Capital is invested to receive a reasonable Return on Investment (RoI), but the unforeseen could cause Loss, Decrease or even Destruction of that Capital. Hence it becomes imperative that we seek protection or a guarantee to safeguard our Capital which is available whether you are Shariah compliant or not. If you intend to conform to Shariah then you should read all the clauses and follow what is laid down without any deviation.
We reproduce below some of the clauses that you would need to adhere to, but you would still have to get more expert opinion before, during and after any agreement you would enter into. An investment for capital would generally entail Investors and an Investment Manager (Mudarib) there could be other parties who would help to protect and guarantee the Investment but they should adhere to the tenets of Shariah.
The following are guidelines to be followed by all who would be a part of that Investment and who would have and derive benefits and profits from that Investment. All parties or partners to the Investment and any foregoing agreement should follow the tents of Shariah if the agreement is to come under it.
The Difference between Protection and Guarantee of Capital
When Capital is invested, every available mechanism should be called upon to protect it, by the Investor and the Investment Manager (Mudarib). Guarantee on the other hand is the liability of the Capital against Loss, Decrease or destruction is borne by a Third Party to reimburse the capital or part of it to the Investor.
Shariah permits the protection of Capital, within it’s tenets. The Investment Manager (Mudarib) is bound and liable to use the specified Shariah guidelines to protect the capital against Loss, Decrease or Destruction. Loss of Capital, Depreciation, Inflation or fluctuation of exchange rates or any other risks is available under Shariah compliant instruments. The Investment Manager (Mudarib) should ensure and endeavor to grow the Investment and protect it within the guidelines provided but may not be responsible for the affects of market forces unless he is held responsible for negligence.
Willful misconduct, negligence or breach of contract on the part of the Investment Manager (Mudarib), makes him liable for the Loss, decrease or Destruction of the Capital and if determined that the accrued profit is now also a part of the capital, that would be included too.
Shariah compliant to protect capital
There are ample and clearly defined mechanisms and instruments under Shariah to protect Capital and these guidelines should be followed and complied. The Investors should collectively bear the risks and losses if any, proportionate to their Investment and the Investment Manager (Mudarib) is liable only for willful misconduct, negligence or breach of conduct, provided every step was Shariah compliant in the process.
Islamic insurance or Takaful to cover the various risks the capital could endure is permitted and recognized under Shariah, which could be sought by the Investors or the Investment Manager (Mudarib) on their behalf. Islamic insurance or Takaful to protect imports, exports, leased assets or for that matter anything that could be covered under permissible Islamic insurance or Takaful is permitted.
A third party who could be a Government statutory body, institution, guardian or father with less than half ownership or relationship could intervene to indemnify the Investment Manager (Mudarib) in case of Loss, Decrease or Destruction of the Capital. A third party could also intervene to indemnify the Investment Manager (Mudarib) against willful misconduct, negligence or breach of conduct without any consideration received. Creating reserves to protect the Capital from external or internal forces should be from the Investor’s profits but not from the Investment Manager’s (Mudarib’s) profits.
Increasing and diversifying investment assets to receive an appropriate return and counter risks if any foreseen is permitted. Amalgamating assets, whether they are real estate, commodities, different currencies, financial assets like stocks or “Sukuk” are permitted.
Division of the whole or part of the capital to minimize risks, into accepted “Murabahah and “Musharakah” contracts, with third parties, with exemplary credit ratings are permitted. Division of the invested capital into “Ijarah” and “Musharakah” contracts with the former with good credit ratings of a combination of the principal amount and the rental amount, with the latter the other part. Divide the Capital into “Murabahah” and “Arboun” contracts with the first part with the former of the initial capital and profits and with the latter the purchased assets and new assets purchased, whilst observing Shariah relating to “Arboun”.
Obtaining security guarantees in Murahabah, Salam and Istisna’a to ensure debts are paid or sell as an option due to nonpayment.
Pursuing and obtaining any other Shariah permissible instruments and mechanisms, to protect the Capital from Loss, Decrease and Destruction. The Investors can direct the Investment Manager (Mudarib) to comply with any other Shariah mechanisms, guidelines and limitations.
Non-Shariah compliant to protect capital
Non complying Shariah instruments or mechanisms could not be used to protect the Capital and everything should be within the purview of the Shariah. Holding the Investment Manager (Mudarib) totally and completely responsible for all Loss, Decrease or Destruction is not permitted. Unconditional third party undertakings, out of the purview of the Shariah are not permitted to recover the capital.
Committing or obligating the Investment Manager to purchase the investment assets or a part of it, not conforming to the purview of the Shariah. Any type of undertaking by any third party, to guarantee the Capital for a fee, which is not in the purview of the Shariah. Protecting the Capital by other means which are not permissible under the Shariah, for the simple reason that it would not be within the tenets of Shariah.