THE USE OF FLOATING CHARGE AS AN ISLAMIC COLLATERAL INSTRUMENT: A SHARIAH COMPATIBILITY ANALYSIS

Abstract

The provision of collateral or security is imperative in modern
banking as it serves as a significant form of risk mitigation against
customer’s default in financing activities. One of the most common
security instruments utilized by financial institutions is a charge. In
the context of a client which is a body corporate, it may create either
a fixed or a floating charge. A floating charge has some unique
features whereby it constitutes a charge on a class of a company’s
present and future assets. From the Shari’ah perspective, an Islamic
financial institution’s collateral arrangements must primarily comply
with the Shari’ah. The unique feature of a floating charge where the
charged assets may constantly change from time to time may require
thorough Shari’ah deliberation to determine its Shari’ah status. This
paper specifically analyses floating charge from the Shari’ah
perspective juxtaposing the discussion with the known legal
characteristics of a floating charge under the law. The paper
evaluates the compatibility of floating charge with the Shari’ah,
using rahn contract and requirements as the benchmark framework.
From the assessment, it is observed that a floating charge does not
fulfil the rahn requirements as stipulated by the majority of jurists
(Hanafi, Shafi’i and Hanbali). Nonetheless, the Maliki opinion
tolerates the features of floating charge involving uncertain or
unknown assets. In this regard, Maliki jurists are generally of the
view that rahn is a secondary contract, hence, it remains valid even
when there are gharar elements in the rahn asset. Another issue in a
floating charge is the possibility of the charged assets becoming
Shari’ah non-compliant or mixed with Shari’ah non-compliant assets
in the future. The Malikis along with the majority of classical jurists
do not allow rahn on impermissible assets. However, the paper finds
some contemporary Shari’ah opinions arguing that they can still be
used as marhun, provided that the prohibited elements are external
and can be eliminated/excluded.