<p>One of the primary issues in Islamic finance transactions is the  determination of the Shariah compliance of the financial instruments. As a  market practice, this role to confirm whether or not a financial instrument  complies with the requirements of Shariah is commonly taken by the Shariah Board  or Shariah Council of an entity, usually the financial  institution.&nbsp;<br /><br />While the basic aspects of Islamic transactions are  theoretically simple, the application and implementation in the real capital  market proves to be more complicated given the reality of the operational and  commercial environment within which Islamic transactions exist. One example is  the determination of profit rates in Islamic financial transactions, which are  often tagged to the interest rates so as to make sense of the indication of the  economic level.&nbsp; Another example is the structure of certain financial  transactions such as Murabaha or bai bithaman ajil (BBA), which is in substance  is to provide financing to the consumer or client, but structured as a trade  transaction to enable to commercial entities make profit out of such &lsquo;financing&rsquo;  instead of making profit from interest which is haram (forbidden/ nor  permissible) in Islam, they make profit from the so-called pure trade  transactions.&nbsp; This led to a situation where the critics of modern Islamic  finance, to view such trade transactions undertaken by these Islamic financial  institutions with their consumers as a repackaging of Islamic finance where form  takes over substance. Whether or not this is true and if so, to what extent it  is true is considered below.<br /><br />As a general rule, for a financial  instrument to be Shariah compliant, it has to strictly contain the elements of  what is permissible under Shariah and should carry any element of what is  constituted as haram under Shariah. Shariah scholars have further established  parameters to ensure that financial products comply with Shariah both in form  and substance; otherwise different levels of legitimacy of such financial  products are accorded. Two primary parameters are aqad and maqasid al shariah.  For example, if a contract such as a Murabaha contract fulfills all the  principles of contract making it a valid contract, then it will be further  examined to determine if it fulfills the maqasid parameter, that is to say  whether it fulfills the objectives of Shariah. If such contract fulfills both  the aqd and maqasid parameters, the contract will be valid and halal  (permissible). However, if such contract only fulfills the aqd and not the  maqasid parameter, it will be labeled as only sahih (genuine) but not halal.  This is because the majority of ulama (scholars) are of the view that mere  conformity to the rules, which go against the purposes of Shariah, are generally  unacceptable.<br />&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <br />While it can be said that almost all of the  Islamic finance transactions fulfill the aqd criterias rendering them sahih,  this does not follow that such Islamic financial transactions necessarily  fulfill the maqasid parameter and the objectives that Shariah intends to  achieve. There seems to be a lack of discussion and consideration given by  Islamic financial participants to the aspects of whether or not it fulfills the  objectives of Shariah. These issues are illustrated below in Islamic financial  transactions based on concepts such as (BBA), bai inah and tawarruq. The Islamic  financial transactions based on these concepts have long been the subject of  controversy amongst Shariah scholars and financiers alike and until now, no one  unified stance has been taken by the global Islamic financial industry in  respect of these transactions. <br />&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <br />It is useful to first briefly  describe the meaning of maqasid al shariah and its elements. Maqasid al shariah  literally means the objectives of Shariah and according to Imam Ghazali, a  renowned Egyptian Islamic Scholar, pursues five basic objectives, ie the  preservation of life, preservation of faith, preservation of lienage and the  preservation of property and these elements have to be protected as absolute  priorities.<br /><br />Both the structure of Tawarruq and Inah generally involve the  purchasing of commodity on credit and selling it for a lower price on cash,  however with different issues involved surrounding the two structures due to  their respective characteristics. In Tawarruq, there are three parties to the  contract and in Inah, two parties. In Tawarruq, a person in need of liquidity  purchases an asset from someone on credit and thereafter sells it for a lower  price to a third party, ie someone other than the original seller. In Inah, the  person in need of liquidity purchases an asset from someone on credit and  thereafter sells it for a lower price to the seller himself. This also gives  rise to BBA where the sale price to the third party, in the case of Tawarruq  and, the seller himself, in the case of Inah, is made on deferred payment  basis.&nbsp;<br /><br />The majority of jurists have generally considered Tawarruq to be  legally permissible whilst Inah, on the other hand is generally disapproved. The  legality of Tawarruq on the general Sharia principle of allowing sale while  prohibiting usury with all elements of transactions are declared permissible and  the absence of explicit evidence to the contrary. However, some jurists  prohibited the practice of tawarruq on the basis that it has similar features of  Inah. Inah, on the other hand, is generally disapproved by the majority of  jurists on the basis that the elements surrounding the contract indicate that  the asset in the transaction is merely being utilized to legitimize riba. The  fact that the asset purchased found its way back to the original seller, points  to a legal stratagem for earning riba. Since the purchaser purchases an asset  for its subsequent buyback by the original seller at a lesser price, Inah  denotes a situation where the purchaser is being assisted by this process to  fulfill his need for cash when he does not have an asset to sell in the first  instance. This gives rise to an indication of hilah where the structure is  adopted to solely circumvent riba and therefore does not fulfill maqasid al  shariah. However, the Shafii school of thought allows Inah on the basis that the  two contracts in Inah are independent of each other although concluded  consecutively. The Shafii refused to read into the intention of the parties and  unless such intention is explicitly stated in the contract to go against Sharia  principle, Inah is valid. In contrast, the structure of Tawarruq does not give  rise to an indication of hilah adopted solely for circumventing riba since the  asset does not return to the original seller. <br />&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <br />However, the  recent resolution the International Council of Fiqh Academy resolved was that  Tawarruq, as practiced by many commercial, Islamic and non-Islamic, banks was  not permissible. In particular they ruled that it came into conflict with  Maqasid Shariah. It is argued that although tawarruq has its basis in the  Shariah, it was, as practiced for the most part until recently, refined by  conventional bankers to fit in with profitability and the transaction control  objectives of conventional banks, i.e. to fit in as closely as possible to  products offered by conventional banks and conventional bank objectives related  to guaranteeing profits or what is termed &ldquo;organized Tawarruq.&rdquo; The  non-permissibility of such organized tawarruq was on the basis that it does do  not fit within the maqasid parameters. Presumably, being a hiyal (ruse) to  circumvent the ban on riba', the niyah of all participants was in contradiction  with the aims of the Shariah.<br /><br />The basic form of tawarruq as being  practiced by individuals without the involvement of banks is allowed. For  example, Individuals buy vehicles on installments and then sell them onward for  an attractive cash price (below that of the vehicle dealers or if lucky higher)  thereby obtaining cash for other purposes, while continuing to pay installments  to the dealers or financiers. As long as the purpose of obtaining cash is  permissible or halal, this has been allowed by the Shariah scholars. What  commercial banks had started to do was basically ensure that the commodity in a  Tawarruq contract (vehicles in the above example) sells for a price that is less  than its cash price, ensuring that banks were the clients&rsquo; agents in not only  buying the commodity but also selling it and organizing the whole transaction  sometimes as a &ldquo;Murabaha&rdquo; contract and other times as a &ldquo;Tawarruq almubarak&rdquo;  contract encouraging borrowing by clients and developing the debt culture which  is not part of the maqasid of Shariah.<br /><br />The issues in BBA transactions are  similar. BBA is a common Islamic banking facility involving immovable properties  as collateral, involving three separate agreements. The bank would purchase the  property concerned from the chargor pursuant to the first agreement. In the  second agreement, the bank would sell the property to the chargor. The third  agreement was a charge given by the chargor to the bank to enable the bank to  sell the property in the event of default by the chargor. It has been argued  that BBA transactions are superficial in its application of the Islamic law. The  mere availability of Arabic terms in an agreement does not mean that the  transaction is Islamic and falls under the ambit of Shariah. For the believers  who transacted on the BBA argued that they are cheated since they are all  labouring under false pretences and misconceptions concocted by the banks under  Islamic guise. True that BBA will offer a fixed amount of repayment unlike its  conventional counterpart which the amount of repayments fluctuates depending on  the market rate hence fulfills the element of uncertainties in Shariah, however  in general the other hand it slaps and oppresses the borrower with a large  repayment sum thus defeating what the maqasid parameters intend to achieve.</p>