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Islamic Finance within Trading Framework: The Way to Legitimate Profit
Submitted By Mohsin Ali 1100345 Submitted To Prof. Dr. Zainal Azam Abdul Rahman
Date of Submission: November 20th, 2011 Semester: September – December 2011
Shari`ah Rules in Financial Transactions SH 1003
Islamic Finance within Trading Framework: The Way to Legitimate Profit
Mohsin Ali 1100345
Table of contents
1. What is trading framework? 2. Trading Framework in Islam: An Introduction 3. Trading under Islamic Law of Commercial Contract
3.1 Valid Contract 3.1.1 Statement of Contract and its Conditions 3.1.2 Two Contracting Parties and their Conditions 3.1.3 Subject Matter of a Contract and Its Conditions 3.1.4 Prices 3.2 The Prohibited Elements in Shariah Commercial Contracts 3.2.1 Duress (Ikrah) 3.2.2 Mistake (Ghalat) 3.2.3 Inequality (Ghubn) 3.2.4 Deception (Taghrir) 3.2.5 Contracts for Forbidden Things 3.3 Options in Sales (Khiyar)
4. Trading Practices/ Financial Transactions Disallowed in Islam
4.1 Basic Prohibitions 4.1.1 Riba 184.108.40.206 Riba in Debt 220.127.116.11 Riba in Sale 4.1.2 Prohibition of Gharar 18.104.22.168 Gharar in Salam and Istisna 22.214.171.124 Prohibitted types of sale due to Gharar 126.96.36.199 Conditional sales and “two bargains in one sale” 188.8.131.52 Bai„ al-arbun (downpayment sale) 184.108.40.206 Bai„ al dayn (sale of debt) 4.1.3 Prohibition of Maisir/Qimar (Games of Chance)
4.2 Other Prohibitions 4.2.1 4.2.2 4.2.3 4.2.4 Sale of impure objects Town dweller is not allowed to sell the goods of a desert-dweller Najash Prohibition of meeting carvans on the route 2
Islamic Finance within Trading Framework: The Way to Legitimate Profit
Mohsin Ali 1100345
4.2.5 4.2.6 4.2.7 4.2.8 4.2.9
Persuading buyers to cancel their purchases from other vendors Commodity used in the commission of sin Earning of a prostitute, the price of a dog and the earning of a cupper Trading at the time of Juma Prayer Monopoly business
4.2.10 Speculative business based on selfish interest
5. Profit in Islam 6. Other Financial Transactions
6.1 Profit sharing transactions 6.2 Leasing (Ijarah) 6.3 Fee based transaction 6.4 Free of Charge transaction 6.5 Supporting Transactions
7. Gray Areas
7.1 Use of hiyal 7.2 Bai‟ al-inah 7.3 Organized Tawarruq 7.4 Murabaha Sukuks 7.5 Equity based Sukuks & Fixed income
8. Difference between Conventional and Islamic trading framework
8.1 Basic Philosophy 8.2 Profit vs Riba 8.3 Time value of money 8.4 Options in sales 8.5 Gharar and speculative activities 8.6 Derivatives 8.7 Dealing in Haram things and activities
9. Government Intervention in Market Place 10. Business Ethics in Islam 11. Summary 12. References
Islamic Finance within Trading Framework: The Way to Legitimate Profit
So. But all exchanges that lead to Riba are unanimously prohibited. Those who after receiving direction from their Lord. The word Bai„ in its widest meaning stands for any bilateral contract. Trading activity. defines a sale as “the exchange of property for property”. let us see how Islam views trade. In this paper our focus would be on describing the process of trading governed by Islamic Principles. which is completed by declaration and acceptance. Similarly. basically trading framework is a hypothetical description of the process of commercially exchanging goods and services. Exchange in the form of trading involves the reciprocal exchange of property rights along with usufruct. to become valid. So." but Allah hath permitted trade and forbidden usury. one thing being the subject matter and the other being price. which is termed the sale of usufruct. Trading framework could be viewed differently from different perspectives. their case is for Allah (to judge). but those who repeat (The offence) are Companions of the Fire. They will abide therein (for ever). ( Those who devour usury will not stand except as stands one whom the Evil One by his touch Hath driven to madness. exchanges based on Gharar or absolute uncertainties are void. must be free from all false & prohibited practices. Bai„ means exchange of one thing with another. ownership rights. Different exchanges involve different rules in respect of the liabilities and benefits for the parties to exchange. a code of Islamic commercial law based on the Hanafi Fiqh. the Lessor gives usufruct against rental but retains 4 Islamic Finance within Trading Framework: The Way to Legitimate Profit . 2. a simple word for Bai„ would be “exchange”.Mohsin Ali 1100345 Islamic Finance within Trading Framework: The Way to Legitimate Profit 1. This may involve all types of trading activities and any exchange. The literature of Hadith and Fiqh contains mention of many types of Bai„ that have been prohibited by the Prophet (pbuh). in which Allah SWT has compared between Trade and Interest and declare the permissibility of former and prohibition of latter. (al-Baqarah 2:275) Literally. What is trading framework? Framework basically means “A hypothetical description of a complex entity or process” and trading can generally be defined as “The commercial exchange (buying and selling on domestic or international markets) of goods and services”. desist. In that sense. deception and/or Gharar. In Ijarah. shall be pardoned for the past. etc. Trading Framework in Islam: An Introduction I want to start introducing trade in Islam from a verse from following verse of Holy Quran. That is because they say: "Trade is like usury. THE MEJELLE. and in the language of the law. it signifies an exchange of property for property with mutual consent of the parties. The common factor of all such prohibited types is that they contained the elements of Riba.
as conventional banks deal in money. A trade transaction requires the transfer of complete and instant ownership that is irreversible once finalized. Trading framework in Islam is governed by Islamic law of commercial contracts. “risk and reward” is an essential ingredient of trade. trade is one of the admirable professions among innumerable lawful sources of earnings and Islam has put a tremendous emphasis on it for the acquisition of wealth. distinguishes between prohibition and permission by saying: „And Allah has permitted sale and prohibited Riba‟. All banking transactions are covered under this rule and their unequal exchange is tantamount to Riba. delivery of one of the exchanged items can be delayed.Mohsin Ali 1100345 ownership along with the liabilities relating to ownership. have to be executed on an equal basis for the purpose of repayment. In a loan. if wheat is exchanged for barley. as in a credit sale or as in advance payment for purchase of wheat through Salam. When the genera of the goods to be exchanged in trading are different. which is called Riba. In the latter case. In other words. which is called Bai„ in the law. their transactions cannot be termed as Bai„ in the strict sense. but he has to give it back. which is inherent in all trading activities. then. the buyer is liable to pay the agreed price and not the commodity. on the other hand. If gold or any currency is exchanged for wheat or any other commodity. Sunnah. there is a temporary but complete transfer of ownership (along with usufruct) to the borrower. Musharakah involves sharing of ownership and benefit/loss among the partners. But he has to repay a similar item/commodity or the money. now I would like to discuss trading framework in the eyes of Islamic law. and says: „That is because they said Bai„ is like Riba‟. Riba is found if delivery of one is delayed. Qiyas and Ijtihaad. It means that the seller excludes the commodity from his ownership and gives it to the buyer on a permanent basis. ownership is transferred for a specified period and exactly its similar has to be paid back (Al Jaziri. 5 Islamic Finance within Trading Framework: The Way to Legitimate Profit . and prohibited (Haram). as soon as a sale agreement takes place. ownership of the subject matter is transferred to the buyer. Ijma. In loans. there is no Riba. the item/commodity of loan is transferred to the borrower and he gets ownership of the item with full discretion about its use. with annotation by Nawavi). Therefore. who can use the loaned item like his other possessions. the Islamic trading framework is not a product of human thought resulting from any scientific inquiry: it is a divine direction leading to a unique way of earning legitimate profit. Renowned Hanafi jurist Sarakhsi says: “Trade is of two kinds: permitted (Halal). allowable and non-allowable things. Both are types of trade. In other words. While Riba-based loaning involves the definite right of return. Allah Almighty informs us. Trading framework in Islam is based on divine knowledge source of which are Quran. 1981. about the rational difference between exchange (Bai„) and Riba. In trade. Transaction becomes usurious if it involves an exchange of two counter values. through the denial of the disbelievers. while in loans. Bai„ yields risk-based return. Loan transactions. 1973). Almighty. So. irrespective of whether he has made cash payment or has to pay in the future according to an agreed schedule.” As in ayah (Al-Baqarah 2:275) mentioned above. because they are species of the same genus (Muslim.
indicating his/her consent to what is offered by the other party. 3.1 Statement of Contract and its Conditions: Without the statement a contract cannot be formed. offer and acceptance are considered as external proof of the contract. Ahcene Lahsasna. Contracting Parties 3. however. From the viewpoint of soundness and legal affects according to Shariah. While acceptance is what is said by the one to whom the ownership is to be transferred. is the one that fulfils all of its pillars and conditions. that is. These types represent the viewpoint of the Hanafi School. According to a number of 6 Islamic Finance within Trading Framework: The Way to Legitimate Profit . and invalid (batil).” (Al-Ma‟idah: 1).. and it is an internal and intangible aspect. other aspects are not considered pillars of a contract. According to the Hanafi School. Subject matter of contract 4. Price Let us discuss necessary conditions related to all these pillars which are required for a valid contract 3. Statement of Contract 2. who believe. statement and two other aspects. offer is what is stated first by one of the two parties. These jurists did not make any distinction between imperfect and invalid contracts on the grounds that whatever is imperfect to the Hanafi School is invalid in their understanding (Dr. All of these transactions are basically governed by different types of contracts. Since the consent of the parties is the primary condition of a contract. i. contracts are divided into three types: valid (sahih). valid and invalid.e. and is not connected with those attributes that would make it unlawful. imperfect/voidable (fasid). according to all jurists. In order to form a valid contract following four elements have to be taken under consideration. two contracting parties and the subject matter are also included among the pillars. These conditions are generally related to four pillars of contract. contracts are divided into two types.Mohsin Ali 1100345 3. The majority of jurists maintain that offer is what is stated by the one who transfers the ownership. Trading under Islamic Law of Commercial Contract Islamic law is considered to be the complete code of life containing different aspects of human life including financial transactions. Here I am only intending to discuss Valid Contract. According to the majority of jurists. irrespective of whether it occurs firstly or secondly. According to the majority of jurists. 1. The Hanafi School of Law maintains that the statement is considered to be the only pillar of a contract. They opine that other aspects will automatically follow the statement. Allah says about the contracts: “O you.1 VALID CONTRACT A valid contract. Statement is formed through offer and acceptance. and acceptance is what is secondly stated by the other party because the latter occurs as consent to what the first party has established. 2006). fulfill your contracts.1.
such as “I sold. According to Imam Abu Hanifah. unable to talk. or one is able and the other is unable. According to the Islamic system. which is called in Arabic as khiyar al-majlis . an acceptance must be connected with an offer. Conformation of Offer to Acceptance: An acceptance must conform to an offer. the view of the Hanafi School in this regard is preferred because it is precise and also.Mohsin Ali 1100345 contemporary jurists. this tense is utilized for instant offer and acceptance. while a female can attain it at the onset of menstruation.” and “I bought.2 Two Contracting Parties and Their Conditions Islamic law enables parties with following attributes to enter into a contract: Puberty: It is must for a valid contract that contracting parties must have attained puberty. and parties are not allowed to delay until the end of the session.” This is because although the past tense is originally for the past. other tenses such as present. irrespective of whether both parties are able to talk. Use of Past Tense: Jurists prefer the past tense for verbal expression for forming an offer and an acceptance. and custom of the parties. The second view is supported by a sahih Hadith: “Both seller and purchaser have the choice (to revoke the contract) unless they have separated from each other”. A male can attain it when he starts to ejaculate sperms in his night dreams. Hanafi and Maliki Schools of Law maintain that a contract is binding immediately following an offer and acceptance. According to most jurists. Connection of Acceptance with Offer: This is related to the principle of sitting of contract. other jurists maintain that both parties are allowed to rethink and delay until the end of the session. Other than verbal and written expressions. The majority of Muslim jurists opine that this type of offer and acceptance is permitted. by this standard. this age is eighteen years for a male and seventeen years for a female. they should be in conformance with the words and terms that are normally used in the customs of the parties to indicate a particular type of contract. writing also could form an offer and acceptance. could be utilized for forming a contract depending on the intention. circumstances. if they reach a certain age. jurists have disputed whether an offer and acceptance are allowed to be formed through silent consent by means of giving a price and handing over the sold good. or parties are allowed to delay for further thinking about it until the end of the session.1. Due to the fact that customary practice of this nature did prevail in the past and it has been continuing the world over until now. there will be no consent. they are considered pubescent. Imam 7 Islamic Finance within Trading Framework: The Way to Legitimate Profit . Without mutual consent of parties contract cannot be formed. or the command form of a verb. according to linguistic uses. In order to make an offer and acceptance clear. if both parties are present. future. If these signs do not appear and they become older. Beside verbal expression. Jurists dispute on whether a contract is binding immediately following an offer and acceptance. If this conformity does not exist. This conformity could either be explicit or implicit. Let us now discuss conditions of statement of a contract. Both should be in the same sitting. 3. Clarity of Offer and Acceptance: Both offer and acceptance must be clear and void of ambiguity. differentiation between offer and acceptance becomes easier. On the other hand.
Being of a Subject Matter Known to both Parties: Jurists basically agree that the subject matter of a contract must be known to both parties. It should be noted that a subject of a contract can be known and identified by the contracting parties through physical viewing at the time of the contract or before the contract or viewing a similar object with the same 8 Islamic Finance within Trading Framework: The Way to Legitimate Profit . he is considered to be mature. Allah SWT says: “Examine orphans until they reach the age of marriage (i. They dispute over whether this condition must be fulfilled in all types of contracts or not. no contract is to be made.e.). If a subject matter is forbidden by the Shariah. Maturity: Contracting parties must also attain maturity. etc. Sanity: For a valid contract. In all these cases the subject matter must fulfill the following conditions: Suitability of a Subject Matter for a Contract: Muslim jurists have unanimously maintained that a subject matter must be suitable for concluding a contract on it. such as making a will (wasiyyah). puberty). a contract is not allowed to be concluded when the subject matter is swine. If a person possesses all these three qualities. If someone is a wrongdoer from the religious viewpoint. yet from a worldly viewpoint.1. According to jurists. he is considered to be fully capable of negotiating and concluding different types of contracts independently. he is allowed to conclude a contract when he remains sane. If someone temporarily becomes insane and later regains sanity. Following are the reasons which can make a subject unsuitable for a contract. i. gift. If both or one of them is insane.g. flesh of a dead animal is not considered a property of value to a Muslim. The Shafi„i School of Law maintains that for the different types of contracts the subject must be known to both parties. 3. maturity is: “Good and proper dealings with wealth from a worldly viewpoint”. wealth.Mohsin Ali 1100345 Malik considers the pubescent age to be seventeen years for both male and female. it is not a suitable subject matter for a contract. A person is not allowed to deal with his wealth independently without attaining maturity. a utility. contracting parties must be sane. sanity and maturity. it is not suitable for forming a contract e. If a subject matter is not owned by any of the parties. do not require fulfillment of this condition because ignorance in these types of contracts does not cause a dispute.g..3 Subject Matter of A Contract and Its Conditions The subject matter of a contract can either be a tangible thing (such as money.. the contract will be invalid. hand over their wealth to them. If a subject matter is not considered property of value to one of the parties. If it is not suitable. puberty.” (Al-Nisa‟: 6). There is no text of the Quran or Hadith with regard to puberty age. but he is not allowed to do so when insane. or a work. The Hanafi School of Law opines that contracts for donation or charity.e. The opinion of the Maliki School of Law in this regard conforms to that of the Hanafi School. goods. it is not suitable for a contract e. etc. he is capable of dealing with money and wealth properly without wasting or misusing it. If you find them matured. such as water in the river or a deer in the forest.
If the subject of a contract is a utility or work.1. a sale contract for a stray animal. Governments should not be involved in fixing prices except when obvious pitfalls are noticed within the market and the price. is invalid. to the ethics recommended by the Shariah. In this case. Shariah texts have spelt out the necessity to keep transactions away from illicit acts like fraud. their subjects must be capable of being handed over at the conclusion of the contract. Kitab al Buyoo)). iv. due to artificial factors. 9 Islamic Finance within Trading Framework: The Way to Legitimate Profit . the business environment and the nature of the merchant and of the goods. the Islamic Fiqh Council of the OIC. With regard to pricing. Islam is not inclined to fix prices or profit margins for traders and leaves them to be settled by the forces of demand and supply. as the subject matter is to be manufactured or harvested in future time. It can also be identified by the description of the genus. ii. The basic principle in the Quran and the Sunnah of the Prophet (pbuh) is that a person should be free to buy and sell and dispose of his possessions and money. contention. 1336 (also in Abu Daud. No. however. There is no restriction on the percentage of profit a trader may make in his transactions.4 Prices As a principle. It is generally left to the merchants themselves. deceit. the best ultimate benefit of society and for efficient allocation of resources (Tirmidhi. Capability of a Subject Matter to be Handed Over: All jurists agree that for contracts that involve the exchange of property. what is required is the strong possibilities of its occurrence in the future like renting a car.Mohsin Ali 1100345 description. such as moderation. the causes of defects. forgery. which is not possible to be accomplished. The limitations are only to take care of some moral. leniency and indulgence. cheating. it should normally be present at the time of the contract. It is not legal to conclude a contract for performing a job. religious and cultural perceptions and aspirations. which does not exist. For instance selling grains or fruits before their perfect appearance is not allowed because there is no surety that they will really appear and grow. There are following exceptions to this general rule. concealment of actual benefits and monopoly. 1952. The holy Prophet (pbuh) is reported to have allowed the competitive price mechanism to balance the demand and supply of goods for the dispensation of economic justice. which the seller cannot hand over to the buyer. 1988. which give an important place to the State in ensuring the desired norms. its presence at the time of contract is not required. Salam and Istisna contracts. which are detrimental to society and individuals. type and amount in the case where the subject matter is commonly known by the people or to be delivered in future like in Salam or Istisna contracts. within the framework of the Islamic Shariah. in its fifth session. Rather. 3. resolved the following: i. Therefore. governments should intervene by applying adequate means to get rid of these factors. iii. The Prophet (pbuh) forbade the selling of a good. Presence of a Subject Matter at the Time of Contract: If the subject of a contract is a tangible thing. excessive price increases and fraud. Regard should be given.
is enhanced due to any delay in its payment. All jurists agree that if one definite price is not stipulated in the case of a credit sale. Jurists like Sem¯ak. The difference in price has become a customary factor due to market competition and the free play of market forces and clients are ready to pay a price for the benefit to be achieved by them of having purchased goods without making cash payments. The following tradition is important in this regard: “The person who makes two bargains in one sale. but also the credit performed many important functions in trade transitions. Another point to be clarified is that a person who has bought an asset on credit can sell it onward after taking its possession. not only was buying and selling on credit accepted and apparently widespread. the aim should be the business of trade and the seller should not resort to the practice of Ghaban-e-Fahish. They.1 Duress (Ikrah) Duress in Islamic jurisprudence is to force someone to do something that he dislikes. once mutually stipulated. conditions that must be fulfilled are It should be from a person who is able to implement what he has threatened The compeller must be serious in his threat and The matter under the threat must be very difficult for the compelled to bear. and in the case of cash. What is prohibited is that the price.2. the lower of the two is lawful for him or he would be charging Riba” (Abu Daud. A transaction of credit sale with a price higher than the spot price is acceptable. I will discuss the one by one. the sale price will be so much. but in order to remove the more harmful aspect. Most jurists believe that the seller can indicate two prices. otherwise the contract would not be valid. and contracts for forbidden things.2 THE PROHIBITED ELEMENTS IN SHARIAH COMMERCIAL CONTRACTS The elements which are prohibited in shariah contracts are duress. 3. once sold. non‐conformity. 1752. and also because the price becomes a debt. absolute certainty on price is necessary for the validity of a sale.e. 274). Aoz¯aii and others have interpreted this as a situation where a person declares in the sale contract that in the case of credit. even if he has not made full payment of its price. i. 3. it will become Riba and therefore unlawful. one for cash and another for a credit transaction. This is because a commodity. Sale on Cash and Credit basis: In medieval Islamic trade. p. qualify this with the condition that the difference should be a normal practice of the market. p.Mohsin Ali 1100345 For a sale to be valid measuring unit of price and price itself is to be ascertained and specified . For duress to be accepted by Shariah. Accordingly. he does so against his consent. 14. becomes the property of the purchaser on a permanent basis and the seller has no right to re-price a commodity that he has already sold. deception. so much (Thanwi. but one of the two prices must be settled in the same meeting. mistake. 273). however. 3. 10 Islamic Finance within Trading Framework: The Way to Legitimate Profit .
They support their view through the Hadith of the Prophet (pbuh): “Verily Allah has removed from my community mistake. This Hadith proves that if anything is done under duress. it is considered a mistake in attribute because both belong to the same genus. 3. such as contracts of marriage.2. if a person buys a silver ring. opines that duress makes these contracts dependent on permission of the compelled contracting party. Jurists have three different opinions on whether these contracts are valid under duress or otherwise. but proves to be inaccurate. This mistake could either be in the very essence of a subject. Contracts that are affected and do not have the possibility of being canceled by joking are contracts such as buying and selling. If it was absent from the sitting of the contract. On the other hand. forgetfulness and things for which they are compelled” (Sunan Ibn Majah). divorce. a distinction should be made between whether the subject matter was present in the sitting of the contract or not. and emancipation. If he gives permission it becomes a valid contract. 2. 11 Islamic Finance within Trading Framework: The Way to Legitimate Profit . In the case of a mistake in the very essence of a subject. contracts are divided into the following two groups. it becomes clear to a contracting party that the subject matter of the contract contradicts with what has been contracted for. 3. following its formation. which comes into the brain of a person.2 Mistake (Ghalat) Mistake in Islamic jurisprudence is an assumption about anything. If a mistake occurs in the attribute. Mistake in a contract is that. Here I will discuss the point of views of jurists only related to second type as the focus of this paper is on trading activities. but if consent is given following the removal of duress. but later it has been discovered that it is made of copper. 1. This is called the option of seeing (khiyar al‐ru‟yah). it is not considered. or it was not possible to be observed due to it being obscure and unclear. or in its attribute. but later it was discovered to be Chinese carpet. 2. The majority of jurists maintain that duress causes nullification of these contracts and consent that may come following the removal of duress is not accepted. this is considered to be a mistake in the very essence of the subject matter. a Hanafi jurist. Most Hanafi jurists maintain that duress causes nullification of these contracts. will and mortgage. renting. 1. if someone buys Persian carpet. If the subject matter was present in the meeting of the contract. This option is called the option to cancel due to an error in its attribute (khiyar al‐wasf). a contract is considered as invalid because the difference in genus makes the subject matter non‐existent and a contract for a non‐existing thing is not valid. Zufar. a distinction should be made between whether its attribute was possible to be observed due to its clear appearance. For instance.Mohsin Ali 1100345 In terms of the effect of duress. This is because he has purchased what he has not seen. Contracts that are not affected and do not have the possibility of being canceled by joking. this contract is considered valid. In other words. the purchaser will have the right to choose between retaining this contract as valid or canceling it. it is that which contradicts reality without intention.
3. then the deceived will have the right to retain it as valid or to cancel it. the deceived will have the right of choice between retaining these contracts as valid or canceling them. however. Taghrir Fi„li (Deception Related to Deeds): Taghrir Fi„li is deception that occurs through doing something on the subject matter to show it in a condition that contradicts its reality.3 Inequality (Ghubn) Ghubn in Islamic jurisprudence is inequality of price and subject matter of a contract of exchange. Ghubn is divided into two types: insignificant inequality (ghubn yasir). or wealth of the one who is barred from dealing with his wealth because of being minor or insane or foolish. This type of deception is forbidden in Islam. All jurists agree that if this type of deception 12 Islamic Finance within Trading Framework: The Way to Legitimate Profit .Mohsin Ali 1100345 3. Some Hanafi jurists maintain that excessive inequality affects these contracts. The majority of jurists maintain that excessive inequality does not absolutely affect these contracts. that is. if a seller tells a lie to a purchaser that someone has proposed to give him such an amount of price for his good. Deception is divided into two types: deception related to statements (taghrir qawli) and deception related to deeds (taghrir fi„li). irrespective of whether deception has taken place or not. In such situations these contracts are permitted but not legally binding. and the purchaser is induced with this statement to purchase it at the mentioned price. for which the deceiver will be punished on the Day of Judgment. excessive inequality causes nullification of contracts that occur for properties of endowment and state. But the contracts are not affected and they will remain valid and legally binding except where an inequality occurs for a contracting party because of this deception. The deceived will have the right to retain them as valid or to cancel them. irrespective of whether deception occurs or not. According to all jurists.2. one of them becomes less or more than the other. if it occurs because of deception of a contracting party or his representative. it is considered to be a deception related to deeds. All jurists unanimously agree that insignificant inequality does not affect most contracts. Taghrir Qawli (Deception Related to Statement): Taghrir Qawli occurs because of the deception of one of two contracting parties or his representative in order to induce the other party to conclude a contract even if it happens with inequality. which was not known at the time of contract. if someone paints an old house to show it as new. For example. it is considered to be a deception related to statements. Jurists have different opinions regarding contracts that occur for properties other than those mentioned above. The Hanbali jurists.2. Therefore. these contracts will remain valid and legally binding. For example.4 Deception (Taghrir) Deception in Islamic jurisprudence is to induce a contracting party to think that it is in his interest to take the subject matter whereas in fact it is not so. and excessive inequality (ghubn fahish). This is because it frequently occurs in financial transactions and people tend to forgive each other for this small amount of inequality. But if this inequality does not occur because of deception of a contracting party. opine that excessive inequality does affect these contracts absolutely.
Contract for gambling is forbidden in Islam. Otherwise the sale is not valid. you should not commit them.”(Al‐Baqarah. he has an option. He also says: “O you.”(Al‐Baqarah. any contract for investment in those companies and financial institutions that conduct businesses on the basis of usury is also forbidden. 3. that the right to exercise an option is not automatic. 3. or any other forbidden substances. If a seller has sold an asset as being possessed of some specific quality. the buyer has an option to annul the contract. 2: 275).”(Al‐Baqarah. it still may not be absolutely binding on the parties involved if the condition of option is provided in the contract (Khiyar al-Shart). the owner of the capital should bear it and not the second party. free from any grounds of illegality.89 So long as the parties do not leave the place of contract. It is to be recognized. Allah says: “Allah legalised trading. However. Even when a sale is duly executed. if it 13 Islamic Finance within Trading Framework: The Way to Legitimate Profit . If there is a loss. but forbade usury.3 OPTIONS IN SALES (KHIYAR) The Shariah demands that the seller should disclose all the defects in the article being sold. a contract for investment must be conducted according to a profit and loss sharing policy. and that asset turns out to be without that quality. Allah says: “Surely drinking alcohol. eat from good (lawful) foods that I gave you as sustenance. and he may either be content with it at the agreed price or reject it. On the contrary. however. 3: 130). etc… are impure and deeds of Satan. as in the prohibition of receiving usury. Therefore. not according to a fixed percentage of the capital. The Prophet (pbuh) says: “Seeking lawful sustenance is obligatory for every Muslim. He states: “O you who believe. If you do not do so then be notified about a battle from Allah and His Messenger. It has to be specified at the time of entering into the contract. whether the defect is small or big.Mohsin Ali 1100345 occurs.5 Contracts for Forbidden Things Liquor and pork: No contract should be made for selling or buying forbidden products such as alcohol. When a person has made a purchase and was not aware. This brings us to another extraordinary peculiarity of Islamic law: the doctrine of option or the right of cancellation (Khiyar). therefore. If there is profit. it will affect the contract and make it legally not binding. Allah says: “O you.” No contract should be made for any financial deal on the basis of fixed interest or usury. This is called Mudarabah. However. pork. gambling. who believe.” (5:90). if you are really believers. of a defect in the article bought. The verse indicates that we are not allowed to have our sustenance from things or goods that are forbidden.2. both the owner of the capital and the manager would share it according to an agreed percentage. 2: 278‐279). at the time of sale or previously. who believe. According to these verses. the second party in this last case would lose in terms of the effort put into the venture. 2: 172). Usury is forbidden in Islam. any of them can cancel the deal (Khiyar al-Majlis). fear Allah and abandon receiving whatever amount has been left of usury. do not eat usury…” (Ali `Imran. the deceived will have the right to cancel such a contract.
Khiyar al-Majlis will not be available (Al Jaziri.Mohsin Ali 1100345 is stipulated that the contract has been finalized even if the parties do not separate. This is called an option of payment (Khiyar-e-Naqad). 1973). As regards the Khiyar al Ro‟yat. The Malikis and the Shafi‟is have held. 1973”: Khiyar al-Shart: a stipulation that any of the parties has the option to rescind the sale within so many (specified) days. The following five types of options among various forms discussed in Fiqh books are important but I am referring “Al Jaziri. if the seller declares at the time of the contract that he will not be held responsible for any defect in the commodity. 14 Islamic Finance within Trading Framework: The Way to Legitimate Profit . Since this sale is known as the sale with the option of seeing. Khiyar al Wasf: the option of quality – where goods are sold by specified quality. Khiyar-e-Ghaban: the option relating to price – where goods are sold at a price far higher than the market price. for not seeing the object obstructs the completion of the transaction. and the client is told or given the impression that he has been charged the market price. can be returned after inspection if such an option has been provided for in the sale agreement. Aside from this. and also on account of defects in the commodity being sold. Upon viewing. this is also termed Bai„al Khiyar. the contract will be annulled. The greatest of all defects is the lack of a title or of the right to sell on the part of the seller. they differ on options for more than three days. The Shariah literature discusses the concept of option in trade wherefrom we conclude that the informationally disadvantaged party at the time of entering into the contract can have the option to cancel the contract within a specified period. Such option stipulation can be reserved by either of the parties. The Prophet (pbuh) himself recommended to one of his Companions to reserve an option for three days in all his purchases. This sale would be valid only if payment was made within the specified number of days. It means that he has the option of (rejecting) upon seeing the object even if it is found to be consistent with the manner described. However. Khiyar al Ro‟yat: an option to be exercised on inspecting the goods – goods. it would be unjust not to purchase the commodity by using Khiyar al Ro‟yat. in one of their views. However. but that quality is absent. this kind of option is available even if no such condition is stipulated in the contract if the defect was not brought to the notice of the buyer at the time of the contract and the defect caused a visible decrease in the value of the sold commodity. it must include such option. and so did the Hanbalis. The parties can also agree that if payment is not made within three days. Shaikh Al Dhareer. Jurists are unanimous on the validity of this kind of option. if not according to the contract. he can revoke it or ratify it. Khiyar al „Aib: an option with regard to defect – goods can be returned if found to be defective. Ibn Hazm contends that if a person purchases an unseen commodity but the seller has sufficiently described its features and the commodity conforms to those features. the purchaser has an option without any stipulation with regard to things he has purchased without seeing. the contract is valid according to Hanafis. the goods can be returned. jurists differ as to whether the sale of unseen items is binding or not. 1997 writes in this regard: “The Hanafis and the Shafi‟is have held in one view that the sale is not binding on the buyer.
Mohsin Ali 1100345 that the sale is binding on the buyer should he find the object corresponding to the way earlier described to him. if ye are indeed believers. In Salam and Istisna„a. Trading Practices/ Financial Transactions Disallowed in Islam I have divided prohibited activities in trading in Islam in to two categories i.◙ If the debtor is in a difficulty. Not only the lenders but also borrowers and other parties involved commit sin by paying interest or by giving a helping hand in interest based business. Deal not unjustly. its forms and its connotation. the client would have the options of defect and specification/quality. 4. grant him time Till it is easy for him to repay.1.◙ If ye do it not. In the next section of this paper I would discuss these forbidden things in detail and would add some other disallowed trading practices in Islam. If a destitute is constrained to borrow on interest in case of compulsion to fulfill his basic food needs. This is a manifestly cogent view”.◙ And fear the Day when ye shall be brought back to Allah. In the case of Murabaha to Purchase Orderer.e. In basic prohibitions Riba. and give up what remains of your demand for usury. But if he found it different. first I will discuss them one by and then will proceed for other prohibitions. But if ye remit it by way of charity. and ye shall not be dealt with unjustly. Khiyar al Ro‟yat is not available if the goods are according to the specifications already stipulated. 4.1 Riba Riba in Loan/ Debt: I want to start with following verses of Holy Quran: O ye who believe! Fear Allah. that ye may (really) prosper. Take notice of war from Allah and His Messenger: But if ye turn back. But a person who takes advantage of interestbased loans for luxurious consumption or for the development of his businesses is culpable as per the above doctrine. indulging in Riba-based transactions is tantamount to being at war with Allah (SWT) and His Messenger.1 Basic Prohibitions: 4. Then shall every soul be paid what it earned. doubled and multiplied. and if Murabaha is executed. Gharar and Gambling are included. ◙ Fear the Fire. Basic prohibitions and other prohibitions. and none shall be dealt with unjustly. 15 Islamic Finance within Trading Framework: The Way to Legitimate Profit . If the assets or the goods required by the client are not according to the stipulated specification or have any material defect. that is best for you if ye only knew. there is the possibility of granting limited permission to borrow on interest. First. he will have the right to rescind the sale unless the bank gets a certificate of fitness just at the time of the sale after giving the client sufficient opportunity to examine the asset. but fear Allah. which is prepared for those who reject Faith: ◙ (Aale Imran 3:130-131) From the above references from the Quran we can derive a number of results regarding the severity of the sin of Riba. he has the option either to ratify the sale or to revoke it. ye shall have your capital sums. which no one should even think of.◙ (al-Baqarah 2:278-281) O ye who believe! Devour not usury. the client will have the right not to purchase the goods as per his promise.
usury and interest. provided that the exchange is hand to hand. A debt (Dayn) is a liability to pay which results from any credit transaction like a purchase/sale on credit or due rentals in Ijarah (leasing). salaries and wages. the creditor has the right to the principal amount only. I want to start with following three ahadith of Prophet Muhammad (pbuh): i. the liability or the amount of debt generated from the credit transaction. there should be no doubt that commercial interest as in vogue is Riba in the light of the principle given by the Holy Quran. over and above the principal of loan or debt would be Riba. or Return on cash or a converted form of cash without bearing liability in terms of the result of deployed cash or capital – which is prohibited. equal for equal. The amount of debt has to be paid back at a stipulated time and the creditor (in case of debt) has no right to demand payment of the debt before the mutually agreed time. exactly the amount given as the loan and in the latter case. in the former case. As such. Kitab al Musaqat. Riba in Sale: For elaborating Riba in sale and its prohibition. remuneration and profits. It explains that all income and earnings. the man replied that this was not the case and added that he exchanged a Sa„a (a measure) of this kind for two or three (of the other kind). Bilal explained that he traded two volumes of lower quality dates for one volume of that of the higher quality. Riba. chapter on Riba) ii. etc. The Prophet (pbuh) said: “This is precisely the forbidden Riba! Do not do this. Any amount. would include all gains from loans and debts and anything over and above the principal of loans and debts and covers all forms of “interest” on commercial or personal loans. meaning prohibited gain. barley for barley. rent and hire. and use the proceeds to buy the others. 1981. “Gold for gold. The word “Riba”. can be categorized either as: • • Profit from trade and business along with its liability – which is permitted. The holy Prophet (Pbuh) said. according to the criterion. it falls under the purview of Riba as prohibited by the Holy Quran. silver for silver. The principle that the Holy Quran has given in verses 2: 278 and 279 is that in both loans and debts. As such. the Prophet (pbuh) inquired about their source. has been explained in the Holy Quran by juxtaposing it against (profit from) sale. Upon the Prophet‟s asking him whether all the dates of Khyber were such. wheat for wheat. and hand to hand. sell the first type of dates. Sell (the lower 16 Islamic Finance within Trading Framework: The Way to Legitimate Profit . The holy Prophet replied: “Do not do so.” (Ibid) iii. Instead. big or small. if the commodities differ. then you may sell as you wish. conventional interest is Riba.Mohsin Ali 1100345 A loan (Qard) is any commodity or amount of money taken from any other person with liability to return or pay back the same or similar commodity or amount of money when demanded back by the creditor. Bilal (Gbpwh) once visited the Messenger of Allah (pbuh) with some high quality dates.” (Muslim. A man deputed by the holy Prophet (pbuh) for the collection of Zakat/Ushr from Khyber brought for him dates of very fine quality. dates for dates and salt for salt – like for like. As conventional banks‟ financing falls into the category of loans on which they charge a premium.
(When dates are exchanged against dates) they should be equal in weight. Imam Nawavi has summarized these rules in the following way: • When the underlying genus of the two goods being exchanged is different. 2007). jurists have held lengthy discussions. The well-known Hadith on the exchange of six commodities and the other traditions about the exchange of low quality dates for a lesser amount of better quality dates deal with Riba in exchange transactions and have farreaching implications in respect of business activities in the Islamic framework. Loans and debts are governed by the rules relating to their repayment and assignment. Later jurists have extended the scope of this kind of Riba to other commodities on the basis of analogical reasoning (Qiy¯as) and the „Illah (effective cause) of prohibition (Muhammad Ayub. then excess/deficiency is allowed. Gold. Assets could be consumables. Usufructs and services are covered by the rules of Ijarah or Ujrah (leasing/hiring of services). durables. In this context. the first tradition forms the basis of elaborate juristic rules on Riba prohibition in sale contracts and other exchange transactions. etc. 17 Islamic Finance within Trading Framework: The Way to Legitimate Profit . on the basis of which one may extend the rules of Riba to other commodities by analogy is their being used in lieu of money. shares representing pools of assets.g. This may be gold. e. Goods other than monetary units are traded on market-based pricing. the exchange must be on the spot (without delay) and the articles must be equal in weight. In particular. This type of Riba is termed as “Riba Al-Fadl”. but delay in exchange is not allowed.Mohsin Ali 1100345 quality dates) for dirhams and then use the dirhams to buy better quality dates.”(Ibid) Traditions mentioned above relate to the prohibition of Riba in sale or exchange contracts. the major cause. dates for dates or wheat for wheat. According to the rules of exchange of monetary units (Bai„ al Sarf). silver or other currencies.g. shortfall/excess and delay both are permissible. dollars for dollars. The commentator of Sahih Muslim. • When the commodities of exchange are heterogeneous but the genus is the same. monetary units or media of exchange like gold. etc. There is consensus among scholars that the rules of Riba apply to anything that serves the function of money. • When the commodities of exchange are similar. keeping in mind the two types of „Illah that play an effective role in the exchange: the unit of value and the edibility. e. if any article is sold for an article of the same kind. Exchange rules are different for different contracts and types of assets. silver or any paper currency. as in the case of exchanging gold for silver or US Dollars for Malaysian Ringgits (medium of exchange) or wheat for rice (the „Illah being edibility). excess and delay both are prohibited. silver or any monetary units (Athman) are governed by specific rules that have been discussed by jurists under the caption of Bai„ al Sarf (sale of Athman). the exchange of gold for rice or Rupees for a car. In the present scenario.
stake or risk. e. Therefore. 2007).g. In the legal terminology of jurists. The vendor must be able to deliver the commodity to the purchaser. Gharar also means deception through ignorance by one or more parties to a contract.1. A sale or any other business contract which entails an element of Gharar is prohibited. although it has been more difficult to define than “Riba”. “Gharar” is the sale of a thing which is not present at hand or the sale of a thing whose “Aqibah” (consequence) is not known or a sale involving hazard in which one does not know whether it will come to be or not. Gharar is considered to be of less significance than Riba. e. Gharar can be avoided if some standards of certainty are met. Gharar in Salam and Istisna: According to Shar¯ı´ah scholars. Therefore. some degree of Gharar in the sense of uncertainty is acceptable in the Islamic structure of business and finance. chance. to become prohibited. where a number of conditions are required to be fulfilled.Mohsin Ali 1100345 4. when involved in sale contracts it should affect the principal aspects of the contract.2 Prohibition of Gharar The second major prohibition is that of Gharar. Accordingly. This uncertainty relates to the existence of the subject matter. Gharar is found if the liability of any of the parties to a contract is uncertain or contingent. rights of or benefits to the parties and the consequences of the contract. Prohibitted types of sale due to Gharar: Gharar relates more to “uncertainty” than to risk as used in commercial terminology. scholars have differentiated between too much and nominal uncertainty and declared that only those transactions that involve too much or excessive uncertainty in respect of the subject matter and the price in a contract should be prohibited. however. It is prohibited to sell any undeliverable goods. Uncertainty cannot be avoided altogether in any business. The commodity must be clearly known and its quantity must be determined to the contracting parties. a consensus has emerged in the recent past regarding its extent rendering any transaction valid or void. such as in the case of Salam. the sale of a fish in water. Salam cannot be conducted in respect of those goods that are normally not available in the market at the stipulated time of delivery.g. Risk-taking is rather a condition for the entitlement to profit in business. The problem. and it may not be the need of any valid contract like that of Salam and Istisna„a. Following are some types of sales which have been prohibited by Prophet (pbuh) due to Gharar: 1 2 3 4 5 BAI' BAI' BAI' BAI' BAI' AL-MA'DOUM AL-KHATTAR AL-MAHAMEEN AL-MALIQIH AL-NABAL AL-HABALA NON-EXISTENT ITEMS IN DANGER OF NOT BEING FOUND SPERM MALE ANIMALS EGGS OF FEMALE ANIMALS FETUS IN WOMB OF FEMALE ANIMALS 18 Islamic Finance within Trading Framework: The Way to Legitimate Profit . or a bird in the air (Muhammad Ayub. While the slightest involvement of Riba makes a transaction non-Shar¯ı´ah-compliant. “Gharar” means hazard. Lately. delivery of one of the exchange items is not in the control of any party or the payment from one side is uncertain. a hazard or uncertainty would be major and remunerative. was that the extent of uncertainty making any transaction Haram had not been clearly defined. which refers to the uncertainty or hazard caused by lack of clarity regarding the subject matter or the price in a contract or exchange.
DAYN AL-ARBUN WITHOUT RIGHT TO POSSESION FOR LIMIT OF LIFE OR AFTER DEATH SALE OF DEBT DOWNPAYMENT SALE (Source: http://www. IF PRICE/COST UNKNOWN SALAMATAUH AL-MUTAMAL-WUJUDH AL-MUHTAMAL- 22 23 24 25 26 27 28 BAI' BAI' BAI' BAI' BAI' BAI' BAI' TASLIMUH WA SHART AL-GHAIB AL-THAMARA MAJHOUL BI MAJHOUL AL-SOUF AL-LABAN FI DHARI' BIDOUN HAQ AL- WHAT MAY NOT BE DELIVERDED IF WITH A CONDITION THE INVISBLE SEEDS' OF TREE BEFORE THEY BECOME FRUIT UNKNOWNN FOR UNKNOWN WOOL STILL ON SHEEP MILK IN UDDERS OF COW 29 30 31 32 BAI' BAI' BAI' BAI' TASARUF AL-HAYAT WA-MAOUT AL.Mohsin Ali 1100345 6 7 8 9 10 11 12 13 14 15 16 17 BAI' BAI' BAI' BAI' BAI' BAI' BAI' BAI' BAI' BAI' BAI' BAI' AL-MA'JOUZ AL-QANIS AL-GHA'ISS AL-MUZABANA AL-MUHAQALA AL-MULMASA AL-MUNABAZA AL-HASSAT AL-MAJHOUL AL-JAHAL BI AL-AJAL AL-JAHL BI AL-MABI' AL-JAHL BI AL-THAMAN AL-JAHL BI JINSITHAMAN 18 BAI' AW MATHNOUN WHEN KIND/QUANTITY OF GOODS IS ELSEWHERE IS TWO SALES IN ONE DEAL +ONE CONDITIONAL UPON 19 BAI' ATAN FI BAI MA 20 21 BAI' BAI' LA YURJA NEAR DEATH ANIMAL/SLAVE WHAT MAY NOT BE PRESENT OTHER SOMETHING IMPOSSIBLE TO DELIVER SOMETHING BEFORE POSSESING IT DIVERS CATCH' BEFORE SEEING IT FRUIT ON TREE FOR DATES /MONEY HARVESTED WHEAT FOR UNHARVESTED BY TOUCH BY THROWING BY STONE OF UNKNOWN IF UNKNOWN TIME FOR CREDIT UNKNOWN QUANTITY/SIZE/WEIGHT ETC.com/index/index.php?option=com_content&task=view&id=195&Itemid=26) I will discuss only following three briefly: 19 Islamic Finance within Trading Framework: The Way to Legitimate Profit .islamicthinkers.
Zaid ibn Aslam asked the holy Prophet (pbuh) about „Arb¯un as a part of a sale.Mohsin Ali 1100345 Conditional sales and “two bargains in one sale”: The Shariah does not approve sales that are conditional upon such matters that may or not may happen due to games of chance. and if he does not purchase the commodity. which involves lack of clarity and an unjustifiable benefit to any of the parties. Even on face value. 1997. A trader selling a commodity on credit and thus having a bill of exchange. the down-payment will become part of the selling price. an export bill or a promissory note cannot sell it to an Islamic bank as they could to a conventional bank. Hanbalis allow it (Zuhayli. No. a maxim in the Fiqh literature forbidding the sale of debt. We can derive on the basis of the above discussion that in cases of involvement of absolute Gharar or injustice with the buyer (when he committed to purchase. Gharar in this transaction pertains to the time of the meeting. Conditions of gift. it would be permissible on the basis of „Urf. a person says to another: “I will sell you this car if any third person sells me his car”. marriage. to the extent of a customary practice wherein parties do business in the market with free consent and any unforeseen events are also taken into account. or two stipulations in a sale. thereby opening a door to Riba and Gharar. A Hadith quoted by Imam Malik says that the holy Prophet (pbuh) forbade „Arb¯un sale. keeping a margin for itself (Al Baraka. we come across the prohibition of two stipulations in a sale: Shartaan fi Ba„ien. The practice of Bai„ al20 Islamic Finance within Trading Framework: The Way to Legitimate Profit . the condition and finalization of the contract. means the exchange of two things both delayed or exchange of one delayed counter value for another delayed counter value. The Holy Prophet (pbuh) is reported to have said: “unlawful are a sale and a loan (Bai„ wal Salaf). 4. Two traditions of the holy Prophet have been reported in this regard. the Prophet permitted it. the bank can serve as a trader and purchase the commodity from its producer and then sell it to others who need it on credit. 9/12. Bai„ Al-Arbun (Downpayment Sale): „Arb¯un sale has been defined as a sale of down-payment. pp. or a sale of what you do not have. 153). with the condition that if the buyer takes the commodity. As an alternative.” (Tirmidhi. the sale of debt is allowed only when the purchaser has recourse to the original debtor. The Islamic Fiqh Council of OIC and AAOIFI have also allowed customary down-payment sale with the condition that a time limit is specified. 1985. and Bai„wal Shart. The majority of traditional jurists accept the Hadith prohibiting „Arb¯un sale due to the involvement of Gharar. Bai„ Al Dayn (Sale Of Debt): A credit document emerging from any transaction of credit sale represents a debt which cannot be sold as per Shariah rules due to the involvement of Gharar and/or Riba. According to another Hadith. The OIC Fiqh Academy and Sharah scholars in general consider the sale/purchase of such securities or documents representing debt at a price other than their nominal value incompatible with the tenets of the Shar¯ı´ah. However. 508). but cannot do so due to any unforeseen happening). p. 152. However. For example. “Al K¯ali bil K¯ali”. In the Fiqh literature. or sale with a stipulation. the advance money will be forfeited. 1988) Combining contracts which are conditional upon each other confuses the rights and liabilities of the parties and obstructs fair remedies in the event of default. Qard or Shirkah as a part of a sale contract render it a prohibited contract from the Shariah angle. downpayment confiscation might not be permissible. as in the case of Hawalah.
The best example of this practice in the present age is “rollover” in Murabaha. “Maisir”. the commodity must be defined. This principle has near universal application and has earned canonical authority in Islamic law as Ijma„a or consensus (Muhammad Ayub. determined and deliverable and clearly known to the contracting parties. are abominable actions of Satan. Maisir refers to easily available wealth or acquisition of wealth by chance. 2007). benefit or usufruct at the cost of others. 4. will ye not then abstain?” (5: 91) 21 Islamic Finance within Trading Framework: The Way to Legitimate Profit . quality and quantity must be stipulated. and hinder you from the remembrance of Allah. when the period of payment comes and he finds he is not able to pay the debt. for something additional”.1. The general principles for avoiding Gharar in sales transactions that can be concluded as: the contracts must be free from excessive uncertainty about the subject matter and its counter value in exchanges. The Prophet is reported to have prohibited such a sale. he says: “Sell it to me on credit for a further period. so abstain from them. and from prayer. the difference between Maisir and Qim¯ar is that the latter is an important kind of the former. that you may prosper. What is prohibited by this contract is the purchase by a man of a commodity on credit for a fixed period. existence and deliverability of goods and the parties should know the actual state of the goods. derived from “Yusr”. the Hadith literature discusses this act generally in the name of “Qim¯ar”. a person puts his money or a part of his wealth at stake wherein the amount of money at risk might bring huge sums of money or might be lost or damaged. sacrificing to stones.Mohsin Ali 1100345 K¯ali bil K¯ali was prevalent among the pre-Islamic Arabs and was also termed Bai„ al-Dayn bid-Dayn. having entitlement to that money or benefit by resorting to chance. “Qim¯ar” also means receipt of money. References from the Holy Qur‟¯an in this regard are: • • “O you who believe! intoxicants and gambling. According to the jurists. 91). there should be no Jahl or uncertainty about availability. means wishing something valuable with ease and without paying an equivalent compensation („Iwad) for it or without working for it. and. All Shar¯ı´ah boards and Shar¯ı´ah scholars prohibit this practice and any return on this account is not considered legitimate income for Islamic banks. and divination by arrows. in a case of default on the Murabaha receivable. Both words are applicable to games of chance (Muhammad Ayub. a contract must not be doubtful or uncertain so far as the rights and obligations of the contracting parties are concerned. While the word used in the Holy Quran for prohibition of gambling and wagering is “Maisir” (verses 2: 219 and 5: 90. or without undertaking any liability against it. enter into another Murabaha for giving more time to the client and thus charge more on their receivables.” (5: 90) “Satan intends to excite enmity and hatred among you with intoxicants and gambling.3 Prohibition of Maisir/Qimar (Games of Chance) The words Maisir and Qimar are used in the Arabic language identically. whether or not it deprives the other‟s right. 2007). where the banks. by way of a game of chance. Qimar means the game of chance – one gains at the cost of other(s).
prohibited. some of which might be valid.” (4: 219) Gambling is a form of Gharar because the gambler is ignorant of the result of the gamble. privilege or concession on them. This is also permissible as the purchaser knows what he is purchasing and the vendor knows what he is offering for sale and what its price is. Again. Sometimes. but the majority are invalid from the Shariah point of view. the matter could be decided by drawing of lots. sallallaahu alayhe wasallam.• Mohsin Ali 1100345 “They ask thee concerning wine and gambling. A person puts his money at stake wherein the amount being risked might bring huge sums of money or might be lost or damaged. Also. prohibited some forms of sales that people were known to use during his time. The price being known and the property being sold are available for inspection and there is no element of chance. without any scheme of drawing of prizes or lots. but the sin is greater than the benefits‟. Further. Conventional insurance is not Shar¯ı´ah-compliant due to the involvement of both Riba and Maisir. It is necessary to have a test to decide which are permitted and which are not. therefore. Such a form of lottery in such cases is permissible. 22 Islamic Finance within Trading Framework: The Way to Legitimate Profit . entrepreneurs offer products whereby.2 Other Prohibitions The Prophet. Such a sale. Present futures and options contracts that are settled through price differences only are covered under gambling. Presentday lotteries are also a kind of gambling. no one should have any personal right or vested interest in the matter and no one should be deprived of what he had already had or contributed to the process. when sold for a price. though induced and publicized with a reward to attract customers. as in the case of the holy Prophet Younus (pbuh). Lotteries: (some types are permissible): A number of forms of lottery are prevalent. An analysis of the Quranic verses and the holy Prophet‟s traditions would show that in valid lotteries. Maisir and Qimar are involved in a number of conventional financial transactions and bank schemes/products which Islamic banks have to avoid. grantor or a man in authority has to select some people who have equal footing in order to confer some right. any additional product is given to the purchaser as an incentive. wherever a donor. 4. if the exigency of a situation dictates that some out of them have to forego any right or fulfill any liability. the solution in the absence of any other valid or agreed formula is not to decide arbitrarily but through drawing of lots. Wisdom behind this prohibition of some sales is to facilitate ease for people and not to increase prices for them. which come under the banner of gambling and are. it is designed to stop sales that might include risk or trickery and eliminate any sale that might instigate hatred and enmity amongst people. is not hit by any provision or tenets of the shariah. Governments and public/private sector corporations mobilize resources on the basis of lottery and draws. Say: „In them is great sin and some benefits for people.
dead animals. prohibited that because it includes deception of the seller who does not know the market price. Ibn Mas'oud narrated that the Prophet. "If a man sees a commodity that is sold below its actual value and he increases the value to the correct value. and lamp oil?• He said: •No.2.2.2. polishing leathers." 4.3 Najash: The Prophet. It was said: •O Messenger of All¯ah. for Allah sustains some from others. Ibn Hazm. as stated in an agreed upon hadeeth. even though it is not worth such an elevated price.4 Prohibition of meeting carvans on the route The Prophet. Ibn Abdul-Barr and Ibn al-Arabi. his brother should give him advice." This is supported by the hadeeth narrated by Imaaam Ahmad that the Prophet.1 Sale of impure objects The Messenger of Allah (pbuh) said: Allah and his Messenger have forbidden the sale of wine. "Leave the people alone. which are used for painting ships.” (Agreed upon) 4. especially if he did not have bad intentions. prohibited that a town dweller (urban resident) be allowed to sell the goods of a desert-dweller (rural resident). al-jumhoor (the majority of scholars) have gone with the impermissibility of such actions based on the generality of the hadeeth text. prohibited going to meet the vendor on route in an agreed upon hadeeth. "We were forbidden to allow a town-dweller to sell the goods of a desert-dweller. the Messenger of Allah said: •May Allah punish the Jews. This is because the urban resident might wait until people are in need of the goods and then raise the prices.. Should one ask his brother for a sincere advice. pigs. even if the latter is a brother from the same mother and father. then he should not be accused of najash. held the opinion permitting such action. sallallaahu alayhe wasallam. when All¯ah Almighty forbade the fats of dead animals for them. and idols. "The Prophet. thus consuming their price unlawfully. said. this is forbidden•. Then. prohibited meeting caravans on route with the intention of purchasing goods before the sellers know the market price. prohibited najash. This prohibition is based on the hadeeth narrated by Ibn Umar that Allah's Messenger prohibited najsh. Scholars have unanimously agreed on the prohibition of such action if the increase in price puts the commodity at a higher price than similar items. This means that the urban resident is prohibited from selling the goods of a rural resident on behalf of the latter. they melted them and sold them. sallallaahu alayhe wa sallam. sallallaahu alayhe wasallam. how about the fats of dead animals. however. Najash is trickery whereby one offers a high price for a commodity not intent upon buying it but upon cheating someone else who wants to buy it. sallallaahu alayhe wa sallam. sallallaahu alayhe wasallam. Anas Bin Malik said.2 Town dweller is not allowed to sell the goods of a desert-dweller The Prophet." 23 Islamic Finance within Trading Framework: The Way to Legitimate Profit .2. Ibn al-Arabi stated that. (Agreed upon) Even if the price is increased to the price of a similar commodity. sallallaahu alayhe wasallam. Ibnul Qayyim said. (Narrated by authors of 6 books) 4.Mohsin Ali 1100345 4.
2. selling weapons during periods of fitnah (confusion or instability). therefore. 4. Allah says. it has. "I will buy it from you for ten dollars." [5:2] This prohibition is based upon knowledge of the intention or evidence supporting the suspicion.Mohsin Ali 1100345 4. And don't urge a woman who is engaged to someone else to cancel her engagement so that she can become engaged to you. Khadij (Allah be pleased with him) reported: I heard Allah's Apostle (may peace be upon him) as saying: The worst earning is the earning of a prostitute.7 Earning of a prostitute. 4. one says to a vendor selling a commodity to one person for seven dollars.” On the basis of above hadith all jurist agree on unlawfulness of trading after the adhan for Jumah prayer however there is dispute among them regarding the validity of contract. a negation of the principle of maximum social advantage which the Islamic society sets out to achieve. sallallaahu alayhe wasallam. then hasten to remember Allah and leave your trade…. "I have the same item for seven dollars for you. “O you who believe. except with the permission of the other person. This would include selling juice to someone who uses it to make khamr (intoxicants).6 Commodity used in the commission of sin It is also prohibited to sell a commodity that might be used in the commission of sin.9 Monopoly business As monopoly means concentration of supply in one hand.2. prohibited the Muslims from persuading buyers to cancel their purchases from other vendors." (Ahmad) 4. For example.5 Persuading buyers to cancel their purchases from other vendors The Prophet. said. Number 3805: Rafi b.2. "And do not help one another in sin and transgression. SAW. "Do not urge someone to return what he has already bought from another vendor so as to sell him your own goods. it leads to exploitation of the consumers and the workers. and then sell them his goods. the price of a dog and the earning of a cupper: All. when the call is made for prayer on Friday. the price of a dog and the earning of a cupper are forbidden. thus. 4. also prohibited a Muslim from entering into a transaction to purchase a commodity when his brother Muslim has already negotiated a purchase of that same commodity. or selling a house to someone who will use it for sinful deeds.2.2. Sahih Muslim Book 10. Gigantic trusts cartels and monopolies should not exist in the Islamic society. been declared unlawful by the Holy Prophet (may peace be upon him). 24 Islamic Finance within Trading Framework: The Way to Legitimate Profit . earning of a prostitute." Ibn Umar narrated that Allah's Messenger. sallallaahu alayhe wasallam." The Prophet. the price of a dog and the earning of a cupper.8 Trading at the time of Juma Prayer: In the 9th verse of surah al-Jumah Allah SWT says. The monopoly-dominated economic order betrays lack of harmony between private and social good and is. This is tantamount to saying to someone who is buying an item for ten dollars.
risk can be mitigated but not totally eliminated. The holy Prophet was so happy with his honesty and expertise that he prayed for the promotion of his trade and business. lotteries. ownership transfer risks. According to Muhammad Ayub. chance or hazard. the parties can bargain on any price. thus. services or usufruct of goods. Remaining within the Shariah principles. legal and documentation risks and other mode-specific risks. Profit has to be earned by sharing risk and reward of ownership through the pricing of goods. In other words. The important Shariah maxims: “Al Kharaj bi-al-Daman” or “Al Ghunm bil Ghurm” is the criterion of legality of any return on capital. controlling the whole market to achieve personal gains. the return on invested funds that plays a productive role in any business is a factor in the willingness and ability to cause “value addition” and bear the risk of a potential loss in the business.Mohsin Ali 1100345 4. if any. if he wants to get any profit over his investment.10 Speculative business based on selfish interest Speculation means buying something cheap in bulk at a time and selling it dear at another and. price or rate of return risks. because return in respect of them either does not accept the business risk or is based on pure luck. 5. then sold one of them in the market for one dinar and gave the holy Prophet a goat and also one dinar. Profit in Islam: Islam has ordained transparency in respect of features/qualities of the merchandise and honesty in dealing. Hence. market risks. commodity risks. For getting the right of receiving profits over the principal one has to bear the risk of loss in business. A close observation will reveal that speculators are primarily interested in private gains regardless of the larger interest of the society. In all economic activities there could be some commercial risk and one has to bear that risk for the validity of the profit or earnings. implying that interest. These speculators try to create artificial scarcity of goods and commodities and thereby create an inflationary pressure on the economy. Islamic banks will face credit/party risks.2. In Sunan Abu Daud. 25 Islamic Finance within Trading Framework: The Way to Legitimate Profit . As the poor masses have to pay for this. The holy Prophet (pbuh) sent one of his Companions („Urwah) to purchase for him a goat and gave him one dinar. Transfer of commercial risk to anyone else without transferring the related reward is not permissible. 2007. Islam has condemned such speculative business. Reward should depend on the productive behavior of the business where funds are used. etc. In a market where buyers and sellers trade with liberty. gambling. are prohibited. Urwah went to the market and purchased two goats for one dinar. we come across a very interesting instance. meaning that one has to bear loss. Islamic banks are allowed to take risk mitigation/management measures. In debt-creating modes.
e.5 Supporting Transactions: I will discuss Hawalah. in Shirkah loss is to be borne on the percentage of capital pooled by each party and in Mudarabah all loss is to be borne by Rab-ul-mal and the mudarib will only loose the value of efforts he has made. According to Lane Rahn can be defined as “to pledge or lodge a real or corporeal property of material value in accordance with law as security for a debt or pecuniary obligation”. which at the end of renting period are to be transferred to the name of lessee. Profit sharing in both of these contracts is on the basis of pre-agreed ratio. 6. 6. One type of deposits accepted by Islamic banks are on qarde-hasan basis. Wadiah is an implicit or explicit empowerment of another for safekeeping of one‟s property. The case of loss is different for both. (CIFP Module of Shariah Rules in Financial Transactions) Both of these are also termed as equity based modes of financing. 6.3 Fee based transaction Wakalah and Kafalah are two transactions which are being used by Financial institutions for earning fee income. Ibn Qudamah defined it as a conjoining of guarantor‟s liability to the liability of the principal obligor for the discharge of a pecuniary obligation or debt or the delivery of property.2 Leasing (Ijarah) Leasing (Ijarah) means to employ the services of a person for a consideration (ujr) or sale of usufruct of a property to another in exchange for consideration (ajr). Banks accept deposits under this contract as well. Rahn and Wadiah contracts under this heading. 6.Mohsin Ali 1100345 6. As far as Kafalah is concerned. skill or goodwill to venture into a certain business activity.1 Profit sharing transactions: Profit sharing transactions are of two types i. whereby one party will provide capital (thus becomes rab al-mal – capital provider) while the other party works with the capital (thus becomes „mudarib – entrepreneur).4 Free of Charge transaction: Qard-e-hasan comes under the heading of free of charge transactions. No profit is given to this type of deposit holders. Banks use Ijarh for financing assets. The former one is known as Ijarah al-ashkhas and the latter one is known as Ijarah al-a‟yan. Other Financial Transactions Beside sale based transactions following other Financial Transactions are also allowed by Islam: 6. 26 Islamic Finance within Trading Framework: The Way to Legitimate Profit . Hawalah is an arrangement by which a debtor got freedom from a debt cy another becoming responsible for it. On the other han Mudarabah is the agreement between two parties (or more). entrepreneurship. as no profit is to be given to the creditor. On the other hand Qard-e-hasan can be given to the poor to enable them to start their own business so that they could come out the bracket of poverty. The Majallah define wakalah as “(Agency) consists of one person empowering some other person to performsome acts for him. Shirkah and Mudarabah. whereby the later stands in the stead of the former in regard to such act”. Shirkah is any form of business where two or more persons pool together their financial resources. This is the only type of lending permissible in Islam.
Malikis and Hanbalis have declared the use of Hiyal as haram and totally prohibited. were reported to have ruled against acceptance of a gift from the debtor before settlement of the debt. Gray Areas 7. all acts should be interpreted in the light of their spirit and intent and not by their appearances _ _ _ Second – attempts at bypassing the law are tantamount to deceit.2 Bai‟ Al-Inah Inah is a two party transaction where a person sells an asset to another for cash and then immediately repurchases the same from the buyer at a higher price to be paid normally in future/installment. The suspicion points regarding Inah are: 1) The seller in the first transaction is in need of cash 2) The buyer is ready to facilitate with a view to concluding the second transaction on much higher price 3) The price in the second sale in higher 27 Islamic Finance within Trading Framework: The Way to Legitimate Profit . etc.1 Use of Hiyal Fiqh literature contains mention of a number of legal ruses that people have used to circumvent the prohibition of Riba. each is valid on its own footing. 10. as such as new owner he is free to sell the same to any party including the seller himself and ownership right cannot be question by mere suspicion on his motive as such right is so fundamental in Shariah such it acts as general principle. and deceit is prohibited in Shar¯ı´ah as evidenced by the Qur‟¯an and the Sunnah _ _ _ Third – the Prophet. contain reference to many techniques that people used to make transactions technically permissible. Similarly.Mohsin Ali 1100345 7. Muslim jurists. Scholars in favour of Inah say that Even though there are 2 transactions but they are independent transactions. This is what is called use of Hiyal. Sh¯atbi‟s al Mowafaq¯at. Mahmasani. They say that Intention of the parties to affect lending with interest can be inferred by looking at the way they have behaved. Fat¯awa Alamgiri. following the example of the Prophet. 1961 narrates the following bases for the prohibition of Hiyal: “First – the Shar¯ı´ah texts are not aimed at the deeds themselves but rather at the interest which those deeds are intended to serve. Inah comes under gray area because of the arguments of majority of scholars are against it. there are seemingly two transactions tied into one resulting in lending and not true sale. only be done when buyer in the transaction has taken delivery of the purchased asset. the Companions and the Followers have been quoted in opposition to legal fictions _ _ _ Ibn Masud and Ibn Abbas. 355–364). According to Mahmasani.. The Shafi„e. 7. They also argue that Hadith/authorities cited in banning Inah is not authoritative enough to quash this general principle. it is more of loan with interest in essence and Hadith provisions and general rules governing sales not in favour of allowing Inah. their followers and the doctors of traditions such as Imam Bukhari agreed on the prohibition of legal fictions and on the necessity of avoiding them”. because the purpose of a gift under such circumstances was the postponement of payment of the debt and a ruse to legalize interest. only such Hiyal are permissible as are compatible with the spirit of the Shariah. Mahmas¯ani‟s Falsafa al Tashri. p. Therefore. (Ali. n.d. while according to Hanafis. ruses or subterfuges are against the Shari‟i spirit and are not permissible. it is being done without expressed intention to do the linking.
In particular. whereby various „credit enhancements‟ and strategies were introduced to the mudarabah and musharakah Sukuk structures to achieve capital protection and predictable periodic returns similar to other fixed-income or bond instruments. the legal ownership of the properties would reside with the investors. except in the case of a trading or financial entity selling all its assets. Regulated tawarruq offered and carried out by some Islamic banks strongly indicates a willing cooperation aimed at supplying cash against a higher credit obligation. in order to be tradable. and its subsequent sale by the purchaser to a party other than the seller on cash.3 Organized Tawarruq: Let us first define Tawarruq. (2009). B. or a portfolio with a standing financial obligation. that is. these strict Shariah prescriptions for equity-based Sukuk structure may not be attractive to risk-averse investors with a conventional mindset. the underlying assets should be sold to the investors. thus providing the necessary protection to them. in which some debts. 7.4 Murabaha Sukuks: According to AAOIFI sukuk must not represent receivables or debts. for the purpose of obtaining cash. Organized Tawarruq is condemned by contemporary scholars because the client is found to do little other than expressing the amount of cash required by him. which try to achieve the same economic outcome like conventional instruments. When the parties are known to each other and everything is preplanned then the Tawarruq is known as organized Tawarruq. Murabaha sukuks basically represent receiveable. Over time. sukuk should not be backed purely by receivables. A. However. and second. were included unintentionally. As such. distort the vision of Islamic economics based 28 Islamic Finance within Trading Framework: The Way to Legitimate Profit . This type of Tawarruq is being practiced by the banks nowadays. 7. the periodic returns are also dependent on actual profits made and can be variable. the structure of equity-based Sukuk has evolved into debt-based obligation. And the objective only happens to be obtaining cash from the bank against undertaking a debt to be settled in installments. that is why Murabaha Sukuks are not acceptable as already mentioned Islam prohibits commercialization of debt. 7. the capital cannot be guaranteed. wariq”. It is prominent that organized tawarruq borne strong resemblance borne to a hilah for attainment of riba. These innovations made in structuring Sukuk .Mohsin Ali 1100345 than the first one due to credit element and 4) if the financier/buyer is known riba‟ practitioner/ahl al-inah the suspicion is even bigger. The Islamic Fiqh Academy of Jeddah has described tawarruq as “the purchase of a commodity that is in the ownership and possession of the seller against a deferred price. incidental to physical assets or usufruct.5 Equity based Sukuks & Fixed income: The fundamental characteristics of equity-based Sukuk are rooted in two basic features: first. In sukuk securitization. This recommendation is related to the first point raised by AAOIFI above where sukuk holders should stand in the line of owners of underlying assets and not in the line of creditors. If the originator were to become insolvent. the characteristics of mudarabah and musharakah do not meet the risk appetite of investors who mainly expect capital preservation and fixed-income instruments as commonly featured in conventional bond instruments (Ghani .
276) infer that Riba on loans and debts must not be equated with trade or profit from sale. doi: 10. Riba. Perfect honesty in business and truthfulness in trade are much emphasised by the Holy Prophet (pbuh). this article concludes that the substance of a contract that has greater implications to the realization of Maqasid alShariah should be equally looked into. it is considered as ibadah. which signifies that one can claim profit only if he is ready to take liability – bear the business risk. also known as Maqasid al-Shariah. The overemphasis on form over substance leads to potential abuse of Shariah principles in justifying certain contracts. by only focussing on the legal forms of a contract rather than the substance especially when structuring a financial product. The conventional trading framework is also based on the concept of profit maximization without other considerations. The concepts of business ethics and corporate social responsibility are being accepted by the conventional trading practitioners only in the last century. Islamic finance just appears as an exercise of semantics. Islam forbade all the activities which are unjust for individuals and society and that is also the primary reason of the prohibition of Riba. On the other hand Islamic trading framework is based on absolute justice and fairplay.17) 8. The rationale of this principle is that earning profit is legitimized by engaging in an economic activity and thereby contributing to the development of resources and 29 Islamic Finance within Trading Framework: The Way to Legitimate Profit . Earning wealth is allowed by Islam but only through hilal sources. Difference between Conventional and Islamic trading framework 8. The permissibility of trading in the verse precedes the prohibition of Riba. Adam Smith considered man as he is: dominated by self-love. Islam defines trading framework in which you have to follow what God‟s interest is.2 Profit vs Riba Holy Quran (verses 2: 275. It will not be an exaggeration to say that absolute honesty in business and commerce is really an Islamic concept. which in fact are contradictory to the Shariah text and ultimately undermining the higher objectives of Shariah. but without much altruistic concern for others. whereas in Riba-based business.1057/fsm.1 Basic Philosophy The differences between conventional and Islamic trading framework starts from very basics. except in the use of euphemisms to disguise interest and circumvent the many Shariah prohibitions.e. the functions and operations are really no different from conventional banks.Mohsin Ali 1100345 on justice and equitability. These visions are deeply inscribed in the objectives of Shariah.2010. An important difference between profit and Riba is that the former is a result of real investment activity in which the business risk is allocated more evenly among all the parties involved. (Journal of Financial Services Marketing (2010) 15. reward is guaranteed to a party leaving the other party in risk. if any. Otherwise. 203 – 214. The base of conventional economics lies on self interest and materialism. This distortion stems from the restricted view of understanding Shariah. In process of getting maximized profit they started practicing things which are against the very nature of trading i. which fact signifies that the alternative to Riba is trading. In the final analysis. 8. Riba is not only prohibited in Islam but also in Christianity and Judaism. Riba-based transactions do not meet the Shariah requirement of “Al-Kharaj bi-al-Daman”.
locating and purchasing goods for his client. is not changed. they see everything with respect to debt and calculate time value accordingly. while undertaking trade services. The permissibility of a higher credit price than the cash price will be discussed in a subsequent section of this chapter. time value of money can only be recognized in trading and not in Qard or Dayn. whereby he can cancel the contract within a specified period. and therefore Shariah for ensuring justice demands that the seller should disclose the defects. namely Khiyar al-Roiyyat and Khiyar al-Aib. Even when a sale is executed. like damage in storage or in transit and market and price risks. otherwise the sale will be deemed invalid. and secondly. once agreed between the parties at the time of bargain. The Shariah permits a trader to sell for cash or on credit subject to the condition that the price. if any. because the latter are just considered as charitable acts in Islam and hence any kind of getting increase in amount is strictly prohibited. These two options give buyer power to cancel the contract. even if the margin of profit in the case of a credit sale of a commodity is more than the margin involved in the cash market price of that commodity. Time is a valuable economic resource. if Khiyar al-Shart is provided in the contract. without any stipulation with regard to thing he has purchased without seeing.4 Options in sales: Options in sales given by Islam are quite different from the options being practiced in the future and forward markets. giving a smaller and smaller share of the national produce to those doing real work for the creation of wealth in the economy. for which he is allowed to charge a certain amount of profit. But in Islam. Conventional framework also applies the same concept in debt instruments. 30 Islamic Finance within Trading Framework: The Way to Legitimate Profit . he takes business risk in obtaining the goods. The Shariah also provides option to the less informed party in the contract. even if the payment is not made by the due date. the buyer has the two other options. Interest is justified in conventional framework on the basis of time value of money. Islamic financial institutions. Credit prices of commodities are usually higher than its cash price. the creditor must refrain from accepting any gift unless exchange of such gifts was in practice between the borrower and the lender before the advancement of loan. 8.Mohsin Ali 1100345 society.3 Time value of money: All consumption and production activities take time that is the reason of emergence of the concept “time has value”. On the other hand in the case of credit sales in conventional trading. have to fulfil the conditions required for valid sales. 8. trading is a genuine economic activity where the real assets are being exchanged. All these activities and risks justify his earning a profit. so there is no question of giving such option to buyer. But in Islam. if the product do not conforms to the specifications. relationship between the two parties is that of lender and borrower. prior to the sale. The profit margin earned by a trader is justified firstly because he provides a definite service in the form of seeking out. free from any grounds illegalities. Apart from the above mentioned options. On the other hand. this is the evidence which proofs the acceptance of time value of money in Islam. In conventional trading framework. it may still not be binding on both the parties. earning money from money on the basis of interest creates a rentier class. The holy Prophet (pbuh) has said that after making a loan.
They may produce huge profits for financial institutions at the cost of others. where the speculators are actually not intending to buy any asset and just want to earn from price fluctuations due to these activities. But. The institutions dealing in derivates and hedge funds claim that diversity of hedging products protect their clients against market volatility and provide a larger spectrum of risk management to the benefit of the society. Mr. Isam only allows the sale and purchase of real assets with the intention to use or resell and earn profit from it. On the other hand only minimal uncertainty is allowed in transaction. March 15. if a person purchases an unseen commodity but the seller has sufficiently described its features and the commodity conforms to those features. Warren. Warren Buffet. Higher the uncertainty in a transaction more would be the profit. In case the underlying assets are equities and commodities it would be seen whether or not Riba and Gharar are involved. The Economist. a key valuation element in arriving at the fair value of an option contract remains the rate of interest. 8. Same is the case with speculative activities. there are different opinions as to whether the sale of unseen items is binding or not. As a group.Mohsin Ali 1100345 Regarding Khiyar al-Roiyyat. 8. it would be unjust not to purchase the commodity by using Khiyar al-Roiyyat. for example) are clearly un-acceptable according to the Shariah principles. actually volatility is caused by their activities when they trade in derivatives as a part of rip-off factor and the clients are sold nothing for something – protection against a danger that never needed to exist in the first place. Derivatives involving such financial contracts which themselves are prohibited in Shariah (Riba based bonds & forward foreign exchange where mutual exchange is not simultaneous.6 Derivatives: According to Muhammad Ayub The conventional options.e. currency futures etc are called derivatives i. These sorts of flexibilities are not present in conventional trading framework. 31 Islamic Finance within Trading Framework: The Way to Legitimate Profit . Islamic legal rules. Credit derivatives and total return swaps that are agreements to guarantee counterparty against default or bankruptcy merit special concern (Buffet. products such as interest-rate swaps. But these profits are not necessarily indicative of productive efforts. swaps and futures stem from debts and involve sale and purchase of debts/liabilities.” Most of the derivatives incorporate gharar (absolute risk). do not allow transactions devoid of real/productive activities. stock options and futures. Islam prohibits all those transactions which have huge amount of uncertainty involved in them. 2003). instruments derived from the expected future performance of the respective underlying assets. Islam disallows speculative activities where the intention is to earn from the fluctuation of price due to speculative activities. Chairman Berkshire Hathaway says: Derivatives are financial weapons of mass destruction mainly due to opaque pricing and accounting policies in swaps. According to Ibn Hazm. gambling and interest and support speculative activities.5 Gharar and speculative activities: In conventional trading framework there is no prohibition that how much uncertainty is involved in a transaction. Experts are of the view that even in case of acceptable forms of underlying assets. particularly the ban on Gharar and on the sale of debt for debt. options and other complex products whose prices are not listed on exchanges.
soothsaying etc. When Muhammad was asked to set the price of goods in a market he responded. the consumer may nullify the transaction upon realizing the seller's unfair treatment. These things include wine. sale of debt. Producers are expected to inform consumers of the quality and quantity of goods they claim to sell. Islam is not like what is nowadays being called as modern man‟s religion which is just a personal and private affair and has nothing to do with economic and political life as effectively operative in our commerce and politics as in our domestic life and social relations. government non-interference should be upheld. On the other hand Islam has specified the haram things. Islam allows transacting in any other thing except what are specified as haram. such as the protection of public interest. Some scholars hold that if an inexperienced buyer is swayed by the seller. is tolerated under specific circumstances. swine. let the people carry on on with their activities and benefit mutually.7 Dealing in Haram things and activities The main focus of conventional trading frame work is profit maximization. Prophet Muhammad (may peace be upon him) who. dealing in which is prohibited in Islamic trading framework. Business Ethics in Islam Islam is a religion which regulates and directs life in all its departments. During the days of Muhammad SAW. thereby gaining monopoly over the market. Government intervention. No matter from where it comes. Government interference in the market is justified in exceptional circumstances. The produce was later sold at a higher price within the city. urged 32 Islamic Finance within Trading Framework: The Way to Legitimate Profit . a small group of merchants used to meet agricultural producers outside the city and bought the entire crop." 10. That is the reason why perfect honesty in business and truthfulness in trade are much emphasised by the Holy Prophet (may peace be upon him).Mohsin Ali 1100345 8. prostitution. however. Producers and consumers should not be denied information on demand and supply conditions. The Qur'an also forbids discriminatory means of transaction. "I will not set such a precedent. on the one hand. Islam prohibits the fixation of a price by a handful of buyers or sellers who have become dominant in the market. It will not be an exaggeration to say that absolute honesty in business and commerce is really an Islamic concept. Muhammad SAW condemned this practice since it caused injury both to the producers (who in the absence of numerous customers were forced to sell goods at a lower price) and the inhabitants of Medina. Under normal circumstances. ال تحري م ع لى ال دل يل ي دل ح تى اإلب احة األ ش ياء ف ى األ صل In origin all thing in muamalaat are permissible unless prohibited by evidence (Quran & Sunnah) 9. they have even legalized prostitution. Government Intervention in Market Place Islam promotes a market free from interferences such as price fixing and hoarding.
on the other band. He prizes faith. iii. should somehow compensate him for the excessive payment received. To give just measure and weight. iv. 85-86). Without such understanding he will go astray and fail into serious lapses making his earning unlawful. According to Imam Ghazali. tarianism and justice. Islam expects the buyer and the seller to look upon each other as Muslim brethren or fellow human beings. Not to withhold from the people the things that are their due. a Muslim who makes up his mind to adopt trade as a profession or to set up his own business should first acquire a thorough understanding of the rules of business transactions codified in the Islamic Shari'ah. iii. said: "Laisa minna man gashshdna" (Whosoever deceives us is not one of us). If one ponders over the forms of transaction prohibited by Islam.Mohsin Ali 1100345 his followers to adopt trade as their profession. We are told in these verses that commerce can flourish under conditions of peace and security. It the seller happens to overcharge the buyer. According to Islam. Islam does not believe in the view that all is fair in business and that every kind of cleverness and deceit is justifiable in business transactions. Not to commit evil on the earth with the intent of doing mischief. and defraud not men of their things. instead of feeling proud of his cleverness in doing so. 33 Islamic Finance within Trading Framework: The Way to Legitimate Profit . a person who sacrifices his faith. Indeed. Islam insists upon absolute justice and fairplay in business dealings. A Muslim will not go in for such a bad bargain. A Muslim merchant is not a worshipper of the Mammon with an inordinate love for money. iv. To be contented with the profit that is left with us by God after we have paid other people their due. one can arrive at the following ethical guidelines for doing business: i. exhorted them to observe truthfulness and honesty in their business transactions (Muhaamad Ayub. while reprimanding the dishonest dealer. v. and. It does not approve of the cut-throat competition. The Holy Qur'an has stressed the importance of fairness in business: "And. ii. Islam regards business or commerce as an economic activity to be carried on in a spirit of humanity. and act not corruptly in the land making mischief. he. All bargains that are clenched without giving the purchaser a fair chance of examining the things are prohibited because this amounts to denying him a right that was his due. if you are believers" (Al-Quran 9. each trying to go all his way to help and serve the other. the very concept is un-Islamic. In these words addressed by Hadrat Shu'aib to his people. What remains with Allah is better for you. and loses the good pleasure of his Lord to make a monetary gain has not made a good bargain. ii. piety and righteousness above all. 2007). O my people. Islam has disallowed all transactions not based upon justice and fairplay The Holy Prophet (may peace be upon him). the Holy Qur'an enunciates the fundamental principles of commerce as follows: i. give full measure and weight justly.
The subject matter. To achieve this objective. i. dead bodies of animals and other goods the use of which has been declared to be Haram (unlawful).Mohsin Ali 1100345 vi. The acceptance should conform to the offer in all its details. any of the two counter values can be postponed. the latter refers to a future sale wherein the goods sold are to be supplied later against prepaid price (Salam).g. Forcible transactions or transactions in which the buyer takes undue advantage of the helplessness or misery of the seller are also discouraged. in essence. One can subdivide sale according to the types of Mabi„ being exchanged. in writing or through indication and conduct. the Shariah has advised some prohibitions and recommended some ethics. which can be conveyed by spoken words. vii. swine. an ethical system and ethics need to be an inseparable part of the system. Any contracts must be made as explicit as possible in order to avoid Gharar and injustice to any of the parties. all contracts are valid unless they violate the text of the Holy Quran or Sunnah of the holy Prophet (pbuh). In a transaction. Detailed study of the rules and norms reveals that Islamic finance is. and when such obligations may be bought. or are in conflict with the objectives of the Sharah. A clause in the contract allowing a change in liability beyond the control of the liable party would be unjust. The prohibition of sale of a debt for a debt affects when obligations (to perform or to pay) are delayed. offer and acceptance. While the former is a credit sale or Bai„ Mu‟ajjal. A property is either a specific existent object. The Islamic system disapproves of any exploitation or injustice on the part of any of the parties involved. The mode of Murabaha can be used in trading of „Ayn and merchandise and not in credit documents or Dayn. or the client agrees to automatic compensation for the bank in case of his failure to meet the liability. a house. payment of the price. It has also forbidden trading in things that have a debasing or vitiating influence on the Muslim society. A valid contract must comprise the following intrinsic elements: The form. viii.e. Commercial contracts have to be concluded at a price that is agreed mutually without uncertainty or hazard (Gharar) with regard to the subject matter and the counter value or consideration and the seller‟s ability to deliver. What is not prohibited is permissible. which must be lawful.g. e. the client in Murabaha agrees that the bank can change his liability whenever the latter likes. in actual existence at the time of the contract and should be capable of being delivered and precisely determined either by description or by inspection/examination. Summary: All commercial transactions must be governed by the respective rules and norms of Islamic ethics. as enunciated by the Shariah. Islam has prohibited traffic in wine.e. i. who must have the capacity for execution. or an object defined generically or abstractly by an obligation (Dayn). e. sold or otherwise transferred. Therefore. or delivery of the commodity. 11. The contracting parties. 34 Islamic Finance within Trading Framework: The Way to Legitimate Profit .
we cannot have the agreement of hire and purchase in one contract. it must be non-contingent and effective immediately. Islam seeks to block all those channels that eventually lead to injustice. In some such cases. In order to nip evil in the bud. Generally. because it is based on riba and gharar. The arrangement of “two contracts into one contract” is not permissible in Shariah. 35 Islamic Finance within Trading Framework: The Way to Legitimate Profit . therefore. those in which the rights of the contracting parties are not clearly defined and those that enable some to amass wealth at the expense of others and which could result in litigation. yet it is always there. false assertions and breach of contracts and promises also lead to injustice. dishonesty. Conventional trading framework includes many transactions which contradict with Islamic rules. either to one of the contracting parties or to the general public. fraud. because the sale of goods attributable to the future is void in the opinion of the majority of scholars. Such transactions involve appropriation of other‟s wealth without right or justice. Practices like Riba. In every instance of prohibited business conduct one can discern an element of injustice. the injustice may not be apparent. Islam prohibits all transactions that depend just on chance and speculation.Mohsin Ali 1100345 If the contract is one of sale. we can only undertake/promise to purchase the leased asset. Gharar.
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