LIBOR & The Reaction of Islamic Finance

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Issue 1: Can we delink sukuk & Islamic banking transactions from LIBOR?*

Comment: Definitely because, LIBOR involves RIBA (Usury), which is prohibited under Shari’ah Principles (al-Qur’an, 2:275). Sukuk as well as Islamic banking deals expressly oppose the element of Usury in any component of their operations. Thus, no justification for Sukuk or Islamic banking operation to link with LIBOR per se.

Issue 2: Would it be possible to have Islamic banks' fees higher, even in rare occasion, than the LIBOR Rates?

Comment: It is justifiable for Islamic bank to impose the fees higher than the LIBOR rates. Because, Islamic banking is (in current practice) liable to pay both income tax as well as Zakat, in contrast, the Conventional financial institution under LIBOR rate is liable to pay only income tax. Yet, Islamic bank offers better benefits to its customers than the conventional ones because, its operation is asset based with risk sharing leading profit sharing techniques, which is proven to have been more attractive to all than the one offered under LIBOR rates.

Issue 3: Could you elaborate on why many shari’ah scholars have been uneasy when it comes to returns on the ijara sukuk as they are typically benchmarked to LIBOR, an interest rate indicator?

Comment: There are several mechanisms of rating namely: FIXED rate, INDICATIVE rate, FIXED charge, INDICATIVE charge, FIXED income, INDICATIVE income. Some scholars perhaps fail to differentiate among all these categorization in the eyes of Shari’ah. Therefore, any rate FIXED by amount except the FIXED charge are within the ambit of the standard practice of LIBOR, which is opposed by the Spirit of Shari’ah. Thus, an INDICATIVE rate is totally different from a FIXED rate. A Fixed rate is approved by LIBOR but opposed by Shari’ah, which proposes alternatively the INDICATIVE rate. Hence, no confusion shall arise as far as the practices of INDICATIVE rate adapted in SUKUK al-IJARAH.

Issue 4: "Taqi Usmani has suggested a benchmark based on a common pool, which invests in Islamic instruments. If most of the assets are tangible, its units can be bought and sold based on their net asset value which is determined on a periodic basis", please justify your view if you are against Usmani suggestion?

Comment: I fully agree with Mufti Usmani. Because his idea provides INDICATIVE thought by deriving the outcome from the common pool, which is again sharing the above highlighted ‘INDICATIVE rate’ view.