Strict norms have hindered the development of gold related investable products in the Islamic finance world and restricted the investment only in the form of bullion and jewelry. A few gold related Islamic investment products which supported investors to buy and sell precious metals in a bulk form at competitive rates while, managing the supply chain to ensure secure vaulting existed prior to the introduction of the Gold Standard. However, lack of understanding and harmony of Sharia law with regards to gold product offerings kept investors away from these investments.
According to Islamic tradition, gold is one of the six “ribawi*” items, along with silver, dates, wheat, salt and barley and is subject to the Sharia rulings for currency exchange (al-Sarf). And hence, very stringent rules apply to the transactions involving these items to ensure that the transactions remained riba-free. Contrary to traditional paper based precious metals contracts that are traded on exchanges worldwide, Sharia law compels that constructive possession be taken for both gold and silver. This creates a unique problem for clients that of being able to store their gold or silver bullions securely until the time comes to exit. Alongside being unable to access precious metals in a bulk form, the storage conundrum has prevented Sharia conscious clients from trading in precious metals. Additionally, financial assets (such as sukuk, mutual funds, ETFs), which are wholly backed by physical gold are to be construed as gold and therefore, must be dealt with in accordance with the Sharia principles governing the dealings in gold.
Since gold is fungible, Sharia also mandates both segregation and allocation for the establishment of definitive ownership of physical gold. Ownership of physical gold requires the actual segregation of that gold from all other gold holdings stored at the same location. The Sharia requires this segregation to establish the precise loss and liabilities of a particular owner of the gold in case of the partial damage to the place where all the gold is kept. However, in case of non-segregation of gold, the gold owners are required to share risks proportionate to their ownership in the holding.
The new AAOIFI gold standard opens up the following avenues:
- It is permissible to buy the shares of a Gold mining company provided that the transaction complies with the AAOIFI’s standard 21 (Financial Paper – Shares and Bonds)
- Gold Savings Schemes: Provided the savings schemes comply with the rules related to payment and possession.
- ETFs and Gold Certificates: Provided these instruments are backed by real gold and constructive possession is realized by allocation of gold or by holding a certificate that represents ownership of a specified gold that is distinguishable from others, by serial numbers or other distinct marks. Moreover, the certificate is issued the day the contract is concluded [Trade Date “T+0”]. However, it restricts the sale of unspecified gold without physical possession. According to the standard, possession of a gold certificate is as good as the constructive possession, provided the gold certificate is as good as taking physical possession of the gold in terms of legal effect, transfer of risk and benefits.
*In the category of medium of exchange such as currency, gold and silver
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