AAOIFI 24th Annual Shari’ah Boards Conference Day 2

Finance-Focused Summary

The conference’s fourth session examined how exceptional events affect contracts, delivery, payment obligations, documentary credits, and insurance. The fifth session debated whether compensation may be charged for a party’s commitment or promise—an issue relevant to credit facilities, guarantees, hedging, options, and insurance. The discussion focused primarily on Sharia and contract treatment, not portfolio or security recommendations.

1. Emerging Circumstances and Financial Contracts

Macroeconomic and operational context: Speakers cited wars and unrest, supply-chain and shipping disruptions, the closure of sea lanes—including the Strait of Hormuz—and increased shipping and insurance costs. They also raised inflation, cyberattacks, and payment-system outages as possible causes of delayed performance. The panel noted that emergency rules tend to receive attention during crises and then fade, and said AAOIFI Emergency Circumstances Standard No. 36 needs further development.

Proposed framework for assessing a disrupted contract:

• Establish a direct causal link between the exceptional event and the breach or delay.
• Identify the contract stage, the parties’ responsibilities, and who bears the relevant risk or guarantee.
• Distinguish between:
  • Temporary impediment: generally supports delay or suspension.
  • Exceptional hardship or loss: may warrant a contract-specific adjustment.
  • Impossibility of performance: may justify termination or dissolution.
• Preserve the contract when feasible, and assess each contract individually rather than applying a blanket rule.
• Allocate actual, unforeseen costs fairly while avoiding adjustments that create prohibited increases in debt.

Documentary credits and trade finance:

• A letter of credit involves several independent relationships, including the sale, the customer-bank relationship, and the bank’s undertaking to the beneficiary. Cancelling the sale does not automatically cancel the bank’s credit obligation.
• Force majeure does not automatically extend a credit’s expiry date. Delayed or non-compliant documents may still permit rejection, subject to the credit terms and applicable rules. AAOIFI Documentary Credit Standard No. 14 was cited.
• Speakers distinguished minor delays from delays that defeat the contract’s purpose or breach an essential delivery date. Serious delay may give the buyer a cancellation right; the discussion generally rejected automatic compensation against a seller whose delay was caused by force majeure.
• For Murabaha, risk before the institution’s valid possession and resale remains with the institution. After a valid sale and transfer of guarantee to the customer, the customer generally bears the risk. The agreed delivery location and the type of sale or shipping terms matter.

Debts, rescheduling, and payment difficulty:

• A decline in sales or profits does not by itself excuse payment when the debtor remains solvent and able to pay.
• Speakers distinguished among an insolvent debtor, a solvent debtor temporarily lacking liquidity, and a solvent debtor who delays payment despite having the means.
• Exceptional circumstances may support postponement or rescheduling, but not an increase in an established debt. The researchers also discussed proof of inability to pay.
• Dr. Abdul Bari Mashal cautioned against using new financing or tawarruq to pay off existing debt, arguing that this risks reproducing debt rescheduling in a form inconsistent with Islamic-finance principles.

Insurance in exceptional circumstances:

• One research position allowed conventional insurance temporarily and narrowly where takaful coverage was unavailable or inadequate, subject to controls:
  • Document the lack of suitable takaful.
  • Limit conventional cover to the uncovered need.
  • Obtain Sharia-board approval.
  • Limit the period and scope.
  • Return to takaful when it becomes available.
  • Cap recovery at the actual loss.
• Commentators warned that “need” must not become a broad or indefinite exception and called for clearer limits on coverage and duration. Takaful was presented as the preferred route, with a call to develop coverage for force majeure and supply-chain risks.

2. Compensation for a Commitment

The fifth session considered whether a commitment—such as a promise to provide funding, a guarantee, or a future transaction—can itself be treated as an asset or service for which a fee may be charged.

Conditions proposed by Dr. Nazih Hammad for compensation to be permissible:

• The commitment provides an intended, legitimate benefit or prevents harm for the party receiving it.
• The benefit is Sharia-compliant and has a customary monetary value.
• The commitment can be performed.
• The arrangement avoids prohibited elements such as riba, gambling, and excessive uncertainty.

Hammad argued that some commitments can have financial value and be compensated, including certain currency commitments made to meet genuine business needs. He distinguished such hedging from speculation. He also argued that conventional commercial insurance is not inherently invalid as an exchange contract, while maintaining that investment of premiums in interest-bearing instruments remains prohibited. This position was contested and differs from the more restrictive view described by other participants and collective Sharia rulings.

Key disputes and cautions:

• A commitment fee on an unused credit line was rejected by Hammad in the example discussed: a bank made a $2 million facility available, of which the customer used $1.5 million, leaving $500,000 unused. He argued that charging for the unused portion did not provide a corresponding benefit to the customer.
• Participants disagreed over fees for guarantees, facility availability, and commitments to enter future transactions. Some saw a permissible service or risk-management function; others considered such fees compensation for time, credit, or a guarantee, or a route to prohibited gains.
• Hammad cited AAOIFI Sharia Standard No. 36 in the emergency-contract discussion. The session also referred to AAOIFI Documentary Credit Standard No. 14 and International Islamic Fiqh Academy Resolution No. 63, which addresses option contracts in modern financial markets.
• The discussion distinguished waiving an existing right from selling or charging for a newly created commitment. Examples included intellectual-property and trade-name rights, priority rights, guarantees, linkage fees, options, and derivatives.
• Commentators cautioned that customary market value alone does not establish Sharia permissibility. They urged reviewers to examine what the fee actually compensates—such as work performed or a real service, rather than the passage of time, credit, or risk—and to avoid turning narrow exceptions into general rules.

Instruments, Contracts, and Sectors Mentioned

• Trade and Islamic finance: documentary letters of credit, Murabaha, Salam, Istisna, Ijara, tawarruq, debt rescheduling, credit facilities, and credit lines.
• Markets and hedging: currencies and forward currency commitments, options, futures, financial derivatives, and palm-oil and index futures.
• Risk transfer: takaful, conventional insurance, reinsurance, guarantees, and letters of guarantee.
• Operational exposures: shipping, imports and exports, supply chains, payment systems, and cyber disruption.
• No stock tickers, equity recommendations, bond yields, valuation multiples, or portfolio-performance figures were discussed.

Key Figures and References

• AAOIFI Emergency Circumstances Standard No. 36: identified as requiring further editing and development.
• AAOIFI Documentary Credit Standard No. 14: cited in the discussion of letters of credit.
• International Islamic Fiqh Academy Resolution No. 63: cited regarding options contracts.
• $2 million facility; $1.5 million utilized; $500,000 unused: example in the debate over fees for an unused credit commitment.
• Gaza: an audience participant cited the destruction of 80% of housing units financed through Islamic banks and financial institutions as context for questions about financing obligations.
• No investment return, market-price target, or performance metric was provided.

Disclosures

No “not financial advice” disclaimer was stated. The speakers presented differing Sharia interpretations; the positions summarized above are not a single agreed ruling or a general investment recommendation.

Presenters, Commentators, and Sources

• Session 4 chair: Sheikh Dr. Bashir Ali Omar.
• Session 4 researchers: Dr. Abdul Bari Mashal; Sheikh Khader Sultan Tazbayev.
• Session 4 commentators: Sheikh Dr. Aznan bin Hassan; Sheikh Dr. Abdul Nasser Musa Abu Al-Basal.
• Session 5 chair: Sheikh Essam bin Muhammad Ishaq Al-Abbasi.
• Session 5 presenters: Professor Dr. Nazih Hammad; Sheikh Dr. Ibrahim Al-Otaibi.
• Session 5 commentators: Professor Dr. Ertugrul Bayinkalan; Sheikh Dr. Ibrahim Al-Darir.
• Institutions and sources referred to: AAOIFI standards; the International Islamic Fiqh Academy and its resolutions; the Al-Baraka Symposium; Malaysia’s central bank and its takaful/insurance documentation; and Sharia-board and jurisprudence-council decisions.