This article discusses the need for Islamic finance products to move beyond just ensuring Shariah compliance and instead focus on fulfilling the spirit and purpose of Islamic teachings. It proposes creating a higher certification for Halal products based on Maqasid Shariah principles that evaluates corporate social responsibility. This "Tayyab" certification would benchmark products as not just permissible but providing extra benefits. The article also suggests Islamic investors and firms consider social responsibility factors that research has shown can improve financial performance and stock prices.

1. 23©
16th
December 2015
SPECIAL
REPORT
HALAL PRODUCTS
By Mujtaba Khalid
Although growing rapidly, averaging
double-digit growth in the past
decade, the modern Islamic finance
industry faces a number of challenges.
Practitioners and academics alike
have pinpointed a number of issues
including a lack of secondary markets
for Shariah compliant products, a lack
of consistency of standards in different
jurisdictions and a shortage of qualified
professionals (lawyers, bankers and
academicians among others) who
adequately understand both the Islamic
and conventional sides of the equation.
Most importantly though, for an industry
based on faith, credibility presents a
fundamental challenge for Islamic finance
to demonstrate how Shariah compliant
products provide an authentic alternative
to interest-based conventional products.
Islamic finance appears to have entered
into a new era in its evolution where
previously frowned upon areas are
now coming to the fore. Sectors such as
derivatives, hedge funds, the extensive
use of Tawarruq/commodity Murabahah
and other structuring methods to create
effective cash raise many questions on the
authenticity and direction of the industry.
This phenomenon has been referred
to as Shariah arbitrage, that is, Islamic
structured products created using wrappers
to overcome restrictions. This excessive
engineering of basic structures and products
designed to clone conventional structures
will eventually result in the Islamic banking
industry losing the opportunity to define its
differentiating factor.
This article looks at creating a higher
certification within the Halal products
universe which not only complies with
Shariah concepts but fulfills the actual
spirit and Maqasid of Islamic teachings
– an Islamic version of corporate social
responsibility certifications which uses
Maqasid Shariah as a benchmark. The
approach is about moving beyond
compliance to the law, and providing
something extra and beneficial, be it in
the product or behavior. Concepts such
as Tayyab, Mandoob (recommended)
and Makruh (disliked) are equally
relevant when creating a certification
and eventually a range of products that
provides a choice to the ultimate user of
Halal products to opt for enhanced value.
De inition of Tayyab
The Quran mentions the word Tayyab
over 40 times in a number of contexts but
the general meaning purports to goodness
within an action or object. We read it to
describe food, income, spouses, wealth,
agricultural products, character, property,
speech and manners. The meaning of
Tayyab, therefore, covers a range of goodly
descriptions: wholesome, enjoyable,
delicious, pure, beautiful, soft, safe, fertile,
chaste and fresh.
Its applicability is vast and is arguably
a subjective concept but in Arabic, to
appreciate the meaning of a word, one
must look at its antonym; which in this
case is Khabeeth. This is understood to
mean that which is filthy, foul, corrupt, and
dirty. Tayyab is its opposite. Tayyab can
only be understood once consideration is
given to the Halal. Ibn Khatir notes that
Tayyab has been mentioned many times in
the Hadith in conjunction to what is Halal.
However, Tayyab is more than just Halal.
It is mentioned in the Quran: “He (the
Prophet) will make good things (Tayyibat)
lawful to them and forbid them the
bad things (7:157).” Ibn Al Qayyum
explains this verse as meaning those
things permitted by the Prophet were
already among the ‘good things’ in life. By
declaring it lawful, he had vested another
level of goodness in them. The things
which are Tayyab are naturally Halal.
Conversely, Ibn Al Qayyum explains that
Allah has only forbidden deeds that are
shameful (Khabeeth) from the perspective
of any reasonable person. In the Quran,
Allah states that: “A good (Tayyib) deed is
like a good (Tayyib) tree: The roots are firm
and its branches are in heaven (14:24).”
Proposed applications: Private
equity and equity investments
One possible use of the Tayyab
methodology, among many others, is
using Maqasid Shariah-based equity
investment decisions as well as within
equities trading. This is not only to
appease the devout Muslim investor,
but according to conventional academic
research, social responsibility has a
positive impact on a firm’s profitability
and investors’ earnings.
For example, King and Lenox (2001)
showed that an increase in the value
of US firms is directly related to a firm
adopting environmental standards.
Feldman et al (1996) from their analysis
found that improvements in a firm’s
environmental performance result in
the stock price being less susceptible to
market movements, which in turn leads
to an increase in a public company’s stock
price thus making it a better investment.
Similarly, according to Abramson et al
(2000), socially responsible screened
portfolios offer competitive returns both
in the short and long run, compared to
the benchmark return.
Moving forward
Current Islamic finance products
and structures — both financial and
otherwise — have a single dimension of
either being Halal or Haram (permissible
or non-permissible). The evolution of the
Halal economy would be the formation
of a new genre of products and services
that are based on being Tayyab – being
wholesome and more beneficial than
basic Halal options. Moving forward,
broadly, the following paradigms should
be assessed vis-a-vis Islamic teachings
in both the financial and business arena
to define the next generation of Islamic
products:
• Corporate governance and general
internal business practices
• External business practices (including
social responsibility)
• Financial product structuring, and
• Underlying asset selection.
Mujtaba Khalid is a senior associate at the
IFC UK and also an assistant professor at
COMSATS IIT. He can be contacted at
mkhalid@ukifc.com.
Beyond Halal — An evolution of Shariah
compliant products
Focusing on the spirit and purpose (Maqasid) of Shariah, MUJTABA KHALID proposes a move past Halal and
Haram, to emphasize the clear gradations in the actions of a Muslim that have been defined in Islamic teachings.