Resolution No. (45): "Ruling on Investment Risks Management Account in Islamic Banks"

Date: (21 /1/ 1421 AH), corresponding to (25/4/2000 AD).

The Board received the following question:

What is the ruling of Sharia on the investment risks management account in Islamic banks?

The answer: All of success is attributed to Allah:

At its meeting, the Iftaa` Board examined the nature of the aforementioned account. Is it an account owned by Islamic banks? Alternatively, is it a special-purpose account not owned by these banks and they may not dispose of it outside of what has been allocated to it, and therefore may not invest it? If they violated this, do the proceeds go to the account, and in no case shall the bank dispose of such proceeds, nor shall it dispose of the origin of the account?

After a lengthy discussion of this subject, considering the reasons for the establishment of this account, and examining the Law of the Jordan Islamic Bank and the statute of the Islamic International Arab Bank, the Board concluded: 

The idea of opening an account in the Jordan Islamic Bank to manage investment risks emerged upon setting up its law on the basis of the principle established in Islamic jurisprudence (Fiqh), which states that it is allowed that a third party guarantees losses that may occur in the Mudaraba contract (Mudaraba is a partnership in profit whereby one party provides capital and the other party provides skill and labor. The provider of capital is called "Shahib Al-maal", while the provider of skill and labor is called "Mudarib") between depositors of the mutual investment account and the Islamic Bank. This is given that the depositors are the "Shahib Al-maal", and the bank is the "Mudarib" in the Mudaraba contract envisaged to be established between them. In the Mudaraba contract, it isn`t allowed that the "Mudarib" guarantees any loss since the "Mudarib"-the bank- has not committed any act of negligence and misconduct, and the whole loss is the liability of "Shahib Al-maal, and for the "Mudarib", it suffices that he has lost his work.

According to the decision of the Fatwa Committee at the time (20 Rajab - 28 Ramadan 1397 AH, corresponding to 6/8 - 11/9/1977 P.16): "The organization of the Sharia methods for protecting invested capital against loss depends on the outcome of the discussions with the Fatwa Committee as reflected in the amended version of the Islamic Bank`s Law, which reads as follows:

The Islamic Bank shall annually deduct 20% of net profits to be credited to the Special Reserve Account for Investment Risk. This is based on scholarly views that authorized agreement to allocate an unspecified portion of profits, within the scope of the Mudaraba, to a third party, other than the contracting ones.

This account remains active and allocated to cover any suffered loss, of course that which is not incurred due to any negligence, misconduct or violation on the part of the bank. This is as long as the Islamic Bank continues to operate since this reserve serves as a mutual insurance fund to which the total investors contribute to their benefit and that of new investors.

If the Bank is liquidated, this investment risk balance becomes donated money, of course the amount exceeding the threshold required to cover the loss, and that balance deserves to be directed to charitable organizations, as stated in the Law.

The Islamic Bank shall bear any loss due to any reason that makes it liable for guarantee, such as transgression, compromise and violation, whether due to the failure or negligence of the administration, or because of the employees' infringement and manipulation of invested funds.

In order for this matter to be controlled in terms of what the Islamic Bank must be held to account for on Sharia grounds, the draft law of the Islamic Bank stipulates that the loss shall be thoroughly examined by the Sharia observers... etc.

Clearly, this account is not deducted from the Bank's profits; rather, it is deducted from the Mudaraba profits on the basis that it is a continuous cooperative insurance, until the amount of this account is double the capital. The Bank's Law holds this account liable for any loss that occurs in the event there is no negligence or misconduct on the part of the Bank.

Consequently, no matter what the case may be, it is not permissible to consider this account as the property of the Bank. However, if it is considered as such, then the Mudaraba contract underlying the bank's idea for the depositors is deemed inadmissible according to Sharia. For more clarity, the Law, based on the decision of the Fatwa Committee, stipulated that upon the liquidation of the Bank and on the basis that it is not considered among the allocations owned by the Bank, this account must be transferred to the Zakat Fund. This is taking into consideration that it (account) isn`t owned by the Bank and the latter is keeping it for a specific purpose, which is investment risk management, and in accordance with the conditions explained by the Law.

The establishment of an investment risk management account is exactly the same as accepting the government's guarantee for the origin of the funds in the Muqarada bonds (bond value) after the start of the project, even if the project financed by the bonds loses. This is considering that the government is a third party, other than the two contracting parties: the issuer of the bond and the subscriber.

The Fatwa Committee`s decision of 8 February, 1398 A.H., corresponding to 17 January 1978, states:

Since it was understood from His Excellency the Minister of Awqaf and Islamic Affairs that the Ministry is seeking the government's guarantee to pay the value of the remaining Muqarada bonds, when they are due, on time.

The Ministry of Awqaf and Islamic Affairs-pursuant to article 4 of the Awqaf Act No. (26) Of 1966-has a moral personality and financial and administrative independence.

From an Islamic perspective, the Ministry functions as the Waqf administrator.

It is permissible for the government-based on its general mandate-to take care of the affairs of the employees and encourage any party to perform that, which is beneficial to the society as a whole.

Based on the above, the Fatwa committee and the participants in this meeting are of the view that after achieving the government`s guarantee, the provision that the subscribers shall incur the loss is no longer an option or a necessity. Therefore, the Iftaa` Board decides what follows:

1- It is allowed for the government to guarantee the Muqarada bonds allocated for the construction of the Waqf lands, as the government is a third party, based on the binding promise.

2- There is no need then to stipulate, in the Muqarada bonds issued for this purpose, that the subscribers shall bear the loss.

The Iftaa Board confirmed this matter after having read the letter of His Excellency the Minister of Awqaf and Islamic Affairs where he decided:

A- Confirming the decision of the Fatwa Committee regarding the Draft Law of the Muqarda bonds and the compatibility of its provisions and articles with the rules of Sharia.

B- Confirming the decision of the Fatwa Committee regarding the permissibility of the government`s guarantee to pay the basic value of the Muqarada bonds, which must be completely settled on time considering that the government is a third party. Based on its general mandate, the government must take care of the affairs of the employees and can encourage any party to perform that, which brings collective benefit.

C- The Iftaa` Board has noticed that Article (12) of the Temporary Law No (10), 1981 added-after stating that the government shall guarantee to pay off the nominal bonds of Muqarada which must be paid in full on time-that the amounts paid by the government in this case become a loan to the project to be paid in full immediately after paying the Muqarda bonds in full. This means that the government, which accepted to guarantee the nominal value of the bonds as a third party, isn`t a third party any more, and the project itself has settled that amount. Simply, the project itself has borrowed from the government because it didn`t have the liquidity to cover the nominal value needed to be covered, which is, in fact, a guarantee against loss given  by the capital provider "Shahib Al-Maal" to the worker "Al-Mudarib" in the Mudarba contract. However, this is contrary to the established rules of the Mudaraba contract in Islamic Fiqh. 

Therefore, the Iftaa` Board is of the view that it is necessary that the government maintains its guarantee as a third party and continue as such. This is in order to be acceptable in Sharia not to state in the Muqarada bonds that the subscriber shall bear the loss, as mentioned in the provision of the Fatwa Committee in the Resolution referred to above.

Based on this, the Iftaa` Board deems necessary to end Article (10) at the phrase "at the scheduled date" and delete the rest. In reality, Waqf projects and projects conducted by municipalities and the financially and administratively independent organizations, which will benefit from this guarantee, are among the vital projects that will revive the nation and benefit the community, in addition to the fact that the government is keen on holding and encouraging socioeconomic development. The general rule is that, as states the Temporary Law, such projects shouldn`t be initiated save after carefully examining their economic feasibility and having the sufficient guarantees in terms of the good functioning of the project and proper control. 

(There is no harm in the government`s settling of the value of the origin of these bonds on the scheduled dates nor wasting of public funds. Rather, it is positively using the latter in rare cases and exceptional conditions)...End of the resolution.

Upon presenting the recent Banks` Draft Law to the Iftaa` Board, it noticed that the words "Allocated" and "Account" can cause ambiguity where it appears that it is owned by the Bank. Thus, the word "Fund" is used instead to confirm that it isn`t one of the allocations decided in the banks as reserves, for instance. Rather, it isn`t in the possession of the depositors and the Bank.

In conclusion, the Board of Iftaa` is of the following view:

The Sharia framing for the investment risk management account adopted by Islamic banks is assessed as a third party, introduced by the legislation, other than the two parties (The depositors and the bank) of the contract envisaged in the mutual open investment accounts in Islamic banks. Therefore, this account isn`t owned by the depositors or the bank and it isn`t allowed to use it in other than what it has been allocated for, so it isn`t allowed for the bank to invest it. In case the bank did invest it, the revenues belong to this account and the bank isn`t allowed to dispose of it nor the origin of the funds.

Upon the liquidation of the Islamic Bank, the funds of this account must be paid to the Zakah Fund, as established in the Law of the Jordan Islamic Bank and the statute of the Islamic International Arab Bank. And Allah The Almighty Knows Best.

Iftaa` Board

Chairperson of the Iftaa` Board, Chief Justice, Izz Al-Deen Al-Tamimi

Dr. Abdulsalam Al-Abbadi

Dr. Mohamoud Al-Bakheet

Dr. Umar Al-Ashkhaar

Sheikh Saeid Hijjawi

Sheikh Mahmoud Shwayaat

Dr. Yousef Gheezaan

Sheikh Na`eim Mojahid