TBTF – Bear Sterns collapse and Syariah compliance
// December 31st, 2009 // No Comments » // Business
While on holiday, I bought the book “Too Big To Fail” by Andrew Ross Sorkin. I’m about one-fifth of the way through the book. Really gripping stuff, but I wish I had a better way of remembering the names of the key players. Maybe I should put the profiles of the ensemble cast in an Appendix, along with their photos (haha!).
On Monday I recalled a comment from the first Chapter, and recounted it to one of my colleagues at work. Apparently, sources on Wall Street have it that a group of short-sellers maliciously manipulated Bear Sterns’s share price and reputation. This eventually resulted in the merger of Bear Sterns with JP Morgan in a stock swap of $2 per share, down from $172 per share a year earlier. The $2 offer was revised to $10 per share, but that is still less than 10% of the $172 high.
I recounted this story to my colleague because she attended a recent two-day seminar conducted by the Centre for Islamic Banking, Finance and Management (CIBFM) on Syariah compliant financial services, and she had briefed me earlier on some of the materials presented during the seminar.
From what we learned, key in determining if a transaction is “Syariah compliant” is whether it adheres to a set of 5 key principles:
- Avoidance of “Riba” – I think of this as “Usury“. Whether “profit sharing” agreements in murabaha (profit-sharing) transactions really represent “Interest” on debt (where a debt is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits, per the IASB Framework) … ah, that is the topic of a whole separate series of blog posts!
- Avoidance of “Gharar” – A deceptive sale with uncertain payoffs, benefiting one party at the expense of the other
- Avoidance of “Maysir” – Games of chance and gambling
- Avoidance of transactions involving prohibited commodities – all that is “Haram” e.g. Alcohol, drugs, etc.
- Contracts must have mutual consent, purpose and motive – quite similar to how in common-law systems, the key requirements for the creation of a contract are offer & acceptance, consideration, intention to create legal relations, legal capacity and formalities.
So I was thinking … between running a modern financial services firm and maintaining Syariah compliance … how do we reconcile these two needs? Are they congruent? Are they competing?
More after the break.
