PART III ISLAMIC FINANCE – PRODUCTS AND PROCEDURES 177 8 Overview of Financial Institutions and Products: Conventional and
M. Fahim Khan Division Chief
5.6 W‘ADAH (PROMISE) AND RELATED MATTERS
5.5.8 Permissibility as a General Rule
Everything that is not prohibited is permissible. The principle of permissibility establishes the fact that all agreements and conditions contained in them are permissible as long as they do not contradict any explicit text of the Qur’¯an or Sunnah.
Individuals are not always in a position to conduct exchange transactions on a spot payment basis. Many times, one of the two counter values to an exchange transaction is not exchanged simultaneously, as happens in credit (Mu’ajjal) or forward (Salam) transactions.
The validity of these transactions requires certain rules. Such contracts are discussed in detail in various other chapters.
However, modern Muslim jurists do not at all consider themselves bound by their predecessors, and most Islamic banks consider the promise to purchase as binding. Further, they require collateral against the possibility of the promise being dishonoured. This reasoned departure from medieval Fiqh demonstrates that important developments are occurring in the way Islamic judgements are constructed. These developments are creating a degree of conflict among Islamic legal scholars, and objections have been raised against the Murabaha transaction as it is currently practised.”
In the opinion of this author, it does not involve any conflict. It seems that Ray has not thoroughly read the position and importance of promise in Islamic Shar¯ı´ah. Many traditional jurists, particularly the Malikis, Hanbalis and some Hanafi and Shafi‘e, and almost all contemporary jurists have accepted the legal effectiveness of promise if understanding between the promisor and the promisee takes place in commercial dealings with mutual consent. According to them, fulfilling a promise is mandatory and a promisor is under moral as well as legal obligation to fulfil his promise. In this regard, Shaikh Taqi Usmani says:
“This view is ascribed to Samurah b. Jundub, the well-known companion of the holy Prophet
‘Umar B. Abdul Aziz, Hasan al-Basri, Sa‘id b. al-Ashwa’, Ishaq b. Rahwaih and Imam Bukhari.
The same is the view of some Maliki jurists, and it is preferred by Ibn-al-Arabi and Ibn-al-Shat, and endorsed by al-Ghazzali, the famous Shafi‘e jurist, who says the promise is binding if it is made in absolute terms. The same is the view of Ibn Shubruma”.25The third view is presented by some Maliki jurists. They say that in normal conditions, promise is not binding, but if the promisor has caused the promise to incur some expenses or undertake some labour or liability on the basis of promise, it is mandatory on him to fulfil his promise for which he may be compelled by the courts.26
Further, this does not contradict any Nass (text) of the Qur’¯an or Sunnah and therefore can be accepted on the principle of Ib¯ahatul Asliyah.
The Islamic Fiqh Academy of the OIC has made the promise in commercial dealings binding with the following conditions:
1. The promise should be unilateral or one-sided.
2. The promisor must have caused the promisee to incur some liabilities or expenses.
3. If the promise is to purchase something, the actual sale must take place at the appointed time by the exchange of offer and acceptance. Mere promise itself should not be taken as the actual sale.
4. If the promisor backs out of his promise, the court may force him either to purchase the commodity or pay actual damages to the seller. The actual damages will include the actual monetary loss suffered by him, but will not include the opportunity cost.27 According to the majority of scholars, Muwa‘adah or Mu‘ahidah (bilateral promise) is not allowed in situations where ‘Aqd is not allowed (e.g. forward currency contracts), and thus not enforceable by law. However, some scholars of the subcontinent consider bilateral promise as enforceable by law except for the bilateral promises in transactions like short- selling of currencies or shares of joint stock companies. Notwithstanding the binding nature of promise, the difference between a contract (‘Aqd) and a bilateral promise is that the ownership in bilateral promise is not transferred at the time of signing the promise, while in
25Al Muhallah, 8: 28; Bukhari, al-Sahih, al Shahadat; Ghazali, 3: 133, cf. Usmani, 2000a, p. 122.
26For detail see Usmani, 2000a, pp. 120–126.
27OIC Fiqh Academy, 5th Conference, Resolution Nos. 2 and 3.
‘Aqd, not only the ownership transfers but also the rules of inheritance apply as soon as it is executed.
The binding nature of promise has important implications for Islamic banks’ operations in respect of Murabaha to Purchase Orderer, Ijarah-wal-Iqtina‘, Diminishing Musharakah, which is used by many Islamic banks in the world for housing finance, and for the disposal of goods purchased by banks under Salam/Istisna‘a.
5.6.1 Token Money (Hamish Jiddiyah) and ‘Arb ¯un
In the case of binding promises, Islamic banks take token money from the promisee clients, which is the amount taken from them to convey seriousness in purchasing the relevant commodity/asset. In Arabic, this is called Hamish Jiddiyah – the margin reflecting the firm intention of the promisee. Banks hold token money as a trust and adjust it in price at the time of the execution of the sale. This means that Hamish Jiddiyah is taken before the execution of an agreement, as against ‘Arb¯un, which is taken from the buyer as part of the price after execution of the sale agreement. In cases where the bank undertakes some activities and incurs expenses in purchasing the asset for onward sale to the promisee, and the latter fails to honour the “promise to purchase”, the bank can recover the actual loss from the promisee;
the excess/remaining amount of Hamish Jiddiyah will have to be given back to the client.
The actual loss does not cover the loss in respect of “cost of funds”.28‘Arb¯un is the earnest money given at the time of execution of the sale as part of the price.
Such amounts are also taken in tenders, in which the bidders show their intention to purchase an asset at a certain price and instantly give a part of it to the seller who has called the bid. If the bid is accepted, the amount becomes part of the price. So the amount is treated as a trust until the time of bidding and the nonsuccessful bidders have the right to get it back. Bidders can cover actual damage sustained in the bidding process.29
The seller, after execution of the sale against a part payment, has the right to retain the whole amount of ‘Arb¯un if the other party has failed to perform within the period stipulated in the agreement. The AAOIFI, however, considers it preferable to refund the amount over and above the loss actually sustained by the seller.30
In recent years, ‘Arb¯un has become a subject of intensive research in respect of finding any alternative to the conventional options. It therefore warrants some detail. Imam Malik has defined ‘Arb¯un in the following words: “It is when a person buys a slave or rents an animal and says to the seller or the owner of the animal, ‘I will give you one dinar or one dirham or more or less and if I ratify the sale or the rent contract, the amount I gave will be part of the total price. And if I cancel the deal, then what I gave will be for you without any exchange’.”31He considers this deal invalid.
Two traditions are reported with regard to ‘Arb¯un in various books of Hadith, one prohibiting and the other allowing ‘Arb¯un sale. But both of these are considered weak and unauthenticated. Among the main schools of Islamic Fiqh, only the Hanbali school considers Bai‘ al ‘Arb¯un a legal contract. They rely mainly on the report from Naf‘i Ibnal Harith,
28AAOIFI, 2004–5a, No. 5, p. 66.
29AAOIFI, 2004–5a, pp. 65, 66, 76.
30AAOIFI, 2004–5a, pp. 65, 66, 76.
31Al-Baji, 1332AH,4, p. 158.
an officer at Makkah deputed by Caliph Umar (Gbpwh), which states that he bought from Safwan Ibn Umayyah a prison house for Caliph Umar (Gbpwh) for four thousand dirhams on condition that if the Caliph approved of it, the deal would be final, otherwise Safwan would be given four hundred dirhams.32
The majority of contemporary jurists are of the view that if a buyer in actual sale transactions stipulates by his free will and without any duress that he will either finalize the deal within so many days or the sale will be considered cancelled and the seller will get the amount given in advance, it could be considered legal. But open options, even in valid sales, wherein the parties have no intention to buy and want profit simply by transferring risk to the other party, are against the basic philosophy of Islamic finance. That is why conventional options have not been accepted as genuine instruments in Islamic finance. We shall discuss this in detail in Chapter 8. Here, we can briefly say that the concept of ‘Arb¯un is acceptable to the extent of part payment after finalization of the deal. Its legality as a separate sale, i.e. Bai‘ al ‘Arb¯un, and its implications for the legality of conventional options are not acceptable, in general, to scholars.