PART III ISLAMIC FINANCE – PRODUCTS AND PROCEDURES 177 8 Overview of Financial Institutions and Products: Conventional and
M. Fahim Khan Division Chief
6.11 AL ‘INAH SALE AND THE USE OF RUSES (HIYAL)
Fiqh literature contains mention of a number of legal ruses that people have used to circum- vent the prohibition of Riba. Fat¯awa Alamgiri, Mahmas¯ani’s Falsafa al Tashri, Sh¯atbi’s al
76Tirmidhi, 1988, No. 1331, pp. 30, 31; Muslim, 1981,10, pp. 227, 228.
Mowafaq¯at, etc. contain reference to many techniques that people used to make transactions technically permissible.77
Joseph Schacht has undertaken extensive work in modern times on the subject of Hiyal.
By elucidating types of Hiyal and commenting on works by Shaybani and Khassaf, of the Hanafi Fiqh, and Qazwini, a Shafi‘e jurist, Schacht relates a part of Hiyal to casuistry practices that could mislead the people. Study of a vast literature in this regard would reveal that the legality of Hiyal refers to some procedural devices advising people to be careful in making contracts and framing legal statements. The purpose would be to avoid clashes with the law and not to avoid the law. Accordingly, Hiyal, to the extent that they are acceptable, are precautionary devices and a counterpart of Shariat literature.78
Mahmasani 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. Therefore, 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, and deceit is prohibited in Shar¯ı´ah as evidenced by the Qur’¯an and the Sunnah Third – the Prophet, the Companions and the Followers have been quoted in opposition to legal fictions Ibn Masud and Ibn Abbas, following the example of the Prophet, were reported to have ruled against acceptance of a gift from the debtor before settlement of the debt, because the purpose of a gift under such circumstances was the postponement of payment of the debt and a ruse to legalize interest. Similarly, Muslim jurists, 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”.79
According to Mahmasani, ruses or subterfuges are against the Shari’i spirit and are not permissible. The Shafi‘e, Malikis and Hanbalis have declared the use of Hiyal as haram and totally prohibited, while according to Hanafis, only such Hiyal are permissible as are compatible with the spirit of the Shar¯ı´ah. An example of a permissible Shari’i Hilah is that a borrower may sell something to a lender at a price which is less than its actual price, or the borrower may purchase something from the lender at a price higher than its actual price.80The purchaser can use the commodity himself or sell it in the market to get cash for other needs. However, this is the practice of real purchase and sale (termed Tawarruq) and different from Bai‘ al ‘Inah that involves buy-back and that has been prohibited by the holy Prophet.
In Fat¯awa Alamgiri (Hanafi Fiqh), a Hilah in terms of which a ruser sells a commodity of
$1000 payable after a year and then buys the same commodity for $950 on cash payment, has been declared unlawful due to the involvement of the element of Riba. This practice is known as Bai‘ al ‘Inah, defined as a double sale involving “buy-back”, by which the borrower and the lender sell and then resell a commodity between them, once for cash and once for a higher price on credit, with the net result of a loan with interest.
Jurists consider ‘Inah a stratagem whose function is to attain illegal ends through legal means. Ibn Qudama says: “If a person sells something on credit, it is not permissible to buy that commodity at a price less than the price at which he sold. Similarly, if a person sold something for cash and then purchased on credit at higher than the sale price, it would not
77Ali, n.d.,10, p. 355–364.
78Schacht, 1964, pp. 81–84, 205–210.
79Mahmasani, 1961, pp. 124, 125; for detail see pp. 119–126.
80Mahmasani, 1961, p. 122.
be permissible. However, if he purchases at a price less than he sold for cash, it would be permissible”.81
Although some jurists, particularly Shawafi‘, allow ‘Inah in specific cases,82 jurists in general have prohibited it. Even the Shafi‘es do not give tacit approval for this. Saiful Azhar Rosly and Mahmood M. Sanusi have concluded in a study: “We have argued therefore in the above that the view of Imam Shafi‘e has reached a level which is similar to the other Muslim schools, although the methodology which he adopted appears to be different as he considered that when the legal preconditions of the contract are fulfilled, it cannot be cancelled on the account of the intention of the parties. Likewise, this study finds no significant Shar¯ı´ah justification of Bai‘ al ‘Inah.”83
On this basis, the Shar¯ı´ah committee of Al Baraka has not approved the purchasing of a commodity by a company on credit for $20 and then selling it for cash for $15 to a sister company (holding company) on account of this being Bai‘ al ‘Inah.84 This means that actually, the commodity has been purchased back by the same seller who undertakes a transaction only to get interest. However, if one of the two companies is not fully owned by the owner of the first company, this would not amount to Bai‘ al ‘Inah, as the commodity has not been sold only to the first seller but also to others. This would be permissible provided there was not any manipulation to circumvent the Riba prohibition.
In fact, in most such cases, no handing over or possession takes place, as had been the case in buy-back-based mark-up operations in the NIB system in Pakistan adopted in the 1980s that were declared non-Shar¯ı´ah-compliant by the Shar¯ı´ah Courts.
Another form of ‘Inah is where one person asks another: “Buy for me (from a third party) such and such an object for ten dinars in cash, and I will buy it from you for 12 dinars on credit.”85This transaction does not necessarily constitute Riba so long as the parties engage in normal trade and ownership is actually transferred. However, Maliki jurists prohibit it on the grounds of blocking the means (to an illicit end) (Sadd al-Zar¯ai‘). Ibn Taymiyah, a Hanbali jurist, in this respect says: “And if the person who requests [that the other buy an object for cash and sell it to him on credit with an increase] aims [by concluding this transaction] at obtaining dirhams (money) against a greater quantity of dirhams at term, and the seller also aims at the same thing, then this is Riba, and there is no doubt as to its prohibition, no matter how it is arrived at. Indeed actions are to be judged by intentions, and each person has his intention”.
Ibn Taymiyah goes on to divide ‘Inah sales into three groups according to the buyer’s intention:
1. He buys the goods (on credit) in order to use them, such as food, drink and the like, in which case this is sale, which God has permitted.
2. He buys the goods in order to trade with them; this is trade, which God has permitted.
3. He buys the goods to get dirhams, which he needs, and it was difficult for him to borrow or sell something on a Salam contract (immediate payment for future delivery), so he
81Ibn Qudama, 1367 AH,4, pp. 174–177.
82See Nawavi in his annotation ofSahih Muslim, 1981,6, p. 21.
83Rosly and Sanusi, 1999.
84Al Baraka, 1997, p. 128.
85cf. Ray, 1995, p. 56.
buys a good in order to sell it and take its price. This, then, is Tawarruq (a form of ‘Inah), which is Makrooh (reprehensible) according to the most eminent of the jurists.86 Another variant of sale and repurchase transactions is when a person sells his house and takes the price, but then, for example, the purchaser promises that whenever he gives the price back, the latter will resell the house to him. This is a ruse permitted by Hanafi jurists subject to certain conditions. Such an arrangement, termed Bai‘ bil Wafa in the Hanafi Fiqh, basically treats the sold asset as collateral until the amount is paid back by the other party to the sale. In this arrangement, a person sells his house and takes the payment; the buyer promises to the seller that whenever the latter gives him back the price of the house, he will resell the house to him. The Hanafi jurists have opined that if the resale of the house to the original seller is made a condition for the initial sale, it is not allowed. However, if the first sale is executed without any condition, but after effecting the sale, the buyer promises to resell the house whenever the seller offers to him the same price, this promise is acceptable and it creates not only a moral obligation, but also an enforceable right of the original seller.
Even if the promise has been made before effecting the first sale, after which the sale has been effected without a condition, it is allowed by certain Hanafi jurists.87
On the basis of the above, some forms of repurchase promises have been allowed by the Shar¯ı´ah scholars, and Islamic banks provide housing finance through the arrangement of Diminishing Musharakah. Banks purchase a part of the ownership of the client in a plot of land/house and the client promises to repurchase the same after the lapse of a period in which its market value changes, generally one year. The period of one year has been suggested by scholars so that the transaction might not enter into the prohibited category of Bai‘ al ‘Inah or a sale and buy-back arrangement.88