B A N K E R’ S C O M M E N TA RY

Shari’ah Standard No. (59):

Sale of Debt

Being a technical commentary on the Arabic text of

AAOIFI’s Shari’ah Standard No. (59): Sale of Debt.

Dr. Yousuf Azim SIDDIQI

BANK ER ’S COMMENTARY

Shari’ah Standard No. 59

Sale of Debt

Being a technical commentary on the Arabic text of

AAOIFI’s Shari’ah Standard No. (59): Sale of Debt

By:
Dr. Yousuf Azim SIDDIQI
Banker’s Commentary- Shari’ah Standard No. (59): Sale of Debt
Dr. Yousuf Azim Siddiqi
Kanz Publishers (Beirut)
First Edition: 2023
ISBN – 978-9953-987-71-2

2
Disclaimer:
The present material is NOT the English translation of the AAOIFI Shari’ah
Standard No. (59). Practitioners and regulators should rely on the official
version for Shari’ah decision-making.
Views expressed in the present work do not necessarily represent the viewpoint of
the author’s current or past employers or educational institutions.
Examples are given only for illustrative purposes; any similarities or variances
are coincidental.

3
 THE AUTHOR

Dr. Yousuf Azim Siddiqi worked for over a decade as Shari'a personnel in various
Islamic banks. He was associated with ADIB, Arcapita, Dubai Bank and Emirates
Islamic. He actively participated in developing some of the most innovative Shari’a
compliant products, like Nasdaq Murabaha Certificates, Repo of Murabaha Debt,
Hybrid Ijarah, etc. He was part of the core team of EIB’s USD 2 Billion Sukuk
Programme (2016). In 2021, joined ADIB (UAE) as the Head of the Shari’a Training
Department. He has an interest in writing on Islamic jurisprudence and history in
English, Arabic and Urdu. He co-translated the Book of Sale (The Second Book of
Majallah), published by the IIiBF (Malaysia). His book on Indian scholars’
pronouncements related to unprecedented financial matters was published in Beirut.

B.Com. from Ness Wadia College of Commerce (Pune), an MBA (Finance) from the
University of Wales (UK) and a PhD. (Islamic Banking & Finance) from IIUM
Institute of Islamic Banking & Finance.

Lives in Abu Dhabi (UAE) with his mother, wife and little Khadija.

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 CONTENT

The Journey so Far… .................................................................................................... 8

Acknowledgement ..................................................................................................... 11

Provisions of the Standard ......................................................................................... 12

Scope of the Standard ........................................................................................... 12
Definition of Debt ............................................................................................... 14
Types of Sale of Debt ........................................................................................... 17

Fourthly - Sale of Debt to the Debtor .................................................................. 18

First Rule: Avoidance of Ribā........................................................................ 18
The Case of Exchanging Usurious Commodities .................................... 18
Heterogeneity of the Debt and Its Consideration ................................. 18
Homogeneity of the Debt and Its Consideration .................................. 19
The Case of Settling the Monetary Debt in Other Currency ..................20
Condition (I): No Outstanding Balance Remaining .......................... 20
Condition (II): No Stipulation ............................................................ 21
Condition (III): Sale at the Prevailing Exchange Rate ....................... 21
The Case of Substituting the Salam Asset ................................................ 22
Condition (I): Fit to be a consideration of Salam Capital ...................23
Condition (II): Market Value Not More than the Original ...............23
Second Rule: the Sale is Not a Artifice (ḥīla) for Ribā.................................. 23
Third Rule: New Obligation of Increased Debt............................................ 24
Extinction of the Debt .............................................................................. 24
Debt as Salam Price ................................................................................... 24
Rollover of Murabaha Debt ..................................................................... 25
Increase in the value and the tenure..................................................... 26
Acceptable Murabaha Rollover ........................................................... 26
a. Independence of the New Transaction ................................... 27
b. Validity of the Contract with Shari’ah Effect ........................ 28
c. Application of the Sale Proceeds ............................................. 29
Murabaha Rollover with a Delinquent Customer .............................. 30
d. No Compensation for Delay ................................................... 30
General Provisions of Sale to the Debtor ....................................................... 31
Future Sale of Debt ................................................................................... 31
Bilaterally Binding Promise ...................................................................... 31
Unilaterally Binding Promise.................................................................... 31

Fifthly - Sale of Debt to a Third Party ................................................................. 32

Sale of Debt for Cash ...................................................................................... 32

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 CONTENT

Sale of Debt for Debt ...................................................................................... 32

Sale of Debt for a Specific Commodity ......................................................... 33
Sale of Debt for a Specific Commodity ......................................................... 33
Sale of Debt for an Unidentified Commodity ............................................... 33
Sale of Debt for an Unidentified Usufruct .................................................... 34
Sale of Commodity Debt ............................................................................... 34
Sale of Specified Unidentified Usufruct ........................................................ 35
Avoiding Gharar ............................................................................................. 35
Consent of the Debtor ................................................................................... 36
Option to Rescind .......................................................................................... 37

Sixthly - Division of the Debt............................................................................... 38

Shares of Claimants in a Debt ........................................................................ 38
Dividing Multiple Debts ................................................................................ 38
Distributing Assets ......................................................................................... 38

Seventhly - Ownership of the Debt & Securing It............................................... 40

Risk Transfer .................................................................................................. 40
Transfer of Security ........................................................................................ 40
Securing the Debt ........................................................................................... 41
Sale with Recourse .......................................................................................... 41

Eighthly: Sale of the Debt Combined with Other Assets.................................... 43

Entities with Asset Turnover.......................................................................... 43
Commingling of Assets .................................................................................. 44
Rule (I): Having Shari’ah Effect ............................................................... 44
Rule (II): Debt Ratio at the Issuance ....................................................... 44
Rule (III): Tangibility Ratio ..................................................................... 45
Rule (IV): Cash Proceeds of Debt ............................................................ 45
Combining of Assets ...................................................................................... 46
Composite Sukuk ........................................................................................... 47

Ninthly: Contemporary Practices of the Sale of Debt ........................................ 49

Negotiable Instruments .................................................................................. 49
Sale of Negotiable Instruments ................................................................ 49
Discounting of Negotiable Instruments .................................................. 49
Bonds .............................................................................................................. 49
Salam Sukuk and Murabaha Sukuk: .............................................................. 50
Financial Securities comprising of receivables ............................................... 50
Securitization of Receivables .......................................................................... 51

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 CONTENT

Factoring ......................................................................................................... 51
Portfolio Swap ................................................................................................ 52

7
 INTRODUCTION

The Jour ney so Fa r …

In 1990, the Islamic banking and finance industry was going to

witness a giant leap towards industry regularisation when decision-
makers of select banks decided to establish a global organisation to
look after issues of accounting that are particular to Islamic banks and
financial institutions. Later, that organisation was renamed and was
known as the Accounting & Auditing Organization for Islamic
Financial Institutions (more commonly known by its acronym of
AAOIFI).

At its inception, AAOIFI focused on issuing accounting and

auditing standards for Islamic banks and financial institutions. Later,
the mandate was expanded to start publishing Shari’ah standards. The
purpose of issuing these standards is to provide the Islamic financial
industry with a base set of rules that can be used and referred to in the
regular business and operations carried out by Islamic banks and
financial institutions. The purpose shall not be to curtail the freedom
of juristic interpretation (ijtihād) but rather to set bare-minimum
requirements of Shari’ah in each type of transaction.

Initially, the documents were released with the title: “Shari’ah

Rules for Investment and Financing Instruments No. (1) Murabaha to
the Purchase Order”. After issuing four standard rules in 2001 on
Murabaha, Ijarah, Salam, and Istisna, the Shari’ah Board of AAOIFI,
the issuing body of Shari’ah documents, decided to rename them to
Shari’ah Standards. Hence, the first Shari’ah Standard was issued with
the title: “Trading in Currencies”. The earlier Shari’ah Rules were re-
issued as Shari’ah Standards No. (8), (9), (10), and (11), respectively.

8
 INTRODUCTION

Within less than a quarter century, the Shari’ah Board of AAOIFI

reached the far away milestone by publishing more than 61 Shari’ah
Standards, which were recently published in its Arabic version
expanding more than 1200 pages. Considering the juristic
sophistication and significant on-ground implications of each ruling
and Shari’ah provision given in these Standards, it is remarkable to
notice the achievement accomplished by the Shari’ah Board of
AAOIFI.

The juristic soundness and industry coverage of these Shari’ah

Standards made them a reliable point of reference among the Shari’ah
practitioners, Islamic bankers, and the regulators themselves. Hence,
in 2018, the Central Bank of the UAE issued a circular making
compliance with the AAOIFI Shari’ah Standards a mandatory
requirement for all the Islamic banks and financial institutions
functioning within the country. This giant leap proved to be,
undoubtedly, a turning point in the history of the Islamic banking
industry. Efforts of codification, over years and years, are now going
to be relied on by the Islamic financial institutions instead of casual
referral by some Shari’ah scholars. The entire industry was going to
move in a mood of Shari’ah synchronisation instead of dull and
unwelcomed standardisation.

In December 2018, AAOIFI Shari’ah Board issued the official

Arabic version of Shari’ah Standard No. (59): Sale of Debt. The
Standard took long rounds of preparation and discussion. Scholars
and researchers contributed extensively to fine tuning the final
product. Surprisingly, when the Standard came, some people argued
that the Standard is merely a by-product or a derivative of earlier
Shari’ah standards. Although it is evident that some provisions and
rulings of the Standard were never expressed in the earlier Shari’ah
standards (e.g., sale of entities with mixed assets (i.e., debt and tangible
assets).

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 INTRODUCTION

Further, some persons from the legal fraternity have raised

emergency flags that implementation of Shari’ah Standard No. (59)
means nothing but end of Sukuk industry and syndicated financing.
Luckily, these alarming statements were often made verbally,
otherwise they would have been a good material for comical usage
referred to by future audience. The fact remains that Shari’ah
Standard No. (59) was implemented in full force and the industry
moved to a new set of products and norms. I was fortunate to be part
of the translation team that translated the Standard from Arabic to
English. The English translation was released on 26th March 2021.

This work is my third opportunity to serve AAOIFI Shari’ah

Standards. My earlier work was the Arabic commentary on the
Shari’ah Standard No. (59): Sale of Debt, which came in more than
100 pages. This was followed by a technical commentary on AAOIFI
Shari’ah Standard No. (61): Payment Cards in 49 pages. Readers in
English were more comfortable in reading technical commentary then
a lengthy commentary. I pray that this humble work will assist non-
Arabic speakers in understanding and implementing the Shari’ah
requirements of an important standard.

Happy reading

Yousuf Azim Siddiqi

Abu Dhabi (UAE) | siddiqiya@yahoo.com
2nd March, 2023

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 Acknowledgement

No matter how small and humble is the effort, but sincere support,
and help of many persons are instrumental in shaping it.

Firstly, I would like to thank my mentor in Islamic banking, Dr. Osaid

Kailani (Global Head of Shari’a at ADIB), his continued mentorship
and guidance helped me get a better understanding of the importance
of Shari’ah rulings in a complex financial transaction.

Also, I would like to thank Dr. Abdul Rahman Al Saadi (Faculty of

Islamic Banking at Bahrain University and Shari’ah Secretary at
AAOIFI) for assigning me the translation tasks of the Shari’ah
standards. Mr. Omar Ansari (Secretary General of AAOIF) was
always a source of encouragement during the translation journey.

Friends and ex-colleagues were extremely helpful in understanding

technical aspects, to mention a few; I would like to thank Dr.
Abdulrahman Yousif Habil (a well-known Islamic legal jurist), Dr.
Abdulsalam Kilani (Head Shari’a Department at Emirates Islamic
Bank), Dr. Asem Ahmad (Head Shari’a Audit at EIB), Mr. Stuart
Faysal Hadi Brocklehurst (Bonnard Lawson Dubai), Mr. Sahir Aslam
(UK), Dr. Syed Ehsanullah Agha and Mr. Adam Abdulmajeed
Alufanla (both at Shari’a Consultations Department of ADIB).

May Allah the Exalted reward them all with the best here and
thereafter, Aameen..

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 I- SCOPE OF THE STANDARD

Pr ovisions of the Sta nda r d

Shari’ah Standard No. (59) focuses on the Shari’ah provisions

related to debt. In this part of the book, we shall present all the
Shari’ah provisions that were outlined in the Arabic version of
the Standard.

Mainly the Standard is divided into five key sections

(from s. 2 to s. 9). Section 1 of the Standard is an introductory
section that outlines the scope of the standard. The remaining
eight sections are related to: definition of debt (s. 2), types of sale
of debt (s. 3), sale of debt to the debtor (s. 4), sale of debt to a
party other than the debtor (s. 5), division of the debt (s. 6),
transfer of ownership and securing the debt (s. 7), sale of debt
and trading it with something else (s. 8), and contemporary
applications of sale of debt (s. 9).

Scope of the Standard

Following the practice of good codification, the
Standard starts with an introductory section that outlines what
falls within the scope of the Standard. Hence, the reader,
whether a banking professional or a Shari’ah expert, should
know what he can exactly get from the Standard.

1 The Standard deals with Shari’a rulings related to the

sale of the debt to the debtor and its sale to a third party, i.e., a
party other than the debtor.
The Standard does not deal with the discharge of debt
(istīfā’ al-dayn) by the debtor, whether in whole or in part if it

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 I- SCOPE OF THE STANDARD

was done because of an obligation other than a commutative

arrangement. For example, Shari’a rulings related to debt resulted out of a
non-commutative contract are not addressed in the Standard. A husband
might owe to his wife a mahar (dower) amount. This Standard does not deal
with such scenarios.
Also, the Standard does not deal with Shari’a rulings of
the novation (ḥawāla). For example, Mr. (A) owes $ 100 to Mr.
(B), Mr. (A) transfers his obligation to pay to Mr. (C). Further,
the Standard does not deal with Shari’a rulings of set-off
(muqāṣa). For example, Mr. (A) owes $ 100 to Mr. (B), and at the same
time Mr. (B) owes $ 50 to Mr. (A), a set-off arrangement settles the
outstanding liabilities, either fully or partially.
Rulings of novation or set-off are not addressed in the
Standard because there is a different standard for each.

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 II - DEFINITION OF DEBT

Definition of Debt
Prior to start presenting Shari’ah rulings on the sale of
debt, it would be important to have a clear definition of debt.
2 As per Shari’ah, debt is an established asset that is owed
by the debtor, irrespective of its cause of establishment.
2 The debt could be established out of a loan contract. For
example, Mr. (A) borrowed $ 1000 from Mr. (B). The loan amount to be
repaid is a debt.
The debt could be established out a commutative
contract (Ꜥaqd muꜤāwaḍa). For example, an Islamic bank sold a car on
deferred payment basis for BD 10,000/-. The sale price will be a debt.
The debt could be established due to misconduct
(taꜤddī) or negligence (taqṣīr). For example, there was negligence from
the data management company, and the Islamic bank suffered a direct and
actual loss of BD 10,000/-. If the claim of the loss is made then this amount
will become a debt.
As per Shari’ah, the debt could be in the form of money,
commodities, or usufructs.
Usually, people assume that debt is confined to money.
The debt in kind is neither imagined nor correct to be described
that way. Hence, as per Oxford’s Dictionary of Law, debt is
defined as: “1. A sum of money owed by one person or group to
another. 2. The obligation to pay a sum of money owed”.
However, as per Black, debt was defined as: “a nonmonetary
thing one person owes another; such as goods or services <her debt
was to supply him with 20 international first-class on the alirline
of his choice”. Even Aiyar mentioned: “debt includes cash or
kind”. It is very crucial to take the nonmonetary aspect into
consideration at this point because Islamic banks enter into
Forward Ijarah, Salam and Istisna contracts. In all these
contracts, a debt is established which is in the form of usufructs

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 II - DEFINITION OF DEBT

or goods to be delivered in the future. The subjects of contracts

are specified and unidentified. The seller (in Salam or Istisna)
owes to the buyer goods or commodities to be delivered.
Similarly, the lessor (in Forward Ijarah) owes to the lessee
usufruct to be delivered as per specifications.
In a sale contract, such as Istisna, the subject of sale will
be considered as debt because its delivery is deferred. Similarly,
the price will be a debt if its deferred or partially paid. This could
be looked at as ibtidā al-dayn bi al-dayn (establishing a debt
against a debt) which is a form of bayꜤ al-dayn bi al-dayn (sale
of debt for debt). This results in ta’jīl al-badalīn (delay of both
the considerations). Some jurists considered it as a form of bayꜤ
al-kā’li bī kā’li, which is prohibited as per Ḥadīth. However,
Dr. Yāsir ꜤAjīl al-Nashmī discussed the scenario in details in light
of opinions of jurists of four schools of jurisprudence and
concluded that sale of the debt for a debt will is a mean to avoid
a Shari’a prohibition, and its avoidance is not an objective which
needs to be met at all the times. Further, such a sale is valid, as
per Ḥanbalī jurists, provided the subject of sale should be
delivered as per the specifications agreed at the time of sale. As
per an opinion of Ḥanafīs and the view of Mālikīs and ShāfiꜤīs,
such a sale is Salam and not Istisna (i.e., the price cannot be
deferred). The price has to be stated at the time of making the
contract. Dr. Yāsir, if the below conditions are met, the sale is
makrūh (reprehensible):
1. The Istisna seller should have expertise in securing
the subject of Istisna sale;
2. The subject of sale should be described as the case of
Salam contract;
3. The subject of sale should be widely available at the

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 II - DEFINITION OF DEBT

time of contract, or possible to be delivered at the

time of delivery;
4. The sale is not with spot delivery;
5. The sale will not involve ribā, excessive uncertainty,
or excessive incognizance;
6. Delay of price is in the interest of the contracting
parties and will not cause harm for any of the parties.
However, there are many scholars who permitted entering into
a sale wherein delivery of both the considerations of the contract
is deferred. Some of them are: SaꜤīd b. al-Musyyib, al-Sāmirī, Ibn
al-Qāsim, Ashhab, Ibn Ḥabīb, al-Bājūrī. Some contemporary
scholars, like Sheikh Abdullah b. Bayyah and Sheikh
Muhammad al-Mukhtār al-Sallāmī, permitted such a sale if
there was a need to enter into such a sale.

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 III - TYPES OF SALE OF DEBT

Types of Sale of Debt

As far as the buyer is concerned, the sale of debt is one
of the below two types:
3/1
1) Sale of debt to the debtor himself. For example, there is a
debt (let’s say $ 10,000) which is established and owed by the
debtor. The creditor sells the debt to the debtor himself.

3/2 2) Sale of debt to a third party other than the debtor. For
example, there is a debt (let’s say $ 10,000) which is established
and owed by the debtor. The creditor sells the debt to a third party
other than the original debtor.
The Standard addressed Shari’ah rulings of the first type
of sale in s. 4, and Shari’ah rulings of the second type in s. 5.

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 IV- SALE OF DEBT TO THE DEBTOR

Fourthly - Sale of Debt to the Debtor

4/1
As per Shari’ah, it is permitted for the creditor to sell to
the debtor a debt that is previously established between them,
subject to 3 rules.

First Rule: Avoidance of Ribā

4/1/1 As per Shari’ah, sale of debt to the debtor should not
lead to ribā.
As per Islamic jurisprudence, there are three types of
ribā. At this point, the Standard did not only address provisions
of borrowing and lending against interest, i.e., ribā of debts,
rather it covered rulings related to ribā of sale (ribā al-buyuꜤ) as
well. Ribā of sale occurs when certain ribawī (usurious) assets
are exchanged without observing certain Shari’ah provisions.
Basically, a ribawī asset would any of 6 categories stated
by the Prophet (PBUH), i.e., gold, silver, barely, salt, dates,
wheat. Scholars have further expanded the underlying cause
(Ꜥilla ribawiya) for applying rulings of ribā.

The Case of Exchanging Usurious Commodities

4/1/1/1 If the debt is a usurious commodity (for example, the debtor
is supposed to settle a debt in kind which is 100 kg of dates), then the sale
of such a debt must fall within one of the below conditions.

Heter ogeneity of the Debt a nd Its Consider a tion

The first condition would be one where a debt in a
ribawī commodity is sold against another ribawī commodity,
but the sold debt and its consideration belong to different kinds.
For example, the debt is 100 kg. of debts and it is sold by the creditor to the

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 IV- SALE OF DEBT TO THE DEBTOR

debtor for a consideration of 250 kgs of salt.

4/1/1/1/a As per Shari’ah, it is required for the creditor to take
possession of the consideration of the sold debt, i.e., salt in the
above example, in the contract session. There is no Shari’ah
requirement to match the quantity of the sold debt and its
consideration.
For example, the gold manufacturer was supposed to deliver 100
gold bars to the buyer. Both the parties reach an agreement to substitute the
gold with silver. Hence, the outstanding debt in gold, owed by the seller-cum-
debtor, will be sold by the creditor (i.e., the seller) to the debtor against a
consideration in silver bars. It is expected that the originally agreed quantity
of gold will be different from the delivered quantity of silver. Such an
arrangement of sale is permitted provided possession of the consideration of
the debt (i.e., the silver) is transferred immediately to the creditor (i.e., the
buyer on credit) with delay.
As per the view of majority of Islamic jurists in the contemporary
era, currencies in circulation are subject to rulings of ribā when it comes to
exchanging them against each other. Hence, currencies are quasi-ribawī
commodity. For example, if the debt owed by the debtor is in Egyptian
Pounds and is substituted with Pounds Sterling, then it should be ensured
possession of Pounds Sterling is taken by the creditor during the contract
session with no delay in transferring possession by the debtor.

Homogeneity of the Debt a nd Its Consider a tion

4/1/1/1/b The second condition would be one where a debt in a
ribawī commodity is sold against another ribawī commodity, in
way that the sold debt and its consideration belong to the same
kind. For example, the debt is a specific quantity of Ajwa dates, and it is sold
by the creditor to the debtor for a consideration of a specific quantity of
Khalas dates.
As per Shari’ah, two conditions must be met. Firstly, it
is required that the quantities of the debt and its consideration
are equal (tamāthul). For example, if the debt, in Ajwa dates, is sold

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 IV- SALE OF DEBT TO THE DEBTOR

against Khalas dates, then the quantity of Ajwa should be equal to the
quantity of Khalas.
Secondly, as per Shari’ah, possession of the
consideration of the debt shall be transferred in the contract
session of selling the debt. For example, if the existing debt in Ajwa dates
is sold for Khalas dates, then the consideration of the existing debt (i.e.,
Khalas dates) should be transferred to the creditor in the contract session
without delay in delivering Khalas dates.

The Case of Settling the Monetary Debt in Other Currency

4/1/1/2 As per Shari’ah, it is permitted for the creditor to recover
his monetary debt, either in whole or part, in a currency other
than the currency in which the debt was established, subject to
the conditions as given below. For example, Mr. (A) owes to XYZ Bank
BD 10,000/-. It would be permitted if Mr. (A) settles the outstanding debt
in a currency other Bahrani Dinar, provided fulfilling three conditions given
below.

Condition (I): No Outsta nding Ba la nce Rema ining

4/1/1/2/a Firstly, as per Shari’ah, it is required that the possession
of the substitute of the debt is transferred in the contract session,
so that no part of the debt amount, which has been converted
into another currency, remains outstanding. For example, Mr. (A)
owes to XYZ Bank BD 10,000/-. If Mr. (A) and XYZ Bank agree to settle the
entire outstanding debt quoted in Bahraini Dinar in Euro (let’s say equals to
€ 25,000/), then it is required that in the contract session the entire amount
of original debt’s substitute is settled to XYZ Bank. This means that Mr. (A)
should pay € 25,000/- in the contract session, and it is not allowed to pay part
of the converted debt (let’s say € 20,000/-) and the remaining (in this case €
5,000/-) will be paid later.
For example, Mr. (A) owes to XYZ Bank BD 10,000/-. If Mr. (A)
and XYZ Bank agree to settle the one-third of the outstanding debt (BD
3,333.33) quoted in Bahraini Dinar in Euro (let’s say equals to € 8,348/),
then it is required that in the contract session the substitute of converted debt

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 IV- SALE OF DEBT TO THE DEBTOR

is settled to XYZ Bank. This means that Mr. (A) should pay € 8,348/- (which
is in lieu of BD 333.33) in the contract session, and it is not allowed to pay
part of the converted debt (let’s say € 5000/-) and the remaining (in this case
€ 3,348/-) will be paid later. The other part of the original debt, which is not
converted, (equals to BD 6666.66) will remain outstanding as per the original
terms and conditions as agreed between Mr. (A) and XYZ Bank.

Condition (II): No Stipula tion

4/1/1/2/b Secondly, as per Shari’ah, discharge of the debt in
another currency before the stipulated discharge time should
avoid any of the following cases.
a. Discharge in different currency should not be
stipulated as a condition. For example, the Murabaha
contract between Mr. (A) and XYZ Bank stated that the
Murabaha price (quoted in Bahraini Dinar) will be settled in
Euro at the time of settlement. Such a practice should be
avoided.
b. Discharge in different currency should not be
noticeable by anticipation. For example, XYZ Bank
asked its customer (Mr. (A)) to transfer funds in Euro on a
future date which coincides with the settlement date of
installments in Bahraini Dinars.
c. Discharge in different currency should not a
customary practice. For example, XYZ Banks issues LC in
Euro and enters into Murabaha with the LC applicant in Euro,
but it’s a known customary practice that LC is settled in the
local currency. This should not be a case.

Condition (III): Sa le a t the Pr eva iling Excha nge Ra te

4/1/1/2/c Thirdly, as per Shari’ah, if the debt is discharged in a
currency different that the original currency of the debt, then it
should be ensured that it is done at the exchange rate prevailing

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 IV- SALE OF DEBT TO THE DEBTOR

on the day of settlement; provided the the debt was any of the
two cases:
a- the debt was the result of a loan contract, [for example,
Mr. (A) was extended BD. 10,000 as a short-term loan facility
by XYZ Bank]; or
b- there was a delay by the debtor settling the debt
when it matured [for example, Mr. (A) was supposed to
settle Murabaha installments in Bahraini Dinars on 3rd May.
But he requested on 5th July to settle the outstanding amount
in Euro].
For example, Mr. (A) has a Murabaha bullet payment of BD
100,000/- to be paid to XYZ Bank on 3rd May. However, the customer
delayed in settling the amount on the agreed due date. Mr. (A) agreed to make
the payment in Euro (the current market rate is BD 1 = € 2.5), instead of
Bahraini Dinar, and would pay Euro 252,000/- (which comes to BD 1 =
€2.52). This arrangement is not Shari’ah compliant because the creditor ends
up receiving more than the market rate and the increased amount of € 2,000
are interest.

The Case of Substituting the Salam Asset

4/1/1/3 Salam is a contract of selling a commodity or a usufruct
that is specified and unidentified with a future delivery and spot
payment. The sale price is called capital of Salam. For example, Mr.
(A) sells to Mr. (B) 1000 kg. of soft white wheat to be delivered after 6 months
for a price of BD 4,000/- to be settled on spot.
4/1/1/3 As per Shari’ah, after the maturity date of Salam sale
(i.e., the delivery date), it is permitted to substitute the subject
of Salam sale with an item (whether belongs to the same kind or
different from the subject of Salam), other than cash, provided
it was not stipulated in the contract to carry such substitution.
Further, it should be ensured the conditions given below are
fulfilled.

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 IV- SALE OF DEBT TO THE DEBTOR

Condition (I): Fit to be a consider a tion of Sa la m Ca pita l

4/1/1/3 Firstly, as per Shari’ah, the substituting asset (al-badal)
should be fit to be the subject of Salam for the Salam capital. For
example, Salam contract was entered to deliver 1000 kg. of dates against a
Salam capital (i.e., Salam price) that will be in kind in the form of 3000 kg. of
red wheat. Now, if the Salam buyer and the Salam seller agree to substitute
the Salam asset with 3000 kg. of white wheat, then this will be Shari’ah non-
compliant, because after substitution, it will be sale of 3000 kg. of red wheat
(to be delivered in the future) against 3000 kg. of white wheat (price in kind
to be settled immediately). Since both the subject of sale and its consideration
are ribawī assets so there should not be any delay in the delivery of both the
items. However, if dates were exchanged with any non-ribawī item then it
would be permitted.

Condition (II): Ma r ket Va lue Not Mor e tha n the

Or igina l
4/1/1/3 Secondly, as per Shari’ah, the market value of the
substitute asset should not exceed the market value of the
subject of Salam at the delivery time. For example, Salam sale was
made to sell 1000 kg. of wheat. Supposedly, the Salam seller (who is supposed
to deliver the commodity at a future date) finds it difficult to deliver the
subject of Salam as agreed originally. Hence, it is not permitted for the parties
to the Salam contract to agree on substituting the original commodity (i.e.,
wheat) with another commodity (supposedly, dates) that have higher market
value. This prohibition comes under the objective of eliminating any chances
for the creditor (i.e., the Salam buyer) to benefit from the Salam price paid in
advance, because the difference in price between 1000 kg. of dates and 1000
kg. of wheat will constitute interest (ribā).

Second Rule: the Sale is Not a Artifice (ḥīla ) for Ribā

4/1/2 As per Shari’ah, the transaction of selling a debt to the
debtor should not be a legal artifice (ḥīla) for indirectly earning
ribā. For example, Mr. (A) wants to lend BD 1000/- to Mr. (B) for an

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 IV- SALE OF DEBT TO THE DEBTOR

interest amount of BD 100/-. Since lending against interest is not permitted,

so the parties will agree to enter into a Salam contract wherein Mr. (A), as
Salam buyer, pay BD 1000/- for a commodity to be delivered by Mr. (B).
Upon the delivery date, the parties will agree to substitute the debt (in the
form of commodity to be delivered by Mr. (B)) for a cash amount to be paid
on spot by Mr. (B) and it will be equal to BD 1100/-. This is not acceptable
as per Shari’ah.

Third Rule: New Obligation of Increased Debt

4/1/3 As per Shari’ah, the transaction of sale of debt to the
debtor should not lead to establishing a new debt as an
obligation upon the debtor with an increase upon the existing
debt. For example, Mr. (A) has an outstanding debt of Murabaha financing
owed to XYZ Bank and it amounts to BD 5,000/-. If the Bank sold its debt
to Mr. (A) in a way that a new debt obligation was created for a value of BD
6,000/- then this will not be acceptable as per Shari'ah.

Extinction of the Debt

4/1/3/1 As per Shari’ah, it is not permitted to sell the debt to the
debtor in exchange for a new debt, which is established as an
obligation upon him, if the new debt is more than the existing
debt. This is a form of extinction of debt (faskh al-dayn). For
example, Mr. (A) has an outstanding debt of Murabaha financing owed to
XYZ Bank and it amounts to BD 5,000/-. If the Bank agrees to sell the debt
to Mr. (A) for BD 6,000/- to be paid as a deferred payment, then this shall be
extinction of the original debt (i.e., BD 5,000/-) and creation of a new debt
(i.e., BD 6,000/-). Such an act is not permitted by Shari’ah.

Debt as Salam Price

4/1/3/2 As per Shari’ah, it is not permitted to make the debt as
the Salam capital. For example, XYZ Bank entered into a Murabaha
transaction with Mr. (A) and the outstanding amount is BD 5,000/-. No
Salam contract can be proposed between XYZ Bank and Mr. (A) so that XYZ

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 IV- SALE OF DEBT TO THE DEBTOR

Bank (as Salam buyer) will consider the outstanding amount on the
Murabaha as Salam price.

Rollover of Murabaha Debt

Murabaha is a sale transaction wherein the sale price has
to be determined, known and fixed at the time of carrying out
the Murabaha contract between the Murabaha seller and the
Murabaha buyer. In case the tenure of financing is long then
Islamic banks opt for alternative solutions where there is a room
for variable pricing (i.e., Ijarah, Musharak, Wakala etc.).
However, Islamic banks faced difficulties in applying alternative
structures where the customer (as an obligor) has limited
underlying assets, or the banks (as a financier) were not willing
to take asset risk for longer tenures. This led to introduction of
Murabaha rollover deals.
Pursuant to the Murabaha rollover, at the initial stage
the financier and the customer enter into a commodity
Murabaha transaction for a short tenure (let’s say one or three
months). The Murabaha will generate liquidity for the customer
and create a liability upon him. At the end of the first periodic
period, the customer settles the due amount, and the remaining
outstanding amount is rolled over through entering into a new
commodity Murabaha transaction wherein the generated
liquidity automatically settles the outstanding amount as per the
first deal. Now, the customer has to be pay the Murabaha price
of the second deal which will be settled partially by the end of
the second period, and the remaining amount is again rolled
over. Every roll-over takes into consideration the prevailing rate
of financing. Now see the guidance as per the Standard.

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 IV- SALE OF DEBT TO THE DEBTOR

Incr ea se in the va lue a nd the tenur e

4/1/3/3 As per Shari’ah, all such things are prohibited, which
may lead to an increase in the amount or the value of the debt
against increasing the debt tenure or could be a means to it,
irrespective of whether the debtor is solvent or insolvent. For
example, Mr. (A) entered into Murabaha transaction with XYZ Bank, and it
created a debt obligation valuing BD 30,000/- to be settled in 6 years. In the
3rd year, Mr. (A) makes a request to extend the remaining tenure by another
3 years. XYZ Bank increases the tenure, so that the total tenure becomes 9
years, but at the same time increase the outstanding debt, if it was BD
15,000/-, to BD 25,000/-. This means that the original debt increased by BD
10,000 and the aggregate value (before and after the request) increased from
BD 30,000 to BD 40,000/-. Such a practice is not Shari’a compliant.
As per Shari’ah, it is not permitted to substitute the debt
owed to the creditor for a commodity and then selling that
commodity to the debtor for a deferred price higher than the
amount of debt, and it is in the form of the proscribed sale of
‘Inah. For example, Mr. (A) entered into Murabaha transaction with XYZ
Bank, and it created a debt obligation valuing BD 30,000/- to be settled in 6
years. In the 3rd year, Mr. (A) requests to substitute the debt (due by Mr. (A)
and values BD 15,000/-), for a commodity (let’s say 1000 kg. of wheat).
Hence, Mr. (A) exchanges 1000 kg. of wheat against the outstanding debt of
BD 15,000/-. As a second leg, XYZ Bank will sell back the same commodity
(i.e., 1000 kg. of wheat) to Mr. (A) at a price higher than the first leg price
(i.e., more than BD 15,000/-, e.g., BD 25,000/-). This result in higher
amount of debt to be settled by the debtor. This is not Shari’ah compliant.

Accepta ble Mur a ba ha Rollover

Once the Standard made it clear that such forms of
rollover are not acceptable, it highlighted in the coming sections,
the acceptable form of Murabaha rollover.
4/1/3/4 As per Shari’ah, if a solvent debtor customer requests,
then it is permitted to execute a Murabaha contract between the

26
 IV- SALE OF DEBT TO THE DEBTOR

customer and the creditor Institution, pursuant to which a new

debt is established upon the customer that will be more than the
first debt, even if the customer settles whole or part of the first
debt using the sale price of the commodity that was purchased
under the new financing. This would be acceptable provided
fulfilling the requirements given below.

a. Independence of the New Transaction

4/1/3/4/a As per Shari’ah, if a Murabaha rollover is taking place,
then it should be ensured that the new Murabaha should be a
financing transaction independent of the transaction that
established the first debt. This could be established through
different parameters:
i. entering the new Murabaha will not be stipulated in
the contract of the first debt. For example, Company (A)
entered into Murabaha transaction with XYZ Bank, and it
created a debt obligation valuing BD 3,000,000/-. It was stated
in the financing agreement that the Murabaha will mature
after 3 months. Subsequently, Company (A) and XYZ Bank
will enter into a new Murabaha that will automatically settle
the existing Murabaha. Stipulating such a condition is not
Shari’ah compliant.
ii. Settlement of the first Murabaha through sale
proceeds of the commodity purchased pursuant to
the new Murabaha is a requirement that is neither
stated in the new Murabaha contract, nor in the
financing documentation. For example, Company (A)
entered into Murabaha transaction with XYZ Bank, and it
created a debt obligation valuing BD 3,000,000/-. It was stated
in the financing agreement that the Murabaha will mature
after 3 months. After 3 months, Company (A) and XYZ Bank
entered into a new Murabaha transaction. Once the customer
owned the commodity, pursuant to the new Murabaha

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 IV- SALE OF DEBT TO THE DEBTOR

transaction, then the customer can sell the purchased

commodity and realize sale proceeds. As per this section, no
financing document (either in the new or the first Murabaha)
will state that sale proceeds of the purchased commodity will
be used against settlement of the outstanding amount of the
first Murabaha.
4/1/3/4/a
As per Shari’ah, credit approval must be given for
the new Murabaha because it is new financing.
Requiring credit approval will ensure that the new
Murabaha transaction has a banking impact and
cannot be considered as an annexure to the first
Murabaha transaction.

b. Validity of the Contract with Shari’ah Effect

4/1/3/4/b The contract of the new Murabaha should be a valid
contract that will resulting it's respective Shari’ah effects. Some
of the Shari’ah effects are as follows:
i. The customer should be entitled to take actual
delivery of the subject of the sale (i.e., the
commodity purchased pursuant to the new
Murabaha). For example, Company (A) entered into
Murabaha transaction with XYZ Bank, and it created a debt
obligation valuing BD 3,000,000/-. It was stated in the
financing agreement that the Murabaha will mature after 3
months. After 3 months, Company (A) and XYZ Bank
entered into a new Murabaha transaction. However, the
customer will not be entitled to take actual delivery of the
commodity purchased by him pursuant to the new Murabaha.
Such a stipulation/arrangement is not Shari’ah compliant.
ii. If the delivery of the commodity (purchased as per
new Murabaha) to the customer was constructive,
then the customer is entitled to retain ownership of
the commodity or to dispose of the subject of sale as

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 IV- SALE OF DEBT TO THE DEBTOR

he deems fit with no obligation to sell thereof. For

example, Company (A) entered into Murabaha transaction
with XYZ Bank, and it created a debt obligation valuing BD
3,000,000/-. It was stated in the financing agreement that the
Murabaha will mature after 3 months. After 3 months,
Company (A) and XYZ Bank entered into a new Murabaha
transaction. Upon executing the contract of the new
Murabaha, the customer is entitled to retain ownership of the
commodity, to sell it off or to use it as finds suitable.

c. Application of the Sale Proceeds

4/1/3/4/c As per Shari’ah, once the commodity (purchased as per
the new Murabaha) is sold by or on behalf of the customer, then
the customer is entitled to dispose of the sale price of the
commodity as he deems fit. This includes depositing the sale
proceeds in an account held with the Islamic bank wherein the
customer is carrying out Murabaha rollover. For example,
Company (A) entered into Murabaha transaction with XYZ Bank, and it
created a debt obligation valuing BD 3,000,000/-. It was stated in the
financing agreement that the Murabaha will mature after 3 months. After 3
months, Company (A) and XYZ Bank entered into a new Murabaha
transaction. Company (A) has the right to use the sale proceeds of the
commodity (i.e., the subject of sale of the new Murabaha) as it deems fit.
Also, the sale proceeds can be deposited in an account held with XYZ Bank.
4/1/3/4/c As per Shari’ah, the new Murabaha should entitle the
customer to use the sale proceeds as per his choice to settle the
first debt after one working day following his receipt of the sale
proceeds or getting the amount deposited in his account. For
example, Company (A) entered into Murabaha transaction with XYZ Bank,
and it created a debt obligation valuing BD 3,000,000/-. It was stated in the
financing agreement that the Murabaha will mature after 3 months. After 3
months, Company (A) and XYZ Bank entered into a new Murabaha
transaction. Company (A) has the right to use the sale proceeds of the
commodity (i.e., the subject of sale of the new Murabaha) to settle the

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 IV- SALE OF DEBT TO THE DEBTOR

outstanding amount of the first Murabaha after one working day.

Mur a ba ha Rollover with a Delinquent Customer

The conditions and scenarios given above are related to
solvent customer. However, if the Murabaha rollover is entered
with a delinquent customer, then the given below conditions
should be observed.

d. No Compensation for Delay

4/1/3/4/d As per Shari’ah, it is not permitted for the Islamic bank
to compensate itself, either directly or indirectly, for the
delinquency of the customer in settling the first debt of a
Murabaha rollover. For example, Company (B) entered into Murabaha
transaction with XYZ Bank, and it created a debt obligation valuing BD
500,000/-. It was stated in the financing agreement that the Murabaha will
mature after 1 month. Company (B) is facing financial difficulties and could
not make the payments on time. The new Murabaha was entered after 25
days from the maturity of the first Murabaha. XYZ Bank entered into a new
Murabaha transaction, but it increased the Murabaha profit to recover delay
of 25 days. This is not Shari’ah compliant.
4/1/3/4/d As per Shari’ah, the profit rate in the new Murabaha
should not exceed the rate for such a customer if he were not
delinquent. For example, Company (B) entered into Murabaha
transaction with XYZ Bank, and it created a debt obligation valuing BD
500,000/-. It was stated in the financing agreement that the Murabaha will
mature after 1 month. Company (B) is facing financial difficulties and could
not make the payments on time. The new Murabaha was entered after 25
days from the maturity of the first Murabaha. XYZ Bank entered into a new
Murabaha transaction, but instead of charging Company (B) profit of 2.5%
p.a., XYZ Bank charged the company profit at 3.5% p.a. This was done to
compensate delinquency of the customer. If the customer was not
delinquent, the rate of profit would have been 2.5% and not 3.5%. Increasing
the rate of profit in such a way is not Shari’ah compliant.

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General Provisions of Sale to the Debtor

The Standard explained various forms, norms and
rulings of sale of debt to the debtor, e.g., sale of ribawī asset,
different currency settlement, substituting the Salam asset. In
this part, it explains some general provisions related to sale of
debt to the debtor.

Future Sale of Debt

4/2 As per Shari’ah, it is not permitted to enter into an
agreement between the creditor and the debtor at the
origination of the debt to sell the debt to the debtor in the
future. This comes in light of avoiding entering into a sale
contract effective from future date. The contract of sale should
have an immediate effect (nājiz).

Bilaterally Binding Promise

4/2 As per Shari’ah, the creditor and the debtor cannot enter
into a bilaterally binding promise. For example, Mr. (A) sells goods on
Salam to XYZ Bank. Both the parties extend bilaterally binding promises that
they will substitute the Salam asset with another commodity. This is not
Shari’ah compliant.

Unilaterally Binding Promise

4/2 As per Shari’ah, if there was no ribā, there was no
presence of no artifice and no new obligations was created with
increased debt, then it is permitted to have a unilaterally binding
promise to sell the debt to the debtor.

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 V- SALE OF DEBT TO A THIRD PARTY

Fifthly - Sale of Debt to a Third Party

Once the Standard covered Shari’ah rulings related to
sale of debt to the debtor, now it moves to sale of debt to a third
party.

Sale of Debt for Cash

5/1 As per Shari’ah, it is not permitted to sell a monetary
debt against cash. The reason for not allowing such a sale
because this amounts to ribā al-nasī’a, if the debts and its
monetary consideration are of the same value, and it would ribā
al-faḍal if values differ. For example, XYZ Bank extended Murabaha
facilities to number of its customers. The aggregate value of Murabaha
receivables is BD 300,000/-. It will be Shari’ah non-compliant if XYZ Bank
sells its Murabaha receivables to a third party for cash, irrespective whether
the consideration was at par, at discount or at premium.

Sale of Debt for Debt

5/1 It is not permitted to sell a monetary debt against a
monetary debt. The reason for not allowing such a sale because
this amounts to double-leg ribā al-nasī’a, if the debts and its
monetary consideration are of the same value, and it would ribā
al-faḍal if values differ. For example, XYZ Bank extended Murabaha
facilities to number of its customers who are located abroad. The aggregate
value of Murabaha receivables is BD 300,000/. Another bank is willing to
acquire this debt against local debt in the country of XYZ Bank. It will be
Shari’ah non-compliant if XYZ Bank sells its Murabaha receivables to a third
party for debt, irrespective whether the consideration was at par, at discount
or at premium.
However, if the creditor (i.e., the financier) is willing to
assign the debt to a third party, then it will be the case of
assignment of rights and not sale of debt. Before settlement of
the debt, if the debt is extinguished (halāl al-dayn), then the

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 V- SALE OF DEBT TO A THIRD PARTY

assignor (i.e., the creditor who assigned his right of debts to a

third party) should arrange an alternative debt.

Sale of Debt for a Specific Commodity

5/2 As per Shari’ah, it is permitted to sell a monetary debt
for a commodity with spot delivery. For example, XYZ Bank extended
Murabaha facilities to number of its customers. The aggregate value of
Murabaha receivables is BD 300,000/. XYZ Bank wants to exit from the
transaction because of delinquency issues. QRS Bank is willing to acquire
these facilities for BD 275,000/-. Both the banks understand that sale of debt
against cash is not allowed. Hence, QRS Bank will purchase specific
commodities worth BD 275,000/-, and then it sells the commodity to XYZ
Bank on spot Murabaha basis wherein the Murabaha price will be the
Murabaha cost (BD 275,000/-) plus Murabaha profits (BD 25,000/-). XYZ
Bank transfers its ownership claim in the underlying debt to QRS Bank and
takes possession of the purchased commodity. XYZ Bank liquidates the
commodity, as per its wish, and generates liquidity. Since the commodity will
be sold, most likely, at the cost price, so XYZ Bank will realize BD 275,000 as
sale proceeds.

Sale of Debt for a Specific Commodity

5/2 As per Shari’ah, it is permitted to sell a monetary debt
for a usufruct or service wherein its object of delivery is
identified at the time of sale.

Sale of Debt for an Unidentified Commodity

5/2 Salam is a sale contract where the seller sells a specified
and unidentified goods to the buyer for spot payment by the
latter. Hence, before delivery of the Salam goods, the subject of
sale remains a debt owed by the Salam seller.
As per Shari’ah, it is not permitted to sell a monetary
debt against a commodity with deferred delivery.

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 V- SALE OF DEBT TO A THIRD PARTY

For example, XYZ Banks owes BD 300,000/- as Murabaha

receivables due by its customers. In a separate arrangement, XYZ Bank wants
to acquire the underlying Salam asset which is yet to be delivered. It would
be Shari’a non-compliant, if XYZ Bank acquires the Salam asset against sale
of Murabaha receivables of BD 300,000/-. Hence, the Salam capital (i.e., the
Salam price) cannot be a debt owed by a third party.

Sale of Debt for an Unidentified Usufruct

Forward Ijarah (ijarah mawṣūfa bi dhimma) is a lease
contract where the lessor leases a specified and unidentified
usufruct to the lessee. Hence, before delivery of the usufruct, the
subject of Ijarah remains a debt owed by the Ijarah lessor.
5/2 As per Shari’ah, it is not permitted to sell a monetary
debt for a usufruct or a service with an unidentified object of
delivery (maḥal al- istīfā’ )(1). For example, XYZ Bank extended
Forward Ijarah to number of its customers. The aggregate value of Ijarah
facilities is BD 3,000,000/-. None of the Ijarah assets are delivered. QRS Bank
wants to sell a monetary debt, payable after 3 months, against acquiring
Ijarah facilities extended by XYZ Bank. This will be Shari’ah non-compliant
because a monetary debt (payable to QRS) will be sold against specified and
unidentified usufructs (owed by XYZ Bank). Once the object of delivery is
identified and customers of XYZ Bank start enjoying the usufruct, then XYZ
Bank can sell the usufruct in exchange of monetary debt owed to QRS.

Sale of Commodity Debt

Salam is a sale contract where the seller sells a specified
and unidentified goods to the buyer for spot payment by the
latter. Hence, before delivery of the Salam goods, the subject of

(1) Maḥal al- istīfā’: is the object of enjoyment that refers to the means and tools of
driving the underlying usufruct. For example, XYZ Bank leases a car on Forward
Ijarah basis. The customer will enjoy the usufruct of using the car, but the object
of enjoyment (i.e., in this case the car) should be identified at the time of
delivering the usufruct. Otherwise, the underlying usufruct remains a debt.

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sale remains a debt owed by the Salam seller. This is often

referred as commodity debt (dayn al-silaꜤī ).
5/3 As per Shari’ah, it is not permitted to sell a commodity
debt before taking possession of the underlying commodity,
whether it is sold against cash, commodity, usufruct, or service.
For example, XYZ Bank entered into Salam contract with a metal
supplier, so that a specified type of metals are delivered after 3 months. Before
taking possession of the Salam asset, it will be Shari’ah non-compliant if XYZ
Bank sold the Salam asset to a third party for cash, specific commodity,
usufruct or service.

Sale of Specified Unidentified Usufruct

Forward Ijarah (ijarah mawṣūfa bi dhimma) is a lease
contract where the lessor leases a specified and unidentified
usufruct to the lessee. Hence, before delivery of the usufruct, the
subject of Ijarah remains a debt owed by the Ijarah lessor.
5/4 As per Shari’ah, it is not permitted to sell the debt if it
was a usufruct or a service that is a specified unidentified
(mawṣūfa fī dhimma), where the object of delivery is not
specific, regardless of whether such usufruct or service are sold
for cash, commodity, usufruct, or service.
For example, XYZ Bank, as a lessor, entered into Forward Ijarah
contract with its customer, so that specified properties are delivered after 3
years. Before taking possession of the Ijarah assets, it will be Shari’ah non-
compliant if XYZ Bank sold the Forward Ijarah asset to a third party for cash,
specific commodity, usufruct or service.

Avoiding Gharar
5/5 As per Shari’ah, it is not permitted to sell the debt to a

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 V- SALE OF DEBT TO A THIRD PARTY

third party if it has excessive uncertainty (gharar )(2). Some

examples and scenarios were given to further explain this
provision.
5/5
As per Shari’ah, it would be excessive uncertainty, if the
debt is not established either by acknowledgement or by
evidence. For example, XYZ Bank intends to sell a debt owed to it.
However, there is no document in place which proves that the parties have
acknowledged the debt or any evidence that proves existence of the debt.
5/5 As per Shari’ah, it would be excessive uncertainty, if
there was lack of knowledge (jahāla) of the amount of debt. For
example, XYZ Bank sold cars on Murabaha but the Murabaha price will be
determined in the future. If XYZ Bank sells the outstanding debt to a third
party against specific commodities, then it would be Shari’ah non-compliant
because value of the debt is not known. Further, it is not permitted to leave
the Murabaha price undermined.

Consent of the Debtor

5/6 As per Shari’ah, it is not required to secure consent of
the debtor at the time of selling the debt, owed by him, to a third
party unless the debtor and the creditor have agreed otherwise.
For example, XYZ Bank extended Murabaha facilities to number of
customers, and the aggregate value of the outstanding facilities was BD
300,000/-. If XYZ Bank wants to sell the outstanding debt to a third party,
subject to the rulings and provisions given in the Standard, then it is not
required to obtain consent of each customer. However, if the agreement with
the customer stated to seek customer’s consent before selling the debt, then
condition should be fulfilled.

(2) Refer to Shari’ah Standard No. (31): Controls on Gharar in Financial

Transactions.

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 V- SALE OF DEBT TO A THIRD PARTY

Option to Rescind
In Islamic jurisprudence, the contracting parties in a sale
contract have an option, either one of them or both the parties,
to rescind the contract. This is called option to rescind (khayal
al-faskh). There are many types of options that are recognized
by Shari’ah.
5/7 As per Shari’ah, the buyer of the debt shall have the
rescission option for misrepresentation (khayār al-taghrīr) if
the debt seller is aware of the debtor’s insolvency or
procrastination, but the buyer was not informed about that by
the seller.

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Sixthly - Division of the Debt

An asset could be a corporeal property, also called
tangible asset, or a debt, which is called in the banking as
receivable. Further, the asset could be owned by one person and
duly segregated by allocation. Similarly, ownership of the asset
could be held jointly by several persons without segregating it.
In this part of the Standard, rulings and provisions are
highlighted about division of the debt that is held by different
partners.

Shares of Claimants in a Debt

6/1 As per Shari'ah, it is permitted for the claimants in one
debt to divide it among themselves in proportion to their
respective shares so that each claimant shall reserve his respective
share in it. For example, XYZ Bank and QRS Bank entered into a
Murabaha syndication deal wherein respective shares in financing were 30%
and 70%. The joint debt (i.e., the Murabaha receivables to be paid by the
obligor) can be divided among the financiers, so that XYZ Bank owns 30% of
the debt, and QRS Banks owns 70% of the debt.

Dividing Multiple Debts

6/2 As per Shari’ah, it is permitted for the claimants in
multiple debts to divide the debts among themselves so that each
claimant shall reserve a debt or more based on his share. For
example, XYZ Bank and QRS Bank entered into a syndication deal that
involves several structures (e.g., Murabaha, Salam, Istisna). It is permitted if
the debts are divided among the participants (i.e., XYZ Bank and QRS Bank)
based on their capital contribution. Hence, if XYZ Bank contributed 30%
then 30% of Murabaha receivable will be owed by the bank.

Distributing Assets
6/3 As per Shari’ah, it is permitted if what is owned by the

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 VI- DIVISION OF THE DEBT

partners includes debts, tangible assets, and cash, and the

partners agree on an arrangement where some of them will take
debts, some will take cash, and others will take tangible assets.
For example, XYZ Bank and QRS Bank entered into a syndication deal that
involves several structures (e.g., Murabaha, Salam, Istisna, Musharaka). It is
permitted if XYZ Bank or QRS Bank chooses one type of debt or tangible
asset and leaves others. Hence, XYZ Bank may request that all its capital
contribution should be directed to Murabaha receivables, or QRS Bank can
request to keep its profile debt-free.

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 VII- OWNERSHIP OF THE DEBT &
SECURING THE DEBT
Seventhly - Ownership of the Debt & Securing It
In Islamic jurisprudence, validity of a sale contract is
based on valid transfer of the ownership and bearing the
underlying risk of the subject of sale. It could be possible that
banks claims that debts were sold to a third party, but its
ownership remains with the original seller. To address this
challenge, the Standard gave some provisions.

Risk Transfer
7/1 Ownership of the debt and its risk are transferred to its
buyer by the effect of any means that customarily allows the
buyer to claim the debt. For example, XYZ Bank has a Murabaha
outstanding debt of BD 100,000/-. The bank sold the debt to QRS Bank
against exchange of specific commodities. However, QRS Bank has no right
to claim the debt. This means that the debt is still held by XYZ Bank and its
sale was invalid.

Transfer of Security
7/2 As per Shari’ah, if the debt is secured via an established
pledge or an established guarantee, then the pledge and the
guarantee will transfer to the buyer along with the sold debt,
subject to any of the scenarios give below.
Firstly, buyer of the debt has stipulated upon the seller
to transfer the security to the buyer. For example, XYZ Bank entered
into auto Murabaha transaction with its customer for BD 10,000/-.
Outstanding Murabaha debt was secured by post-dated cheques provided by
the customer. Later, XYZ Bank sold the outstanding debt for a specific
commodity to QRS Bank. If QRS Bank stipulated upon XYZ Bank to
transfer the security, along with the debt, then the security should be
accordingly transferred.
7/2 Secondly, it could be a prevailing custom that requires
transfer of security along with the sold debt.

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 VII- OWNERSHIP OF THE DEBT &
SECURING THE DEBT
7/2 Thirdly, the pledgor or the guarantor have not
stipulated a condition regarding non-assignability of the pledge
or the guarantee. For example, XYZ Bank entered into auto Murabaha
transaction with its customer for BD 10,000/-. Outstanding Murabaha debt
was secured by a guarantee provided by customer’s employer. Later, XYZ
Bank sold the outstanding debt for a specific commodity to QRS Bank. If no
condition is found in the guarantee issued by the employer that stops XYZ
Bank to assign the guarantee, issued in the favour of XYZ Bank, to a third
party, then there is no Shari’ah issue in assigning the guarantee to the debt
buyer once the debt is sold.

Securing the Debt

7/3 As per Shari’ah, it is permitted if the buyer of the debt
stipulates upon the seller of the debt to secure the debt by a
Shari’ah compliant guarantee from a third party so that the
buyer will purchase the debt secured via a guarantee. For example,
XYZ Bank entered into auto Murabaha transaction with its customer for BD
10,000/-. Outstanding Murabaha debt was unsecured or insufficiently
secured. Later, XYZ Bank sold the outstanding debt for a specific commodity
to QRS Bank. It is permitted if QRS Bank (as the buyer of debt) requests
XYZ Bank to obtain a Shari’ah compliant Takaful cover for the same.

Sale with Recourse

7/4 As per Shari’ah, it is permitted if the buyer of the debt
stipulates upon the seller of the debt to guarantee the debt owed
by the debtor so that the buyer will have the right of recourse
upon the seller about the portion of the debt that was not
recovered. For example, XYZ Bank entered into auto Murabaha
transaction with its customer for BD 10,000/-. Outstanding Murabaha debt
was unsecured or insufficiently secured. Later, XYZ Bank sold the
outstanding debt, valuing BD 7,000/-, for a specific commodity to QRS
Bank. It is permitted if QRS Bank (as the buyer of debt) stipulates upon XYZ
Bank that if the customer of XYZ Bank has not settled the debt partially or

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SECURING THE DEBT
fully then QRS Bank will have the right of recourse to XYZ Bank for the
amount that remained unsettled.

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 VIII- SALE & NEGOTIABILITY OF THE
DEBT

Eighthly: Sale of the Debt Combined with Other

Assets

A debt could be combined with other assets, and then it

is sold or negotiated as a financial security. In this part, the
Standard deals with Shari’ah provisions related to these matters.

Entities with Asset Turnover

8/1 As per s. 8/1, supposedly there is an entity that is in
existence and carries permissible activities on ongoing basis.
These activities could be commercial, financial, industrial,
related to real estate, services, agricultural, import-export, sale
and purchase of commodities and the like.
If above is the case, then as per Shari’ah, it is permitted
to sell such an entity or its share without considering the
provisions of the sale of debt about the portion of the debts out
of its assets. The ratio of debts is immaterial, as long as such debts
are generated from the turnover of business because such debts
are ancillary to the core activity of the entity. For example, the debt
ratio (i.e., debt: total assets) is immaterial while analysing shares of joint-stock
companies, including Islamic banks. Since debts are ancillary to the core
activity of such companies.
8/1 As per Shari’ah, the above ruling will not apply if the
entity is not entirely composed of debt. For example, an express loan
company might not have any tangible assets except debt obligations to be
settled by its customers. At the time of selling this company or its share, it
should be ensured that provisions of sale of debt as given in the previous
sections are observed.

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DEBT
Commingling of Assets
8/2 A financial or a commercial institution might have
assets which include debts, tangible assets, usufructs, and rights.
The institution may carve out some assets (including debts,
tangible assets, and the like), so that these assets are held by a
legally recognised entity wherein commingling of assets (khulṭa)
is materialised, and assets of the Institution are not turned over
on an ongoing basis. For example, a special purpose vehicle
(SPV), or an investment portfolio, that is registered with the
relevant authorities.
If above is the case, then the institution may sell or
securitize such an entity (either entirely or a common share out
of it) or issue Sukuk thereof. This is permitted subject to the
following rules.

Rule (I): Having Shari’ah Effect

8/2/1 Firstly, as per Shari’ah, the sale shall result in its
respective Shari’ah effects. This includes transfer of ownership
and risk to the buyer, as the buyer shall bear the risks associated
with the asset. It is not permitted to stipulate that the seller will
bear such risks at any stage of the process. For example, XYZ Bank
wants to issue Sukuks that are based on the underlying assets that are carved
out a portion of XYZ Bank’s assets. These assets are debts (like Murabaha,
pre-delivery Forward Ijarah or Istisna facilities) as well as tangible assets (like
Mudaraba, post-delivery Ijarah, or Wakala facilities). It would be Shari’ah
non-compliant if it was stated in the agreements that XYZ Bank (as seller of
the underlying assets) will bear the risk of the underlying assets either at the
origination stage or during the life of Sukuk.

Rule (II): Debt Ratio at the Issuance

8/2/2 As per Shari’ah, it is required that the ratio of tangible
assets and other like assets shall exceed 50% of the value of the

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 VIII- SALE & NEGOTIABILITY OF THE
DEBT
assets of the entity. For example, XYZ Bank issued Sukuk using debts
(like Murabaha, pre-delivery Forward Ijarah or Istisna facilities) as well as
tangible assets (like Mudaraba, post-delivery Ijarah, or Wakala facilities). It
should be ensured that tangible assets are at least 51% of the total assets.

Rule (III): Tangibility Ratio

8/2/3 As per Shari’ah, it is required for the institution issuing
Sukuk to take all the necessary precautions to maintain the
tangibility ratio (i.e., >51% tangible assets).
Hence, if the ratio is no longer maintained due to a
supervening event (e.g., sudden cash settlement of Ijarah facilities),
which is acknowledged by a competent Shari’ah Board, then the
Institution is required to forthwith restore the ratio within a
period specified by the Shari’ah Board.
In all instances, the ratio of the tangible asset shall not
fall at any time below 33% of the value of the asset(s).
In case the institution fails to raise the ratio of tangible
assets then the Sukuk-holders shall be notified that the Sukuks
are no longer negotiable except in accordance with the Shari’ah
conditions for trading debts.
If the Sukuk were listed on an exchange, it is required to
delist them, and the Sukuk-holders will be entitled to liquidate
their holding of Sukuk, subject to compliance with the
provisions of disposition of debts.

Rule (IV): Cash Proceeds of Debt

8/2/4 As per Shari’ah, if some of the debts of the underlying
assets were settled, then, at the time of acquiring new debt, the
entity must abide by the rule set out in S. 5 of this Standard. For
example, the underlying assets of Sukuk comprise of Murabaha receivables,
valuing BD 40 Million, whereas tangible assets value at BD 60 Million. If

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DEBT
existing Murabaha receivables were settled (i.e., turned into cash), and it is
planned to replace the outgoing debt with another debt, so it should be
ensured that the new debt is acquired against a commodity, neither against
cash nor against existing debt. Hence, firstly the entity will purchase a
commodity using the cash proceeds. Secondly, the entity will sell the
commodity against new debt to be included in the portfolio of underlying
assets.
As per Shari’ah, the following scenarios are not asset
turnover (taqlīb), that allow selling and buying without
observing provision of the sale of debt,:
a. substitution of part of the debts, tangible assets, or
other like assets of the entity. For example, the
underlying assets of Sukuk comprise of 40 facilities of Ijarah
and 20 facilities of Murabaha. During the life of Sukuk, the
originator decides to replace some of Ijarah facilities with
Murabaha or Ijarah facilities that are held by the originator.
This kind of substitution is not turnover of assets.
b. extending a new Murabaha to the debtor itself. For
example, the underlying assets of Sukuk comprise of 40
facilities of Ijarah and 5 facilities of Murabaha. During the life
of Sukuk, Murabaha facilities matured, and cash proceeds
were received. A new Murabaha is entered between the entity
(as Murabaha seller) and the originator (as Murabaha obligor)
to maintain income stream in the portfolio of underlying
assets. Such a Murabaha does not represent asset turnover.

Combining of Assets
8/3 Financial securities might be issued through combining
of assets (jamꜤ ) that are debt as well as tangible assets.
As per Shari’ah, if debts, other tangible assets, and the
like are combined for the purpose of selling them under one leg,
without such assets fulfilling the requirements of Shari’ah
compliant commingling, then Shari’ah provisions as set out in s.

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 VIII- SALE & NEGOTIABILITY OF THE
DEBT
5 of the Standard shall apply. For example, XYZ Bank wants to issue
Sukuk. Looking at the portfolio of the bank, 40 Ijarah facilities and 20
Murabaha facilities were selected. These assets were not registered under a
legal entity, rather stated jointly in a sale contract, separated in the accounting
books or earmarked in the institution’s books. This means that its neither the
case taqlīb (asset turnover), as set out in s. 8/1, and nor the case of khulṭa,
(commingling of assets), as set out in s. 8/2. Hence, such securities will be
treated as pure debt with no tangibility consideration.

Composite Sukuk
8/4 In the recent years, a new form of Sukuk emerged in the
Islamic banking industry. These are known as ṣukuk
murakkaba, can be referred as composite Sukuks. These are
different from hybrid Sukuks which are mainly exchangeable,
convertible and perpetual Sukuk. In hybrid Sukuks there is one
type of underlying assets of Sukuk that might turn its nature due
to an agreed upon trigger.
Composite Sukuks are such Sukuks wherein the
underlying assets of Sukuk carry two or more different natures,
and each parts functions independently from each other.
Usually, Sukuk originators collect proceeds of Sukuk to be
invested in a Murabaha leg and the other in acquiring Ijarah or
creating Mudaraba assets. If the Murabaha portion defaults
then Ijarah will not be affected, and vice-versa.
As per Shari’ah, if composite Sukuks are issued, so that
part of their proceeds is utilised in executing the Murabaha
transactions while the other part is utilised in tangible assets
(e.g., the assets of Mudaraba, Ijarah, or service agency), so
trading will be subject to s. 8/2 provided that the Sukuk issuance
shall not guarantee what is not permitted as per Shari’ah. For
example, XYZ Bank raised composite Sukuk that has two legs: Murabaha
(49%), and Mudaraba (51%). As it is known that Mudaraba-part is neither

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VIII- SALE & NEGOTIABILITY OF THE
DEBT
capital protected, nor coupons are guaranteed. In this case it will be Shari’ah
non-compliant if the profits in the Murabaha portion are inflated
abnormally so that it cannot only guarantee the principal of Murabaha,
rather it covers the principal and profit of Mudaraba.

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Ninthly: Contemporary Practices of the Sale of

Debt

Negotiable Instruments
As per Oxford’s Dictionary of Finance & Banking, a
negotiable instrument is a document of title that can be freely
negotiated, in which the stated payee of the instrument can
negotiate the instrument by either inserting the name of a
different payee or making the document open by endorsing it
(signing one’s name), usually on the reverse; (pg. 237). There are
three types of negotiable instruments: bill of exchange,
promissory note, and cheque.

Sale of Negotiable Instruments

9/1/1 As per Shari’ah, it is permitted to sell a negotiable
instrument to the debtor or a third-party subject to considering
the provisions of the sale of debt, as set out in s. 4 and s. 5 of this
Standard respectively.

Discounting of Negotiable Instruments

9/1/2 As per Shari’ah, it is not permitted to discount
negotiable instruments. However, the first creditor of the
negotiable instrument can be settled an amount lower than the
face value. For example, Mr. (A) draws a cheque in favour of Mr. (B) with
the value of BD 10,000/- to mature after 3 months. It is permitted if the
cheque is settled by Mr. (A) within one month for an amount of BD 9,500/-
provided such a discount is not stipulated.

Bonds
As per Oxford’s Dictionary of Finance & Banking,

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bonds are an IOU issued by a borrower to a lender. Bonds

usually take the form of fixed-interest securities issued by
government, local authorities, or companies; (pg. 39). Bonds will
be classified as Shari’ah non-compliant if mainly they carry
interest, or the borrowed funds are paid more than what was
borrowed.

9/2/1 As per Shari’ah, it is not permitted to trade in Shari’ah

non-compliant bonds, whether by their sale, purchase,
assignment, or otherwise.

Salam Sukuk and Murabaha Sukuk:

Sukuks can be issued based on Salam wherein Sukuk
proceeds will be deployed in purchasing an asset on Salam basis.
Once, the asset is delivered then it can be sold or leased to a third
party.
Sukuks can be issued based on Murabaha wherein
Sukuk proceeds will be deployed in purchasing an asset from a
supplier and then selling it to the party that needs financing.
Throughout the life of Sukuk, the obligor services Murabaha
principal and profit.
9/3/1 As per Shari’ah, it is not permitted to trade in Salam-
based Sukuk and Murabaha-based Sukuk for a cash price.
9/3/2 As per Shari’ah, it is permitted to exchange Salam Sukuk
or Istisna' Sukuk with the debtor (i.e., the Salam/Istisna seller)
following the rule of sale of debt, as set out in Item No. (4/1) of
this Standard. Further, see Item No. (4/1/1/3) of this Standard.

Financial Securities comprising of receivables

9/4/1 Trading in financial securities, whose underlying assets

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comprise debts owed by a third party, shall be subject to the rule

set out in this Standard. Hence, it will be looked at the position
of the debt in the portfolio, whether it is asset turnover,
commingling of assets or combing of assets.

Securitization of Receivables
9/5/1 Securitization of receivables is a mechanism for
converting debts to financial securities that can be traded in the
money markets.
As per Shari’ah, it is not permitted to trade in financial
securities based on securitization of monetary debts unless their
trading is against a commodity, a usufruct, or a service wherein
its object of delivery is identified. For example, XYZ Bank has a debt
of BD 300,000/- in the form of auto Murabaha receivables. XYZ Bank wants
to raise liquidity from the market against this debt. This security will not be
sold to the investors on cash, rather it will be for a commodity, usufruct or a
service.

Factoring
9/6/1 Factoring is a contract whereby an institution assigns its
trade receivables, which are invoiced in whole or only in specific
types thereof, frequently to a factor.
A factor is a party that takes the place of the creditor-
institution with regards to the debts it assumes and stands
obliged to pay its amounts to the institution immediately on the
spot or upon maturity, regardless of whether these debts were
recovered or not.
Factoring is carried for a pre-agreed monetary amount.
9/6/2 As per Shari’ah, it is not permitted to deal in a contract
of purchasing the invoices on a discount (factoring) unless their

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purchase was for a commodity, or a usufruct or a service wherein

the object of delivery is identified, as given in s. (5/2) of this
Standard.

Portfolio Swap
As per Shari’ah, it is not permitted to sell the debt to a
9/7
third party for another debt that is owed by another party to the
third party. Such as when two institutions agree to swap their
portfolios of receivables [owed] by their customer

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