DAIMG summery on SUKOOK-Dr. Asad Zaman

DAIMG’s Summary on Sukook-Dr .Asad Zaman Da Afghan Iqtisad Mashwarti group strongly recommends against the type of Sukook currently dominating the international market, for reasons to be detailed below. Instead, alternative forms which are both permissible in the Sharia, and also in the best interests of the IEA, are described and discussed. Recommended form of Sukook 1. The Shari’a endorses Tamveeli transactions which create a spirit of partnership and cooperation between all parties to the transaction. An investment project which aims to extract minerals for export, where the profit would be shared by the investors, is of this type. In this case, the Sukook issued for funding the project, would make investors partial owners of the project. Since the investors are paid from funds generated by the project, they have interest in seeing the project succeed. 2. This principle means that only projects which earn dollars can pay returns in dollars. Thus, sukook denominated in dollars can only be used to finance export sector products. Even though financial emergencies sometimes necessitate the sale of natural resources, in the long run it is essential to acquire the skills to process these resources. Export of finished products, rather than natural resources, creates far greater earnings, and also creates valuable skills within the domestic economy. Instead of exporting lithium, Afghanistan should set up an industry to produce lithium batteries which is run by domestic manufacturers. Sukook for financing this project can be issued to investors, who will then take an interest in setting up the industry within Islamic Emirate Afghanistan. 3. Sukook for domestic mega projects which will generate earnings in Afghanis would also pay return in Afghanis as a share of the earnings. If financing such projects requires some expenditure in dollars, there are many ways to innovatively finance such projects which would not create dollar debts for the IEA. One example is to sell dollar-equivalent sukook to some of the investors in the project. Here the investors pay dollars, and are promised the equivalent purchasing power in dollars, five years later. This payment would be made in Afghanis five years later, using the dollar exchange rate at that time. This would not create unmanageable debt, since the payout would be limited to the earnings out of the project itself.  Three reasons why DAIMG does not recommend the form of Sukook described in the Awfi Bahram company proposal are discussed below. 4. The conventional Sukook which dominate the international market are exactly equivalent in form to an interest-based loan. This similarity has caused many scholars to rule that these forms are against the Sharia. The Sharia prohibits interest-based debt because it is extremely harmful to the debtors. David Graeber’s book “Debt: The First 5000 Years” describes the history of how interest-based debt has been used to enslave both individuals and nations over thousands of years. 5. A second reason why dollar-based Sukook are against the Sharia is because they involve high levels of Gharar. Even though the amounts to be paid are fixed in dollars, what this amount will be in Afghanis five years later is highly uncertain. The East Asian economies, which were highly successful for decades, were induced to borrow in dollars. Then, a collapse in the value of domestic currencies against the dollar changed loans of millions of dollars in loans of billions of dollars. This collapse of the exchange rate forced them to sell precious domestic assets very cheaply on the international market, so as to finance repayments. 6. The third reason why conventional sukook are against the Sharia is because these are "adversarial transactions". Foreign Investors in East Asia celebrated the collapse of East Asian currencies, because they were able to purchase huge amounts of domestic resources in return for their dollar loans. If the loans had been on a cooperative musharka basis, collapse of domestic economy would have hurt the investors, and they would have attempted to protect their investments by preventing this collapse. It has been explained how the Global Financial Crisis was caused by the interest-based mortgage debt used to purchase housing. Collapse of the market caused enormous harm to the debtors, but created enormous profits for the financial sector, which ended up owning assets worth far more than their loans. 7. The economics of conventional sukook are also highly unfavorable for the Afghani Economy. Given current market conditions and current perceptions of Afghanistan, an interest rate of 12% on the loan would be considered highly favorable to Afghanistan. But there are no real sector investment projects within Afghanistan which can generate such large returns (except for minerals, to be discussed separately). Thus, use of Sukook to finance domestic projects, to be paid out of dollars from returns in Afghanis, is likely to cause huge losses from projects which had the potential to generate high profits for the economy. This kind of foreign investment in the power sector in Pakistan has created an unbearable burden of dollar debt in Pakistan. This is known as the “revolving” debt, because the only way to finance payments is by borrowing more money. 8. There is only one sector which can produce high returns in dollars, sufficient to pay back interest rates of 12% which sukook loans will at least require. This is the mining sector. This generates double profits for foreign investors. They provide loans to set up the mining industry, and they purchase natural resources, like lithium, gold, gemstones, etc. Whereas the natural resources are purchased very cheaply, the processed forms - batteries, jewelry, etc. – are far more profitable, and generate massive profits for foreigners, at the expense of the domestic Afghani economy. It is far better to have cooperative investors setup local industries which process natural resources into finished products, providing skills, capabilities, and far higher export earnings, to Afghanistan.

To summarize, conventional dollar based Sukook are equivalent to an interest-based debt at a very high interest rate, and are extremely harmful for the Afghani Economy. Islamic forms of the Sukook make investors participants in the economic project, and ensure that they have an interest in seeing the project succeed. When we create Sukook aligned with both the form and the spirit of the Sharia, powerful forces both spiritual and material come into play to ensure success. The Quran promises prosperity – wealth and children – to those who follow the orders of Allah. Also, in the sharia based sukook, the financiers of the project have a strong interest in taking actions to protect their project against failure.