Page 7 - Islamic Finance Practices

deposits are labelled profit loss sharing (PLS),

it remains a deposit fund in which Islamic

banks must hold sufficient capital to back-up

the Murabahas as required by the Basel
Committee. It will frustrate any attempts to

diversify assets into PLS and true Murabaha,

istisna and salam as the capital charges are

exorbitantly high due to the business risk

carried by these real-sector based products.

The way out is to use tawaruq instruments that

are only too similar to interest-bearing loans.

 Tawaruq fatigue: the tawaruq contract applied

in Islamic financing has detached asset that

consumers intended to buy from the tawaruq

sale contract. The customer no longer needs

to enter into an agreement with Islamic banks
into buying and selling, say a house or

machinery. By entering into the tawaruq

scheme, customers obtain the liquidity needed

to purchase the assets they want, like taking a

bank loan. While undoubtedly, tawaruq sales

have evidence underlying asset attached to

the sale, business risk or price risk is avoided

by way of quick sale and purchase of the
assets. The danger of high contract

concentration risk is in sight if less effort is

done by regulators to control the use of

tawaruq.