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AN ANALYSIS ON THE APPLICATION OF THIRD
PARTY GUARANTEE IN ISLAMIC CAPITAL MARKET
WITH SPECIAL REFERENCE TO ØUKÕK
BY
CHAIBOU ISSOUFOU
A thesis submitted in fulfilment of the requirement for the
degree of Doctor of Philosophy in Law
Ahmad Ibrahim Kulliyyah of Laws
International Islamic University Malaysia
AUGUST 2014
ii
ABSTRACT
The application of third party guarantee is drastically becoming a paramount element
in Islamic capital market. Its proper application in Islamic capital market has not been
researched deeply without specific focus on ØukËk. Therefore, the primary objective
of this study is to analyze the application of third party guarantee in Islamic capital
market with special reference to various ØukËk such as ØukËk al-IjÉrah, ØukËk al-
MuÌÉrabah and ØukËk al-IstiÎnÉ‘. The overview of the concept of third party
guarantee in Islamic law which includes Muslim jurists’ point of views on third party
guarantee, its objective in Islamic law, pillars, legality, conditions and its effects on
the contracting parties as well as the views of Muslim jurists on charging a fee on the
third party guarantee have been explicitly analyzed. The concept of the application of
third party guarantee in Islamic capital market and its instruments, Islamic money
market and Islamic derivatives, has also been discussed in this study. The
methodology used in the study is based on qualitative analysis whereby primary and
secondary sources were collected. It was discovered in the study that the application
of third party guarantee is permissible in Islamic capital market and its instruments
provided that it is done voluntarily. The findings of the study further elaborated that
the application of third party guarantee must be done without charging any fee in
relation to the guarantee. It was also revealed in the study that the application of third
party guarantee is permissible in the processes of ØukËk al-IjÉrah, ØukË al-MuÌÉrabah
and ØukËk al-IstiÎnÉ‘ without taking any fee in relation to the guarantee. However, in
a ØukËk al-IstiÎnÉ‘ transaction it is permissible to impose compensation on the
manufacturer in case he delays the delivery of the manufactured asset on the due date
and that it amounts to cause of damage on the commissioner to manufacture. Finally,
the study provides suggestions for an alternative application of third party guarantee in
Islamic capital market to the existing one such as having a government of a country to
provide a voluntary third party guarantee for the project that ØukËk is issued.
iii
iv
APPROVAL PAGE
The thesis of Chaibou Issoufou has been approved by the following:
__________________________
Rusni Hassan
Supervisor
__________________________
Ahmad Azam Othman
Co-supervisor
__________________________
Aznan Hasan
Internal Examiner
__________________________
Mohamad Akram Laldin
External Examiner
__________________________
Abdi Omar Shuriye
Chairman
v
DECLARATION
I hereby declare that this thesis is the result of my own investigations, except where
otherwise stated. I also declare that it has not been previously or concurrently
submitted as a whole for any other degrees at IIUM or other institutions.
Chaibou Issoufou
Signature …………………………………. Date……………………..
vi
INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA
DECLATION OF COPYRIGHT AND AFFIRMATION
OF FAIR USE OF UNPUBLISHED RESEARCH
Copyright © 2014 by Chaibou Issoufou. All rights reserved.
AN ANALYSIS ON THE APPLICATION OF THIRD PARTY
GUARANTEE IN ISLAMIC CAPITAL MARKET WITH
SPECIAL REFERENCE TO ØUKÕK
No part of this unpublished research may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without prior written permission of the copyright holder
except as provided below.
1. Any material contained in or derived from this unpublished research may
only be used by others in their written with due acknowledgement,
2. IIUM or its library will have the right to make and transmit copies (print or
electronic) for institutional and academic purposes.
3. The IIUM will have the rights to make, store in a retrieval system and supply
copies of this unpublished research if requested by other universities and
research libraries.
Affirmed by Chaibou Issoufou.
………………………………. ……..……………….
Signature Date
vii
This work is dedicated to all my parents, all my family members and all Muslim
brothers especially Law students and those who want to write on the third party
guarantee in Islamic capital market.
viii
ACKNOWLEDGEMENTS
In the name of Allah, Most Gracious, Most Merciful. All praise is for Allah subhÉnahu
wa ta'ÉlÉ and His blessings and salutations be upon His Messenger Muhammad
ÎallallÉhu alaihi wasallam and his companions and those who follow them in upholding
the cause of the right religion. For the first time that I sat down to attempt to write my
thesis, I realize that it would not be an easy task for me because of lack of materials,
particularly in this area of research. However, after I have completed this thesis, I would
like to thank International Islamic University Malaysia and Ahmad Ibrahim Kulliyyah of
Laws for granting me the opportunity to join this programme. My appreciation and thanks
to every person who has helped me directly or indirectly, particularly to my lecturers in this
Kulliyyah. It is a great pleasure to express my profound gratitude and thanks to my two
supervisors Associate Prof. Dr. Rusni Hassan and Dr. Ahmad Azam Othman for their
sincere supervision, as without their physical and moral support, this work cannot be
achieved at the moment. Special thanks from the deepest of my heart go to internal
examiner Associate Prof. Dr. Aznan Hasan and external examiner Associate Prof. Dr.
Mohamad Akram Laldin for their sincere examination and supervision, as without their
sincere examination, this work cannot be in this appropriate way.
In addition, I also should owe thanks to Iqra’ Charitable Organization, Prof.
Dato' Dr. Sano Koutoub Moustapha and Kaossar Banu Ropun for their financial
assistance and moral support, as without this financial assistance, I would have
stopped at the middle of my academic career. Last but not least, I thank my parents,
especially my late father and mother for their patience and endurance for letting me to
be away from them for a long period of time. I have the pleasure to express my
thanks to my family members, especially my wife (Nimatoulaye Moussa) for her
moral support, endurance and encouragement as well as my children for their patience
and pain.
ix
TABLE OF CONTENTS
Abstract ..................................................................................................................... ii
Abstract in Arabic ..................................................................................................... iii
Approval Page ........................................................................................................... iv
Declaration Page ....................................................................................................... v
Copyright Page .......................................................................................................... vi
Dedication .................................................................................................................. vii
Acknowledgements .................................................................................................... viii
List of Abbreviations ................................................................................................. xiii
Table of Transliteration .............................................................................................. xiv
CHAPTER ONE: INTRODUCTION .................................................................... 1
1.1 Statement of Problem ............................................................................... 5
1.2 Hypothesis of Research ............................................................................ 7
1.3 Objective of Research .............................................................................. 8
1.4 Methodology of Research ......................................................................... 8
1.5 Scope and Limitations of Research .......................................................... 9
1.6 Literature Review ..................................................................................... 10
1.7 Chapterisation ........................................................................................... 24
CHAPTER TWO: AN OVERVIEW OF THE CONCEPT OF GUARANTEE
AND THIRD PARTY GUARANTEE IN ISLAMIC LAW ................................. 27
2.0 Introduction............................................................................................... 27
2.1 Definition of Guarantee ............................................................................ 28
2.2 Legality of Guarantee ............................................................................... 35
2.3 Objective of Guarantee in Islamic Law .................................................... 38
2.4 Types of Guarantee in Islamic Law .......................................................... 41
2.5 Pillars of Guarantee in Islamic Law ......................................................... 45
2.6 Conditions of Guarantee in Islamic Law ................................................. 48
2.6.1 Conditions of Guarantor ................................................................. 48
2.6.2 Conditions of Guaranteed person ................................................... 50
2.6.3 Conditions of Creditor ................................................................... 50
2.6.4 Conditions of the Subject Matter of Guarantee.............................. 52
2.6.5 Conditions of Offer and Acceptance .............................................. 55
2.7 Effect of Guarantee Contract .................................................................... 56
2.7.1 Right of Creditor to Claim from Guarantor ................................... 56
2.7.2 Right of Guarantor to Claim from Guaranteed Person .................. 58
2.8 Modes of Guarantee ................................................................................. 61
2.9 Charging fee on Guarantee in Islamic Law .............................................. 63
2.10 Third Party Guarantee in Financial Matters ........................................... 68
2.10.1 Third Party Guarantee for Debt ................................................... 68
2.10.2 Third Party Guarantee for Tangible Asset ................................... 69
2.10.3 Third Party Guarantee for Future Liability .................................. 71
2.11Conclusion ............................................................................................... 73
x
CHAPTER THREE: CONCEPT OF THIRD PARTY GUARANTEE IN
ISLAMIC CAPITALMARKET ............................................................................. 75
3.0 Introduction ................................................................................... 75
3.1 An Overview of the Islamic Capital Market ...................................... 77
3.2 Segment of Islamic Capital Market .......................................................... 79
3.2.1 Islamic stock Market ...................................................................... 80
3.2.1.1 Application of Third Party Guarantee in I-Stock Market .... 82
3.2.2 Islamic Money Market ................................................................... 85
3.2.2.1 Application of Third Party Guarantee in I-Money Market. 88
3.3 Instruments of Islamic Capital Market ..................................................... 89
3.3.1 Islamic Real Estates Investments Trusts ........................................ 89
3.3.1.1 Application of Third Party Guarantee in I-REI Trusts ........ 93
3.3.2 Islamic Unit Trust .......................................................................... 94
3.3.2.1 Application of Third Party Guarantee in I-Unit Trust. ....... 96
3.3.3 Islamic Exchange Traded Fund ...................................................... 97
3.3.3.1 Application of Third Party Guarantee in I-ET Fund ........... 98
3.3.4 Islamic Derivatives......................................................................... 100
3.3.4.1 Bay al-Salam and Bay al-IstiÎnÉ‘ Contracts as Alternative
to Conventional Future Contracts .................................................... 102
3.3.4.2 Parallel Salam and IstiÎnÉ‘ as alternative to CFM .............. 104
3.3.4.3 Bay al-‘ArbËn as alternative to Option Contracts ............... 107
3.3.4.4 Application of Third Party Guarantee in ID Market ........... 109
3.3.5 ØukËk in Islamic Capital Market .................................................... 110
3.3.5.1 Significance of ØukËk in Islamic Capital Market ................. 113
3.3.5.2 SharÊ‘ah Issues on ØukËk in Islamic Capital Market ........... 115
3.3.5.3 Application of Third Party Guarantee in Islamic ØukËk ...... 117
3.4 Conclusion ................................................................................................ 119
CHAPTER FOUR: APPLICATION OF THIRD PARTY GUARANTEE IN
ØUKÕK AL-IJÓRAH ................................................................................................ 121 4.0 Introduction............................................................................................... 121
4.1 An Overview of ØukËk Al-IjÉrah .............................................................. 122
4.2 Essential Features of ØukËk Al-IjÉrah in Islamic Law.............................. 126
4.3 Process of ØukËk Al-IjÉrah ....................................................................... 130
4.3.1 Structure of SukËk Al-IjÉrah .......................................................... 130
4.3.1.1 Application of Third Party Guarantee in the Structure of
ØukËk Al-IjÉrah ............................................................................... 136
4.3.2 Circulation of ØukËk Al-IjÉrah in Islamic Law .............................. 139
4.3.2.1 Application of Third Party Guarantee in Circulation of
the ØukËk Al-IjÉrah .......................................................................... 142
4.3.3 Redemption of ØukËk Al-IjÉrah in Islamic Law ............................ 143
4.3.3.1 Application of Third Party Guarantee in the Retrieval of
ØukËk Al-IjÉrah ................................................................................ 146
4.3.4 Termination (’IïfÉ’) of ØukËk Al-IjÉrah ......................................... 147
4.3.4.1 Application of Third Party Guarantee in Termination of
ØukËk Al-IjÉrah ............................................................................... 148
4.4 Conclusion ............................................................................................... 149
xi
CHAPTER FIVE: APPLICATION OF THIRD PARTY GUARANTEE IN
ØUKÕK AL-MUÖÓRABAH ..................................................................................... 151 5.0 Introduction .............................................................................................. 151
5.1 An Overview of ØukËk Al-MuÌÉrabah ..................................................... 152
5.2 Essential Features of ØukËk Al-MuÌÉrabah In Islamic Law .................... 160
5.3 Process of ØukËk Al-MuÌÉrabah .............................................................. 165
5.3.1 Structure of SukËk Al-MuÌÉrabah ................................................ 165
5.3.1.1 Application of Third Party Guarantee in Structure of
ØukËk Al-MuÌÉrabah ...................................................................... 173
5.3.2 Circulation of ØukËk Al-MuÌÉrabah in Islamic Law .................... 174
5.3.2.1 Application of Third Party Guarantee in Circulation of
the ØukËk Al-MuÌÉrabah ................................................................ 175
5.3.3 Redemption of ØukËk Al-MuÌÉrabah in Islamic Law .................. 179
5.3.3.1 Application of Third Party Guarantee in Retrieval of
ØukËk Al-MuÌÉrabah ...................................................................... 181
5.3.4 Termination of ØukËk Al-MuÌÉrabah ............................................ 182
5.3.4.1 Application of Third Party Guarantee in Termination of
ØukËk Al-MuÌÉrabah ...................................................................... 183
5.4 Conclusion ................................................................................................ 184
CHAPTER SIX: APPLICATION OF THIRD PARTY GUARANTEE IN
ØUKÕK AL-ISÙÔØNÓ‘ .............................................................................................. 186 6.0 Introduction .............................................................................................. 186
6.1 An Overview of ØukËk Al-IsÏiÎnÉ‘ ............................................................ 187
6.2 Essential Features of ØukËk Al-IsÏÊÎnÉ‘ in Islamic Law............................ 194
6.3 Process of ØukËk Al-IsÏiÎnÉ‘ ..................................................................... 197
6.3.1 Structure of SukËk Al-IsÏiÎnÉ‘ ........................................................ 197
6.3.1.1 Application of Third Party Guarantee in the Structure of
ØukËk Al-IsÏiÎnÉ‘ .............................................................................. 203
6.3.2 Circulation of ØukËk Al-IsÏiÎnÉ‘in Islamic Law ............................. 205
6.3.2.1 Application of Third Party Guarantee in Circulation of
the ØukËk Al-IsÏiÎnÉ‘ ........................................................................ 207
6.3.3 Redemption of ØukËk Al-IsÏiÎnÉ‘in Islamic Law .......................... 209
6.3.3.1 Application of Third Party Guarantee in the Redemption
of ØukËk Al-IsÏiÎnÉ‘ ........................................................................ 210
6.3.4 Termination of ØukËk Al-IsÏiÎnÉ‘ ................................................... 211
6.3.4.1 Application of Third Party Guarantee in Termination of
ØukËk Al-IsÏiÎnÉ‘ .............................................................................. 213
6.4 Conclusion ............................................................................................... 214
CHAPTER SEVEN: CONCLUSION AND SUGGESTIONS ............................ 216 7.1 Suggestions and Recommendations ........................................................ 222
REFERENCES ......................................................................................................... 228
APPENDIX (I) ........................................................................................................... 253
APPENDIX (II) ........................................................................................................ 257
APPENDIX (III) ........................................................................................................ 261
APPENDIX (IV) ........................................................................................................ 267
xii
APPENDIX (V) ......................................................................................................... 272
APPENDIX (VI) ........................................................................................................ 292
xiii
LIST OF ABBREVIATIONS
AAOIFI Accounting and Auditing Organization for Islamic
Financial Institutions
A.S Alaihi al-SalÉm
BNM Bank Negara Malaysia
I-ETF Islamic Exchange Traded Fund
I-PRS Islamic Profit Rate Swap
I-UT Islamic Unit Trust
I-REITs Islamic Real Estate Investment Trusts
IAB Islamic Accepted Bill
IBD Investment Banking Division
KFH Kuwait Finance House
MDIC Malaysia Deposit Insurance Corporation
OIC Organization of the Islamic Conference
SIMC Sarawak International Medical Centre
SSHMC Sarawak Specialist Hospital and Medical Centre
SPV Special Purpose Vehicle
SAW ØallallÉhu Alaihi Wasallam
SWT SubÍÉnahu Wa Ta‘ÉlÉ
xiv
TABLE OF TRANSLITERATION
’ D Ö K
B Dh Ù L
T R Ú M
Th Z ‘ N
J S Gh H
× Sh F W
Kh Ø Q Y
Short Vowels
A
I
U
Long Vowels
Ó
Ô
Õ
1
CHAPTER ONE
INTRODUCTION
The operation of third party guarantee exists in almost all developed countries and is
having an increasing presence in the Islamic capital market, especially the ØukËk
transactions. It is of paramount importance in economic and social objectives, the
principal ones being the protection of small, unsophisticated investors, maintaining
confidence and stability within the financial sector and the acceleration of failure
resolution strategies in cases where an institution fails.
The Islamic capital market is one that is free from Islamically prohibited
elements such as usury (ribÉ), gambling (maysir) and uncertainty (gharÉr). This is
unlike the conventional capital market which operates based on the above prohibited
elements as well as other activities considered illegal in Islam.
The third party guarantee and its operation derive from the principle of mutual
consent guarantee between investors. From the perspective of Islamic law, the third
party refers to a person who is not involved with the investment and has no
relationship with the investors, but who will be a guarantor for any loss that may occur
to the principal amount or profit from the investment.
As for the operation of third party guarantee in the Islamic capital market,
particularly in ØukËk, it remains in its the initial stage compared to the conventional
third party guarantee, which has been rooted in the economic, capital market and
banking system since its origin in 1829 in New York State (USA).1 Therefore, there
1 Maria L. Fres-Felix, Deposit Insurance Schemes: Its Nature, Role and Issues (Kuala Lumpur, The
South East Asian Central Banks Research and Training Centre, 1991),7.
2
is a need to conduct research in this area in search for a new model of guarantee in the
Islamic capital market to better grasp the concept of third party guarantee and its
application in the Islamic capital market.
Islamic law is a comprehensive law suitable for anytime and anywhere. In
addition, many Muslim countries rely on the products of the Islamic capital market,
such as Øukūk investment. This research is therefore undertaken in order to highlight
the operational practice of third party guarantee in Islamic law and its application in
the Islamic capital market with particular reference to ØukËk. This is because ØukËk
investment is a milestone for the provision of capital for long-term investment that
conforms with the principles of Islamic law. Hence, this study investigates the
practice of the Islamic capital market with a special focus on the third party guarantee
in ØukËk, such as ØukËk al-IjÉrah, ØukËk al-MuÌÉrabah and ØukËk al-IstiÎnÉ‘. The
challenge of the Islamic capital market in the contemporary financial sector is to have
an Islamically permissible third party guarantee to promote its capital market
development anywhere in the world.
Furthermore, based on the basic understanding of the Islamic capital market, it
is worthwhile taking a look at some of the key issues relating to the third party
guarantee under an Islamic capital market system. The issue of third party guarantee
is not only relevant to Islamic banking and financial instruments, but to the Islamic
capital market as well. This is because this third party guarantee is implemented in
ØukËk investments in most Muslim countries, such as Danajamin Nasional Berhad of
Malaysia.The underlying principle of any guarantee in Islamic law is that it is
voluntary, wherein a guarantor should not take any benefit from it, whether it is a
financial or physical benefit. However, the dealings among Muslims in past eras
3
differ completely from contemporary dealings, especially in commercial transactions,
which are plagued by deception and mistrust.
This system of third party guarantee, with charging a fee, exists in some
Muslim countries either explicitly or implicitly and can be found either in banking
activities or ØukËk investments. For example, in ØukËk investment in Jordan, the
government guarantees an investment subscription which that Ministry of
Endowments has on the endowed land. At the maturity of the investment period, the
government will return to the Ministry of Endowments for reimbursement of what it
has paid in terms of the guarantee it provided. In the banking sector, there is the
Malaysian Deposit Insurance Corporation (MDIC) which is imposed on banks by the
Central Bank of Malaysia to essentially guarantee the affairs of banking institutions.
In addition to this, in ØukËk we have Danajamin Nasional Berhad which insures the
investment of the ØukËk.
In Islamic law there are transactions that are not guaranteed unless an act of
negligence occurrs, such as MuÌÉrabah ØukËk investment, IjÉrah ØukËk and IstiÎnÉ‘
ØukËk. Investment of such ØukËk, in order to conform with the Islamic law, must be
on risk bearing and not on risk management or guarantee of the principal amount or
profit.
In the perspective of Islamic law, wealth belongs to AllÉh and human beings
are accountable for any transaction that may be carried out by them. Furthermore,
investment is encouraged by Islamic law, but this is not absolute. A person should
invest his wealth in such a way that it does not contravene the principles of Islamic
law. He should invest his assets in a way that provide opportunity for others to work
and benefit the society. Islam has forbidden usury (ribÉ) and similar illegal activities
because they hold back the economy and limit wealth circulation among the wealthy.
4
Hence, the wealthy will manipulate or exploit the poor and this will affect the
economy, not only at the individual level, but also at the social level. This
contravenes with the principles of Islamic law regarding wealth which is to make
wealth circulate among the people through various instruments that conform with the
principles of Islamic law, such as investing in the Islamic capital market free of illegal
activities.
Furthermore, the objective of investment in Islamic law is not simply to make
the financial products look similar to that of conventional financial instruments, but
rather it is to evolve innovative types of assets that are in conformity with Islamic law
principles. Therefore, the investment of ØukËk should not be considered a
replacement for the conventional bonds which are based on ribÉ because they are only
contractual debt obligations with no existence of real asset during the term of the
contract.2
In light of that, the present study focuses and elaborates on the above-
mentioned issues, which have not been well elaborated by previous researchers.
Given that ØukËk investment has become the main method for redemption or
increasing the capital of any investment and financing any project, the study also
highlights the main differences between investment of ØukËk as regards to Islamic and
conventional law, so as to offer a solution for third party guarantee and its application
in the Islamic capital market pertaining to ØukËk investment.
2 Wan Abdul Rahim Kamil, Islamic Participatory Contracts: MushÉrakah and MuÌÉrabah (Structuring
ØukËk), paper presented at Workshop on Detailed Structuring of Islamic Securities. Organized by
Islamic Banking and Finance Institute Malaysia, 27 October 2007 (Kuala Lumpur: Islamic banking and
Finance Institute,2007), 5.
5
1.1 STATEMENT OF PROBLEM
The Islamic Fiqh Academic in Jeddah and the Islamic Fiqh Academic in Makkah
have discussed the issue of third party guarantee in the Islamic capital market,
particularly in Øukuk investment. The resolution was that third party guarantee that
includes a fee is impermissible in Islamic law3. However, it is permissible for the
government to voluntarily guarantee capital or the specific profit of an investment in
order to give assurance to those wishing to invest their money in this kind of business.
The question that may arise is whether the government can guarantee this huge
amount without returning to the issuer for reimbursement. Another question that may
arise is whether it is possible to find nowadays a voluntary guarantor who can
guarantee this huge amount of investment.
Furthermore, al-ØidÊq MuÍammad al-’AmÊne al-ÖarÊr stated that the guarantee
by the government for the original price and specific profit of investment of ØukËk al-
MuÌÉrabah will convert a MuÌÉrabah contract into a loan contract in which the
creditor stipulated an extra amount on the loan, and this is no longer a contract of
MuÌÉrabah, but a contract of loan which charges a profit which is ribÉ.4
MuÍammad TaqÊ ‘UthmÉnÊ also stated that a guarantee for capital or specific
profit of investment is impermissible because guarantee is only permissible in Islamic
law in matters that are guaranteed originally by the principal such as loan or price of
sold items. Matters which are not guaranteed originally by the principal such as
safekeeping instruments or capital amount of partnership or capital amount of
investment, Muslim jurists unanimously agree that such instruments are not
guaranteed. Therefore, it is impermissible in Islamic law to guarantee capital of
3 Fiqh Academic resolution no. 5 in Majallah Majma‘a al-Fiqh al-IslÉmÊ, vol. 2 no, 2 session no. 2
(Jeddah: Majma‘a al-Fiqh al-IslÉmÊ, 1986),1209 4 Al-ØidÊq, MuÍammad al-’AmÊne al-ÖarÊr, “SanadÉt al-MuqÉraÌah” in Majallah Majma‘a al- Fiqh
al-IslÉmÊ, vol. 4, no.4 session no.4 (Jeddah: Majma‘a al-Fiqh al-IslÉmÊ, 1988), 1814.
6
investment or loss of profit. This is because the entrepreneur does not guarantee those
instruments, unless there is negligence or transgression from him. TaqÊ ‘UthmÉnÊ also
stated that it is impermissible for the issuer to purchase the ØukËk at the original price
at maturity of the period of investment because all the assets of the project belong to
the capital providers. If the entrepreneur purchased them at the original price, then the
investment will amount to a loan contract.5
As a result of this, the existing third party guarantee system, which is
dominantly based on the conventional system, needs to be reformed to be in line with
the principles of Islamic law. In the course of doing this, special attention would be
paid to the following issues:
(i) Which authority regulates this third party guarantee system because in
most Muslim countries the regulation of third party guarantee on
financial institutions is normally imposed by a central regulatory
authority? For instance, in Malaysia Danajamin Nasional Berhad
which is regulated and supervised by the Central Bank of Malaysia
offers a third party guarantee for the payment in case there is any
shortfall from the investment of the ØukËk. In Jordan, the government
guarantees the principal amount or a portion of profit of ØukËk al-
MuÌÉrabah that the Ministry of Endowments conducts on its endowed
lands. This study intends to examine whether such regulation complies
with the principles of Islamic law.
(ii) Whether the principal amount of investments is guaranteed or both
principal amount and profit are guaranteed. In ØukËk al-MuÌÉrabah
investment for example, if the issuer wants to buy or pay back
5 MuÍammad TaqÊ ‘UthmÉnÊ, “Sanadat al-MuqÉraÌah” in Majallah Majma‘a al- Fiqh al-IslÉmÊ, vol. 4,
no 4 session no.4, (Jeddah: Majma‘a al-Fiqh al-IslÉmÊ, 1988), 1857-1859.
7
instruments of investment at maturity of the period, at which price will
he purchase the instruments? Is it at nominal price or at market price?
Similarly, in ØukËk al-IjÉrah and ØukËk al-IstiÎna‘ when the
subscription is closed, the money taken from the investors would
become the real asset belonging to them.
(iii) The issue on how a third party guarantee can be managed without
contradicting Islamic law is been discussed.
(iv) Issues on whether it is permissible in Islamic law to charge a fee on
the application of this third party guarantee in the Islamic capital
market pertaining to ØukËk is also included.
In view of the above-mentioned issues, there is a significant need to conduct
research on this model of third party guarantee as a new model to be adopted by the
Islamic capital market, particularly in ØukËk. Since this is new, the research seeks to
provide a clear picture of the conceptual and operational practices of the third party
guarantee in the Islamic capital market pertaining to ØukËk al-IjÉrah, ØukËk al-
MuÌÉrabah and ØukËk al-IstiÎna‘.
1.2 HYPOTHESIS OF RESEARCH
The hypothesis of this research is that the application of third party guarantee as
presently practiced in the Islamic capital market (i.e. charging a fee) pertaining to
ØukËk is not in compliance with the principles of Islamic law. This is because they
apply the conventional third party guarantee, which contravenes the principles of
Islamic law as it contains the unlawful elements of interest (ribÉ). In Islamic law, for
8
any investment to be in conformity with the principles of Islamic law, it must be risk
bearing as mentioned in the ×adÊth of the Prophet (S.A.W): “No risk no gain”.6
1.3 OBJECTIVE OF RESEARCH
By considering Muslim jurists’ discussions on the third party guarantee in the Islamic
capital market, the application of this third party guarantee is still at its preliminary
stage. Therefore, the present study aims to achieve the following objectives:
1. To study the concept of third party guarantee from the point of view of
Islamic law in terms of its concepts and application.
2. To analyse the concept of third party guarantee in the Islamic capital
market and its instruments.
3. To analyse the application of third party guarantee in ØukËk al-IjÉrah,
ØukËk al-MuÌÉrabah and ØukËk al-IstiÎna‘
4. To assess the future prospects for the third party guarantee system and its
role in the contemporary Islamic capital market and economic
development.
5. To suggest and recommend solutions to problems emanating from the
application of third party guarantee in the Islamic capital market,
particularly in the ØukËk.
1.4 METHODOLOGY OF RESEARCH
The research adopts a qualitative approach wherein the theoretical framework of third
party guarantee in Islamic capital market pertaining to ØukËk is approached through
the collection of relevant data from literature such as textbooks, encyclopaedia,
6 ’AbË DÉwËd, SulaimÉn bin al-AshaÎ al-SajistÉnÊ, Sunan AbÊ DÉwËd vol 2, (Egypt: Maktabah al-
TijÉriyyah al-KubrÉ, 1950), 306.
9
articles in academic journals, seminars, conference papers, dissertations or thesis,
online databases and internet materials. This method of data collection is based on
library research in order to examine the legal issues relating to third party guarantee,
and to refer to the opinions of scholars of Islamic law.
In order to achieve this method, the researcher resorts to initially highlighting
the views of jurists on issues pertinent to third party guarantee, after which the
arguments of the Muslim scholars on the issues are examined and analysed.
Thereafter, the researcher extracts the legal rules that are in consonance with the
principles of the Islamic law.
In addition, the researcher highlights the fatwÉ of prominent scholars and the
resolutions of Fiqh Academies on the topic. The researcher then offers his view
supported with evidence either from the Qur’Én or Sunnah or the scholars’ points of
views. This method of analysis is adopted in order to make a comprehensive
understanding of third party guarantee in Islamic law, particularly its application in
the Islamic capital market as related to the issue of ØukËk investment. These
methodologies have been used in order to examine the theory and practice of third
party guarantee in the Islamic capital market, particularly in ØukËk al-IjÉrah, ØukËk al-
MuÌÉrabah and ØukËk al-Istisna‘.
1.5 SCOPE AND LIMITATIONS OF RESEARCH
The corporate bodies that deal with the capital markets, both Islamic and
conventional, can be grouped into two. The first is the banking institutions such as
development banks and investments banks, and the second is the non-banking
institutions, such as insurance corporations and savings funds companies.
11
This research focuses on the Islamic capital market pertaining to ØukËk, based
on the mechanism and structure adopted in Malaysia and Bahrain because they are the
pioneers of the Islamic capital market among Muslim countries. This study is not
comparative but analytical. The research also covers ØukËk al-IjÉrah, ØukËk al-
MuÌÉrabah and ØukËk al-IstiÎnÉ‘ because these types of ØukËk are the predominant
SukËk in the Islamic capital market, and the issue of third party guarantee is more
relevant to them.
The research focuses only on the above-mentioned ØukËk because the most
popular ØukËk in the global ØukËk market is ØukËk al-IjÉrah followed by ØukËk al-
MuÌÉrabah. Sometimes the investors use investments based on hybrid ØukËk al-
IjÉrah and ØukËk al-IstiÎnÉ‘.7
1.6 LITERATURE REVIEW
Most of the accessible literature on third party guarantee concentrates on the guarantee
in debt. The classical jurists unanimously agree that any guarantee is voluntary in
order to facilitate dealings among Muslims. However, only a few materials are
available on the topic of third party guarantee in the Islamic capital market pertaining
to ØukËk. Hence, there is a need for this research.
Classical scholars such as Ibn Rushd8, Al- QarÉfÊ
9, Ibn Al- SÉ ‘ÉtÊ
10and Ibn
QudÉmah,11
as well as Al-HumÉmah NiÐÉm,12
discussed the types of guarantee, and
7 Faisal Hasan , Global SukËk Market, Global Investment House, Kuwait posted on 09 March 2009 by
Asif Hussein <http://www.sailanmuslim.com/news/?p=599> accessed on 26 December, 2009. 8 Ibn Rushd, MuÍammad bin AÍmad al-QurÏubÊ, BidÉyat al-Mujtahid wa NihÉyat al- MuqtaÎid vol. 2,
(Beirut: DÉr- al- Ma‘rifah, 1985), 295-298, 272-279. 9 Al-QarÉfÊ,ShihÉbu Al- DÊn AbÊ al- AbÉs AÍmad bin ‘Abd al-RaÍamÉn al-ØanhÉnÊ, al-DhakhÊrah fÊ
FurË‘ al-MÉlikiyyah vol. 6, vol. 9, (Beirut: DÉr al-Kutub al-‘Ilmiyyah, 2001), 434-457, 480-537, 10Ibn al- SÉ ‘atÊ, MuÐÐafar al-DÊn AÍmad bin ‘AlÊ bin Tha‘alab, al-×anafÊ, Majma‘a al- BaÍraini wa
MultaqÉ al-NÊraini fÊ al-Fiqhi al- ×anafÊ (Beirut: DÉr al-Kutub al-Ilmiyyah, 2005), 442-447. 11 Ibn QudÉmah, ‘Abd AllÉh bin AÍmad, al-MughnÊ vol. 4, vol. 6 (Beirut:‘Alam al-Kutub nd ), 590-
623, 383- 402.
