23© 16th December 2015

SPECIAL REPORT

HALAL PRODUCTS

By Mujtaba Khalid

Although growing rapidly, averaging double-digit growth in the past decade, the modern Islamic fi nance industry faces a number of challenges. Practitioners and academics alike have pinpointed a number of issues including a lack of secondary markets for Shariah compliant products, a lack of consistency of standards in diff erent jurisdictions and a shortage of qualifi ed professionals (lawyers, bankers and academicians among others) who adequately understand both the Islamic and conventional sides of the equation. Most importantly though, for an industry based on faith, credibility presents a fundamental challenge for Islamic fi nance to demonstrate how Shariah compliant products provide an authentic alternative to interest-based conventional products.

Islamic fi nance appears to have entered into a new era in its evolution where previously frowned upon areas are now coming to the fore. Sectors such as derivatives, hedge funds, the extensive use of Tawarruq/commodity Murabahah and other structuring methods to create eff ective cash raise many questions on the authenticity and direction of the industry. This phenomenon has been referred to as Shariah arbitrage, that is, Islamic structured products created using wrappers to overcome restrictions. This excessive engineering of basic structures and products designed to clone conventional structures will eventually result in the Islamic banking industry losing the opportunity to defi ne its diff erentiating factor.

This article looks at creating a higher certifi cation within the Halal products universe which not only complies with Shariah concepts but fulfi lls the actual spirit and Maqasid of Islamic teachings – an Islamic version of corporate social responsibility certifi cations which uses Maqasid Shariah as a benchmark. The approach is about moving beyond compliance to the law, and providing something extra and benefi cial, be it in the product or behavior. Concepts such

as Tayyab, Mandoob (recommended) and Makruh (disliked) are equally relevant when creating a certifi cation and eventually a range of products that provides a choice to the ultimate user of Halal products to opt for enhanced value.

De inition of TayyabThe Quran mentions the word Tayyab over 40 times in a number of contexts but the general meaning purports to goodness within an action or object. We read it to describe food, income, spouses, wealth, agricultural products, character, property, speech and manners. The meaning of Tayyab, therefore, covers a range of goodly descriptions: wholesome, enjoyable, delicious, pure, beautiful, soft, safe, fertile, chaste and fresh.

Its applicability is vast and is arguably a subjective concept but in Arabic, to appreciate the meaning of a word, one must look at its antonym; which in this case is Khabeeth. This is understood to mean that which is fi lthy, foul, corrupt, and dirty. Tayyab is its opposite. Tayyab can only be understood once consideration is given to the Halal. Ibn Khatir notes that Tayyab has been mentioned many times in the Hadith in conjunction to what is Halal. However, Tayyab is more than just Halal.

It is mentioned in the Quran: “He (the Prophet) will make good things (Tayyibat) lawful to them and forbid them the bad things (7:157).” Ibn Al Qayyum explains this verse as meaning those things permitt ed by the Prophet were already among the ‘good things’ in life. By declaring it lawful, he had vested another level of goodness in them. The things which are Tayyab are naturally Halal. Conversely, Ibn Al Qayyum explains that Allah has only forbidden deeds that are shameful (Khabeeth) from the perspective of any reasonable person. In the Quran, Allah states that: “A good (Tayyib) deed is like a good (Tayyib) tree: The roots are fi rm and its branches are in heaven (14:24).”

Proposed applications: Private equity and equity investments One possible use of the Tayyab methodology, among many others, is

using Maqasid Shariah-based equity investment decisions as well as within equities trading. This is not only to appease the devout Muslim investor, but according to conventional academic research, social responsibility has a positive impact on a fi rm’s profi tability and investors’ earnings.

For example, King and Lenox (2001) showed that an increase in the value of US fi rms is directly related to a fi rm adopting environmental standards. Feldman et al (1996) from their analysis found that improvements in a fi rm’s environmental performance result in the stock price being less susceptible to market movements, which in turn leads to an increase in a public company’s stock price thus making it a bett er investment. Similarly, according to Abramson et al (2000), socially responsible screened portfolios off er competitive returns both in the short and long run, compared to the benchmark return.

Moving forwardCurrent Islamic fi nance products and structures — both fi nancial and otherwise — have a single dimension of either being Halal or Haram (permissible or non-permissible). The evolution of the Halal economy would be the formation of a new genre of products and services that are based on being Tayyab – being wholesome and more benefi cial than basic Halal options. Moving forward, broadly, the following paradigms should be assessed vis-a-vis Islamic teachings in both the fi nancial and business arena to defi ne the next generation of Islamic products:

• Corporate governance and general internal business practices

• External business practices (including social responsibility)

• Financial product structuring, and• Underlying asset selection.

Mujtaba Khalid is a senior associate at the IFC UK and also an assistant professor at COMSATS IIT. He can be contacted at mkhalid@ukifc.com.

Beyond Halal — An evolution of Shariah compliant productsFocusing on the spirit and purpose (Maqasid) of Shariah, MUJTABA KHALID proposes a move past Halal and Haram, to emphasize the clear gradations in the actions of a Muslim that have been defi ned in Islamic teachings.