In the name of God, the compassionate the merciful
I chose this topic today due to some questions I had from my readers. They are eager to know the standpoint of Islamic finance as far as T-bills are concerned. Treasury bills, otherwise known as T-bills are short-term debt securities mostly issued and backed by the government of a country. The US Department of the Treasury is very well known for issuing T-bills. They are one of the safest investments available because they are backed by the full faith and credit of the government that issues them. T-bills are considered to be virtually risk-free, making them a popular choice for investors seeking a safe place to park their money.
Some features of Treasury Bills
Maturity: T-bills have relatively short maturities, typically ranging from a few days to one year. The most common maturities are 4 weeks (28 days), 13 weeks (3 months), and 26 weeks (6 months).
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Issuance at a Discount: T-bills are typically sold at a discount to their face value. The difference between the purchase price and the face value represents the investor’s return on investment. When the T-bill matures, the investor receives the face value.
Fixed Interest Rate: T-bills do not pay regular interest like other bonds. Instead, the return is the difference between the purchase price and the face value. This difference is often referred to as the “discount rate.”
Liquidity: T-bills are highly liquid investments. They can be easily bought and sold in the secondary market before they mature.
Tax Benefits: The interest income from T-bills is exempt from state and local income taxes, but it is subject to federal income tax.
Safety: T-bills are considered one of the safest investments because they are backed by the. Government that issues them and the risk of default is extremely low.
T-bills from an Islamic Finance Perspective
Some general principles in Islamic finance include;
i) The principal amount paid for the purpose of the investment must not be guaranteed because a loss may occur.
ii) Profits must not be guaranteed because there may be loss.
iii) Interest must not be charged on lending and investment. Qur’an (2:275–81, 3:129–30, 4:161 and 30:39), states unequivocally against charging of interests.
iv) The profit from the investment must be shared among the investors in percentage terms and not in real amounts.
v) If there is any loss, the loss must also be shared among the investors. In such cases, it may either be shared in percentage or real amount.
Islamic finance, which is guided by Sharia principles, prohibits earning or paying interest (riba) and promotes ethical and responsible investment. Treasury bills (T-Bills) can be viewed from an Islamic finance perspective as follows:
Permissibility (Halal): T-Bills can be considered Halal (permissible) if they comply with Sharia principles. They must not involve the payment or receipt of interest (riba). When governments issue T-Bills, they typically do not involve interest, making them potentially acceptable.
Profit and Loss Sharing: Islamic finance encourages profit and loss sharing. In the case of T-Bills, investors do not directly share in the profits or losses of the government projects they fund. This aspect is inconsistent with Islamic finance principles. In other words, the government must share the profits or losses with the investors. The government must also not guarantee the repayment of the principal to the investors since the money was meant for investment and investment also faces risks. Hence the principal must not be guaranteed.
Sukuk as an Alternative: Islamic finance offers alternatives to conventional interest-based investments, such as Sukuk (Islamic bonds). Sukuk represents ownership in an asset or project and complies with Sharia principles by sharing risks and rewards. Investors will definitely prefer Sukuk over T-Bills.
Compliance with Ethical Guidelines: Islamic finance also considers ethical and social responsibility. Investors should ensure that the government’s use of funds raised through T-Bills aligns with Islamic values and principles. In this case, T-bills cannot be guaranteed as such.
In a nutshell, T-Bills may be considered permissible in Islamic finance only if, structured in a way that adheres to Sharia principles and avoids interest-based transactions. However, investors in Islamic finance may prefer investment instruments like Sukuk that align more closely with profit and loss sharing and other ethical principles. It is essential for individuals considering such investments to consult with Islamic finance experts or scholars to ensure compliance with Sharia guidelines. May this little explanation benefit us. And Allah knows best! Praise be to Allah in whose favor good deeds are accomplished- (ibn Maajah 3803).
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
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