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Bundles/packages financing: applying the majority rule

The simple form of a bundle is common stocks. They represent a group of assets, tangible and intangible, including cash and receivables. Yet, they can be traded at a market price that may be different from the vace value because of the rule of majority. Consequently, the recognized ruling of Shari’ah is that common stocks may not be traded at a market price if the majority of the companies assets are in receivables and cash although this is a theoretical case or at least very rare in real life as long as we include the market capitalization as an intangible asset.

Creating bundles of goods, services, receivables and may be cash and securitizing them is not restricted to common stocks, it can be done by Islamic banks and other financing and refinancing institutions. The IDB has been doing the same in transferring contracts to the Islamic Unit Investment Fund for two decades and it’s been used as a means to discounting (securitizing) its investments at the IUIF.

Bundling lays the ground for a series of financial products that can respond to all personal financing needs and consequently rendered baseless the argument for “a genuine need” for Tawarruq. If there is a need for a certain form of “personal financing” it can be satisfied by means that do not allow themselves to be abused as what actually happens in the case of Tawarruq that is often used to overcome the barriers placed by the prohibition of interest on rescheduling for increment and on abusing the financing for “’Abath” or objectives that can’t otherwise be financed according to the Shari’ah criteria.

Hedging through options (not trading options)

Finally, hedging existing positions may be differentiated from trading options.

While buying options for the purpose of price speculation may be argued as fictitious and profiteering without owning a real asset that may have an independent demand and supply for its own intrinsic utility/productivity, covering an existing position through buying or selling an option may be looked at as a means to reduce potential variations in prices and then tame price speculation.

Accordingly, one way hedging through options can be found useful and permissible, a matter that can also be used in Islamic financial innovation.

Before concluding this section it should be noted that the rules stipulated in the Basel II accord provide a reasonably adequate basis for reducing credit risk, market risks and default and moral hazard risks and Islamic banks should really look at the Basel II requirement in a positive manner.

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