At the 2008 Islamic Funds World conference held in Dubai, two top industry figures put forward opposing views on the wa'ad swap - the promise agreement with which returns from one basket of assets are swapped with returns from another. Increasingly, this mechanism is being used to give Shariah compliant investors exposure to returns from haram, or non-Shariah compliant, assets.
Supporters of the technique say that it is no different to issuing a sukuk, for example, against the LIBOR (London Inter-Bank Offered Rate) benchmark, which is widely used in pricing Islamic bonds even though it is an interest rate.
Shaykh Yusuf Talal DeLorenzo, chief Shariah officer and board member, Shariah Capital, is a staunch opponent of the wa'ad swap with haram returns. "The purpose of this swap is to bring returns that are not compliant to Shariah investors - and everyone knows it," he told the audience. "It is a mistake to say that the haram basket is no more than a benchmark. All that happens is the non-Shariah basket of assets sets a benchmark and it's no different from LIBOR - wrong." He said that the comparison with LIBOR was inappropriate, since the interest itself, rather than the benchmark rate, is the forbidden part." As a mere benchmark it has nothing to do with the transaction," DeLorenzo said. "In a wa'ad swap it is what creates the returns, and that is the problem." LIBOR for ijara is totally unrelated to the ijara transaction. With the haram basket of assets, its performance is directly related to the return. The funding, whether it's direct or indirect, is there." He pointed out that LIBOR has been approved by Shariah boards for use as a benchmark for Islamic returns."There is no participation by Muslim investors in LIBOR - it's the business of the London banks," he added.
DeLorenzo argued that a Muslim investor taking part in a wa'ad swap is implicated in every investment decision the bank subsequently takes with his funds. "When you accept this investment product, you accept the whole series, whether you know it or not," he said. "As the money moves, its character changes." DeLorenzo concluded by saying: "If you're going to swap returns of one basket of performing assets for another, then you must insist that the assets in both baskets are halal. "Only then can you be sure of receiving returns that are halal."
Taking a slightly different view was Dr Hussein Hassan, director of Islamic finance structuring for Deutsche Bank UAE, which has pioneered Shariah compliant products that give Islamic investors exposure to non-Shariah returns.
In the specific mechanism outlined in the white paper issued by Deutsche Bank in 2007, the wa'ad swap is an agreement between the bank and the investor to swap the returns from two baskets of performing assets, which are kept entirely separate and do not interfere with each other. When the assets are deposited with the bank, it agrees with the investor to hand over the return from the basket of haram assets at the due date, in return for the return from the basket of Shariah compliant assets. The Islamic investor therefore takes the risk that the Shariah compliant assets he deposited with the bank could outperform the haram returns he will receive when the swap is conducted. For this reason, two agreements need to be signed to ensure that both sides carry out their obligations on the due date. He said that he expected a greater range of benchmarks to be available to the Islamic finance industry in future, making it easier to create Shariah compliant investment products that are linked to other assets.
Alka Banerjee, chairperson of Standard & Poor's index committee, also argued that more Islamic benchmarks were necessary to develop the industry. "Commodities is one that's really crying out for indices," she said. "That's a no-brainer. They are a big source of revenue for most Islamic countries and we do not have a commodities index right now. All commodities indices are based on futures pricing and futures are not Shariah complaint, so until the scholars come up with an acceptable form of pricing that index, it's waiting to happen." She predicted that Islamic ETFs (exchange traded funds) would take off in the next two years, and called for more breadth and depth in the Islamic funds industry, something that was echoed by other participants.
