Shariah Standard on Gold

Transcription

1 Shariah Standard on Gold Exposure Draft 11 November 2015 This exposure draft has been prepared by Amanie Advisors for the World Gold Council. The Shariah Supervisory Board of Amanie Advisors will undertake a final review and examination of the standard to determine whether it accurately and precisely represents the requirements of the Shariah (or otherwise) once the standard has been further developed. More information can be found on

2 Contents Introduction to the Standard... 4 Objectives... 4 Overview... 4 Scope... 4 Effective Date... 4 Related Rulings, Guidelines and Standards... 4 Definitions Shariah Position on Gold i Specific Rulings in Dealing with Gold Time of the Exchange iii Counter-Values of the Exchange Issues of Segregation and Allocation of Gold Gold as Collateral, Security Deposit and Urbun Gold as Capital in Partnership Contracts Gold as an Underlying Asset in Various Contracts Subject Matter of Sale Contracts Subject Matter of a Lease Subject Matter of a Loan Gold under Custodianship or Deposit Gold Managed under Agency xii Gold Treatment in a Transfer of Debt Gold in the Settlement of a Debt via Set-off Gold Embedded within an Undertaking Gold under Endowment Gold Jewellery Zakat on Gold xiii Case Studies Case Study 1 Gold Investment Account Gold Investment Account Overview Shariah Applications to Gold Investment Accounts Case Study 2 Gold Options Contract Gold Option Overview Shariah Applications to Gold Options Case Study 3 Rahn Rahn Overview

3 Shariah Applications to Rahn Case Study 4 Gold Exchange Traded Fund Gold ETF Overview Shariah Applications to Gold ETFs Case Study 5 Gold Backed Sukuk Gold Backed Sukuk Overview Shariah Applications to Gold Backed Sukuk Shariah Basis for Rulings

4 Introduction to the Standard Objectives To provide clear guidance from the Shariah perspective on the usage of gold in financial and investment transactions for Islamic financial institutions and participants. This standard also aims to increase transparency regarding the use of gold in various market practices. Overview This standard provides guidance on Shariah principles that are used in financial dealings that involve gold. Gold is a unique item in the Shariah and has specific rules governing it. Thus, practitioners need to be cautious when transacting with gold and need to ensure that they meet all the requirements as set out in the Shariah. This becomes more pertinent as Islamic financial services are constantly growing in sophistication, bringing with it the need for a greater understanding of the intricate matters of Islamic financial services and the application of the Shariah. Scope This standard includes all relevant Shariah principles and contracts and is therefore intended to be appropriate for all types of financial transactions. This standard was developed on a non-exclusive basis and so should be applicable to all areas of Shariah-compliant financial transactions that involve gold, except in areas where a specific exclusion has been made. Effective Date To be decided. Related Rulings, Guidelines and Standards This standard is intended to be implemented alongside existing laws, regulations and standards that exist for both Islamic financial services as well as gold and commodity markets. 4

5 Definitions Allocated Gold Allocated gold is gold physically owned outright by an investor and is stored under a safekeeping or custody arrangement. It is the property of the investor. Fungible Hamish Jiddiyyah Ijarah Istisna' Kafalah Mudharabah Mudharib Murabahah Musharakah Qardh Rahn Riba/Ribawi Salam A commodity whose individual units are capable of mutual substitution. Security given for a promise to purchase. If the buyer is not proceeding to purchase, the seller can demand compensation for the actual damage, if the security is higher, the buyer receives an amount back, if the actual damage is higher, then the seller can demand additional compensation above the security. A contract of lease. A contract to build, manufacture, construct, or develop the object of sale at a definite price, over a defined period of time, according to agreed specifications between the parties. A contract of guarantee or surety that provides assurance in terms of performance and value when the object of the transaction is exposed to adverse change due to varying outcomes. A profit sharing contract of partnership. Under a Mudharabah contract, the capital provider agrees to share the profits between themselves and an entrepreneur at an agreed ratio percentage. An entrepreneur. A sale of a commodity at cost price plus a known profit. A form of equity partnership investment. Similar to equity investment in a conventional capital market but the investments made must be confined to stocks and financial securities or other assets that are consistent with the principles of Shariah. Note, partnership contracts come in three forms, namely work partnership, partnership by reputation and partnership by capital. An interest free loan. Pledge or security. Interest or usury. Refers to the purchase of a commodity for deferred delivery in exchange for immediate payment. Thus, in a Salam contract, the price is paid in full and in advance while the commodity is deferred to an agreed date in the future. 5

6 San ah Sarf Segregation Sil ah Sukuk Takaful Tawarruq Unallocated Gold Urbun Wa d Wadiah Wakalah Wakeel Waqf Waqif Zakat Manufacturing or manufactured goods. An exchange of two different types of currencies. Where the commodity is stored separately or isolated from any other assets. A commodity. Securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets. Islamic insurance. To buy spot and sell on deferred payment (or vice versa) to a third party to facilitate cash liquidity. Unallocated gold is gold promised to an investor but not physically owned by or stored on the investor s behalf. Down payment or earnest money. A promise. A contract of custodianship. A contract of agency between an agent and principal. An agent. Endowment. The person who endows. A form of religious levy on the wealth of Muslims. It is based on wealth that exceeds the specified quantum for a defined period (where relevant) and is meant for the poor and needy as well as other specified beneficiaries. 6

7 1.0 Shariah Position on Gold i 1.1. Gold is a fungible item (mithli) which is often mutually interchangeable Gold is an item which is vulnerable to the prohibition of riba if it is exchanged for one another on a deferred delivery mode and/or of unequal amount. If it is being exchanged with silver or other ribawi items, the exchange must be on spot basis only Gold is equivalent to current fiat currency being the legal tender. Thus, all Shariah rulings on currency exchange (Sarf) apply to all gold transactions. ii 1.4. Although gold is deemed as a currency and therefore subject to the Shariah principles and rulings on Sarf, it may take on other forms, such as a commodity or a usable element in technology Any financial assets (such as sukuk, mutual funds, ETFs), which are wholly backed by physical gold are to be construed as gold Any claim on gold arising from other contracts such as pledge, safe custody or security deposit must be dealt with in accordance with the Shariah principles governing the dealings in gold Gold can be exchanged for either an asset or service, as may be agreed by two or more parties, without the asset or service needing to comply with the spot and equal counter-values requirements Any mixed-assets within an undivided portfolio of investment assets which comprises gold below 49% or less is not considered as gold and therefore not subject to the specific Shariah rules on exchange of gold. This ruling only applies to an undivided investment portfolio of assets and is not applicable to tangible assets mixed with gold. 2.0 Specific Rulings in Dealing with Gold 2.1 Time of the Exchange iii The time of exchange of gold for other gold or money must meet the following requirements: The taking possession of these counter-values must be on a spot basis, with actual or constructive possession The contract of exchange must not be conditional or attributed to any element which may render the exchange not simultaneous and spot. 7

8 2.1.3 Forward and future contracts of gold are not permissible because the actual or constructive exchange of the gold for money will be deferred to a future date However, it is permissible to execute the future exchange of the gold for money by means of the following methods: One party may unilaterally undertake (Wa d) to purchase a certain amount of gold for a fixed amount of money at an agreed date in the future. In this manner, the actual contract and exchange of the gold for money will take place in the future at an agreed date for the agreed price. A bilateral binding promise to purchase and sell gold at a certain price in the future is not permissible A unilateral undertaking (Wa d) may either be absolute in its terms or it may be made conditional. For example, the undertaking to purchase gold may be conditional on the price of gold at a certain level. 2.2 Counter-Values of the Exchange The amount of the two counter-values in the exchange of physical gold must be equal In the case of the exchange of physical gold for money, the price can be agreed at any price as long as it is on spot basis The exchange of gold for an undivided portfolio of assets which includes gold comprising less than 49% of those assets, in accordance with 1.8 above may be executed on a deferred basis. 2.3 Issues of Segregation and Allocation of Gold As gold is fungible, the requirements of both segregation and allocation are necessary for the establishment of definitive ownership of physical gold Ownership of physical gold requires the actual segregation of that gold from all other holdings in physical gold stored at the same location. The Shariah requires this segregation to establish the precise loss and liabilities of a particular owner of the gold in case of the partial damage to the place where all the gold is kept. In the interests of clarity, in the event gold is not segregated, the transaction is still deemed as valid, however, the parties will share any risks proportionately The physical gold, after being segregated, must be allocated only to its legal or beneficial owner. The gold which is segregated and allocated cannot be used for 8

9 some other transactions for the account or another party other than the owner of this gold. 3.0 Gold as Collateral, Security Deposit and Urbun 3.1 Gold may become security in the form of ingots, gold items, wafers, coins or gold nuggets provided that there is a document to prove its authenticity. iv 3.2 If the gold used as security under Rahn which is put under the custody or possession of the creditor/pledgee, is lost, stolen or damaged, the latter will be responsible to replace the lost, stolen or damaged gold to the owner/debtor if the loss or damage is a result of the pledgee s misconduct, negligence or breach of specific terms. 3.3 If the debtor defaults in payment of his debt, the creditor is entitled to apply to the courts/relevant authorities for the sale of gold which is pledged as collateral for the debt to the market, for the satisfaction of the debt. 3.4 The creditor may stipulate in a contract that the debtor may give a mandate to the creditor to sell the pledged gold to the market without recourse to the courts. 3.5 The creditor may also stipulate that the creditor may have the right to liquidate the indebtedness of the debtor by taking direct ownership of the pledged gold. The creditor is entitled, from the sale of the gold, to no more than the amount of the debt owed (to the creditor). The valuation of the gold is independent of the creditor and may be subject to the prevailing market price of the gold at the time of the default and realisation of the pledge. 3.6 The pledgee may use this pledged gold for his own purposes with the permission of the pledger while taking full responsibility of returning the same amount and quality of the gold and provided that the obligation is not a loan. 3.7 In principle, the pledged gold should be in the possession of the creditor/pledgee or third party custodian (al- adl). It is permissible for the pledged gold to be left in the possession of the debtor/pledger or third party custodian (al- adl) and all the rules governing pledges remain applicable to the pledged gold. The pledger cannot discharge the third party as the holder of the pledged gold or recover the pledged gold from the third party before settlement of the debt in order to protect the interest of the creditor/pledgee. v 3.8 It is permissible for the debtor to pledge the gold of a third party with the permission of the third party owner ( borrowed pledge ). 3.9 Possession of documents of title to physical gold held in warehouses is considered to be constructive possession of the pledged gold. 9

10 3.10 Gold may be accepted as a security deposit (Hamish Jiddiyyah) and can be used to compensate any actual loss and expenses of the counter party should the owner of the gold fail to enter into any contract or deliver any financial obligation. The realisation of the gold price must be based on the prevailing market value on the day of this realisation The above gold (gold used as a security deposit) may also be treated as part of the payment of purchase price or rental to the financial institution if the customer decides to enter into a particular contract with the financial institution provided always that this arrangement is not made a condition of the transaction. The valuation of this gold must also be subject to the prevailing market value on the day of the payment of either the purchase price or rental Any gold which is treated as a security deposit is construed as an asset held by a custodian. If the gold is lost, stolen or damaged the custodian will be responsible to replace the lost, stolen or damaged gold to the owner if the loss or damage is a result of the custodian s misconduct, negligence or breach of specific terms The custodian may impose a fee for providing the safe keeping of gold held as a security deposit. The fee may be based on a ratio or formula that correlates to the gold under custody. The charging of a fee is not allowed if the gold is placed as security under the Qardh/loan contract with the custodian when the fee correlates to the amount of loan. 4.0 Gold as Capital in Partnership Contracts 4.1 Gold can be used as capital of Musharakah with the agreement of all partners. vi 4.2 Gold can be used as capital in a Mudharabah contract provided it is liquidated for capital in monetary form. 4.3 Gold may be pledged by one partner in favour of another partner against negligence or misconduct. vii 4.4 In order for gold to be the capital of Musharakah, the monetary value of the gold must be determined and expressed in currency equivalent at the time of entering into the Musharakah contract for all partners to know the quantum of share contributed to the partnership. 4.5 In the above two situations, the redemption of capital can be in the form of money which is equivalent to the amount of money being initially realised (from the liquidation of gold to the market to get cash capital) or being valued based on the market value of gold at the time of concluding these contracts. The capital 10

11 redemption (inclusive of profit) can also be in the form of gold which should be reflective of the same amount of money at the time of entering into these two contracts. 4.6 It is not permitted to stipulate that a partner in a partnership contract guarantees the gold as capital of another partner. viii 4.7 A third party may provide a guarantee to make up any loss of gold as capital of some or all partners. This guarantee is restrained with the conditions that: The third party guarantor should not own more than a half of the entity to be guaranteed The guaranteed entity should not own more than half of the entity that undertakes to provide a guarantee. In case of a third party guarantee, the partner benefiting from such guarantee is not entitled to claim that the partnership contract becomes null and void or to refuse to meet his obligations under the contract if the guarantor fails to guarantee, on the grounds that the beneficiary enters into the partnership contract taking into account the provision of such guarantee. 4.8 It is not permitted for the partners to stipulate that one of the partners will receive as a profit share a lump sum from the profit or a percentage (e.g. 5%) of the gold contributed as capital of the partnership. ix 4.9 It is not permissible to use gold dust or nuggets as capital contributions in a partnership. 5.0 Gold as an Underlying Asset in Various Contracts 5.1 Subject Matter of Sale Contracts If the customer expresses the wish to acquire gold through the institution, it is permissible for the institution to purchase the gold from the supplier on spot basis. The institution will then conclude the Murabahah sale with the Customer on a spot basis. A deferred payment sale on gold is not permissible (refer to clause 1.1.1) Gold can be applied as the underlying asset if exchanged with the original commodity in the 1 st leg of Murabahah Tawarruq where the financier purchases the commodity from commodity supplier. The same is permissible in the 2 nd leg of Murabahah Tawarruq where the commodity is sold to the obligor for gold. The 2 nd leg may be concluded on either a spot or deferred basis Gold may be used as currency towards settlement of instalments of the credit transaction under Murabahah provided that the settlement is done on spot and 11

12 based on the market value on the day of settlement. This arrangement of paying using gold shall not be made a condition in the Murabahah transaction, instead, it shall be unconditional and may be agreed at the time of each particular payment Gold, by itself, is a valuable asset and thus may be the payment or subject matter of a Salam contract between the contracting parties Gold may be used as the price of Salam contract, either pure gold or mixed with other items or metals. In situations where gold is used as the price of Salam, the subject matter of that particular Salam contract shall not be gold and vice versa. Gold may not be used as payment for Salam contracts in which the subject of the contract is gold. Gold may be used, however, as payment in Salam contracts for commodities (other than gold and silver). x If gold is mixed with other items or metals, thus it is regarded as commodity (sil ah) and this makes it qualified to be the price of Salam even though the subject matter of Salam is a pure gold or vice versa (refer to clause 1.8) If the gold becomes the price of a Salam transaction, the gold must be given by the purchaser to the seller on the spot during the execution of contract as per normal rules of Salam. Later, the subject matter of the Salam will be delivered to the buyer at the pre-determined date of delivery provided always that the subject matter of Salam in this case must not be pure gold On the other hand, if the gold becomes the subject matter of Salam, it is not permissible for the price to be paid from currency or gold as this is tantamount to riba. It is permissible for the price to be paid by a commodity such as crude palm oil or any other types of metals such as palladium, copper or platinum The payment can be made via constructive or physical transfer to the seller and it can be represented by a certificate It may be agreed between the parties that late delivery penalties are charged to the seller if the seller fails to deliver the subject matter of Salam at the agreed date/time. The late payment charges must be equal to an amount incurred as a cost or an expense to the purchaser so as to rectify any damages provided always that this shall exclude any time value of money The seller is allowed to sell the gold as the subject matter of the Salam on spot at maturity to a third party if the purchaser fails to take delivery The guarantee of the payment of Salam or the delivery of gold is permissible by a third party Taking Islamic insurance/takaful to protect the gold in a Salam transaction is allowable. 12

13 The purchaser has the right to not take delivery if the seller delivers ordered gold with lower quality and orders the seller to deliver as per earlier agreed specifications The seller is allowed to enter into a separate Salam contract which is regarded as parallel Salam and he is subject to the normal rules of Salam contract. 5.2 Subject Matter of a Lease A pillar of a valid lease contract is that there is a rental income for the leased asset. Physical gold may be the subject matter of a lease contract provided always that the usufruct of the physical gold or the physical gold that is subjected to a lease contract shall not result in any dilution or consummation (unlike other consumables) and that the said physical gold can be returned intact to the lessor. Examples of this transaction could be the rent of gold for display purposes or the rent of gold for petro-chemical products The parties may agree that gold be used as the rental payment Upon maturity, the leased asset may be sold to the lessee for the consideration of an amount of gold provided always that such arrangement of having gold as a consideration is not made as a condition to the contract and the price consideration shall be paid on spot There is no objection if two or more partners in ownership of gold lease to one another their proportionate ownership in the gold It is permitted that the lessee pays Hamish Jiddiyyah or earnest money as a deposit in the form of gold. The Hamish Jiddiyyah should be returned to the lessee if the lease is not established for any reason. The lessor is allowed to take from the Hamish Jiddiyyah money an amount equalling the damages caused to the lessor as a result of the lessee s failure to enter into the lease agreement. 5.3 Subject Matter of a Loan It is permitted to lend and borrow gold, but only if this is done without any interest It is permissible for the lender of gold to charge a fee to the borrower if the lender is incurring costs to facilitate the loan or for services related to the loan, such as the delivery of gold, in which case the fees must match the actual costs incurred, excluding the time value of money. 13

14 5.3.3 It is impermissible to charge or pay any fee for the loan itself or to agree for the return of a value of gold that is above that which was lent and borrowed Lent gold is fungible, as such, the borrower may return a different item of gold, provided that it meets the exact specifications as the gold borrowed. The parties may not stipulate the return the same gold, but the borrower may return the same gold to the lender The borrower may mix gold with its own gold or gold borrowed from other parties, provided that it maintains the ability to distinguish and differentiate the gold that is owed or belongs to each party. There is no restriction for the borrower to mix fungible items of gold (of the same exact specimen and quantity) except where the parties have agreed to keep the lent gold segregated. 5.4 Gold under Custodianship or Deposit A custodian under a Wadiah contract may not use gold that has been put under its safekeeping The custodian may not comingle gold with other assets of the custodian or any other asset under its safekeeping. xi The custodian may charge fees for its services of safekeeping gold. The fee may be chargeable at a fixed amount, a formula and/or be tied or related to the gold under safekeeping, provided it is agreed upon by the parties at the time the contract is executed If the gold under custody is diminished, degraded or altered due to the negligence or misconduct of the custodian, the custodian will be liable to replace it with identical gold of the same specimen, quality and quantity. If the gold is irreplaceable the custodian will be liable for damages equivalent to the market value of the gold. 5.5 Gold Managed under Agency xii Physical gold can be purchased through an agent over the counter or via online transfer The appointed agent will act as a wakeel (agent) who will buy the physical gold from a supplier in cash or on spot basis Gold which is held by the agent must be held according to the rules on custodianship (Wadiah). 14

15 5.5.4 The agent may act as an agent for both the seller and the buyer provided always the price is not determined by the agent and that there shall be clear, separate and transparent independent documentation and exchange of notices to sufficiently distinguish the agent s role on behalf of the buyer and on behalf of the seller, respectively It is permissible for an agent to impose a fee for any transaction of the gold. 5.6 Gold Treatment in a Transfer of Debt The transfer of debt is the replacement of a debtor with another debtor/transferee. Gold may be a part of a transfer of debt contract if the debtor owes an amount of gold to a creditor via a Salam contract. The payer/transferee of the debt thus takes on the obligation to settle the debt in gold to the creditor from the transferor It is required that the payer/transferee pays only the amount of gold that is owed to the creditor under the Salam contract to avoid the payment and receipt of riba. Thus the creditor is not allowed to demand any amount above that which the transferor was obliged to pay and the payer/transferee is not allowed to demand any reduction in the amount that the transferor was obliged to pay If the creditor decides to waive or reduce the obligation to pay all or an amount of gold then it will be independent of the transfer of debt contract and will be at the sole discretion of the creditor Likewise, if the payer/transferee decides to increase the amount of gold it will pay beyond the amount it is obliged to pay under the transfer of debt contract, it will be independent of the transfer of debt contract and will be at the sole discretion of the payer/transferee. 5.7 Gold in the Settlement of a Debt via Set-off The set-off of a debt may occur when two parties owe and are owed simultaneously to and from one another an amount that is similar in kind and type, but not necessarily in quantity and date of maturity, which is free from any third party encumbrance. Gold may be a part of a set-off arrangement whereby one or both parties owes the other an amount of gold. 15

16 5.8 Gold Embedded within an Undertaking A legitimate undertaking is a binding unilateral promise to enter into a formal arrangement or contract at a future date with specified terms and conditions. An undertaking does not constitute a contract in and of itself as the undertaking is only binding on the promisor It is permissible to undertake to purchase or sell gold at a future date. The sale and purchase or lease agreement for gold must be in accordance with the rules of exchange of gold It is permissible to stipulate in the undertaking the price at which a party undertakes to purchase or sell gold at a future date If two parties bilaterally promise to set-off future debts between them, and the setoff includes gold, the promises must be concluded on the basis that the set-off will take place based on the current value of gold at the time of the actual set-off It is permissible to undertake to contribute or increase capital to a partnership in the form of gold It is permissible, upon issuance until maturity, but after the passing of ownership of gold to the holders of certificates, to trade certificates that represent ownership of gold Trading of certificates that represent a promise to purchase or sell gold without a counter value stipulated is not permissible. 6.0 Gold under Endowment 6.1 Gold, by itself, is a valuable asset and thus can be qualified for Waqf. 6.2 The Waqif (person who gives endowment) is permitted to choose the gold to be endowed either for charitable Waqf or family Waqf as gold can be beneficial to both the public at large as well as family members of the Waqif. 6.3 If the gold has mixed with other items or metals, it can qualify for Waqf provided that it has value and can be beneficial to the public at large. 6.4 If gold becomes the asset of Waqf, the Waqf administrator is allowed to change the gold to other valuable property if the gold is found to be difficult to spread wide benefit to the public. This can be done, for example, by liquidating the gold in exchange for cash obtained at the market value of the gold. 6.5 The same rules will apply to the exchange of gold for cash as apply to the exchange of gold for ribawi items. 16

17 7.0 Gold Jewellery 7.1 Gold may be processed to be made as jewellery, crafts, decorations or similar forms of gold based products which qualify to be categorised as manufactured goods (san ah). Under a manufacturing process, there is considerable effort and craftsmanship skill applied to create gold jewellery and other gold products. Often the process is lengthy and involves numerous steps to change the gold into different forms, designs and textures. This process gives a material change to the gold whereby the item becomes a manufactured product with a value that is different (usually higher) than that of pure gold. 7.2 Items resulting from such a manufacturing process shall be considered as non-ribawi commodities and thus exempted from the rules of Sarf. 8.0 Zakat on Gold xiii 8.1 Gold is deemed as money and as such, subjected to requirements of zakat on monetary asset. 8.2 Zakat on gold is subject to the minimum amount of gold of 85 grams and that the actual or constructive ownership of the gold has been maintained for one lunar year (354 days). 8.3 The rate of 2.5% will be applicable on gold for zakat payment. 17

18 Case Studies 1 Case Study 1 Gold Investment Account Gold Investment Account Overview There are a variety of ways in which gold can be utilised as an underlying asset within a deposit product. Investment accounts may use gold as an investment for customers to enhance returns on the deposit as compared to savings and current accounts. Shariah Applications to Gold Investment Accounts It may be possible to structure an Islamic gold investment account in numerous ways using various different principles. The structure that is used determines the rules that apply. In general, the customer will purchase physical gold and own the gold at the prevailing market price as reported by the bank. The customer can opt for the bank to keep the gold in the bank s custody or to receive physical delivery. Thus, any product must be in compliance with clause 2.3 of this standard. If the customer decides later on to sell the gold to the bank, the bank will buy it at the prevailing market price In the case where the bank acts as an agent to the customer, the parties must comply with the requirements as set out in clause 5.5 of this standard. The bank may also act as a custodian for the customer in the case where the customer opts to not take physical delivery, in which case the requirements as set out in clause 5.4 must be met. 1 These case studies are examples of transactions that may occur and no consideration has been made with regards to whether they currently exist or not. The applications mentioned herein are intended to be examples and thus not fully comprehensive. Each transaction that involves gold will most likely be unique and therefore independently subjected to all or some of the rules and stipulations mentioned herein. 18

19 Case Study 2 Gold Options Contract Gold Option Overview Gold options are option contracts in which the underlying asset is a gold futures contract. The holder of a gold option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying gold future at the strike price. This right will cease to exist when the option expires at market closure on the expiration date. Shariah Applications to Gold Options Gold as a commodity could be subject to a futures sale under the Salam principle whereby the purchaser pays the purchase price upfront in order to receive the gold commodity at a future date. In this scenario, the Salam contract would need to comply with all of the requirements in clause 5.1. For example, the consideration would need to be an item that does not cause riba to occur (i.e. not also gold). In most cases, the purchaser is not interested in taking delivery of the asset, but would instead sell the underlying futures contract to a third party while benefiting from the difference in the purchase price and the sale price (to the third party). In accordance with clause 5.1, the purchaser would not be entitled to sell the gold that has not yet been delivered under the Salam contract as the ownership of the gold would only be achieved once the gold is delivered. Where the purchaser would like to pay for the gold at the date of future delivery (thereby replicating the economics of a conventional option and futures contract), the purchaser may issue a unilateral undertaking that requires the purchaser to purchase gold with an agreed specification at a future date. In accordance with clause 2.1.4, the purchaser may stipulate the price at which they undertake to purchase the gold at the date of the undertaking. Upon the exercise date, the parties must enter into an independent sale and purchase of gold on a spot basis at the agreed terms in the undertaking, provided that the seller wishes to accept and exercise the undertaking provided by the purchaser. The execution of the sale and purchase of gold must be in accordance with the requirements set out in clause 2.1. As the undertaking is unilateral, it is binding on the purchaser only, and therefore the seller has full discretion to either enter into the sale and purchase at the exercise date or not. 19

20 Case Study 3 Rahn Rahn Overview Rahn may be one of the solutions for those who need to make immediate payment for financing obligations. An entity or individual can provide gold as collateral in return for immediate assistance in overcoming the payment of the financing obligation. The pledger receives a loan from the pledgee which the pledger must pay back within an agreed period. The loan is often a smaller percentage of the gold that has been pledged so as to offer security to the pledgee in case the pledger defaults on the loan repayment. Shariah Applications to Rahn The customer is required to place a valuable asset as collateral for the loan and only pays the fee for the safekeeping of the value as per clause 3 of this standard. No interest or payment of any amount under the loan transaction may be made as this would be tantamount to riba, as per clause 5.3 of this standard. In the case of the collateral being lost, stolen or damaged due to negligence, misconduct or breach of any specific term by the pledgee, clause 3 of this standard should apply. This clause also sets out the entitlements of the pledgee if the customer defaults on the loan repayment. The pledger may pledge the gold of a third party with the permission of the third party owner. It is not necessary that the gold pledge be delivered as long as the precise value may be determined. The pledged gold may be retained in the possession of a third party trusted to retain the pledged gold and the pledger cannot discharge the third party as the holder of the pledged gold or recover the pledged gold from the third party before settlement of the loan. 20

21 Case Study 4 Gold Exchange Traded Fund Gold ETF Overview Gold ETFs are open-ended funds that invest in physical gold bullion as the underlying asset. These instruments are listed on stock exchanges and, hence, can be bought and sold just like the buying and selling of shares. Shariah Applications to Gold ETFs The investment into a gold ETF buys a quoted physically-backed security which is issued by the trust created for the specific purpose of enabling gold investment through it. The trust deed requires the gold denominated shares of the trust to be backed by physical gold which the trust must own in accordance with clauses 2.3 of this standard. The arrangement between the investors and the fund manager could be through either an agent-principal relationship or through a partnership. Where the investors appoint the fund manager as an investment manager on their behalf, the relationship often reflects that of an agent. The agent will be entitled to a known fixed fee (which includes fees as per a formula) for its services in accordance to clause 5.5 of this standard. In other scenarios, the investment manager may be acting as an entrepreneur (if it did not contribute capital) or as a partner (if it did contribute capital to the fund) in a partnership (Mudharabah or Musharakah, respectively). The entrepreneur or partner will be entitled to a pre-agreed share of the profit generated from the investment in gold. The fund in this case must be operated in compliance with the requirements set out in clause 4 of this standard. 21

22 Case Study 5 Gold Backed Sukuk Gold Backed Sukuk Overview A gold Sukuk is a gold-backed Islamic bond which gives investors the opportunity to invest in physical gold through a Shariah-compliant structure. It guarantees the full ownership of gold and enables investors to hold it, trade it, or to request physical delivery. Returns of the Sukuk certificate are derived only from the physical gold value, there is no maturity date on the Sukuk certificate and they can be converted into cash or physical gold. Shariah Applications to Gold Backed Sukuk Within the Sukuk structure, the physical gold is fully allocated and fully backs the sukukholders investment, in line with clauses of this standard. The investments in gold must be based on spot transactions as per clause 2.1. It is common in a Sukuk structure that a special purpose vehicle (SPV) or any other designated entity will act on behalf of Sukuk investors. The contractual relationship is usual enacted through a Wakalah (agency) agreement whereby the Sukuk investors become the principal and the SPV is the agent. In this scenario it is important that the agent acts according to the clauses 5.4 and 5.5 of this standard. As redemption may be executed through the selling of the certificate in return for either cash or gold, it is important that the parties to this transaction observe clause 2.1 of this standard during redemption. It may be possible for a third party to promise to purchase the certificate in return for cash at maturity in accordance with clause

23 Shariah Basis for Rulings i In the traditions of the Prophet (PBUH), there are many traditions which govern the rules regarding the exchange of ribawi/usurious items. The best known hadith is the one reported on the authority of 'Ubadah Ibn ai-samit to the effect that the Prophet (PBUH) said: Gold for gold, silver for silver- until he said - equal for equal, like for like, hand to hand, if the kinds of assets differ, you may sell them as you wish provided it is hand to hand. (Muslim). The other hadith, reported on the authority of Abu Sa'id ai-khudri, is that the Prophet (PBUH) said: Do not sell gold for gold except equal for equal and do not sell what is deferred for a spot exchange (Bukhari). These two hadith show clearly enough that gold is of one kind and the silver is of another. ii See AAOIFI Shariah Standard 1 on Trading of Currencies. iii Constructive possession is on an equal footing with actual possession, because the Shariah never prescribed a particular method for taking possession. Therefore, reference must be made to the prevailing custom in the business community. iv Pledges derive their legitimacy from the following Quranic verse: "If ye are on a journey, and cannot find a scribe, a pledge with possession (may serve the purpose)" (Surat AI Baqarah, verse 283), and the practice of the Prophet (PBUH) since it is known that the Prophet (PBUH) died while his shield was still held as security for a mortgage (Narrated by AI Bukhari in his Sahih, 3/1068). Moreover, a pledge encourages performance and thus prevents the contract from being breached, and this security also justifies its legitimacy. The basis for the permissibility of security deposit is because it is a form of guarantee for any financial damage that may occur. A resolution has been issued in connection with the legality of earnest money (down payment) by the International Islamic Fiqh Academy (Resolution No. 72 (3/8)). v The authority for the principle that the pledge should be in the possession of the pledgee is the Quranic verse: "...a pledge with possession (may serve the purpose)" (Surat AI Baqarah, verse 283) and because the purpose of a pledge is to be held in order to recover the debt from its redemption or sale, and possession is the means to do so. This applies unless the pledgee consents that the pledge be kept by a trusted third party or remain in the debtor's possession. 23

24 vi The basis for the permissibility that partnership capital may be contributed in the form of tangible assets other than cash, after valuation, is that the purpose of partnership is to give partners a right to use the contributed money freely and to share the profit. This objective is realisable even if the capital is contributed in the form of tangible assets just as it is in the case of a contribution in cash. Therefore, it is just as valid to present tangible assets for partnership investment as to present cash. At the liquidation, each one of the partners will be entitled to the equivalent value of the assets presented at the conclusion of the partnership (Al-Mughni 7/24). vii The basis for allowing a party to a partnership to require a guarantee or a pledge from another party as security against cases of misconduct and the like is that this requirement does not conflict with the rules for partnership. viii The basis for the requirement that the guaranteeing institution should not be the owner of the guaranteed institution or vice versa is that by ownership the transaction becomes in substance a guarantee by a partner of the capital of another partner, which in turn would make the transaction akin to a loan. ix The basis for the impermissibility of an agreement to determine the profit share on the basis of a lump sum or a percentage of the capital is because this is inconsistent with the sharing of profit and because profit is not realised unless the capital is maintained intact. x The basis for the impermissibility of having both the subject matter and the capital of a Salam contract being gold is that it would constitute gold for gold at unequal values. The seller is allowed to enter into a parallel Salam contract as it takes the same conditions and rulings as the original Salam. xi The basis for the custodian not being able to use or comingle the gold under a Wadiah contract is that the custodian is responsible to return the exact same piece of gold, therefore, if the custodian were to use or comingle the gold the item would be exposed to a heightened risk of damage/loss which is not tolerated under the Wadiah principle. xii Agency in exchange of gold is permissible because agency is permissible with regard to an activity that the principal could undertake personally. As one could undertake the exchange himself, then it is also lawful for him to authorise its undertaking by others on his behalf. xiii See AAOIFI Shariah Standard 35 on Zakah. 24