PART III ISLAMIC FINANCE – PRODUCTS AND PROCEDURES 177 8 Overview of Financial Institutions and Products: Conventional and
M. Fahim Khan Division Chief
6.5 REQUIREMENTS OF A VALID SALE CONTRACT
6.5.3 Cash and Credit Prices
In medieval Islamic trade, not only was buying and selling on credit accepted and apparently widespread, but also the credit performed many important functions in trade transitions. We find a lot of detail in Fiqh books on various aspects of trade transactions on credit.
Most jurists believe that the seller can indicate two prices, i.e. one for cash and another for a credit transaction, but one of the two prices must be settled in the same meeting. They, however, qualify this with the condition that the difference should be a normal practice of the market, the aim should be the business of trade and the seller should not resort to the practice of Ghaban-e-Fahish. The following tradition is important in this regard: “The person who makes two bargains in one sale, the lower of the two is lawful for him or he would be charging Riba”.38Jurists like Sem¯ak, Aoz¯aii and others have interpreted this as a situation where a person declares in the sale contract that in the case of credit, the sale price will be so much, and in the case of cash, so much.39
Besides the situation described above, another situation is where the seller declares only one price, the credit price, higher than the price prevalent in the market, and the buyer agrees to buy at that price. Jurists differ regarding the legality of charging this excess on account of the period allowed for the payment of the price. The jurists who disapprove argue that the seller himself may not differentiate between the cash and credit price, but if the purchaser
36For detail on Ghaban-e-Fahish, see Al Jaziri, 1973,2, pp. 570–573.
37Al-Atasi, 1403 AH, Majallah, Article 165.
38Abu Daud, 1752,3, p. 274.
39Thanwi, n.d.,14, p. 273.
feels that he has been charged an excess on account of a delay, the transaction will be usurious. However, other jurists, mostly belonging to Shafi‘e and Hanafi schools, deem this form lawful on the grounds that the seller sells the goods on a deferred payment basis and stipulates, at the time of the bargain, the whole price in return for the sale item. This is just like the situation where, for example, a seller declares to the buyer that the price will be $10 if he purchases it today and $11 tomorrow. This is permissible according to all jurists, as the seller has the right to demand the price, keeping in mind the time of the sale contract.
The difference in price therein is in lieu of the item of sale and not as a reward for time.
They argue that the permissibility of the form under consideration can be derived therefrom.
However, when the price is stipulated once, it should not be subject to any change, keeping in mind the period of time given for payment.40
Imam Tirmidhi in his J¯am‘i has also reported that the holy Prophet (pbuh) forbade two sales in one contract. According to Tirmidhi, some jurists have explained this in the sense that a person states: “I sell this cloth for cash for 10 and on credit for 20 (dirhams)” and at separation, one price is not settled. If one of the two prices is settled, it is not prohibited.41 Tohfatul Ahwazi, Sharah J¯am‘i al Tirmidhi, explains that if the seller says that he sells the cloth for 10 for cash and 20 on credit, and the buyer accepts either of the two prices; or if a buyer says that he purchases for 20 on credit or the parties separate having settled on any of the prices, the sale will be valid.42
Jurist Shuk¯ani explains the above aspect and concludes that if the purchaser in such a situation says: “I accept for 1000 for cash” or “for 2000 on credit”, this would be all right.43 He adds that the ‘Illah (effective cause) for prohibition of two sales in one is the nonfixity of the price.44He has a separate booklet on the subject wherein he maintains that he reached the conclusion after thorough research.45
Shah Waliullah inMuaswwa, Sharah Al Mu’watta, writes that if the parties separate after settlement on one price, the contract is valid and there is no difference of opinion in this regard.46
Among scholars of the present age, the late Shaikh Abdullah ibn B¯az, who was the most honoured grand Mufti of Saudi Arabia, permitted instalments sale wherein the credit price could be higher than the cash price.47
Jurists allow this difference, considering it a genuine market practice. It is quite natural that in the market, the credit price of a commodity should be more than its cash price at a point in time, while in forward purchase, the future price will be less than the cash price (that is why the Companions asked the holy Prophet (pbuh) about the validity of Salam/Salaf when Riba was prohibited and the holy Prophet allowed it on the condition that the price, quality and delivery of the goods should be stipulated).
In the words of eminent Hanafi jurist Sarakhsi: “Selling on credit is an absolute feature of trade”. In discussing the rights of a managing partner in a Musharakah contract, Sarakhsi says: “We hold that selling for credit is part of the practice of merchants, and that it is the
40Thanwi, n.d.,14, p. 134; Al Sanani, 1972, pp. 136–137.
41Tirmidhi, 1988, No. 1254.
42Mubarakpuri, n.d.,2, p. 236.
43Shuk¯ani, n.d.,5, p. 12.
44Ibid.
45Shuk¯ani, Shifa al Khilal fe hukm-e-ziadat al thaman al Mujarrad wala’jal.
46Waliullah, 1353 H,2, pp. 28, 29.
47Ibn B¯az, 1995, p. 142.
most conducive means for the achievement of the investor’s goal, which is profit. And in most cases, profit can only be achieved by selling for credit and not selling for cash.” He further states: “A thing is sold on credit for a larger sum than it would be sold for cash”.48
The comments of Abraham L. Udovitch on the views expressed by Sarakhsi are worth mentioning: “This statement makes clear as to why there was a greater profit to be derived from credit transactions The difference in price between a credit and cash sale also helps explain why the prohibition against usury, to the extent that it was observed, did not exercise any crippling restriction on the conduct of commerce. For, while the difference in the price for which one sells on credit and the price for which one sells for cash does not formally and legally constitute interest, it does fulfil, from the point of view of its economic functions, the same role as interest. It provides a return to the creditor for the risk involved in the transaction and compensates him for the absence of his capital.”49
Udovitch, however, overstates the case when saying that the difference in the cash and credit prices of a commodity fulfils the same role as interest. Islamic economics has the genuine provision of converting money into assets and then one can measure its utility.
While it concedes the concept of time value of money to the extent of pricing in credit sales, it does not generate rent on the capital as interest does in credits and advances, creating a rentier class. Money is a means of exchange. As per the rules of the Shar¯ı´ah, $1000 today will be $1000 tomorrow. However, what matters is the translation of 1000 dollars into an asset, in which case that $1000 asset may be worth more or less in any number of years one may consider. Therefore, value has to be in the context of any asset, in which case it can be higher or lower in the future.
The jurists have also derived argument on the difference between cash and credit prices from the Holy Qur’¯an. The Qur’¯an has reported nonbelievers saying: “The sale is very similar to Riba.” (2: 275) Referring to this verse, Shaikh Taqi Usmani says: “Their objection was that when we increase the price of a commodity in the original transaction of sale because of its being based on deferred payment it is treated as a valid sale; but when we want to increase the due amount after the maturity date and the debtor is not able to pay, it is termed Riba, while the increase in both cases seems to be similar.” This objection has been specifically mentioned by the famous commentator of the Holy Qur’¯an Ibn-Abi-H¯atim:
“They used to say that it is all equal whether we increase the price in the beginning of the sale, or we increase it at the time of maturity. Both are equal. It is this objection which has been referred to in the verse ”50 The Holy Qur’¯an’s response to the above thinking of nonbelievers was: “and Allah has permitted trading, and prohibited Riba”.
Allamah Sayyuti has quoted from Mujahid that “people used to sell goods on credit; at the time when the payment was due, they used to give extension against enhanced prices. At this, the verse ‘Do not eat Riba doubled and redoubled’ was revealed.”51Ibne Jarir Tabari has reported from Qat¯adah a similar situation of Riba involvement in which a person sold
48Al Sarakhsi, n.d.,22, p. 45; cf. Udovitch, 1970, pp. 78, 79.
49Udovitch, 1970, p. 80.
50Shariat Appellate Bench, 2000, pp. 536–538; Ibn-abi-H¯atim reports: “ when the payment became due the debtor used to say to the creditor: ‘give me more time, I would give you more than your amount’, when it was indicated that it amounted to Riba, they used to say that it was all equal whether we increase the price in the beginning of the sale, or we increase it at the time of maturity, both are equal. It is this objection which has been referred to in the verse by saying ‘They say that the sale is very similar to Riba’.” (Ibn-abi-H¯atim, 1997,2, Nos. 2891, 2892, p. 545.
51Sayyuti, 2003/1423.
any commodity on a credit price payable at any agreed time; when the payment was due and the purchaser could not pay it, the price was enhanced and the time for payment extended.52 It can safely be derived from the above discussion that a transaction of credit sale with a price higher than the spot price is acceptable.53 What is prohibited is that the price, once mutually stipulated, is enhanced due to any delay in its payment. This is because a commodity, once sold, 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, and also because the price becomes a debt.
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. Therefore, according to many jurists, this aspect is approved by the Nass (clear text of the Shar¯ı´ah) from the Salaf (forebears).54
Accordingly, absolute certainty on price is necessary for the validity of a sale. All jurists agree that if one definite price is not stipulated in the case of a credit sale, it will become Riba and therefore unlawful. For example, A says to B: “If you pay within a month, the price is 10 dollars, and if you pay after two months, the price is 12 dollars”; B agrees without absolutely determining one of the two prices. As the price remains uncertain the sale is void, unless any one of the two alternatives is agreed upon by the parties at the time of concluding the transaction.
Another point to be clarified is that a person who has bought an asset on credit can sell it onward after taking its possession, even if he has not made full payment of its price. If a client C purchases a car on Murabaha, with the price payable in five years, from day one, C is the owner of the car and is liable to the bank for the agreed amount according to the agreed schedule. He can sell the car for any reason after one year, for example to Y, who agrees to pay the remaining installments. Although C has not paid all the instalments, this would not be considered a “sale of what he doesn’t own”.