SALE OF GOODS
AND SALE OF
DEBT:
A COMPARATIVE
ANALYSIS
MUGHEES SHAUKAT
ISLAMIC LAW OF CONTRACT S
2010
PAPER
INCEIF
12/6/2010
2
TABLE OF CONTENTS
No. Topic Page No.
1. Introduction…………………………………………………………………. 03
2. Al-Bay In Islam; The Foundational Robes……………………………… 04
2.1 Pivotal Understanding of Mal and Mal Mutaqawwam.……………. 05
3. The Tale of the Two T’s
3.1. Tangible property right vs intangible property right ……………. 07
4. Calling The Right Rights Has Always Been The Order Of The Day
4.1 corporeal property right vs property right in the obligation
of the debtor:…………………………………………………………….. 08
5. The Writing Has Always Been On The Wall
5.1. Bai al-dayn as sale of debt……………………………………………… 12
6. Wisdom Personified
6.1. It was always meant to be like this……………………………………… 18
6.1.1. Case of derivatives……………………………………………………….. 20
6.1.2. Case of futures (which potentially can spill the future)……………………. 21
6.1.3 Case of Sale and Securitization of Debt……………………………….. 23
7. Conclusion……………………………………………………………………...... 29
Appendix
Bibliography
3
ABSTARCT
Law is concerned, primarily, with fairness whereas social good, including economic good, is conceived in
terms of provisions that depend, ultimately, on production. Fairness is necessary for ensuring dignity
whereas wealth is needed to guaranty security. It goes without saying that Islamic economics as a
discipline cares about efficiency as well as justice and fairness. It is well aware of the fact that in a
balanced realization the two reinforce each other. This paper will propose to demonstrate the ever so
prevalent and dynamically wisdomful nature of Islam even enshrined through Islamic finance by
venturing into a detailed debate rooted from and to the very foundational paradigm of TRADE, the
concept of exchange of property, selling and buying. Incept- ionizing from the submerged argumentation
over the permissible stacked up with the non-permissible stretching to the dimensions of understanding
the basic concepts and then gliding to the depths of despair by permitting the non-permissible pinnacled
by modern financial instruments and concluding in more a self explanatory parlance.
4
1.0. INTRODUCTION:
Most of the contracts entered into in Islamic banking and finance are in the category of
exchange contracts (al-muawadat), which are essentially trading-based. This is quite to
the contrary with the activities in conventional banking and finance, which are mainly
lending-based activities. When the contracts are exchange contracts, they necessarily
entail the exchange of goods, services, or usufruct, for a consideration or price. The
most common forms of the contracts of exchange are either buying and selling (ai-bay')
which involves the sale of goods, or leasing (al-ijarah) which involves the sale of the
usufruct (manfa'ah). In both, the subject matter (Mahall al- 'aqd) is the central focus of
the legal effects accruing from the valid conclusion of the contracts. In Islamic
jurisprudence, exchange contracts require more stringent fulfillment of the conditions of
the subject matter (shurut mahall al- 'aqd), particularly on the conditions of certainty,
ascertainability and proprietary value. This is because, exchange contracts involve the
exchange of counter values, as opposed to the uni-lateral contracts of gratuity (altabarru'at),
which give one-sided benefit to the recipient.
In an Islamic contract of exchange, the counter values - goods/usufruct and
price/consideration - are the subject matters of the contract. To be valid subject matters
of a contract, these counter values need to be properties (amwal) which are certain,
valued and beneficial (mutaqawwam). This is to ensure that their exchange would give
a fair and legal commercial benefit for both sides of the contracting parties. The fairness
of the transaction can be ensured by the ability of both parties to appreciate and benefit
from the proprietary worth of both counter values in the subject matter and give their
consent to the exchange accordingly.
5
Of late, the range of possible counter values and subject matters has expanded so as to
include certain rights, which proprietary value and capacity to be valid subject matters of
contracts may still be very much debatable. These possible counter values include
mostly abstract rights such as, the rights to receivables, the rights to future benefits from
a concluded contract, and the rights to license and concession.
The main issue is, can these rights be traded or sold for a consideration? Can these
rights be valid subject matters for an Islamic project-financing contract, which consists
mainly of a series of exchange contracts? For example, if a person or company obtains
a license to develop a piece of landed property into an industrial area consisting of
factories and other paraphernalia, can the person or company sell the right to others?
Alternatively, can the person or company securitize the right in order to get the financing
for the project?
Thus, it becomes ever so pivotal for one to know what qualifies to be exchanged and
the opposite and even more so when one wants to analyze and that to in a comparative
tone. this article will therefore make an effort by starting from the very scratch seeking to
first scrutinize and hence establish an understanding of what Islam means when it talks
about property and property right with special reference to these rights and their validity
to be proper subject matters in Islamic contracts of exchange.
In doing so, the article analyses the classical and contemporary fiqh writings on the
issue. Then, the study examines the application and relevance of the fiqh interpretations
and develop from the parlance in a self explanatory approach the comparison between
which exchange is permitted and which is not by focusing on sale of dayn to sale of
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other forms, evidenced and supported by to some of the concepts in modern banking
and finance contracts as will be unfolded by the discussion.
2.0 AL-BAY IN ISLAM; THE FOUNDATIONAL ROBES
THE STARTING POINT
2.1. PIVOTAL UNDERSTANDING OF MAL AND MAL MUTAQAWWAM:
As a general rule, the subject matter in a contract of exchange should be property (mal)
that is of value (mutaqawwam) and is capable of ownership (milkiyyah). Thus, it is
important for us to analyze the concept of mal and mal mutaqawwam.
In the dictionary, definition of mal (its plural - amwal) is simple and straight forward, i.e.,
"whatever you own from all matters". However, the legal defmitions given by the jurists
to mal are various. This is mainly due to their differences in describing the focus of the
proprietary aspects of things (manat maliyyah al-ashya'). Some of them say that
properties are limited to corporeal matters only (a 'yan), whilst others say that they also
include usufructs (manafi') and rights (huquq). Majority of the classical Hanafi jurists
were in favour of the first approach towards defining mal, i.e., limiting it to corporeal
matters only. For example, Ibn Abidin defined mal as "that which human nature inclines,
and can be stored for future needs.
In other occasions, he described mal as "corporeal matter ( 'ayan) that is capable of
being controlled and acquired", and " ... is limited to corporeal matters (a'yan), to the
exclusion of usufructs (manafi'}".He further said, "the proprietary aspect of mal is also
established by its worth or value (taqawwum) that allows the lawful enjoyment of the
property. Interestingly, Ibn 'Abidin recognized that usufructs can be subjects of
7
ownership (milk), yet, they are not amwal because they cannot be made specific
subjects to dealings and transactions (tasarruf).
Relating the concept of mal to the subject matter in a contract of exchange, article 363
of the Majallah provides that "a thing, which admits the consequences of a sale, is a
thing sold, which exists, is capable of delivery, and is mal mutaqawwim". The Majallah
also adopts the l:Ianafis' view in limiting the subject matter in a sale contract to
corporeal matters (a 'yan) only. For example, article 150 provides that the subject matter
of sale (mahall al-bay') is what is known as al-mabi'. Al-mabi' is defined in article 151 as"
a thing fixed and individually perceptible('ayn) designated at the sale, and is the
principal object of the sale, because the benefit is derived from the things ('ayn) alone
and the price is the means for the mutual exchange of property." 'Ayn on the other hand
is defined in article 159 as "a thing which is fixed and individually perceptible", giving the
examples of a horse, a chair, a heap of com which exists and is present and a sum of
money.
The jumhur comprising of the Maliki, Shafi'i and Hanbali schools took the second
approach to the definition of mal, whereby they considered rights and usufructs as
property as long as they are related to property and any assets of value: According to
the jumhur's view, in order to be mal mutaqawwam, two essential elements should be
present. First, the usufruct of the thing should be legally permissible; and second, it is
customarily treated as property or of proprietary value. Almost all contemporary
scholars prefer the view of the jumhur in the inclusion of rights and usufructs in the
meaning of mal.
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3.0. THE TALE OF THE TWO T’s
3.1. TANGIBLE PROPERTY RIGHT VS INTANGIBLE PROPERTY RIGHT:
An issue that may arise in relation to a corporeal property right(Haqq mali 'ayni is
whether its object should always be a material and tangible thing ('ayn maddi), or, could
it also be an abstract and intangible thing ('ayn ma'nawi) as well?
According to al- 'Ibadi, an abstract right can still be considered as a kind of property
right, because it is capable of being valued by property and is giving its owner a
proprietary value (qimah maliyyyah) capable of being valued by pecuniary or monetary
measures. 'Ali al-Khaifif also considered an abstract and intangible property right as a
special form of ownership right, i.e., Haqq mali 'ayni. AI-Durayni further argues that the
object of ownership (mahall al-milkiyyah) may also include abstract rights, and is not
necessarily limited to material and tangible things only?
Thus, it can be concluded that corporeal property right also includes abstract and
intangible rights. In fact, in the decision by the OIC Fiqh Academy, intellectual property
rights have been said to be property rights that are capable of being bought and sold for
a consideration, despite of their intangible nature.
The discussion on intangible rights opens the door to other analogous situations. For
example, whether other abstract and intangible rights, such as the rights to license and
concession enjoy the same position with intellectual property rights. An analysis of the
decision according intellectual property right the status of Haqq mali 'ayni, that is
capable of being a subject matter of exchange contracts, indicates a number of factors
that qualify intellectual property right to its current status. The factors for its qualification
as Haqq mali 'ayni can be summarized as:
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• Its nature as a property with special characteristics;
• It has proprietary value according to custom;
• It can be owned exclusively by its owner, i.e., the owner is free to benefit from the
property and prevent others from trespassing or interfering with the property.
• The property is deliverable and exsists
• It is not prohibited to own by Shariah
4.0. CALLING THE RIGHT RIGHTS HAS ALWAYS BEEN THE
ORDER OF THE DAY
4.1. CORPOREAL PROPERTY RIGHT VS PROPERTY RIGHT IN THE OBLIGATION
OF THE DEBTOR:
A more controversial issue pertaining is whether certain abstract property rights should
be regarded as dependent on the corporeal matter ( 'ayn), i.e., a kind of choses in
possession; or should it be regarded as a kind of proprietary right established in the
liability (al-Haqq al-thabit fi al-dhimmah), i.e., a kind of choses in action?
If the abstract proprietary right is dependent upon the corporeal matter, it is arguably an
independent asset ('ayn) and thus, the rule pertaining to the avoidance of riba in the
exchange of debts and monies, i.e., that both counter values must be equivalent and
the delivery be prompt, may not apply. On the other hand, if the abstract proprietary
right is regarded as established in the liability (fi al-dhimmah), it is arguably a form of
debt (dayn), hence, the rule of equivalence and promptness in the exchange of debts
10
and monies may apply. Similarly, if the right is considered as a debt, the rule against
bay' al-kali' bi al-kali' should also be observed. It is thought that an abstract property
right may still be attached to a corporeal matter, such as that of intellectual properties
and products. Yet, some other abstract proprietary rights may not be clearly attached to
a corporeal matter, and are arguably more in the nature of rights fi al-dhimmah, such as
the rights to future receivables in a contract of sale with deferred payment (bay'
bithaman ajil). The issue becomes pertinent in considering the legality of the sale of the
right to receivables from sales contracts at a discounting, as it has been practiced, for
example in Malaysia, for the creation of some of its Islamic bonds.
Being a debt or analogous to a debt, implies the treatment of this property right as
similar to that of the treatment of money, the exchange of which, is subject to the rules
pertaining to avoidance of riba al-fadl and riba al-nasi'ah in the exchange of ribawi
items. According to the rule, the right in debt cannot in general be exchanged for
another debt, deferred (bay' al-kali' bi al-kali' or alternatively termed as bay' al-dayn bi
al-dayn). Thus, in a contract, say to sell a right to receivables from sales, the rules for
the sale of debts with money will apply - i.e. the exchange has to be cash! spot, and if
made in the same currency - the exchange should be at par. If the transaction is
deferred, this may amount to bay' al-kali bi al-kali' which will also be tantamount to riba
al-nasi'ah. The amount should also be the same if the purchase price is in the same
currency with the original debts in order to avoid the occurrence riba al-fadl. The view
that the right to receivables in sale contract is dayn makes the securitization of the right
to receivables almost impossible.
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The prevalence of this view also explains the objections that some of the Malaysian
Islamic bonds receive from the other quarters of the Muslim world. Another example of
an analogous situation where haqq mali fi al-dhimmah in sale contract becomes an
issue is what the Hanbali”s describe as bay' al-mawsuf fi aldhimmah ,i.e., purchase of
an 'abstractly defined good' in the obligation of the seller.
For example, the Hanbalis treat manufacture sale (bay' al-istisna') as a form of bay' almawsuf
fi al-dhimmah, with a necessary condition that the buyer must pay in full at
once, and is bound by the contract as long as the final product agrees with the
contractual description. The condition of spot full payment is essentially to avoid the rule
against bay' al-kali' bi al-kali'. However, due to the practical difficulty in imposing full
payment at the time of a manufacture contract, the Hanbalis would alternatively allow
for partial payments or even fully deferred payment using an alternative legal
description of the contract. In this case, the contract is not treated as bay' al-mawsuf fi
al-dhimmah, but rather, a contract of sale of the raw materials ('ayn), actually delivered,
with a condition (shart) that they be constructed into a building, the payment of which
may be deferred and made subject to the final product satisfying the contractual
description.The latter contract, thus, amounts to a sale of 'ayn for dayn which is allowed,
instead of a sale of dayn for dayn which is not allowed.
The second line of opinion on the issue of whether the right to receivables in sales
contract should be treated as Haq mali ayni or Haq mali fi-al-dhimmah is that, the right
is considered as an independent property right(Haq mail). The argument given is, since
the right to receivable in sale contract is attached to real corporeal asset ('ayn), i.e., the
goods that form the subject matter of the sale contract, it is not a debt (dayn). The right
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to receivables seen in this light is therefore an independent form of haq mali and can be
traded like any other property rights?
An analysis of the view suggests that the exchange of these types of rights is
considered as the exchange of 'ayn for 'ayn or 'ayn for dayn, and thus, is not
objectionable. In a similar line, the Hanafis have allowed bay' al-istisna:, defining it as a
sale of an 'ayn though one that does not exist yet. Here, the Hanafis treat the property
which is yet to be constructed as an 'ayn, not dayn nor fi al-dhimmah. Hence, a building
to be constructed or partially under construction is already treated as an 'ayn – a
corporeal matter - though in reality it may only be an expectation of a corporeal property
to exist in the future. This expectation may be described as a right to a future corporeal
property, thus, a corporeal proprietary right (Haq mali 'ayni). Since this proprietary right
is obviously attached to a corporeal property ( 'ayn) - though one that is to exist in the
future - it is corporeal in nature ( 'ayni). The combination of these characteristics justifies
the entity to be that of ~aq mali 'ayni which is different from Haqq mali fi al-dhimmah
because the former is categorically a corporeal matter ('ayn) and can be exchanged
deferred (dayn) without triggering the rule against the sale of debt for debt.
From the preceding arguments, it seems that the division between the concepts of 'ayn
and dayn have not been decisively drawn. Certain situations that may look like a liability
(fi dhimmah) can still be argued to be an asset ('ayn).hence it becomes imperative for
us to venture on further even more deeply to understand what sale of debt it and the
rules related to it and to decide on its permissibility or not and if so what effects it can
have in the eternity of it.
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5.0. THE WRITING HAS ALWAYS BEEN ON THE WALL
5.1. BAI AL-DAYN AS SALE OF DEBT:
"Dayn" means "debt" and "Bai' " means sale. "Bai'-al-dayn", therefore, connotes the sale
of debt. According to Majalah al-ahkam al-adliyah, no 158 ; Dayn defines as the thing
due i.e the amount of money owed by a certain debtor. Al-Dayn can be either monetary,
or a commodity, i.e food or metal. Bay' Al-Dayn or debt trading or sale of debt can be
defined as the sale of payable right or receivable debt either to the debtor himself, or to
any third party. This type of sale is usually for immediate payment or for deferred
payment.
The Shariah permits the selling of debt by its equivalent in quantity and time of maturity
by way of hawalah. This form of debt trading is accepted by all schools of Islamic law
provided it is paid in full and thus gives no benefit to the purchaser. The rationale for this
ruling is that financial transactions involving debt should never allow deferred payment,
as this would be regarded as Riba or Bay’ al-Kali bi al-Kali which is prohibited by the
Prohpet S.A.W. (International Journal Of Islamic Financial Services, vol 1, no 2, Saiful
Azhar)
According to most Hanafis, Hanbalis and Shafie jurists, it is not allowed to sell Al-Dayn
to non debtor or a third party at all. However Malikis, and some Hanafis and Shafie jurist
allowed selling of debt to third party with some conditions which are :-
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a- The ability of seller to deliver the debts;
b- The debt must be mustaqir or confirmed and the contract must be performed on the
spot;
c- The debt cannot be created from the sale of currency (gold and silver) to be
delivered in the future and the payment is not of the same type as debt, and if it is so,
the rate should be the same to avoid Riba.
d- The debt should be goods that are saleable, even before they are received. This is
to ensure that the debt is not of the food type which cannot be traded to the debtor. (
Hasyiah Ad-Dusuqi, vol 3, p 63 )
The main issue here is, whether it is permissible to sell a confirmed debt which is
backed by a non ribawi goods at discounted price?
Mainstream Islamic scholars have put a plug on the possibility of earning profit by
confirming that any sale of debt (Bay’-al-dayn) or transfer of debt (Hawalat-al-dayn)
must be at face value. This means in the above question, when the bank buys the
instrument of debt (shahada-al-dayn) from the original buyer, it is not entitled to any
discount. Doors of riba are closed shut by disallowing any difference between what it
pays (purchase price of the instrument) and what it receives on maturity (its maturity
value). Notwithstanding the clear verdict against such transaction, some Islamic banks
have been offering Islamic bill discounting products. They essentially treat debt as any
other physical asset that can be traded at a negotiated price.
15
In fact, the prohibition of Bay’-al-dayn is a logical consequence of the prohibition of
"riba" or interest. A "debt" receivable in monetary terms corresponds to money, and
every transaction where money is exchanged from the same denomination of money,
the price must be at par value. Any increase or decrease from one side is tantamount to
"riba" and can never be allowed in Shariah.
Some scholars argue some forms of Bay’ ad-Dayn is permissible, and they said that the
permissibility of Bay ad-Dayn is: -
restricted to a case where the debt is created through a sale of a commodity. In this
case, they say, the debt represents the sold commodity and its sale may be taken as a
sale of the commodity. They said that on the conditions set by Maliki mazhab “payment
is not of the same type as dayn, and if it is so, the rate should be the same to avoid
Riba”. In this context of the sale of securitized debt, the characteristics of securities
differentiate it from currency, and hence, it is not bound by the conditions for
exchanging of Ribawi goods, therefore, selling debt which is represented non-Ribawi
asset is permissible to be discounted. (Securities Commission Shariah Advisory Council
Resolution(p19)
The debt is created by the sale of goods and services through the sale-based modes of
Islamic Finance, particularly Murabahah. The debt is created by the Murabahah mode
of financing permitted by the Shariah and the price, according to the Shariah Scholars
themselves, includes the profit on the transaction and not interest. Therefore, when the
bank sells such debt instrument at a discount, what it is relinquishing, or what the buyer
is getting, is not interest but rather a share in the profit.
16
The arguments, however, have been rejected by majority of the jurists. According to
them, once the commodity is sold, its ownership is passed on to the purchaser and it is
no longer commodity of the seller. What the seller owns is nothing other than money,
therefore if he sells the debt, it is regarded as the sale of money and it cannot be termed
by any stretch of imagination as the sale of the commodity. This is why the view has not
been accepted by the overwhelming majority of the contemporary scholars. (Mufti Taqi
Uthmani, An Introduction to Islamic Finance)
It is considered as the sale of rights on a debt and not the debt itself. In that sense, it is
allowed to sell it to the third party and also either with discount or not. However, majority
of Shariah scholar rejected this view as the right of the debt is still considered as the
debt itself. Such sale would be nothing but a disguised way of receiving and paying
interest.
This is the same as the principles of debt settlement. They say that there is a Hadith
narrated by al-Bukhari that strongly support debt reduction, while parties opposing to
the concept are unable to provide any strong arguments except to justify that debt
reduction contains element of Riba al-nasiah and Riba al-Fadl. Such argument is not
correct because the process of settling a debt does not constitute a trade. Furthermore,
those opposed to debt reduction or discounting have overlooked the mechanism of Ibra’
which involves the discharge of the whole or part of one’s claim on a debtor. Ibra
(rebate) which is similar to debt reduction is accepted by Shariah jurist.
However, the opposing scholars do not agree with the analogy and considered ibra’
and sale of debt with a discounted price is different in its objective and its
17
implementation. The prohibition is also based on the concept of Sadd az-Zariah or
closing the potential Riba from occuring.
Some parties in Malaysia encourage the development for debt discounting as an Islamic
Financial product on the basis that it represents an important field of short term and self
liquidating investment, because the terms of negotiable instruments do not in most
cases extend beyond six months especially in trade based debt discounting (Saiful
Azhar , International Journal Of Islamic Financial Services, vol 1, no 2)
The Islamic Fiqh Academy of Jeddah which is the largest representative body of the
Shariah scholars and is represented by all the Muslim countries, in its 16th convention
at Mekka on 5-10th January 2002 has re-discussed the issue and stated that sale of
debt is prohibited including the following:-
a) Sale of debts to debtors with a deferred payment plan exceeding debt amount as
this can be considered as Riba al-Fadl and Riba an-Nasiah. (Jadwalah ad-Dayn)
b) Sale of debts to a third party with a deferred payment plan whether the debt is paid
with the same type of kind or not; as this can be considered as sale of debt with debt
(bai’ al-kali bi al-Kali which is clearly prohibited by Prophet Muhammad)
According to the academy, commercial papers such as cheques, promissory notes and
bill of exchange cannot be sold at a discount as there is element of Riba.
It is not allowed to deal, issue, distribute or trade with Riba based Bonds because the
element of Riba is present. It is not allowed to deal with debt notes in the secondary
18
market as it involves discounts and sale of debts to third parties which has Riba
elements.
The Islamic Fiqh academy proposed that a Shariah approved alternative for discounted
papers and and sale and purchase of bonds is sale in the form of goods; with a
condition that the seller hands over the good during aqad (contract), it is allowed even
though the price of the good is less than the value of the commercial paper.
It is crucial to recognize and appreciate the differences in opinion even though the
opposite opinion is seems to be weak. Especially in the situation in which all parties
involved are qualified and have their own evidences and interpretations which are
guided by true ijtihad (intellectual effort) guidelines. We must also realize that there is
still room for ijtihad, particularly in the Fiqh Muamalat issue which fall under the Islamic
Legal Maxims “it is a fundamental principle that rulings in Islamic transaction must be
taken into account it objectives”. Therefore, as long as there no ijma’ (consensus of
jurist) that forbids Bay’ ad-Dayn, it is not healthy to condemn other ijtihad. However the
best way suggested in this kind of issue is “Get out from the disputation is always
recommended”. Thus, it’s better to avoid Bay’ Ad-dayn when there is alternative.
let us for the sake of argument support the view that the sale of debt is allowed and a
system which involves selling of debt should be maintained and expand our
understanding a little further for the stretch of imagination in the light of few following
cases because the moment we support then due to the inated virulence of it, this is
how it unfolds as we will judge it through certain pomp financial instruments which base
on the allowance-the syndrome which is trying to sink its teeth in Islamic finance.
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6.0 WISDOM PERSONAFIED
6.1. IT WAS ALWAYS MEANT TO BE LIKE THIS:
The sale of debt to third parties, especially through multiple securitizations, has been
blamed for fueling the worst global financial crisis in generations. Although some
banking experts still say the sale of debt is key to developing a liquid secondary Islamic
bond market and a deeper, more sophisticated sharia banking system.
The global total of asset-backed securities issued and sold to investors fell by 79
percent to $441 billion in 2008, as overleveraged borrowers, banks and investors exited
the market, according to think-tank International Financial Services London.
Some debt financing has always been part of the financial markets. Even in heyday of
Islamic civilization trade credit, a form of debt financing, thrived. Islam has no problem
with that as it fits in with prohibition of exchanging money now with a larger amount of
money after a period of time. The problem starts with sale of debt, whether created by a
money loan or owed as a price of goods sold on credit. Sale of debt is allowed at par or
face value. But there can hardly be a market for exchanging debts at par. You have a
market for debt when bond [i.e., debt] prices are determined by supply and demand.
Sale of debt implies selling risk [or shifting risk]. A thriving market for debts at prices
determined by supply and demand [as in conventional bond markets] is vulnerable to
gambling like speculation as there exists no objective basis for measuring risks of
20
default. The changing prices reflect changing subjective perceptions of the risks
involved. As is well known these perceptions can sometimes be manipulated through
planting stories in the media.
Remarkably, a ban on selling debts would drastically reduce the outstanding volume of
debt. In effect it would scale down the volume of outstanding debts to the level of
existing real assets. The inverted pyramid of debts, standing on a slender base of real
wealth, would be replaced by a rectangular column of debts, owed against an equal
amount of real goods and services acquired. The volatility in the bond market is directly
related to the total volume of bonds. The larger the volume of debts, the weaker its
connection with real wealth, and the more the scope for gambling-like speculation.
6.1.1. CASE OF DERIVATIVES:
Derivatives also involve excessive uncertainty. They facilitate managing certain market
risks (related to prices, rates of exchange, etc.). Chance remains the basic element in
the situation, however, expectations being based on pure speculation. Derivatives too
are a zero sum game: you lose what I gain, unlike the win-win situations in trade or risk
sharing. The claim that they increase liquidity and improve operational market
efficiency in financial markets remains unsubstantiated. What can be empirically
established is that, whatever the initial benefits for a certain class of investors,
availability of derivatives invites speculative activity.
21
6.1.2. CASE OF FUTURES (which potentially can spill future)
Futures trading may be said to proceed over deferred and unpaid debts. A debt is
normally created by a trader who enters the market either as buyer or seller without any
physical exchange of values. The debt so originated may subsequently become the
subject of an offset or a reverse transaction and a chain of sales and purchases may
follow that amount essentially of the sale of debts. The offsetting transaction in futures
also consist of sales involving a debt that one party owes to another and settles it
through the modality of sale and purchase. Many types of sales have been included
under bay al duyuun (lit., sale of debts, also known as bay al kali bi al kali), and it has
been disputed as to whether some of them do in fact qualify as “sale of debts.” It will be
noted that the fiqh concept of bay al-dayn referred to transactions over debts in the
open market without any guarantees. Bay al-dayn basically envisaged sale over an
unpaid debt involving either two, or in some cases, three parties. The basic rationale of
the prohibition of bay al-dayn was over uncertainty in its repayment. Bay al-dayn could
proceed over a bad debt or one in which the debtor simply wanted a further delay due to
his inability to pay on time. Subsequent unfavorable price changes also added to that
uncertainty. The situation is very different in the futures market now where all
transactions are concluded over guaranteed debts. The critics have not hesitated,
however, to pass judgments and say: since the buyer in futures does not pay the price
to the seller nor does the latter take delivery, they transact over debts and indulge in
bay al-kali bil-kali, which is prohibited Some instances of bay al-dayn bil-dayn are
illustrated as follows:
22
1.A borrows two tons of wheat for his personal needs from B. This amount is returnable
in six months. Prior to the expiration date, B sells the wheat, which is a debt on A, to C
in exchange for a ploughing machine to be delivered in one month. This transaction
proceeds over an exchange of debts and is considered unlawful due to uncertainty over
delivery and the resulting likelihood of gharar.
2. A borrows $2,000 from B for a period of one year, but before repayment is made, B
suggests to A that he will rent A’s house in exchange for the sum owed to B. This too
involves selling one debt for another without delivery on either side. If the proposed
exchange is advantageous to one party, it will also involve unlawful gain amounting to
riba.
3. A owes B RM1,000 payable in six months. Upon expiry of six months B asks A to
give him a ton of wheat in exchange to be delivered in one year.
4. A sells a garment to B for RM1,000 payable on spot, and then buys from B the same
or a similar garment for RM1,200 payable in one year. This transaction ([inah), although
validated by the Shafi[is, is invalidated by other schools as it involves riba and,
according to others, because it is a sale of debts. The following Hadith is quoted as
evidence on the subject: Musa ibn [Ubayd reported from [Abd Allah ibn [Umar simply
that “the Prophet prohibited bay al kali bi al kali.
23
6.1.3. CASE OF SALE AND SECURITIZATION OF DEBT:
The second issue we take up is the sale of debt, bai ‘al-dayn. Prohibition of interest
almost eliminates the direct lending of money for business. So there is no bond market
in an Islamic economy whose liquidity should become an issue. Direct lending of money
is replaced by murabaha and similar credit transactions, effectively tying the expansion
of credit with the growth of the economy. In place of conventional treasury bonds
Islamic financial markets have bonds based on Ijara (leasing), Salam (prepaid orders)
or Istisna‘ (manufacturing orders on a pay as you get basis). But there also is a huge
debt created by installment sales and murabaha. To some, making all these wait till
maturity implies waste. This waste occurs at two levels. Firstly, those holding IOUs will
need credit to command real resources in order to continue producing, having
presumably exhausted their own resources in producing what they already sold on
credit. This means the society will always carry lots of illiquid assets, the IOUs.
Secondly, this may force sellers/producers to refuse selling on credit, demanding cash
instead. A society in which all IOUs must await redemption by the original debtor cannot
economize on the use of cash. This is rather inefficient (but not a big deal in a fiat
currency regime!).
It may rightly be pointed out that somebody must await maturity of debts incurred in the
process of acquiring command over real resources on credit. As Keynes pointed out
commenting on the ‘liquidity fetish’, not everybody can be liquid all the time. It is,
however, more efficient to provide opportunities for exchange between those who are
willing to wait and share the risks involved (as the Islamic framework does not reward
24
pure waiting) and those who seek liquidity. One way to do so is to allow IOUs as
collaterals for fresh credit---a practice already in vogue in the Islamic financial market. It
is also permissible to exchange these IOUs for goods and services. But some want
more, let us see if they can have it.
The juristic objection to sale of debts resulting from murabaha, etc. is the same as in
case of selling a debt created by a money loan. If I buy for 90 an IOU worth 100 after a
year, I am doing so in order to earn 10 as interest. They see no reason to distinguish
between IOUs created by murabaha and IOUs created by lending money. This seems
to be underlying the latest Islamic Fiqh Academy resolution on the subject that states: ‘It
is not permissible to sell a deferred debt by the non-debtor for a prompt cash, from its
type or otherwise, because this results in Riba (usury). Likewise it is not permissible to
sell it for a deferred cash, from its type or otherwise, because it is similar to a sale of
debt for debt which is prohibited in Islam. There is no difference whether the debt is the
result of a loan or whether it is deferred sale’ (Islamic Fiqh Academy, 2000, p.234).
However, the view equating, in this context, money loans and debts resulting from credit
has been challenged. There are reasons to treat the two differently, say Chapra and
Khan : ‘The debt is created by the murabaha mode of financing permitted by the
Shariah and the price, according to the fuqaha themselves, includes the profit on the
transaction and not interest. Therefore, when the bank sells such a debt instrument at a
discount, what it is relinquishing, or what the buyer is getting, is not interest but rather a
share in profit’ (Chapra and Khan, 2000, p.78). In other words, a debt resulting from
murabaha has an element absent from a debt arising from borrowing money-- the mark
25
up on spot price. Sale and purchase of murabaha-based debt would take place on this
extra profit margin.
The problem with this proposition is that what was a profit margin for the seller of goods
and services (on a murabaha basis) may not necessarily remain so when the same
seller ‘sells’ the IOU arising from that transaction. Some of the factors involved in the
determination of the mark up on spot price in murabaha may be different from those
involved in the sale of the resulting IOU at a discount. Furthermore, the extra profits
earned in murabaha sale, over and above those earnable on selling for cash, are still
against sale of goods and services. But the part of it that goes to the buyer of the
murabaha based IOU (according to the above mentioned rationalization) has no goods
and services corresponding to it. It is money for money, with a difference of dates.
The authors go on to argue that there is hardly any gharar involved in the sale of debtinstruments
under discussion, a point we may ignore because of the limited purpose of
this paper. What interests me is their plea that the fuqaha reconsider the case of assetbased
debt instruments and allow their sale as it would lead ‘to the accelerated
development of an Islamic money market’ (ibid, p. 79) They proceed to emphasize the
need for such a market by pointing out that Islamic banks may face a liquidity crunch in
its absence, paralyzing the whole system. They also believe ‘it is difficult for banks to
play effectively their role of financial intermediation, without being able to securitize their
receivables’ (Chapra and Khan, 2000, p.79). After discussing alternative avenues of
raising large funds required by client companies through banks, they conclude that ‘it
26
would be preferable to allow banks to rely on the sale of their own assets to raise
liquidity.’( ibid, p.80 )
So it is efficiency that is at stake, in an environment where the inefficient may not long
survive. Once again the same story: the jurists bent on ensuring justice by avoiding
anything similar to riba/interest and the economists keen to maintain efficient markets.
Do they understand each other’s concerns? Is the rationale (hikmah) of prohibiting riba
also applicable to sale of debts resulting from murabaha so that it must be blocked to
ensure justice? What about a trade-off between the two objectives of Shariah, justice
and wealth creation? Is such a trade off acceptable under certain circumstances? Does
it become unavoidable sometimes? Can we agree on some formula that ensures a
reasonable degree of fairness with a reasonable level of efficiency? These questions
have yet to be thoroughly examined. Those arguing in favor of legitimizing sale of debt
have to demonstrate that no alternative methods of ensuring liquidity are available.
They have also to meet the objection that once sale of debt is allowed insofar as asset
based IOUs are concerned, prohibiting the sale of IOUs based on money lending will be
difficult, if not impossible, to sustain.
Bai‘ al-dayn is approved by Malaysian Shariah scholars (Securities Commission, 2002).
It has a place in Islamic banking as practiced in Southeast Asia. Shariah scholars in that
region which follows the Shafi ‘i school of Islamic Law base their opinion on certain
rulings which the scholars in the heartland of Islamic finance following other schools,
generally speaking, do not agree with (Usmani, 2000). Bank Islam Malaysia is
marketing Negotiable Islamic Deposit Certificates (NIDC) backed by murabaha based
27
assets (Archer and Karim, 2002, p.132). ‘In Malaysia the Islamic benchmark bond was
introduced in 1990 and is believed to be based on the murabahah concept. They are
the most popular form of Islamic financing method used in Malaysia’ (al-Amine, 2001,
p.3). Al-Amine goes on to note, however, the controversy that still surrounds the Shari
‘ah legitimacy of these bonds (ibid, p.4).
Many Islamic debt instruments on sale in the Malaysian market are criticized on the
ground that they involve bay‘ al-dayn and bay‘al-‘inah (Rosley and Sanusi, 1999). But
some scholars refer to certain Hanbali and Maliki jurists (.e.g., Ibn e Qayyim and
Dasuqi, respectively ) who ‘are of the opinion that selling dayn to a third party is not
against syarak (shar‘)’ [Ishak.1997, p.6].It is noted that there is a difference between
the debtor being asked by the creditor to pay more than the price agreed upon in a
credit sale in lieu of delay in payment, and selling the IOU arising from that credit sale to
a third party. In the latter case the seller on credit, who holds the IOU, is no longer
dealing with the debtor. He is dealing with a third party to whom he sells the IOU. The
deal between this third party, which now holds the IOU, and the debtor, is free of the
constraints attending upon the deal between the seller on credit and the one who buys
on credit. ‘Bay al-dayn to a third party, however, is different because a third party does
not ask for increase in price from the debtor. The debtor will just pay according to the
initial contract. As dayn has been sold to a third party, the initial creditor will no longer
make a claim but the third party will.’(Ishak, 1997, p.7). Ishak proceeds to argue, ‘ Can
haq al-dayn (be) sold at a lower price? The answer is yes, because it is not a currency
and the attributes transferred when bought consist of haq mall not currency…….Based
on the above, if the initial seller is willing to reduce his right and give the third party the
28
full right, it is not at all against syriah (Shari ‘ah) principles. The same with share
certificates traded, it is an ownership right in a company and when sold in the secondary
market the price is essentially different from the initial price’ (Ishak, 1997, p.7).
Does not sound very convincing, as a shareholder does not hold a claim to a definite
sum of money to be paid in future. But there is no need for me to evaluate these
arguments in analogical terms. What I am interested in is their focus on distancing sale
of debt from riba/interest and trying to show it is fair trade, free of injustice as
symbolized by riba/interest. Hence the claim that asset based securities are like share
certificates and necessary for the well being of people. This is evidenced by Ishak’s
appeal to the ‘syari‘ah (Shari ‘ah) principles of ra’fah and takhfif’ in his conclusion ( ibid,
p.8 ).In other words, it is being asserted that allowing sale of debt arising from credit
sales is neither unjust nor unfair as it does not involve riba/interest. Also it is
emphasized that it should be allowed in order to make life easy and prosperous. I think
it would have been better if instead of finding an analogy between a certificate of
ownership in a company and an IOU, Ishak had pursued the maslaha based arguments
on which he concludes.
It would be far better to conduct the debate openly in the framework of ease versus
hardship, efficiency versus fairness, growth versus distribution. The trade-offs could
then be openly examined, sometime even measured. At the macroeconomic level, we
need to know why liquidity cannot be guaranteed without legitimizing the sale of debt. It
has to be discussed how giving debt-financing a greater role is likely to change the
nature of Islamic economy which emphasizes risk sharing and participatory finance.
29
Alas! That is not the way legal issues are handled, especially in an industry in a hurry,
as the Islamic financial industry currently seems to be, under tremendous pressure from
its more ‘efficient’ competitors. While the Shariah scholar sitting on an Islamic bank’s
advisory board may have barely the time to check the relevant texts and whether a
particular analogical reasoning is acceptable, the task of the social scientists/moral
philosophers is more contemplative, time taking. An appeal to maqasid al-shariah
(objectives of Shari ‘ah) is not that easy as it may seem to the un-initiated. It involves a
far deeper understanding of Islam as a way of life, a process of social reconstruction
and a mission with humanity that one would normally expect in a legal expert these
days. Islamic Finance is about all these objectives, some of which are hard to realize
through analogical reasoning, even financial engineering.
7.0. CONCLUSION:
The above literature is a self explanatory pragma which analyzes the whole dimension
of trade in Islam which submerges in it the qualification of mal and hence its origination
of becoming a permissible subject matter derived from which understanding, extricates
the very realm of the non-permissibility of the controversial and enigmatic sarrogative
subject matter, trade of which violates the very basics norms of shariah hence
sabotaging harnessing of the society .this article has tried to showcase the Islamic
wisdom of why permissible qualification of a subject matter is pivotal and why the debt
as permissible subject matter is debarred ruling out the sale of it.
It proves that allowance of debt salability creates a black hole environment which sucks
the blood out of real sector into virtualism by providing breeding ground to excessive
30
risk taking, speculation showcased by cases on derivatives and futures, securitization
hence sale of debt, catapult of which is deterioration in from of the present crisis.
Islamic allowance of permissible property for trade and debt as the opposite
substantiate the very fact that how Islam is always trying to provide justice and avoid
disputes as to harness not only the individual but the society as a whole. An approach
of do good and have good under the ambit of a just society.
31
APPENDIX
OPINION OF THE PAST ISLAMIC JURISTS:
Hanafi Mazhab
The Hanafis are unanimous in not permitting bay al-dayn with reason that the debt is in the form
of mal hukmi (intangible property) and the buyer takes great risk because he cannot own the item
bought and the seller can not deliver the item sold.
Maliki Mazhab
The Malikis allow bay al-dayn subject to certain conditions as follows:
• Expediting the payment.
• Debtor present at the place of sale.
• Debtor confirms the debt.
• Debtor belongs to the group that is bound by law so that he is able to redeem his debt.
• Payment is not the same type as dayn, and it fit so, and the rate should be the same to
avoid riba.
• The debt cannot be created from the sale of currency (gold and silver) to be delivered in
future date.
• The dayn should be goods that are saleable even before they are received. This is to
ensure that the dayn is not of the food type which cannot be traded before qabadh occur.
32
• There should be no enmity between the buyer and seller, which can create difficulties to
the debtor.
Shafi’i Mazhab
The Shafi’i allows the selling of debt to a third party if the dayn was mustaqir (guaranteed) and
was sold in exchange for goods that must be delivered immediately. The debt is sold; it must be
paid in cash or tangible assets as agreed.
The Securities Commission Shariah Advisory Council held that in the context of the sales of
securitized debt, the characteristic of securities differentiates it from currency. It is not a legal
tender and therefore, it is not bound by the conditions for exchanging of goods. It is not a ribawi
item as the fifth condition set by Maliki mazhab.
33
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