This article contained a valuable information about Islamic Financial Law ruled for Capital Guarantee and Protection Mechanism. A good article to read!

1. Iwan Budhiarta
Islamic Wealth & Business Advisor
wealthmanagementadvisor@gmail.com

2. Capital Guarantee & Capital Protection
Capital Guarantee is derived from a separate third party
Guarantees in the form of a financial instrument (such as bank
guarantee), corporate guarantees or other collaterals to ensure
that the investor will not suffer any loss at all on the amount of
the invested capital even if the underlying investment did not
perform well.
Capital Protection is the feature of a specific structured
product wherein is embedded a derivative securities, that have
the capability to ensure that the investor will get back at
maturity a part or the totality of the money he has invested in
the purchase of the product on day one.

3. Why Capital Guarantee is disallowed in
Contracts of Musharakah or Mudharabah
Contracts of participations such as Musharakah or
Mudharabah demands risk participations by way of:
 Profit & loss sharing (Musharakah), or
 Profit sharing (Mudharabah)
In both cases guarantees are only allowed on the capital
for recovering losses from misconducts by the managing
musharik or the mudharib
Guarantee on performances are disallowed
As an investment strategy, structured products invest in
low-risk securities such as Shariah compliant Government
Securities or ‘zero-coupon’ Sukuk

4. Shariah Rulings :
AAOIFI ( Shari’ah Standard No.13)
 The capital provider is permitted to obtain guarantees from the mudharib that are
adequate and enforceable. This is circumscribed with a condition that the capital
provider will not enforce these guarantees except in cases of misconduct, negligence or
breach of contract on the part of mudharib. [6/0]
Dallah Al Baraka
• It is not permissible for an investor to demand from the entrepreneur (mudharib) to pay
him a fixed percentage of the value of the contract, besides the capital sum, irrespective
of the amount of investment involved or whether the project is profitable or in loss.
Such a contract is unlawful because it involves a guarantee from the entrepreneur
respecting the capital sum, whereas a mudharib is a trustee and cannot be held
responsible for the capital sum except in cases of transgression or negligence. [ al-
Baraka first symposium, Fatwa No.2]
Majelis Ulama Indonesia
 In principle, the capital should not be guarantees unless the loss of capital is caused by
the negligence of the entrepreneur. [Fatwa No : 07/DSN-MUI/IV/2000]

5. Capital Guarantee on Various Sukuk Structures
Capital Guarantee on sukuk can be seen in light of the purchase undertaking of
sukuk by the issuer.
This kind of purchase undertaking is considered as capital guarantee to the
investors.
Therefore, the purchase undertaking at face value is not permitted in the
investments sukuk such as sukuk Musharakah and sukuk Mudharabah as this
impermissibility is in line with Hadith Rasullullah:
‫أن الخراج بالضمان‬
“We have to face the risks in order to get the profit from investments”
Sukuk Al-Ijarah:
AAOIFI resolution in 2008, purchase undertaking at face value is permitted under
sukuk Ijarah.

6. Example of Capital Protection
 The most common capital protected fund under Shariah compliant
structured products structure is whereby:
 the fund invest a portion of their assets in fixed income Shariah
compliant securities likened in feature to a ‘zero-coupon ‘Sukuk or
Shariah Compliant (SC) Government Securities designed to pay out
the total amount invested at a fixed maturity date. This date is
naturally dependent on the prevailing profit rate environment and the
amount of capital the fund can set aside for this purpose without
hampering performance.
 For example a USD 100 portfolio could purchase for example USD 60
worth of ‘zero-coupon’ Sukuk in the expectation that in 10 years the
value of those sukuk would be USD 100. The remaining USD 40 would
then be invested in other investments that have more attractive
returns or in profit locked-in products such as in Tawarruq contracts.

7. CAPITAL PROTECTION STRUCTURED PRODUCTS: Strategy 1
Profit Locked in
feature to ensure
Tawarruq Contracts more returns to
investor
with locked-in profits
USD 40 100% Capital
‘Zero Coupon Sukuk’ or Protection
USD 60 SC Government Securities
INVESTMENT LIFE OF THE PRODUCT

8. CAPITAL PROTECTION STRUCTURED PRODUCTS: Strategy 2
Profit Locked in
feature to ensure
additional returns
Once the Capital Protected component has matured, the to investor
portion is reinvested in other profit locked-in feature
investments e.g. Tawarruq.
Profit Locked in
feature to ensure
Tawarruq Contracts more returns to
investor
USD 60 with locked-in profits
USD 40
100% Capital
‘Zero Coupon Sukuk’ or
USD 60 SC Government Securities Protection
INVESTMENT LIFE OF THE PRODUCT
In this alternative, the capital protection matures before the life of the product. To enhance
earnings the USD60 is reinvested in other profit locked in investments. Derived profits will ensure
additional income to investors

9. Thank You – Terimakasih – Jazaakumullahu khairan katsiraan

10. Thank You – Terimakasih – Jazaakumullahu khairan katsiraan