APC, this would be a valid and acceptable condition under the facts mentioned above.

Part (2)

Regarding the most appropriate Islamic contract/financing option relevant to the

construction of the toll bridge, it would be “Istisna” in which is considered as a “Partnership in

Manufacturing” according to (see: Iqbal and Mirakhor, page 86), and regarded as kind of sale

“Manufacture Contract” or even a complex transaction in other references. (see: Thomas & Kraty,

page 102).

One of the reasons for this selection is that istisna is the suitable way to facilitate the

manufacturing or the construction of an asset at the request of the buyer which is Nima in this case.

In addition, istisna nature gives the flexibility required for such construction as both parties agree

on fixing a price and agree on the specification of the bridge intended to be manufactured. Also,

at the time of delivery if the bridge does not condom to the specifications, Nima has the right to

retract the contract (Nima is the strongest party in such contract).

Concerning the payment terms, istisna gives a lot of flexibility as it is not necessary that

the price be paid in advance. In addition, it is not necessary that the price be paid at the time of

delivery and both parties can agree on the schedule of the payment convenient to both and the

payment also can be in installment.

(see: Iqbal and Mirakhor, page 86)

Part (3)

The construction of the toll bridge project would arise an issue that must be dealt according to

Shari’ah. This issue is regarding the clearance of private homes and lands owned by citizens of

Nima whom hold valid and registered title. The shari’ah standard in this regard relies on the OIC

Fiqh Council Resolution No.29 (4/4) concerning eminent domain. According to the mentioned

resolution, there are four conditions to expropriate a private property which are:

1- Expropriation of these homes and lands must be done by making immediate and just

compensation, determined by qualified experts and such compensations is no less than the

market value of similar property.

2- The expropriation is carried out by public authority (which means Nima in this case) or by

Nima representative in this field. That means the separate contractor to construct the bridge

cannot do the expropriation himself and Nima has to do it as it represents the public

authority.

3- The expropriation must be made in public interest. This is applicable in Nima case as the

toll bridge is a public service and project aims to rebuild the economy of Nima.

4- The expropriated homes and lands shall not be exploited for private or public investments

projects and that the expropriation should not be carried out prior to its justifiable time.

This condition may arise the question of the nature of the toll bridge: is it a public interest

project as it aims to rebuild the crashed economy of Nima? Or is it public investment as it

applies “toll”? This sounds tricky, however, bearing in mind the bad shape of Nima

economy and the necessity for such projects, it would be a public interest project despite

the toll applies.

The resolution indicates that if all or some of these conditions are violated, the

expropriation will be regarded as an act of injustice and seizure.

Part (4)

Nima government is absolutely correct that the commercial (conventional) insurance will

be deemed impermissible by the Nima Shari’ah Board. Nima may seek Islamic insurance (Takaful)

which means a “mutual or joint guarantee” as both participants agree mutually to share their losses

by contributing periodic premiums in the form of investments. Then, Nima and other participants

would be entitled to redeem the residual value of profits after fulfilling the claims and premiums.

Takaful gives Nima the right to receive surplus profits. (see: Iqbal and Mirakhor, page 122)

In other words, Takaful is a sort of mutual aid society, to which Muslims make common

“donations” agreeing to aid each other in the event of loss. (see: Vogel & Hayes, page 36).

In this case, where Islamic option is widely available nowadays, the Shari’ah Board would

definitely direct Nima to Islamic insurance instead of the commercial.

Answer for Question 2 (A):

The relevant AAOIFI Shari’ah standard applies in Jams case is Shari’ah standard No. (8) which is

the Murabaha to the Purchase Orderer. It is the applicable standard bearing in mind that Jams seek

“immediate and exclusive” legal ownership of a yacht.

Part (1)

Since Jams seeks “immediate and exclusive” legal ownership of a yacht by an Islamic

financing instrument, murabaha transaction would be the best option.

In the murabaha transaction, the intermediary (the Bank in this case) buys the goods (a

yacht) and sells them to the consumer (Jams) on installments at a mark-up. The sale is immediate

as Jams wishes, and not prospective or conditional upon future events. Jams would have the

exclusive ownership immediately upon his agreement with the bank. Jams would also have the

right of inspection and associated remedy of rescission. (see: Thomas & others, The murabaha

and simple sales transactions, page 60).

In other words, murabaha is sale of goods at actual, disclosed cost (of the yacht) at the time

of the sale, plus a “mark up” (profit) often linked to benchmark (see: AAOIFI Murabaha standard

at 4/6). The payment terms would be specified in contract. Although installments might be the best

choice for Jams, murabaha payment can be immediate or deferred (lump sum). Also, prepayment

rebate may be provided to Jams by the bank if not stipulated in the murabaha contract.

These are the reasons that makes murabaha the best option for Jams.

Part (2)

The short answer for this question is NO. Islamic law does not prohibit the Bank from

demanding security (collateral). In general, bank may take security/mortgage (rahn), procure

quasi-security (e.g., guarantee (kifalah)), payment assurance (e.g., letter of credit).

However, since it is assumed to answer only according to AAOIFI standard, then it must

be said that Hamish Jiddiyah (e.g. security deposit) applies as a guarantee to the commencement

of the transaction based on AAOIFI standard No. (8) at 2/5/3. In addition, as a guarantee and

treatment of Murabaha receivables, it is permissible for the Bank to have pledge of any item of

real (Jams Maryland home) or movable property (Jams BMW sedan) as a fiduciary pledge.

(AAOIFI No. (8) at 5/2).

Part (3)

According to AAOIFI standard No. (8) at 4/8, Jams may pay the Bank in installments by

short or long term as the selling price of the yacht becomes a debt that Jams is obligated to pay at

the time agreed upon.

Part (4)

According to AAOIFI standard No. (8) at 5/1, if Jams fails to pay the Bank in accordance

with agreed payment terms, the installments may become due before their original agreed due

dates. This may take place in one of the following ways:

The installments automatically become due:

1. As a result of a mere delay in a payment, no matter how short the period of delay is.

2. After a delay in payment exceeding a specific time period.

3. After sending of a reminder notice by the bank to Jams giving a specific time period

for payment.

Also, the Bank may ask Jams for lawful security like Kifalah in addition to the pledge that already

existed on Jams home and BMW sedan (AAOIFI at 5/2).

Part (5)

The Bank may provide Jams with a credit (or discount) if he satisfies his payment

obligation to the bank early based on AAOIFI standard no. (8) at 5/9 which provides:

“It is permissible for the institution to give up a part of the selling price if the customer pays early,

provided this was not part of the contractual agreement”. If it is stipulated in the contract, then it

violates Shari’ah as it is considered Riba. If is not stipulated in the contract, this would be a “gift”

from the bank to Jams.

Answer for Question 2 (B):

Part (1)

As an investment firm that invests in accordance Shari’ah, Halal Group would certainly

have Shari’ah screening for all AYE’s assets, business activities and profit streams.

First, the AYE’s assets. The 7 yachts outright by AYE uses for yachts events would cause

no particular issue in Shari’ah. However, the 3 yachts leased by AYE pursuant to three separate

Islamic lease (Ijarah) agreements with Washington Islamic Bank, may cause an issue bearing in

mind that AYE sub-leases these yachts to other yachts companies including “Drunk Yacht Parties

R Us”, “Wholesome Family Friendly Yacht Parties” and “Gambling & Giggles on the Baltimore

Harbor”.

The sub-leasing of the 3 yachts to companies known for prohibited business activities in

Islamic law, would make this part of AYE’s assets unqualified for Shari’ah-compliant investments

as Halal Group may wish. To illustrate, “Drunk Yacht Parties R Us” company involves alcohol a

prohibited activity in Islam and “Gambling & Giggles on the Baltimore Harbor” company involves

gambling which is also prohibited in Islam. This activities might be permissible if the gross

revenues from such prohibited manner are no more than 5% according to Shari’ah screening. (see:

Mian at 1.3 (a)).

Regarding the commercial building, it has a commercial kitchen, accounting firm and a

theatre that includes food counter operated by the theatre company. Halal Group would screen the

activities conducted in this building to make sure that no alcohol or pork related products are served

in the kitchen and the food counter at the theatre. It would also screen the theatre activities to make

sure that the entertainment provided excludes: music, gambling, cinema/movie theatres and

pornography. In addition, it would screen the accounting firms to make sure no conventional

financing services involved in its activity. However, it must be said that if these prohibited

activities do not exceed 5% of the gross revenues, then it would be acceptable. (see: Mian at 1.3

(a)).

Concerning the commercial kitchen equipment to prepare food served at AYE events, as

long as no alcohol or pork served it would not rise an issue with Halal Group.

Regarding the receivables from events, yacht rentals (through sub-lease), and rental

payments for commercial building tenants, according to Shari’ah screening a company would be

acceptable for Shari’ah-compliant investments if it the account receivables are less than 49% of

total assets. (see: Mian at 1.3 (b)).

Regarding the business activity in which indicates that AYE hosted an event called “Yes!

To Recreational Cocaine”, this would be prohibited by Shari’ah as it involves drugs use.

Part (2)

According to AAOIFI Shari’ah standard no. (9) on ijarah, there are few issues to discuss.

First, the permissibility of sub-leasing. In the mentioned standard at 4/2/4, there is an indication

for such conduct as it provides: “A lessee may invite co-lessees to share with him in the usufruct

to which he has right, by assigning them shares in the usufruct before entering into a sub-lease. In

this case, they become his sharers in the usufruct of the leased property. If the property is sub

leased, each co-sharer is entitled to a share in the sub-lease rental pro rata to his share in the

usufruct”. Jams sub-leased these yachts for six months of his one-year lease which makes them

sharers with him.

However, the same standard at 5/1/1 provides that “an ijarah must be lawful in Shari’ah”

which Jams violated by sub-leasing to companies that host prohibited events related to alcohol,

drugs and gambling.

Part (3)

The best relationship that would allow Jams to bring on an incentivized manager without

committing to a manager’s salary is “Agency/Wikala”. Wikala can be found in details in AAOIFI

Shari’ah standard no. (23).

Wikala includes an authority that vested in one party to act on behalf of another to the

extent authorization. Jams may choose specific or general agency (at 4/1), limited or absolute, paid

or non-paid, binding or non-binding, temporary or continuous. This would work perfectly for Jams

business, knowing that the payment of agency can be gratuitous or compensated (AAOIFI standard

no. 23 at 4. Types of Agency) and it is basically not binding (at 4/3) unless it is paid. According to Islamic law in agency relationship, the manger would not be accountable to Jams and AYE in the event of any manager caused harm to Jams or AYE. Agent is the one who is liable for negligence or misconduct or breach of contract (at 4/2) so Jams and AYE will not be entirely relieve principal of obligation by the agent.

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