TREATMENT OF CASH MARGIN IN ISLAMIC BANKS: BETWEEN SHARIA COMPLIANCE AND COMPLIANCE TO OBJECTIVES OF SHARIA.

INTRODUCTION.

A customer upon approval of his request for issuance of letters of guarantee (LG), she or he is required to provide security in form of cash to the value of the guarantee. Once LG is called by the beneficiary (Makful lahu) of the LG, the cash is used by the bank (Kafil) to repay the obligation. This security is what referred to as Cash Margin. However, if the customer (makful anhu) does not have cash to keep as security, other forms of securities are held to cover the bank against likelihood of the credit exposure.

TREATMENT OF CASH MARGIN IN CONVENTIONAL BANKS.

Conventional banks normally debit this amount of cash to be held as security to the account called ‘Cash Margin Account’ until maturity of the LG. If the LG is not called upon maturity, it is returned to the customer account and if it is called, the bank uses his money to settle the obligation and set-off from this customer cash to repay herself. In case the customer had no enough cash or nor cash at all to keep as Cash margin, other forms of security are held. If the LG is called and paid by the bank, the amount paid turned into a loan granted to the customer for which interest is charged until the amount paid by the bank is fully repaid.

Normally, Cash Margin account doesn’t earn interest to the customer however substantial it may be. Notwithstanding, conventional banks uses it to generate further income for herself.

TREATMENT OF CASH MARGIN IN ISLAMIC BANKS.

It won’t be a surprise to see Islamic banks treat cash margin in the same way as their conventional counterpart in the sense that customer cash deposits in Cash Margin account doesn’t earn profit for them though used by the bank for various purposes (Contrary to AAOIFI Sharia Standard No 5. Clause 4/6 “It is permissible for the pledgor (debtor) to use the pledged asset with the consent of the pledgee (creditor). However, the pledgee is not permitted to use the pledged asset at all, even if the pledgor has consented on it.”) on clear understanding that the customer forfeit any profit generated by it and hence he is not going to bear any risk of loss that might occur to it.

This is done on understanding of the fact, that the amount of cash held by the bank as cash margin is in no doubt a security and the true owner is the customer. Under Sharia, such security are falling under the rules of Rahn (contract of pledge or pawn), which dictates that: the subject manner of pawn contract shall not be used in favor of the pledgee (bank) (As per AAOFI Sharia Standard referred above). If used without his permission, that is a breach of Amanah (Trust) and benefits generated by its use should be given to the pledgor (customer). If customer allows to be used for investment purposes and but he gifted his share of profit to the bank, the bank can keep the profit for herself.

Certainly, if above requirements are upheld, Islamic banks use of Cash Margin deposits at her own risk may be ruled to be Sharia compliant. But by so doing, does it meet or comply with Maqasid Sharia (objectives of Sharia)?

It is my view that, fairness and justice in Islamic financial dealings is very important and a significant requirement or objective of Sharia. However such practice of getting permission to use the deposit in cash margin account without sharing the rewards (or loss if any) with customers defeats it. This is due to the following reasons:

One, customer seeking a guarantee from the bank to fulfill requirement of the government tender for example under the rules of Kafala or Dhamana is required by the bank to pay service charge to cover the actual costs incurred by the bank (kafil) to such issuance and cash as a security to be held under the terms of Cash Margin. Hence, the bank is in no loss/risk-situation for taking this off-balance sheet exposure.

Second, since the bank is in no loss situation, simple justice requires the customer should not be in a loss situation either. Furthermore, the objective of Kafala contract aims to render benefit to the guaranteed person (makful anhu) rather than the guarantor (kafil). However, by Islamic banks investing the deposit in cash margin for her own benefit, not only the customer doesn’t gain anything from his cash but the bank benefit from it (when used by the Islamic bank to generate profit). Furthermore, in all situation customer loses such as in a case where his cash is debited from his remunerative/investment accounts to Cash Margin Account or from non-remunerative account which he would have used it to get some benefits to Cash Margin Account which he will have no access to it completely until maturity of the LG.

Fairness and justice would then requires that this cash should be used by Islamic banks for the benefit of the customer or both rather than the bank alone and the later is what AAOIFI Sharia Standard No 5 clause 7/5/1 and 7/8/1 call for. Almighty says: Almighty says: God commands justice, the doing Of good, and liberality to kith And kin, and He forbids All shameful deeds, and injustice And rebellion: He instructs you, That ye may receive admonition.(Nahl:90)