Islamic Finance is financing that is based on Islamic Law known as Shari’ah. Islamic Finance is gaining popularity due to a growing demand for its competitively priced products as well as the principles on which it is based and built upon. Those familiar with Islamic beliefs know that Islam encompass all aspects of a Muslim’s life including the ownership of property, commercial and financial transactions.
Shari’ah is grounded on certain principles among them:
i. Promotion of the right of an individual to pursue their personal economic good;
ii. Fair treatment and sanctity of contracts wherein all parties involved are required to make informed decisions, not to be misled;
iii. Embracing the certainty and sanctity of contracts;
iv. The express prohibition of the levying of interests, also referred to as Riba or usury
v. Transactions must be underpinned by real economic activities and assets. The majority view among Islamic scholars is that under Shari’iah intangible assets are property, just like tangible assets, they too have monetary value hence entitled to legal protection. Based on this majority view it may be concluded that intangible assets such as Intellectual Property (IP) assets may be used in transactions under Islamic financing schemes;
vi. A risk and profit sharing philosophy, for example when profits are being distributed, the emphasis is placed on the reward for effort;
vii. Generally the prohibition of activities that are considered harmful to the society, what Islam considers haraam.
IP is generally understood as the creation of the human mind leading to inventions and innovations; musical, literary and artistic works; designs, slogans, names and logos among others and when protected by Law enables creators and inventors to earn recognition, attribution or financial benefits for what they have created or invented. This understanding IP seems to fit well with some of the highlighted Shari’ah principles under Islamic financing.
IP protection recognises and promotes the interests of creators or inventors to pursue their economic goals through exploitation of rights in their creations or innovations. It is an important aspect in IP to justly reward human endeavour and for a creator or inventor not to be deprived or misled into giving up the rights in their creations or inventions. For instance, in contracts involving IP assets, the contract ought not to be construed ambiguously and in manner that sneakily transfers ownership of the IP.
One of the tenets of Islamic finance is sharing risk between financial institutions and the individuals or entities that use them. To do that, the two parties may be tied into a longer-term relationship with one another aimed at shifting incentives and avoiding so called cut and run financial deals. So, for example, mortgages or loans that are shariah-compliant would require that the lender and the borrower share the risks involved in repayment rather than charging any form of interest. In the same breadth IP assets may be shar’iah complaint, in that parties can co-own the IP asset for the duration of the financial obligation. In Kenya, patent rights, would see the relationship last for a period of twenty years before the patent right lapses and falls into the public domain. For copyright it would be for the duration of copyright protection. Whereas for trade marks, the relationship is in perpetuity subject to renewal of the trade Mark, after every ten years.
The use of IP assets as collateral for financing is common in many parts of the world and it may also begin to gain acceptance on the African continent. In South Africa for instance, the Trade Mark Act recognises use of registered trade marks as security for a debt. Specifically Section 41(1) and (3) as well as regulation 43 of the Trade Mark Act make provisions for this type of arrangement. The use of trade mark rights as security is often done by way of a deed of security. The deed of security is lodged with the Registrar, who then endorses the Register to the effect that the trade mark has been hypothecated. A deed of security in respect of which an endorsement of the Register has been made has the effect of a pledge of the trade mark to the person in whose favour the deed of security has been granted. In Islamic Financing, this may be entered to reflect that there is an agreement to not only pledge for the benefit of the lender but also co-ownership of the trade mark for the duration of the debt period.
It is important to keep in mind that under transacting within Islamic financing means that the financial trading is limited investment ventures in industries that are not haraam. This would mean valuable brands in commercial activities that are considered as haraam may not be used in Islamic Financing.
The East Africa Islamic Finance Summit that took place in Nairobi on 17th February, 2016 was concluded on a high note with stakeholders optimistic that the growth and development of Islamic Finance and Banking was on the right path. The Attorney General in his special address spoke of the regulatory changes making significant progress in Kenya and also recognised the potential of Islamic finance in Kenya’s economy. The United Kingdom is a key non-Muslim jurisdiction wherein Islamic Finance has achieved notable economic success. The country has managed to attract a lot of Foreign Direct Investment due to the recognition of inclusive participation, sound fiscal and regulatory framework all of which have enabled and encouraged growth in that area.
Whereas there was no specific mention of intangible assets specifically intellectual property assets during the summit, it cannot be ignored that Islamic finance has continued to develop rapidly with growth and development of an array of modern financial assets – both tangible and intangible. As legislative reforms in this area continue in Kenya, the opportunity to begin exploring the inclusion of IP assets in Islamic Finance ought not be overlooked as appears to be the case in the mainstream banking and financing sectors.
This article hopes to excite an interrogation in the IP and Islamic banking and financial sectors especially due to the continued growth of commercial value in IP assets and the current ongoing discussions regarding Islamic Finance in Kenya and East Africa.