Meezan Bank's Guide to

Islamic Banking
Written by

Dr. Muhammad Imran Ashraf Usmani

Ph. D. Islamic Finance

Assistance in translation editing and com!ilation by

Zeenat Zubairi

"AB#$ %F &%'"$'"(

Preface ($&"I%' I INTRODUCTION TO ISLAMIC ECONOMIC SYSTEM 1 2 3 Chapter 1 Chapter 2 Chapter 3 The Islamic Economic System Factors of production in Islam The objectives of the distribution of wealth in Islam

($&"I%' II )IBA I"( P)%*IBI"I%' + &#A((IFI&A"I%'( Chapter $ & ' ( Chapter $ Chapter & Chapter ' Chapter ( !iba in the "ur#an !iba in %adith !iba and its types Commercial interest and usury Simple and compound interest

($&"I%' III I(#AMI& &%'")A&" ) 1* 11 12 Chapter ) Chapter 1* Chapter 11 Chapter 12 Islamic contract Sale +alid Sale Five ,hiyars

($&"I%' I, I(#AMI& M%D$( %F FI'A'&I'G 13 1 1$ 1& 1' 1( 1) Chapter 13 Chapter 1 Chapter 1$ Chapter 1& Chapter 1' Chapter 1( Chapter 1) -ushara,ah -udarabah .iminishin/ -ushara,ah -urabaha Salam Istisna# Istijrar

2* 21

Chapter 2* Chapter 21

Ijarah 01easin/2 Ijarah 3a I4tina

($&"I%' , BA'-I'G I' I(#AM 22 23 Chapter 22 Chapter 23 The features of a conventional 5an, -ushara,ah in ban, deposit

($&"I%' ,I APP#I&A"I%'( %F I(#AMI& FI'A'&I'G 2 2$ 2& 2' Chapter 2 Chapter 2$ Chapter 2& Chapter 2' 6roject financin/ 3or,in/ capital financin/ Import financin/ E7port financin/

($&"I%' ,II I(#AMI& I',$("M$'"( 2( 2) 3* Chapter 2( Chapter 2) Chapter 3* Securiti8ation Islamic Investment Funds The principle of limited liability

P)$FA&$

"oday the world economic system9 that is based on interest9 has resulted in concentratin/ the wealth in the hands of selected few creatin/ monopolies and widenin/ the /ap between the rich and the poor: In contrast Islam encoura/es circulation of wealth and re/ards its role as important to an economy as the flow of blood to our human body: ;ust as clottin/ of blood paraly8es human body9 concentration of wealth paraly8es economy: The fact is that today 1* richest men in the world have more wealth than ( poorest countries of the world: -illions are malnourished9 lac, access to safe water9 cannot read or write9 in short the 4uality of life has decayed and the /raph continues to /o down: Economic justice re4uires a viable economic system supported by an efficient ban,in/ system: Interest based ban,in/ has proved to be inefficient as it fails to e4uitably distribute wealth which is necessary for the well bein/ of man,ind: <n the other hand Islamic ban,in/ is efficient and ensures e4uitable distribution of wealth thus layin/ foundation for an inflation free economy and socially responsible ban,in/: 1ast few years have witnessed a dramatic increase in Islamic ban,in/ the world over: =t least two hundred Islamic ban,s and financial institutions have been set up: =ccordin/ to a research report9 the /rowth rate of these institutions is 1$> per annum: =t least two hundred billion ?S dollars are invested in this system: -any multinational ban,s have opened Islamic ban,in/ windows or subsidiary of Islamic ban,in/: The information on Islamic ban,in/ is also available in boo,s9 C.s and websites in the form of database9 multimedia directories9 and encyclopedias: <n the Shariah side9 there are a number of scholars on Shariah boards of Islamic ban,s who have compiled Fatwas9 resolutions and articles on various issues of Islamic ban,in/ and finance: In 6a,istan9 we have at least two very comprehensive reports on Islamic ban,in/ system produced by Islamic Ideolo/ical Council 1)(* and the Commission for Islami8ation of Economy in 1))2: Therefore Islamic ban,in/ is not a utopian idea: There is a need to develop insi/ht9 educate and train the ban,ers in the Islamic economic and ban,in/ system: 3ithout havin/

a deep understandin/ of the principles of Islamic ban,in/9 it is difficult to offer its products and services that conform to the true spirit of Islamic shariah: In ;uly 1))(9 I joined -ee8an 5an, as a Shariah Consultant with a vision to ma,e the ban, a model Islamic ban,: 3ith the encoura/ement of -r: Irfan Siddi4ui9 our Chief E7ecutive <fficer9 I carried a comprehensive trainin/ course for the staff of the ban,: The series of lectures included topics such as Islamic economic system9 !iba9 its prohibition and classifications9 Islamic contract9 Islamic modes of financin/ and their applications9 ban,in/ in Islam and Islamic Investments: +arious handouts related to the lectures were distributed to the participants of the course that were mainly ta,en from my thesis on -ushara,ah9 -udarabah and @itabAulA5uyoo 0rules of Islamic Sale relevant to Islamic ban,in/ and finance2: Some handouts were adapted from the boo,s and articles written by my respected father -aulana -ohammad Ta4i ?smani: <ur participants of the course were of the view that these handouts and notes from my lectures should be or/ani8ed9 edited and properly translated into En/lish to develop a proper Buide on Islamic 5an,in/: I am /rateful to all team members who helped me prepare this Buide and /ave me some very /ood su//estions: I am especially /rateful to our collea/ue -rs: Ceenat Cubairi for assistin/ me tirelessly in the translation wor,9 editin/ and compilation of this project: I am also /rateful to -r: Irfan Siddi4ui and -r: 6erve8 Said for not only participatin/ in these lectures actively from inception but also encoura/in/ us in the preparation of this Buide: 3e are =lhamdollillah runnin/ this course successfully at The Institute of 5usiness =dministration9 0I5=2 @arachi: 3e have already trained two batches and now the third batch is /ettin/ its formal education on Islamic ban,in/: In the end I pray to =llah Subhanahu 3a Tallah to accept our efforts in %is cause9 and /ive us the /uidance and ability for such humble efforts in future as well to free the world from !iba and revive Islamic values all over the world: =meen:

($&"I%' . I I'")%D/&"I%' "% I(#AMI& $&%'%MI& (0("$M

&ha!ter .1 Introduction %ne of the forms of capitalism9 which has been flourishin/ in nonAIslamic societies9 is the interestAbased investment: There are normally two participants in such transactions: <ne is the Investor who provides capital on loan and the other -ana/er who runs the business: The investor has no concern whether the business runs into profit or loss9 he automatically /ets an interest 0!iba2 in both outcomes at a fi7ed rate on his capital: Islam prohibits this ,ind of tradin/ and the %oly 6rophet enforced the rulin/9 not in the form of some moral teachin/9 but as the law of land: It is very important to ,now the definition and forbiddance of !iba and the injunctions relatin/ to its unlawfulness from different an/les: <n the one hand9 there are severe warnin/s of the "ur#an and Sunnah and on the other9 it has been ta,en today as an inte/ral part of the world economy: The desired liberation from it seems to be infested with difficulties: The problem is very detail oriented and has to be ta,en up in all possible aspects: First of all we have to deliberate into the correct interpretation of the "uranic verses on !iba and what has been said in authentic ahadith and then determine what !iba is in the terminolo/y of the "uran and Sunnah9 what transaction it covers9 what is the underlyin/ wisdom behind its prohibition and what sort of harm it brin/s to society: 3e will start from loo,in/ at the economic philosophy of Islam visADAvis interest: "he economic !hiloso!hy o2 Islam ,is.a.,is Interest The economic philosophy of Islam has no concept of !iba because accordin/ to Islam9 !iba is that curse in society9 which accumulates money around handful of

people9 and it results inevitably in creatin/ monopolies9 openin/ doors for selfishness9 /reed9 injustice and oppression: .eceit and fraud prospers in the world of trade and business: Islam9 on the other hand9 primarily encoura/es hi/hest moral ethics such as universal brotherhood9 collective welfare and prosperity9 social fairness and justice: .ue to this reason9 Islam renders !iba as absolutely haram and strictly prohibits all types of interest based transactions: The prohibition of !iba in the li/ht of economic philosophy of Islam can be e7plained with the cost of distribution of wealth in a society: Distribution o2 3ealth The distribution of wealth is one of the most important and most controversial subjects concernin/ the economic life of man9 which has /iven birth to /lobal revolutions in today#s world9 and has affected every sphere of human activity from international politics down to the private life of the individuals: For many a century now9 the 4uestion has been the center not only of fervent debates9 oral and written both9 but also of armed conflicts: The fact9 however9 is that whatever has been said on the subject without see,in/ /uidance from .ivine !evelation and relyin/ merely on human reason9 has had the sole and inevitable result of ma,in/ the confusion worse confounded: Islamic !ers!ecti4e o2 distribution o2 3ealth In this chapter9 we propose to state as clearly and briefly as possible the point of view of Islam in this matter9 such as we have been able to deduce from the %oly "ur#an9 the Sunnah and the writin/s of the EThin,ersE on distribution of wealth in the Islamic conte7t: 5efore e7plainin/ the point9 it seems to be imperative to clarify certain basic principles which one can derive from the "uran9 and which distin/uish the Islamic point of view in economics from nonAIslamic systems of economy: 1. "he im!ortance o2 the economic goals Fo doubt9 Islam is opposed to monasticism9 and views the economic activities of man 4uite lawful9 meritorious9 and some times even obli/atory and necessary: It approves of the economic pro/ress of man9 and considers lawful or ri/hteous livelihood an obli/ation of the secondary order: Fotwithstandin/ all this9 it is no less a truth that it does not consider Eeconomic activityE to be the basic problem of man9 nor does it view economic pro/ress as the beAall and endAall of human life: -any misunderstandin/s about Islamic economics arise just from confusion between the two facts of considerin/ economics as the ultimate /oal of life and considerin/ it as a necessity in order to have a prosperous life throu/h lawful means: Even common sense can suffice to show that the fact of an activity bein/ lawful or meritorious or necessary separate from it bein/ the ultimate /oal of human life and the center of thou/ht and action: It is9 therefore9 very essential to ma,e the distinction as clear as possible at the very outset: In fact9 the profound9 basic and farAreachin/ difference between Islamic economics and materialistic economics is just thisG According to materialistic economics5 E1ivelihood is the fundamental problem of man and economic developments are

the ultimate end of human lifeE While according to Islamic economics5 E1ivelihood may be necessary and indispensable9 but cannot be the true purpose of human lifeE So9 while we find in the %oly "uran the disapproval of monasticism and the order toG ESee, the benevolence of =llah:E =t the same time we find in the "uran to restrain from the temptations or delusion for worldly life: =nd all these thin/s in their totality have been desi/nated as E=dA.unyaE 0Ethe meanE2 A a term which9 in its literal sense9 does not have a pleasant connotation: =pparently one mi/ht feel that the two commands are contradictory9 but the fact is that accordin/ to the "uranic view9 all the means of livelihood are no more than just sta/es on man#s journey9 and his final destination lies beyond them: That destination is the sublimity of character and conduct9 and9 conse4uently9 the felicity of the other world: The real problem of man and the fundamental purpose of his life is the attainment of theseAtwo /oals: 5ut one cannot attain them without traversin/ the path of this world: So9 all those thin/s too which are necessary for his worldly life9 become essential for man: It comes to mean that so lon/ as the means of livelihood are bein/ used only as a path leadin/ towards the final destination9 they are the benevolence of =llah9 but as soon as man /ets lost in the ma8es of this pathway and allows himself to for/et his real destination9 the very same means of livelihood turn into an Etemptation9 or delusionE into a EtrialEG E=nd ,now that your possessions and your children are but a trialE 0 (G2(2: The %oly "uran has enunciated this basic truth very precisely in a brief verseG ESee, the other world by means of what =llah has bestowed upon youE 02(G''2: This principle has been stated in several other verses too: This attitude of the %oly "uran towards Ethe economic activityE of man and its two aspects would be very helpful in solvin/ problems of man of Islamic economics: 6. "he real nature o2 3ealth and !ro!erty The other fundamental principle9 which can help to solve the problem of the distribution of wealth9 is the concept of EwealthE in Islam: =ccordin/ to the illustration of the %oly "uran EwealthE in all its possible forms is a thin/ created by =llah9 and is9 in principle %is EpropertyE: =llah dele/ates the ri/ht of property over a thin/9 which accrues to man9 to %im: The %oly "uran e7plicitly saysG EBive to them from the property of =llah which %e has bestowed upon you:E 02 G332: =ccordin/ to "uran the reason for this philosophy is that all a man can do is invest his labor into the process of production: 5ut =llah alone9 and no one else9 can cause this endeavor to be fruitful and actually productive: -an can do no more than sow the seed in the soil9 but to brin/ out a seedlin/ from the seed and ma,e the seedlin/ /row into a tree is the wor, of some one other than man: The %oly

"uran saysG E%ave you considered what you tillH Is it you yourselves who ma,e it /row9 or is it 3e who ma,e it /rowHE =nd in another verseG E%ave they not seen that9 amon/ the thin/s made by our own hands: 3e have created cattle for them9 and thus they ac4uired the ri/ht of property over themHE 03&G'12 =ll these verses throw ample li/ht on the fundamental point that EwealthE9 no matter what its form9 is in principle Ethe property of =llahE9 and it is %e who has bestowed upon man the ri/ht to e7ploit it: So =llah has the ri/ht to demand that man should subordinate his e7ploitation of this wealth to the commandments of =llah: Thus9 man has the Eri/ht of propertyE over the thin/s he e7ploits9 but this ri/ht is not absolute or arbitrary or boundless9 it carries alon/ with it certain limitations and restrictions9 which have been imposed by the real owner of the #wealth#: 3e must spend it where %e has commanded it to be spent9 and refrain from spendin/ where %e has forbidden: This point has been clarified more e7plicitly in the followin/ verseG ESee, the other world by means of what =llah has bestowed upon you9 and do not be ne/li/ent about your share in this world: =nd do /ood as =llah has done /ood to you9 and do not see, to spread disorder on the earth:E 02(G''2 This verse fully e7plains the Islamic point of view on the 4uestion of property: It places the followin/ /uidelines before usG 718 3hatever wealth man does possess has been received from =llah: 768 -an has to use it in such a way that his ultimate purpose should be the other world 798 Since wealth has been received from =llah9 its e7ploitation by man must necessarily be subject to the commandment of =llah: 7:8 Fow9 the .ivine Commandment has ta,en two formsGA a8 =llah may command man to convey a specified production of E3ealthE to another man: This Commandment must be obeyed9 because =llah has done /ood to you9 so %e may command you to do /ood to others A Edo /ood as =llah has done /ood to youE: b8 %e may forbid you to use this EwealthE in a specified way: %e has every ri/ht to do so because %e cannot allow you to use EwealthE in a way which is li,ely to produce collective ills or to spread disorder on the earth: This is what distin/uishes the Islamic point of view on the 4uestion of property from the Capitalist and Socialist points of view both: Since the mental bac,/round

of Capitalism is9 theoretically or practically9 materialistic9 it /ives man the unconditional and absolute ri/ht of property over his wealth9 and allows him to employ it9 as he li,es: 5ut the %oly "uran has adopted an attitude of disapprobation towards this theory of property9 in 4uotin/ the words of the nation of %a8rat Shu#aib: They used to sayG E.oes your way of prayer command you that we should forsa,e what our forefathers worshipped9 or leave off doin/ what we li,e with our own propertyHE 011G('2 These people used to consider their property as really theirs or E<ur propertyE9 and hence the claim of Edoin/ what we li,eE was the necessary conclusion of their position: 5ut the %oly "uran has9 in the chapter E1i/htE substituted the term Ethe property of =llahE for the e7pression E<ur possessionsE9 and has thus struc, a blow at the very root of the Capitalistic way of thin,in/: 5ut at the same time9 by addin/ the 4ualification Ewhat =llah has bestowed upon youE9 it has cut the roots of Socialism as well9 which starts by denyin/ man#s ri/ht to private property: Similarly9 0Ethus they ac4uired the ri/ht property over themE2 A a verse in the Chapter ESeenE9 e7plicitly affirms the ri/ht to private property as a /ift from =llah: .ifference between Islam9 Capitalism and Socialism Fow we are in a position to draw clear boundary lines that separate Islam9 Capitalism and Socialism from one anotherG A Capitalism affirms an absolute and unconditional ri/ht to private property: Socialism totally denies the ri/ht to private property: 5ut the truth lies between these two e7tremes A that is Islam admits the ri/ht to private property but does not consider it to be an absolute and unconditional ri/ht that is bound to cause Edisorder on the earthE:

($&"I%' . ,II I(#AMI& I',$("M$'"

&ha!ter .6; I(#AMI& I',$("M$'" F/'D( The term #Islamic Investment Fund# means a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profit in strict conformity with the precepts of Islamic Shariah: The subscribers of the Fund may receive a document certifyin/ their subscription and entitlin/ them to the proArata profit actually earned by the Fund: These documents may be called #certificates#9 #units#9 #shares# or may be /iven any other name9 but their validity in terms of Shariah9 will always be subject to two basic conditionsG 1. Instead of a fi7ed return tied up with their face value9 they must carry a proA rata profit actually earned by the Fund: Therefore9 neither the principal nor a rate of profit 0tied up with the principal2 can be /uaranteed: The subscribers must enter into the fund with a clear understandin/ that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund: If the Fund earns hu/e profits9 the return on their subscription will increase to that proportion: %owever9 in case the Fund suffers loss9 they will have to share it also9 unless the loss is caused by the ne/li/ence or mismana/ement9 in which case the mana/ement9 and not the Fund9 will be liable to compensate it: 6. The amounts so pooled to/ether must be invested in a business acceptable to

Shariah: It means that not only the channels of investment9 but also the terms a/reed with them must conform to the Islamic principles: @eepin/ these basic re4uisites in view9 the Islamic Investment Funds may accommodate a variety of modes of investment9 which are discussed here briefly: $<uity Fund In an e4uity or mutual fund 0unit trust2 the amounts are invested in the shares of joint stoc, companies: The profits are mainly derived throu/h the capital /ains by purchasin/ the shares and sellin/ them when their prices are increased: 6rofits are also earned throu/h dividends distributed by the relevant companies: From this an/le9 dealin/ in e4uity shares can be acceptable in Shari#ah subject to the followin/ conditionsG 1. The main business of the company does not violate Shariah: Therefore9 it is not permissible to ac4uire the shares of the companies providin/ financial services on interest9 li,e conventional ban,s9 insurance companies9 or the companies involved in some other business not approved by the Shariah9 e/: companies manufacturin/9 sellin/ or offerin/ li4uor9 por,9 haram meat9 or involved in /amblin/9 ni/ht club activities9 porno/raphy9 prostitution9 or involved in the business of hire purchase or interest etc: 6. If the main business of these companies is halal9 li,e automobiles9 te7tile9 etc: but they deposit their surplus amounts in an interestAbearin/ account or borrow money on interest9 the share holder must e7press his disapproval a/ainst such dealin/s9 preferably by raisin/ his voice a/ainst such activities in the annual /eneral meetin/ of the company: 9. If some income from interestAbearin/ accounts or nonA%alal activities is included in the income of the company9 the proportion of such income should not e7ceed $> of the total income: If it e7ceeds $>9 it is not permissible to invest in that company: %owever9 if it does not e7ceed $>9 it must be /iven in charity9 and must not be retained by him: For e7ample9 if $> of the whole income of a company has come out of interestAbearin/ deposits9 $> of the dividend must be /iven in charity: -oreover9 the company#s total short term and lon/ term investment in nonApermissible business should not e7ceed 3*> of the company#s total mar,et capitali8ation:

It may be 4uestioned E3hat is the basic rationale of this limitation of $>HE Infact9 there is no specific basis derived from the %oly "uran or Sunnah for the $> rule of non halal 0impermissible2 income: %owever9 this is only the collective outcome 0consensus2 or ijtihad of contemporary Shariah Scholars: To e7plain this consensus of their rulin/9 we shall have to /o bac, to the ori/in or basis of company on Shariah perspective: =s mentioned in the boo,s and research papers of Islamic jurists9 companies come under the rulin/ of Shir,atul =inan: 5ut if the rule of partnership is truly applied in a company9 there is no possibility for any ,ind of impermissible activity or income: 5ecause every shareholder of a company is a shari, 0partner2 of the company9 and every shari,9 accordin/ to the Islamic jurisprudence9 is an a/ent of the other partners in matters of joint business:

Therefore9 the mere purchase of a share of a company embodies an authori8ation from the shareholder to the company to carry on its business in whatever manner the mana/ement deems fit: If it is ,nown to the shareholder that the company is involved in an unAIslamic transaction9 and he continues to hold the shares of that company9 it means that he has authori8ed the mana/ement to proceed with that unAIslamic transaction: In this case9 he will not only be responsible for /ivin/ his consent to an unAIslamic transaction9 but that transaction will also be ri/htfully attributed to himself9 because the mana/ement of the company is wor,in/ under his tacit authori8ation: %owever9 a lar/e number of Shariah Scholars say that ;oint Stoc, Company is basically different from a simple partnership: In partnership9 all the policy decisions are ta,en throu/h the consensus of all partners9 and each one of them has a veto power with re/ard to the policy of the business: Therefore9 all the actions of a partnership are ri/htfully attributed to each partner: Conversely9 the majority ta,es the policy decisions in a joint stoc, company: 5ein/ composed of a lar/e number of shareholders9 a company cannot /ive a veto power to each shareholder: The opinions of individual shareholders can be overruled by a majority decision: Therefore9 each and every action ta,en by the company cannot be attributed to every shareholder in his individual capacity: If a shareholder raises an objection a/ainst a particular transaction in an =nnual Beneral -eetin/9 but his objection is overruled by the majority9 it will not be fair to conclude that he has /iven his consent to that transaction in his individual capacity9 especially when he intends to refrain from the income resultin/ from that transaction: Therefore9 if a company is en/a/ed in a halal 0permissible2 business9 but also ,eeps its surplus money in an interestAbearin/ account9 wherefrom a small incidental income of interest is received9 it does not render all the business of the company unlawful: Fow9 if a person ac4uires the shares of such a company with clear intention that he will oppose this incidental transaction also9 and will not use that proportion of the dividend for his own benefit9 then it cannot be said that he has approved the transaction of interest and hence that transaction should not be attributed to him: In short9 the matter of traditional partnership is different from the partnership of company in this aspect: Therefore if a very small amount of income is earned throu/h these means despite of his disapproval9 then his trade in shares would be permissible with the condition that9 he shall have to purify that proportion of income by /ivin/ it to charity: Fow a 4uestion could be raised as to what e7tent or what limit that income would be for/one: .efinitely9 this matter could not be left on decisions or opinions of lay men9 therefore9 it was resolved throu/h the consensus of proficient Shariah Scholars that the limit of impermissible income should not e7ceed $> of the total income: :. The levera/e or debt to e4uity ratio of the company should not e7ceed 3*>: To e7plain the rationale behind this condition9 it should be ,ept in mind that9 such companies sometimes borrow money from financial institutions that are mostly based on interest: %ere a/ain the aforementioned principle applies i:e: if a shareholder is not personally a/reeable to such borrowin/s9 but has been overruled by the majority9 these borrowin/ transactions cannot be attributed to

him: -oreover9 even thou/h accordin/ to the principles of Islamic jurisprudence9 borrowin/ on interest is a /rave and sinful act9 for which the borrower is responsible in the %ereafterI but9 this sinful act does not render the whole business of the borrower as %aram 0impermissible2: It is e7plained in the conventional boo,s of Islamic jurisprudence that the contract of loan is amon/ those9 that are called E?4ood Bhair -uawadhaE 0Fon compensatory contracts29 therefore9 no void condition such as condition of interest can be stipulated: %owever9 if such a condition has been stipulated9 the condition itself is void9 but it will not invalidate the contract: Since9 the contract remains valid despite of void condition9 the borrowed amount would be permissible to use and it would be reco/ni8ed as owned by the borrower: %ence9 anythin/ purchased in e7chan/e for that money would not be unlawful: %owever9 the responsibility of committin/ the sinful act of borrowin/ on interest rests on the person who willfully indul/es in such a transaction but this does not render his entire business as unlawful: 5ut it should also be remembered that the e7tent of investment in shares of companies9 that involve borrowin/ should be limited: Can this limit be the same as the $> limit that is applied to interest incomeH Fo9 because in this case this activity does not affect the income of the company9 it is less severe than interest based income9 therefore9 Shariah scholars and Islamic jurists e7tended the limit 0from $> which is limit of interestJimpermissible income2 to 3*>: The basis of 3*> is that the 3*> is less than one third 01J3rd2 of the total asset of the company and one third has been considered abundant by the followin/ %adith of the %oly prophet 0S=32 E<ne third is bi/ or abundantE 0Tirmi8y2: %ence whatever is less than one third9 would be insi/nificant: Therefore to avoid the majority or abundance specified in the hadith9 such limit is fi7ed at less than one third of the total asset of the company: =. The shares of a company are ne/otiable only if the company owns some illi4uid assets: If all the assets of a company are in li4uid form9 i:e: in the form of money they cannot be purchased or sold e7cept at par value9 because in this case the share represents money only and the money cannot be traded in e7cept at par: 3hat should be the e7act proportion of illi4uid assets of a company for warrantin/ the ne/otiability of its sharesH The contemporary scholars have different views about this 4uestion: Some scholars are of the view that the ratio of illi4uid assets must be $1> in the least: They ar/ue that if such assets are less than $*>9 then most of the assets are in li4uid form9 and therefore9 all its assets should be treated as li4uid on the basis of the juristic principleG The majority deserves to be treated as the whole thin/: Some other scholars are of the view that even if the illi4uid asset of a company is 33>9 its shares can be treated as ne/otiable: The basis of this view is a wellA ,nown %adith that means E<ne third is bi/ or abundantE 0Tirmi8y2: They say that accordin/ to the %adith oneAthird illi4uid assets will be considered as sufficient or abundant for this purpose: The third view 0of the scholars of the sub continent of 6a,istan and India2 is based on the %anafi jurisprudence: The principle of the %anafi School is that whenever an asset is a combination of li4uid and illi4uid assets9 it can be ne/otiable irrespective

of the proportion of its li4uid part: %owever9 this principle is subject to two conditionsG 1. The illi4uid part of the combination must not be in insi/nificant 4uantity: It means that it should be in a considerable proportion: 6. The price of the combination should be more than the value of the li4uid amount contained therein: For e7ample9 if a share of 1** dollars represents '$ dollars9 plus some fi7ed assets9 the price of the share must be more than '$ dollars: In this case9 if the price of the share is fi7ed at 1*$9 it will mean that '$ dollars are in e7chan/e of '$ dollars owned by the share and the balance of 3* dollars is in e7chan/e of the fi7ed assets: Conversely9 if the price of that share is fi7ed at '* dollars9 it will not be allowed9 because the '$ dollars owned by the share are in this case a/ainst an amount which is less than '$: This ,ind of e7chan/e falls within the definition of #riba# and is not allowed: Similarly9 if the price of the share9 in the above e7ample9 is fi7ed at '$ dollars9 it will not be permissible9 because if we presume that '$ dollars of the price are a/ainst '$ dollars owned by the share9 no part of the price can be attributed to the fi7ed assets owned by the share: Therefore9 some part of the price 0'$ dollars2 must be presumed to be in e7chan/e of the fi7ed assets of the share: In this case9 the remainin/ amount will not be ade4uate for bein/ the price of '$ dollars: For this reason the transaction will not be valid: %owever9 in practical terms9 this is merely a theoretical possibility9 because it is difficult to ima/ine a situation where the price of a share /oes lower than its li4uid assets: =mon/ the three different views mentioned above9 the most conservative view is the first one: Therefore9 nowadays that has been adopted by the majority of Shariah boards of Islamic mutual funds or in screenin/ of the Islamic stoc,s methodolo/y: Subject to aforesaid conditions9 the purchase and sale of shares is permissible in Shariah: =n Islamic E4uity Fund can be established on this basis: The subscribers to the Fund will be treated in shari#ah as partners inter se: =ll the subscription amounts will form a joint pool and will be invested in purchasin/ the shares of different companies: The profits can accrue either throu/h dividends distributed by the relevant companies or throu/h the appreciation in the prices of the shares: In the first case i:e: where the profits are earned throu/h dividends9 a certain proportion of the dividend9 which corresponds to the proportion of interest earned by the company9 must be /iven in charity: The contemporary Islamic Funds have termed this process as #purification#: Some scholars are of the view that even in the case of capital /ains9 the process of #purification# is necessary9 because the mar,et price of the share may reflect an element of interest included in the assets of the company: The method of purification adopted by .ow ;ones Islamic mar,et Inde7 and Islmi4stoc,s:com are in favor of this view: =s we have discussed above for the ne/otiability of the share9 it is essential for the share or securities that they represent more than $$> illi4uid assets: If a mutual fund has 1*> cash and )*> shares9 we shall have to see how much of these shares represent fi7ed assets: Fi7ed assets include land9 e4uipment9 machinery

and leased assets: If these shares represent more than $$> of fi7ed or illi4uid assets9 such shares or -ushar,ah certificates of mutual fund can be ne/otiated at other than par value as well: Sale of option short sale9 future sale and forward sale where some principles of Shariah are lac,in/ are not permissible: Management o2 the 2und5 The mana/ement of the fund may be carried out in two alternative ways: The mana/ers of the Fund may act as mudaribs for the subscribers: In this case9 a certain percenta/e of the annual profit accrued to the Fund may be determined as the reward of the mana/ement9 meanin/ thereby that the mana/ement will /et its share only if the fund has earned some profit: If there is no profit in the fund9 the mana/ement will deserve nothin/: The share of the mana/ement will increase with the increase of profits: The second option for the mana/ement is to act as an a/ent for the subscribers: In this case9 the mana/ement may be /iven a preAa/reed fee for its services: This fee may be fi7ed in lump sum or as a monthly or annual remuneration: =ccordin/ to the contemporary Shariah scholars9 the fee can also be based on a percenta/e of the net asset value of the fund: For e7ample9 it may be a/reed that the mana/ement will /et 2> or 3> of the net asset value of the fund at the end of every financial year: %owever9 it is necessary in Shariah to determine any one of the aforesaid methods before the launch of the fund: The practical way for this would be to disclose in the prospectus of the fund the basis on which the fees of the mana/ement will be paid: It is /enerally presumed that whoever subscribes to the fund a/rees with the terms mentioned in the prospectus: Therefore9 the manner of payin/ the mana/ement will be ta,en as a/reed upon by all the subscribers:

I>arah Fund =nother type of Islamic Fund may be an Ijarah fund: Ijarah means leasin/ the detailed rules of which have already been discussed in chapter 23 this boo,: In this fund the subscription amounts are used to purchase assets li,e real estate9 motor vehicles or other e4uipment for the purpose of leasin/ them out to their ultimate users: The ownership of these assets remains with the Fund and the rentals are char/ed from the users: These rentals are the source of income for the fund9 which is distributed pro rata to the subscribers: Each subscriber is /iven a certificate to evidence his proportionate ownership in the leased assets and to ensure his entitlement to the pro rata share in the income: These certificates may preferably be called #su,u,# A a term reco/ni8ed in the traditional Islamic jurisprudence: Since these su,u, represent the pro rata ownership of their holders in the tan/ible assets of the fund9 and not the li4uid amounts or debts9 they are fully ne/otiable and can be sold and purchased in the secondary mar,et: =nyone who purchases these su,u, replaces the sellers in the pro rata ownership of the relevant assets and all the ri/hts and obli/ations of the ori/inal subscriber are passed on to him: The price of these su,u, certificates will be determined on the basis of mar,et forces9 and are normally based on their profitability:

%owever9 it should be ,ept in mind that the contracts of leasin/ must conform to the principles of Shariah which substantially differ from the terms and conditions used in the a/reements of conventional financial leases: The points of difference are e7plained in detail in the third chapter of this boo,: %owever9 some basic principles are summari8ed hereG 1. The leased assets must have some usufruct9 and the rental must be char/ed only from that point of time when the usufruct is handed over to the lessee: 6. The leased assets must be of a nature that their halal 0permissible2 use is possible: 9. The lessor must underta,e all the responsibilities conse4uent to the ownership of the assets: :. The rental must be fi7ed and ,nown to the parties ri/ht at the be/innin/ of the contract: In this type of the fund9 the mana/ement should act as an a/ent of the subscribers and should be paid a fee for its services: The mana/ement fee may be a fi7ed amount or a proportion of the rentals received: -ost of the -uslim jurists are of the view that such a fund cannot be created on the basis of -udarabah9 because -udarabah9 accordin/ to them9 is restricted to the sale of commodities and does not e7tend to the business of services and leases: %owever9 in the %anbali School9 -udarabah can be effected in services and leases also: This view has been preferred by a number of contemporary scholars: &ommodity Fund =nother possible type of Islamic Funds may be a commodity fund: In the fund of this type the subscription amounts are used in purchasin/ different commodities for the purpose of their resale: The profits /enerated by the sales are the income of the fund9 which is distributed pro rata amon/ the subscribers: In order to ma,e this fund acceptable to Shariah9 it is necessary that all the rules /overnin/ the transactions of sale are fully complied with: For e7ampleG 1. The seller must own the commodity at the time of sale9 because short sales in which a person sells a commodity before he owns it are not allowed in Shariah: 6. Forward sales are not allowed e7cept in the case of Salam and Istisna 0For their full details9 see chapters 1' K 2* respectively2: 9. The commodities must be halal: Therefore9 it is not allowed to deal in wines9 por, or other prohibited materials: :. The seller must have physical or constructive possession over the commodity he wants to sell: 0Constructive possession includes any act by which the ris, of the commodity is passed on to the purchaser2: =. The price of the commodity must be fi7ed and ,nown to the parties: =ny price9 which is uncertain or is tied up with an uncertain event9 renders the sale invalid: In view of the above and similar other conditions9 more fully described in the previous chapters of this boo,9 it may easily be understood that the transactions prevalent in the contemporary commodity mar,ets9 specially in the futures commodity mar,ets do not comply with these conditions: Therefore9 an Islamic Commodity Fund cannot enter into such transactions: %owever9 if there are /enuine commodity transactions observin/ all the re4uirements of Shariah9

includin/ the above conditions9 a commodity fund may well be established: The units of such a fund can also be traded in with the condition that the portfolio owns some commodities at all times: Murabaha Fund #-urabaha# is a specific ,ind of sale where the commodities are sold on a costAplus basis: The contemporary Islamic ban,s and financial institutions as a mode of financin/ have adopted this ,ind of sale: They purchase the commodity for the benefit of their clients9 then sell it to them on the basis of deferred payment at an a/reed mar/in of profit added to the cost: If a fund is created to underta,e this ,ind of sale9 it should be a closedAend fund and its units cannot be ne/otiable in a secondary mar,et: The reason is that in the case of murabaha9 as underta,en by the present financial institutions9 the commodities are sold to the clients immediately after their purchase from the ori/inal supplier9 while the price bein/ on deferred payment basis becomes a debt payable by the client: Therefore9 the portfolio of murabaha does not own any tan/ible assets: It comprises either cash or the receivable debts9 Therefore9 the units of the fund represent either the money or the receivable debts9 and both these thin/s are not ne/otiable9 as e7plained earlier: If they are e7chan/ed for money9 it must be at par value: Bai.Al.Dain %ere comes the 4uestion whether or not baiAalAdain is allowed in Shariah: .ain means #debt# and 5ai means sale: 5aiAalAdain9 therefore9 connotes the sale of debt: If a person has a debt receivable from a person and he wants to sell it at a discount9 as normally happens in the bills of e7chan/e9 it is termed in Shariah as 5aiAalAdain: The traditional -uslim jurists 0fu4ah2 are unanimous on the point that baiAalAdain with discount is not allowed in Shariah: The overwhelmin/ majority of the contemporary -uslim scholars are of the same view: %owever9 some scholars of -alaysia have allowed this ,ind of sale: They normally refer to the rulin/ of Shafai school wherein it is held that the sale of debt is allowed9 but they did not pay attention to the fact that the Shafai jurists have allowed it only in a case where a debt is sold at its par value: In fact9 the prohibition of baiAalAdain is a lo/ical conse4uence of the prohibition of #riba# or interest: = #debt# receivable in monetary terms corresponds to money9 and every transaction where money is e7chan/ed for the same denomination of money9 the price must be at par value: =ny increase or decrease from one side is tantamount to #riba# and can never be allowed in Shariah: Some scholars ar/ue that the permissibility of baiAalAdain is restricted to a case where the debt is created throu/h the sale of a commodity: In this case9 they say9 the debt represents the sold commodity and its sale may be ta,en as the sale of a commodity: The ar/ument9 however9 is devoid of force: For9 once the commodity is sold9 its ownership is passed on to the purchaser and it is no lon/er owned by the seller: 3hat the seller owns is nothin/ other than money: Therefore if he sells the debt9 it is no more than the sale of money and it cannot be termed by any stretch of ima/ination as the sale of the commodity: That is why the overwhelmin/ majority of the contemporary scholars have not accepted this view: The Islamic Fi4h =cademy of ;eddah9 which is the lar/est

representative body of the Shariah scholars and has the representation of all the -uslim countries9 includin/ -alaysia9 has approved the prohibition of baiAalAdain unanimously without a sin/le dissent: Mi?ed Fund =nother type of Islamic Fund may be of a nature where the subscription amounts are employed in different types of investments9 li,e e4uities9 leasin/9 commodities etc: This may be called a -i7ed Islamic Fund: In this case if the tan/ible assets of the Fund are more than $1> while the li4uidity and debts are less than $*> the units of the fund may be ne/otiable: %owever9 if the proportion of li4uidity and debts e7ceeds $*>9 its units cannot be traded accordin/ to the majority of the contemporary scholars: In this case the Fund must be a closedAend Fund:

($&"I%' . I FA&"%)( %F P)%D/&"I%' I' I(#AM

&ha!ter .6 "*$ &API"A#I(" ,I$W In order to understand the Islamic point of view fully9 it would be better to have a loo, at the system of the distribution of wealth that is obtained under the capitalist economy: This theory can be briefly stated li,e thisG wealth should be distributed only over those who have ta,en a part in producin/ it9 and who are described in the terminolo/y of economics as the factors of production: =ccordin/ to the Capitalistic economics9 these factors are fourGA 1. CapitalG which has been defined as Ethe produced means of productionE A that is to say9 a commodity which has already under/one one process of human production9 and is a/ain bein/ used as a means of another process of production: 6. 1abourG that is to say9 any e7ertion on the part of man: 9. 1andG which has been defined as ##natural resources## 0that is to say9 those thin/s which are bein/ used as means of production without havin/ previously under/one any process of human production2:

: Entrepreneur9 or <r/ani8ationG The fourth factor that brin/s to/ether the other three factors9 e7ploits them and bears the ris, of profit and loss in production: ?nder the Capitalist economy9 the wealth produced by the coAoperation of these four factors is distributed over these very four factors as followsG one share is /iven to Capital in the shape of interest9 the second share to 1abor in the shape of wa/es9 the third share to 1and in the shape of rent 0or revenue29 and the fourth share 0or the residue2 is reserved for the Entrepreneur in the shape of profit: T%E S<CI=1IST +IE3 <n the other hand under the Socialist economy9 capital and land instead of bein/ private property9 are considered to be national or collective property: So9 the 4uestion of interest or rent 0or revenue2 does not arise at all under the philosophy of this system: ?nder the Socialist system9 the entrepreneur too is not an individual but the state itself: So profit as well is out of the 4uestion here A at least in theory: Fow9 there remains only one factor namely labor: =nd labor alone is considered to have a ri/ht to wealth under the Socialist system9 which it /ets in the shape of E3a/esE: T%E IS1=-IC +IE3 The Islamic system of the distribution wealth is different from both: From the Islamic point of view9 there are two ,inds of people who have a ri/ht to wealthG 1: Those who have a primary ri/ht that is to say9 those who have a ri/ht to wealth directly in conse4uence of participation in the process of production: In other words9 it is those very Efactors of productionE which have ta,en a part in the process of producin/ some ,ind of wealth: 2: Those who have a secondary ri/ht9 that is to say9 those who have not ta,en a direct part in the process of production9 but it has been enjoined upon the producers to ma,e them coAsharers in their wealth: 1et it be made clear that we are here concerned with the basic philosophy or theory of socialism9 and not with its present practice9 for the actual practice in socialist countries is 4uite different from this theory: IS1=-IC T%E<!L Those who have a primary ri/ht to wealth =s indicated above9 the primary ri/ht to wealth is enjoyed by Ethe factors of production:E 5ut Ethe factors of production## are not specified or technically defined9 nor is their share in wealth determined in e7actly the same way as is done under the Capitalist system of economy: In fact9 the two ways are 4uite distinct: From the Islamic point of view9 the actual factors of production are three instead of bein/ fourGA 1: CapitalG That is9 those means of production which cannot be used in the process of production until and unless durin/ this process they are either wholly consumed or completely altered in form9 and which9 therefore9 cannot be let or leased 0for e7ample9 li4uid money or food stuff etc:2 2: 1andG That is9 those means of production9 which are so9 used in the process of production that their ori/inal and e7ternal form remains unaltered9 and which can hence be let or leased 0for e7ample9 lands9 houses9 machines etc:2:

3: 1aborG That is9 human e7ertion9 whether of the bodily or/ans or of the mind or of the heart: This e7ertion thus includes or/ani8ation and plannin/ too: 3hatever EwealthE is produced by the combined action of these three factors would be primarily distributed over these three in this mannerG one share of it would /o to Capital in the form of profit 0and not in the form of interest2I the second share would /o to 1and in the form of rent9 and the third share would be /iven to 1abor in the form of wa/es: Socialism and Islam =s we said9 the Islamic system of the distribution of wealth is different from Socialism and Capitalism both: The distinction between the Islamic economy and the Socialist economy is 4uite clear: Since Socialism does not admit the idea of private property9 wealth under the Socialist system is distributed only in the form of wa/es: <n the contrary9 accordin/ to the Islamic principles of the distribution of wealth9 which we have outlined above9 all the thin/s that e7ist in the universe are in principle the property of =llah %imself: Then9 the lar/er part of these thin/s is that which %e has /iven e4ually to all men as a common trust: It includes fire9 water9 earth9 air9 li/ht9 wild /rass9 huntin/9 fishin/9 mines9 unAowned and unA cultivated lands etc:9 which are not the property of any individual9 but a common trust: Every human bein/ is the beneficiary of this trust9 and is e4ually entitled to its use: <n the other hand9 there are certain thin/s where the ri/ht to private property must be reco/ni8ed if only for the simple reason that without such a reco/nition it would not be possible to establish the practicable and natural system of economy to which we have alluded while discussin/ the first object of the distribution of wealth: If the Socialist system is adopted and all capital and all land are totally surrendered to the state9 the ultimate result can only be thisG we would be li4uidatin/ a lar/e number of smaller Capitalists9 and puttin/ the hu/e resources of national wealth at the disposal of a sin/le bi/ Capitalist A the state9 which can deal with this reservoir of wealth 4uite arbitrarily9 thus9 leads to the worst form of the concentration of wealth: -oreover9 it produces another /reat evil: Since Socialism deprives human labor of its natural ri/ht to individual choice and control9 compulsion and force becomes indispensable in order to ma,e use of this labor9 which has a detrimental effect on its efficiency as well as on its mental health: =ll this /oes to show that the Socialist system injures two out of the three objects of the Islamic theory of the distribution of wealth namely9 the establishment of a natural system of economy9 and securin/ for everyone what ri/htfully belon/s to him: These bein/ the manifold evils inherent in the unnatural system of the Socialist economy9 Islam has not chosen to put an end to private property alto/ether9 but has rather reco/ni8ed the ri/ht to private property in those thin/s of the physical universe which are not held as a common trust: Islam has9 thus9 /iven a separate status to Capital and to 1and9 and has at the same time made use of the natural law of Esupply and demandE too in a healthy form: %ence Islam does not distribute wealth merely in the form of wa/es9 as does Socialism9 but in the form of profit and rent as well: 5ut9 alon/ with it9 Islam has also put an interdiction on the cate/ory of# #Interest##9 and prescribed a lon/ list of the people who have a secondary ri/ht to wealth: It has thus eradicated the /reat evil of the concentration of wealth9 which is an essential characteristic inherent in Capitalism9

an evil9 which Socialism claims to remedy: This is the fundamental distinction of the Islamic view of the distribution of wealth9 which sets it apart from Socialism: Islam and Capitalism It is e4ually essential to understand fully the difference that e7ists between the Islamic view of the distribution of wealth and the Capitalist point of view: This distinction bein/ rather subtle and complicated9 we will have to discuss it in /reater detail: 5y comparin/ and contrastin/ the brief outlines of the Islamic and the Capitalist systems of the distribution of wealth9 we arrive at the followin/ differences between the twoGA 1: The entrepreneur9 as a re/ular factor9 has been e7cluded from the list of the factors of production9 and only three factors have been reco/ni8ed9 instead of four: 5ut this does not imply that the very e7istence of the entrepreneur has been denied: 3hat it does mean is just that the entrepreneur is not an independent factor9 but is included in any one of the three factors: 2: It is not EinterestE but EprofitE that has been considered as the ErewardE for Capital: 3: The factors of production have been defined in a different manner: Capitalism defines# #Capital## as Ethe produced means of production:E %ence9 Capital is supposed to include machinery etc: as well9 beside money and foodstuff: 5ut the definition of ECapitalE that we have presented while discussin/ the Islamic view of the distribution of wealth9 includes only those thin/s which cannot be utili8ed without their bein/ wholly consumed9 or9 in other words9 which cannot be let or leased A for e7ample9 money: -achinery is to be e7cluded from ECapitalE9 accordin/ to this definition: : In the same way9 Eland## has been defined in a more /eneral way: That is to say9 all those thin/s have been brou/ht under this head9 which do not have to be wholly consumed in order to be used: %ence9 machinery too falls under this cate/ory: $: The definition of 1abor too has been /enerali8ed so as to include mental labor and plannin/: 1et us now /o into the details of this discussion: ?nder the Capitalist system9 the most important characteristic of the entrepreneur 0which entitles him to EprofitE2 is supposed to be that he bears the ris, of profit and loss in his business: That is to say9 from the Capitalist point of view9 Eprofit## is a ,ind of reward for his coura/e to enter into a commercial venture where he alone will have to bear the burden of a possible loss9 while the other three factors of production will remain immune from loss9 for Capital would /et the stipulated interest9 1and the stipulated rent and 1abor the stipulated wa/es: <n the other hand9 the Islamic point of view insists that the ability to ta,e the ris, of a loss should9 in reality9 inherent with Capital itself9 and that no other factor

should be made to bear the burden of this ris,: Conse4uently9 the Capitalist9 in so far as he ta,es the ris,9 is an entrepreneur too9 and the man who is an entrepreneur is a Capitalist as well: Fow9 there are three ways in which Capital can be invested in a business ventureGA 1: 6rivate businessG The man who invests Capital may himself run the business without the help of any partners or shareholders: In this case the return which he /ets may be called EprofitE from the le/al or popular point of viewI but9 in economic terms9 this ErewardE would be made up of 012 EprofitE9 in as much as Capital has been invested9 and 022 Ewa/esE9 as earnin/s of mana/ement: 2: 6artnershipG The second form of investment is that several persons may jointly invest capital9 jointly mana/e the business and jointly bear the ris, of profit and loss: In the terminolo/y of the Fi4h9 such a venture is called EShir,atAulA=4dE or 6artnership in contract: =ccordin/ to the terminolo/y of economics9 in this case too all the partners will be entitled to EprofitE in so far as they have invested capital and also entitled to Ewa/esE in so far as they have ta,en part in the mana/ement of the business: Islam has sanctioned this form of business or/ani8ation too: This form was 4uite common before the time of the %oly 6rophet until he permitted people to retain it9 and since then there has been a consensus of opinion on its permissibility: 3: CoAoperation of Capital and <r/ani8ation 0-udarabah2G The third form of investment is that one person may invest Capital while another may mana/e the business9 and each may have a share in the profit: In the terminolo/y of Fi4h9 it is called E-udarabahE: =ccordin/ to the terminolo/y of economics9 in this case9 the person who invests his capital 0E!abbAulA-alE2 will /et his share in the form of EprofitE9 while the person who has actually mana/ed the business will /et it in the form of Ewa/esE: 5ut if the person who has been mana/in/ the business 0E-udaribE2 eventually suffers a loss in the business9 his labor will /o wasted just as the capital of the investor would /o wasted: This form of business or/ani8ation too is permissible in Islam: The %oly 6rophet himself has made such an a/reement with %a8rat @hadijah before their marria/e: Since then there has been a complete consensus of opinion on this too amon/ the jurists of Islam: -oney 1endin/ 5usiness The fourth form of investin/ Capital9 which has ever since been practiced in nonA Islamic societies is the moneyAlendin/ business: That is to say9 one person lends out capital in the form of a debt9 and a second person puts in his laborI if there is a loss it has to be borne by labor9 but9 profit or loss9 interest does accrue to Capital in any case: Islam has interdicted this form of investment: E<9 believers9 fear =llah9 and /ive up what is still due to you from the interest 0usury29 if you are true believers: 02G2'(2

The %oly "uran also saysG EIf you do not do so9 then ta,e notice of war from =llah and %is -essen/er: 5ut9 if you repent9 you can have your principal: Feither should you commit injustice nor should you be subjected to it:E 02G2')2 In these two verses9 the phrases ##what is still due to you from the interestE and Eyou shall have the principalE ma,es it 4uite e7plicit that =llah does not condone the least 4uantity of interest9 that E/ivin/ up the interestE implies that the creditor should /et bac, only the principal: Thus9 one can clearly see that Islam considers every rate of interest 0e7cept 8ero>2 to be totally inadmissible: In the preAIslamic period9 certain =rab tribes used to carry on their trade with the help of money borrowed on the basis of interest from other tribes: Islam puts an end to such transactions alto/ether: Ibn ;uraij saysG EIn the preAIslamic period9 the tribe of 5anu =mr bin =uf used to ta,e interest from the tribe of 5anuAalA-u/hira9 and the 5anuAalA-u/hira used to pay this interest: 3hen Islam came9 the later owed a considerable amount of money to the formerE: =nd further onG ##The 5anuAalA-u/hira used to pay interest to the 5anu Tha4ifE 1et it be understood that the position of every =rab tribe was li,e that of a joint company9 carryin/ on trade with the joint Capital of its individual members: So9 when a tribe would borrow collectively from another tribe9 it would usually be for the purposes of trade: The %oly "uran prohibited even this practice: Thus9 under the Islamic system of economy9 if a man wants to lend his money to a businessman for bein/ invested in business9 he will have first to decide clearly whether he wishes to lend this money in order to have a share in the profit9 or simply to help the businessman with his money: If he means to earn the ri/ht to a share in the profit by lendin/ his money9 he will have to adopt the mode of EpartnershipE or that of ECoAoperation## 0-udarabah2: That is to say9 he too will have to bear the responsibility of profit or loss A if there is eventually a profit in the enterprise9 he shall have a share in the profitI but if there is a loss9 he shall have to share the loss too: <n the other hand9 if he is lendin/ this money to another person by way of help9 then he must necessarily re/ard this help as no more than help9 and must for/o all demand for a EprofitE: %e will be entitled to /et bac, only as much money as he has lent out: Islam considers it not only unjust but also meanin/less that he should fi7 a rate of EinterestE and thus place all the burden of a possible loss on the debtor: This discussion ma,es it clear that Islam places the responsibility of ##ta,in/ the ris, of loss## on Capital: The man who invests capital in a ris,Abearin/ business enterprise shall have to ta,e this ris,:

($&"I%' . I "*$ %B@$&"I,$( %F "*$ DI(")IB/"I%' %F W$A#"* I' I(#AM

&ha!ter .9 If we consider the injunctions of the %oly "uran9 it would appear that the system for the distribution of wealth laid down by Islam envisa/es three objectsG a8 The establishment of a practicable system of economyG A The first object of the distribution of wealth is that it would be the means of establishin/ in the world a system of economy which is natural and practicable9 and which9 without usin/ any compulsion or force9 allows every individual to

function in a normal way accordin/ to his ability9 his aptitude9 his own choice and li,in/9 so that his activities may be more fruitful9 healthy and useful: =nd this cannot be secured without a healthy relationship between the employer and the employee9 and without the proper utili8ation of the natural force of supply and demand: That is why Islam does admit these factors: = comprehensive indication of this principle is to be found in the followin/ verseG A The condition of Eproper utili8ationE has been assumed because it is possible to ma,e an improper use of forces9 and it has been the case under Capitalism: Islam has struc, at the very root of such an improper use and has thus eradicated the unbridled e7ploitation of private property: ##3e have distributed their livelihood amon/ them in worldly life9 and have raised some above others in the matter of social de/rees9 so that some of them may utili8e the services of others in their wor,:E 0 3G322 b8 Enablin/ every one to /et what is ri/htfully due to himGA The second object of the Islamic system of the distribution of wealth is to enable everyone to /et what is ri/htfully his: 5ut9 in Islam9 the concept and criteria of this ri/ht is somewhat different from what it is in other systems of economy: ?nder materialistic economic systems9 there is only one way of ac4uirin/ the ri/ht to ##wealth##9 and that is a direct participation in the process of production: In other words9 only those factors that have ta,en a direct part in producin/ wealth are supposed to be entitled to a share in EwealthE9 and no one else: <n the contrary9 the basic principle of Islam in this respect is that EwealthE is9 in principle the property9 of =llah %imself and %e alone can lay down the rules as to how it is to be used: So accordin/ to the Islamic point of view9 not only those who have directly participated in the production of wealth but those to whom =llah has made it obli/atory upon others to help9 are the le/itimate sharers in wealth: %ence9 the poor9 the helpless9 the needy9 the paupers and the destitutes A they too have a ri/ht to wealth: For =llah has made it obli/atory on all those producers of wealth amon/ whom wealth is in the first place distributed that they should pass on to them some part of their wealth: =nd the %oly "uran ma,es it 4uite e7plicit that in doin/ so they would not be obli/in/ the poor and the needy in any way9 but only dischar/in/ their obli/ation9 for the poor and the needy are entitled to a share in wealth as a matter of ri/ht: Says the %oly "uranG EIn their wealth there is a ,nown ri/ht for those who as, for it and those who have need for it:E 0'*G2 A2$2 In certain verses9 this ri/ht has been defined as the ri/ht of =llah: For e7ampleG E=nd pay what is ri/htfully due to %im on the day of harvestin/:E 0&G1 22 The word Eri/htE in these two verses ma,es it clear that participation in the process of production is not the only source of the ri/ht to ##wealth##9 and that the needy and the poor have as /ood a ri/ht to EwealthE as its primary owners: Thus Islam proposes to distribute wealth in such a manner that all those who have ta,en a part in production should receive the reward for their contribution to the

production of wealth9 and then all those too should receive their share that =llah has /iven a ri/ht to EwealthE: c8 Eradicatin/ the concentration of wealthG The third object of the distribution of wealth9 which Islam considers to be very important9 is that wealth9 instead of becomin/ concentrated in a few hands9 should be allowed to circulate in the society as widely as possible9 so that the distinction between the rich and the poor should be narrowed down as far as is natural and practicable: The attitude of Islam in this respect is that it has not permitted any individual or /roup to have a monopoly over the primary sources of wealth9 but has /iven every member of the society an e4ual ri/ht to derive benefit from them: -ines9 forests9 unAowned barren lands9 huntin/ and fishin/9 wild /rass9 rivers9 seas9 spoils of war etc:9 all these are primary sources of wealth: 3ith respect to them9 every individual is entitled to ma,e use of them accordin/ to his abilities and his labor without anyone bein/ allowed to have any ,ind of monopoly over them: ESo that this wealth should not become confined only to the rich amon/st youE: 0$)G'2 5eyond this9 wherever human intervention is needed for the production of wealth and a man produces some ,ind of wealth by deployin/ his resources and labor9 Islam /ives due consideration to the resources and labor thus deployed9 and reco/ni8es man#s ri/ht of property in the wealth produced: Every one shall /et his share accordin/ to the labor and resources invested by him: Says the %oly "uranG E3e have distributed their livelihood amon/ them in worldly life9 and have raised some above others in the matter of social de/rees9 so that some of them may utili8e the services of others in their wor,E: 0 3G322 5ut9 in spite of this difference amon/ social de/rees or ran,s certain injunctions have been laid down in order to ,eep this distinction within such limits as are necessary for the establishment of a practicable system of economy9 so that wealth should not become concentrated in a few hands: <f these three objects of the distribution of wealth9 the first distin/uishes Islamic economy from Socialism9 the third from Capitalism9 and the second from both at the same time:

($&"I%' . II )IBA I"( P)%*IBI"I%' + &#A((IFI&A"I%'(

&ha!ter .: )IBA I' "*$ A/)'A' 1. First )e4elation 7(urah al.)um 4erse 9;8 EThat which you /ive as interest to increase the peoples# wealth increases not with BodI but that which you /ive in charity9 see,in/ the /oodwill of Bod9 multiplies manifold:E 03*G 3)2 6. (econd )e4elation 7(urah al.'isa' 4erse 1B18 E=nd for their ta,in/ interest even thou/h it was forbidden for them9 and their wron/ful appropriation of other peoples# property: 3e have prepared for those amon/ them who reject faith a /rievous punishment 0 G 1&12E 9. "hird )e4elation 7(urah Al 'Imran 4erses 19C.68 E< believers9 ta,e not doubled and redoubled interest9 and fear Bod so that you may prosper: Fear the fire which has been prepared for those who reject faith9 and obey Bod and the 6rophet so that you may receive mercy:E :. Fourth )e4elation 7(urah al.Ba<arah 4erses 6D=.E18 EThose who benefit from interest shall be raised li,e those who have been driven to madness by the touch of the .evilI this is because they sayG ETrade is li,e interestE while Bod has permitted trade and forbidden interest: %ence those who have received the admonition from their 1ord and desist9 may ,eep their previous /ains9 their case bein/ entrusted to BodI but those who revert shall be the inhabitants of the fire and abide therein for ever:E 76D=8 EBod deprives interest of all blessin/ but blesses charityI %e loves not the un/rateful sinner:E 76DB8 EThose who believe9 perform /ood deeds9 establish prayer and pay the 8a,at9 their reward is with their 1ordI neither should they have any fear9 nor shall they /rieve:E 76DD8 E*9 believers9 fear =llah9 and /ive up what is still due to you from the interest 0usury29 if you are true believers:E 76DE8 EIf you do not do so9 then ta,e notice of war from =llah and %is -essen/er: 5ut9 if you repent9 you can have your principal: Feither should you commit injustice nor

should you be subjected to it:E 76D;8 EIf the debtor is in difficulty9 let him have respite until it is easier9 but if you fore/o out of charity9 it is better for you if you reali8e:E 76EC8 E=nd fear the .ay when you shall be returned to the 1ord and every soul shall be paid in full what it has earned and no one shall be wron/ed: E 76E18:

($&"I%' . II )IBA I"( P)%*IBI"I%' + &#A((IFI&A"I%'(

&ha!ter .=

)IBA I' *ADI"* A. General 1. From ;abir G The 6rophet9 9 may cursed the receiver and the payer of interest9 the one who records it and the two witnesses to the transaction and saidG EThey are all ali,e Min /uiltN:E 0-uslim9 @itab alA-usa4at9 5ab la#ni a,ili alAriba wa mu#,ilihiI also in Tirmidhi and -usnad =hmad2 6. ;abir ibn #=bdallah 9 /ivin/ a report on the 6rophet#s Farewell 6il/rima/e9 saidG The 6rophet9 9 addressed the people and said E=ll of the riba of ;ahiliyyah is annulled: The first riba that I annul is our riba9 that accruin/ to #=bbas ibn #=bd alA -uttalib Mthe 6rophet#s uncleNI it is bein/ cancelled completely:E 0-uslim9 @itab alA %ajj9 5ab %ajjati alAFabi9 I may also in -usnad =hmad2 9. From #=bdallah ibn %an8alah G The 6rophet9 9 saidG E= dirham of riba which a man receives ,nowin/ly is worse than committin/ adultery thirtyAsi7 timesE 0-ish,at alA-asabih9 @itab alA5uyu#9 5ab alAriba9 on the authority of =hmad and .ara4utni2: 5ayha4i has also reported the above hadith in Shu#ab alAiman with the addition that E%ell befits him whose flesh has been nourished by the unlawful:E :. From =bu %urayrah G The 6rophet9 9 saidG E<n the ni/ht of =scension I came upon people whose stomachs were li,e houses with sna,es visible from the outside: I as,ed Babriel who they were: %e replied that they were people who had received interest:E 0Ibn -ajah9 @itab alATijarat9 5ab alAta/hli8i fi alAribaI also in -usnad =hmad2 =. From =bu %urayrah G The 6rophet9 9 saidG E!iba has seventy se/ments9 the least serious bein/ e4uivalent to a man committin/ adultery with his own mother:E 0Ibn -ajah2 B. From =bu %urayrah G The 6rophet9 9 saidG EThere will certainly come a time for man,ind when everyone will ta,e riba and if he does not do so9 its dust will reach him:E 0=bu .awud9 @itab alA5uyu#9 5ab fi ijtinabi alAshubuhatI also in Ibn -ajah2 D. From =bu %urayrah G The 6rophet9 9 saidG EBod would be justified in not allowin/ four persons to enter paradise or to taste its blessin/sG he who drin,s habitually9 he who ta,es riba9 he who usurps an orphan#s property without ri/ht9 and he who is undutiful to his parents:E 0-ustadra, alA%a,im9 @itab alA5uyu#2 B. )iba an 'asiyah 1. From ?samah ibn Cayd G The 6rophet9 9 saidG EThere is no riba e7cept in Fasiyah Mwaitin/N:E 05u,hari9 @itab alA5uyu#9 5ab 5ay# alAdinari bi alAdinar nasa#anI also -uslim and -usnad =hmad2 EThere is no riba in handAtoAhand MspotN transactions:E 0-uslim9 @itab alA-usa4at9 5ah bay#i alAta#ami mithlan bi mithlinI also in Fasa#i2 6. From Ibn -as#ud G The 6rophet9 9 saidG EEven when interest is much9 it is bound to end up into paltriness:E 0Ibn -ajah9 @itab alATijarat9 5ab alAta/hli8i fi alAribaI

also in -usnad =hmad2 9. From =nas ibn -ali, G The 6rophet9 9 saidG E3hen one of you /rants a loan and the borrower offers him a dish9 he should not accept itI and if the borrower offers a ride on an animal9 he should not ride9 unless the two of them have been previously accustomed to e7chan/in/ such favours mutually:E 0Sunan alA5ayha4i9 @itab alA5uyu#9 5ab ,ulli 4ardin jarra manfa#atan fa huwa riban2 :. From =nas ibn -ali, G The 6rophet9 9 saidG EIf a man e7tends a loan to someone he should not accept a /ift:E 0-ish,at9 on the authority of 5u,hara#s Tari,h and Ibn Taymiyyah#s alA-unta4a2 =. From =bu 5urdah ibn =bi -usa G I came to -adinah and met #=bdallah ibn Salam who said9 ELou live in a country where riba is rampantI hence if anyone owes you somethin/ and presents you with a load of hay9 or a load of barley9 or a rope of straw9 do not accept it for it is riba:E 0-ish,at9 reported on the authority of 5u,hari2 B. Fadalah ibn #?bayd said that EThe benefit derived from any loan is one of the different aspects of riba:E 0Sunan alA5ayha4i2 This hadith is maw4uf implyin/ that it is not necessarily from the 6rophetI it could be an e7planation provided by Fadalah himself9 a companion of the 6rophet9 : &. )iba al.FadI 1. From #?mar ibn alA@hattab G The last verse to be revealed was on riba and the 6rophet9 9 was ta,en without e7plainin/ it to usI so /ive up not only riba but also raibah Mwhatever raises doubts in the mind about its ri/htfulAnessN: 0Ibn -ajah92 6. The 6rophet9 9 said9 ESell /old in e7chan/e of e4uivalent /old9 sell silver in e7chan/e of e4uivalent silver9 sell dates in e7chan/e of e4uivalent dates9 sell wheat in e7chan/e of e4uivalent wheat9 sell salt in e7chan/e of e4uivalent salt9 sell barley in e7chan/e of e4uivalent barley9 but if a person transacts in e7cess9 it will be usury 0riba2: %owever9 sell /old for silver anyway you please on the condition it is handAtoAhand 0spot2 and sell barley for date anyway you please on the condition it is handAtoAhand 0spot2:E 9. From =bu Sa#id alA@hudri G The 6rophet9 9 saidG E.o not sell /old for /old e7cept when it is li,e for li,e9 and do not increase one over the otherI do not sell silver for silver e7cept when it is li,e for li,e9 and do not increase one over the otherI and do not sell what is away Mfrom amon/ theseN for what is ready:E 05u,hari9 @itab alA 5uyu#9 5ab bay#i alAfiddati bi alAfiddahI also -uslim9 Tirmidhi9 Fasa#i and -usnad =hmad2 :. From #?bada ibn alASamit G The 6rophet9 9 saidG EBold for /old9 silver for silver9 wheat for wheat9 barley for barley9 dates for dates9 and salt for salt A li,e for li,e9 e4ual for e4ual9 and handAtoAhandI if the commodities differ9 then you may sell as you wish9 provided that the e7chan/e is handAtoAhand:E 0-uslim9 @itab alA -usa4at9 5ab alAsarfi wa bay#i alAdhahabi bi alAwara4i na4danI also in Tirmidhi2

=. From =bu Sa#id alA@hudri G The 6rophet9 9 saidG EBold for /old9 silver for silver9 wheat for wheat9 barley for barley9 dates for dates9 and salt for salt A li,e for li,e9 and handAtoAhand: 3hoever pays more or ta,es more has indul/ed in riba: The ta,er and the /iver are ali,e Min /uiltN:E 0-uslim9 ibidI and -usnad =hmad2 B. From =bu Sa#id and =bu %urayrah G = man employed by the 6rophet9 9 in @haybar brou/ht for him janibs Mdates of very fine 4ualityN: ?pon the 6rophet#s as,in/ him whether all the dates of @haybar were such9 the man replied that this was not the case and added that Ethey e7chan/ed a sa# Ma measureN of this ,ind for two or three Mof the other ,indNE: The 6rophet9 9 replied9 E.o not do so: Sell Mthe lower 4uality datesN for dirhams and then use the dirhams to buy janibs: M3hen dates are e7chan/ed a/ainst datesN they should be e4ual in wei/ht:E 05u,hari9 @itab alA5uyu#9 5ab idha arada bay#a tamrin bi tamrin ,hayrun minhuI also -uslim and Fasa#i2 D. From =bu Sa#id G 5ilal brou/ht to the 6rophet9 9 some barni M/ood 4ualityN dates whereupon the 6rophet as,ed him where these were from: 5ilal replied9 EI had some inferior dates which I e7chan/ed for these A two sa#s for a sa#:E The 6rophet said9 E<h no9 this is e7actly riba: .o not do so9 but when you wish to buy9 sell the inferior dates a/ainst somethin/ McashN and then buy the better dates with the price you receive:E 0-uslim9 @itab alA-usa4at9 5ab alAta#ami mithlan bi mithlinI also -usnad =hmad2 E. From Fadalah ibn #?bayd alA=nsari G <n the day of @haybar he bou/ht a nec,lace of /old and pearls for twelve dinars: <n separatin/ the two9 he found that the /old itself was e4ual to more than twelve dinars: So he mentioned this to the 6rophet9 9 who replied9 EIt MjewelleryN must not be sold until the contents have been valued separately:E 0-uslim9 @itab alA-usa4at9 5ab bay#i alA4iladah fiha ,haraA8un wa dhahabI also in Tirmidhi and Fasa#i2 ;. From =bu ?mamah G The 6rophet9 9 saidG E3hoever ma,es a recommendation for his brother and accepts a /ift offered by him has entered riba throu/h one of its lar/e /ates:E 05ulu/h alA-aram9 @itab alA5uyu#9 5ab alAriba9 reported on the authority of =hmad and =bu .awud2 1C. From =nas ibn -ali, G The 6rophet9 9 saidG E.eceivin/ a mustarsal Man un,nowin/ entrant into the mar,etN is riba:E 0Suyuti9 alA;ami# alASa/hir9 under the word /habnI @an8 alA#?mmal9 @itab alA5uyu#9 alA5ab alAthani9 alAfasl alAthani9 on the authority of Sunan alA5ayha4i2 11. From #=bdallah ibn =bi =wfa G The 6rophet9 9 saidG E= najish Mone who serves as an a/ent to bid up the price in an auctionN is a cursed ta,er of riba:E 0Cited by Ibn %ajar alA#=s4alani in his commentary on alA5u,hari called Fath alA5ari9 @itab alA5uyu#9 5ab alAnajshI also in SuyutT9 alA;ami alASa/hir9 under the word alAnajish and @an8 alA#?mmal9 op: cit:9 both on the authority of Tabarani#s alA@abir2:

Islam has cate/orically made a clear distinction between the e7cess in capital resultin/ from sale and e7cess resultin/ from interest: The first type of e7cess is permissible but the second type is forbidden and rendered %aram: ESei8ed in this state they sayG #5uyin/ and sellin/ is but a ,ind of interest#9 even thou/h =llah has made buyin/ and sellin/ lawful9 and interest unlawful:E =l 5a4arah 2G2'$ &lassi2ication o2 )iba 1: The first and primary type is called !iba =n Fasiyah or !iba =l ;ahiliya: 6: The second type is called !iba =l Fadl9 !iba =n Fa4d or !iba =l 5ai: Since the first type was specified in the "uranic verses before the sayin/s of the %oly 6rophet 9 this type was termed as !iba al "uran: %owever the second type was not understood by the "uranic verses alone but also had to be e7plained by the %oly 6rophet 9 it is also called !iba al %adees: )iba An 'asiyah This is the real and primary form of !iba: Since the verses of "uran has directly rendered this type of !iba as haram9 it is called !iba =l "uran: Similarly since only this type was considered !iba in the dar, a/es9 it has earned the name of !iba =l ;ahiliya: Imam =bu 5a,r %assas !a8i has outlined a complete and prohibitin/ le/al definition of !iba =n Fasiyah in the followin/ wordsG EThat ,ind of loan where specified repayment period and an amount in e7cess of capital is predetermined:E <ne of the ahadith 4uoted by =li ibn at Talib 0!==2 has defined !iba =n Fasiyah in similar words: The %oly 6rophet saidG EEvery loan that draws interest is !iba:E The famous Sahabi Fa8ala 5in <baid has also defined !iba in similar wordsG EEvery loan that draws profit is one of the forms of !ibaE The famous =rab scholar =bu Isha4 a8 Cajjaj also defines !iba in the followin/ wordsG EEvery loan that draws more than its actual amountE !iba =n Fasiyah refers to the addition of the premium which is paid to the lender in return for his waitin/ as a condition for the loan and is technically the same as interest: The prohibition of !iba =n Fasiyah is one of those issues which have been confirmed in the revealed laws of all 6rophets 0=S2: Some of the old testaments has rendered !iba as haram 0See E7odus 22G2$9 1eviticus 2$G3$A3&9 .eutronomy 23G2*9 6salms 1$G$9 6roverbs 2(G(9 Fehemiah $G' and E8a,hiel 1(G(91391' K 22G122: The "uran has also stated the prohibition of !iba in various verses9 has warned those who persist in practicin/ it of a war which is certain to be declared on them by =llah %imself and %is messen/er and has seriously threatened those

en/a/ed as writer9 witness and dealer in !iba transactions: These verses and ahadith will be discussed at len/th in a separate chapter called EThe prohibition of !iba in the li/ht of "uran and hadithE: =ccordin/ to the above definition of !iba =n Fasiyah9 the /ivin/ and ta,in/ of any e7cess amount in e7chan/e of a loan at an a/reed rate is included in interest irrespective whether at a hi/h or low rate: It has been proven throu/h ahadith that the %oly 6rophet paid e7cess at the loan repayment time but since this e7cess was not paid throu/h an a/reed rate9 it cannot be called interest: This clarifies that the word EdrawsE in the hadith definitionE The loan that draws interest is !iba:E has been used to hi/hli/ht the /ivin/ and ta,in/ of e7cess amount throu/h an a/reed rate in the loan contract: .ue to this9 Imam =bu 5a,r %asas has added the word EconditionE to the definition: The fact that !iba =n Fasiyah is cate/orically haram has never been disputed in the -uslim community: In short9 the !iba of today which is supposed to be the pivot of human economy and features in discussions on the problem of interest is nothin/ but this !iba9 the unlawfulness of which stands proved on the authority of the seven verses of the "uran9 of more than forty ahadith and of the consensus of the -uslim community: Wisdom behind the !rohibition o2 )iba An 'asiyah First of all9 we should reali8e that there is nothin/ in the entire creation of the world9 which has no /oodness or utility at all: 5ut it is commonly reco/ni8ed in every reli/ion and community that thin/s which have more benefits and less harms are called beneficial and useful: Conversely9 thin/s that cause more harm and less benefit are ta,en to be harmful and useless: Even the noble "uran9 while declarin/ li4uor and /amblin/ to be haram9 proclaimed that they do hold some benefits for people but the curse of sins they /enerate is far /reater than the benefits they yield: Therefore9 these cannot be called /ood or usefulI on the contrary9 ta,in/ these to be acutely harmful and destructive9 it is necessary that they be avoided: The case of !iba =n Fasiyah is not different: %ere the consumer of !iba does have some casual and transitory profits apparently comin/ to him9 but its curse in this world and in the %ereafter is much too severe as compared to this benefit: The !iba consumer suffers such a spiritual and moral loss that it virtually ta,es away the /reat 4uality of bein/ #human# from him: =n intelli/ent person who compares thin/s in terms of their profit and loss9 harm and benefit can hardly include thin/s of casual benefit with an everlastin/ loss in the list of useful thin/s: Similarly no sane and just person will say that personal and individual /ain which causes loss to the whole community or /roup is useful: In theft and robbery for e7ample9 the /ain of the /an/ster and the ta,e of the thief is all too obvious but it is certainly harmful for the entire community since it ruins its peace and sense of security: )iba Al Fadl The second classification of !iba is !iba =l Fadl: Since the prohibition of this !iba has been established on Sunnah9 it is also called !iba =l %adees: !iba =l Fadl actually means that e7cess which is ta,en in e7chan/e of specific

homo/enous commodities and encountered in their handAtoAhand purchase K sale as e7plained in the famous hadithG The 6rophet said9 ESell /old in e7chan/e of e4uivalent /old9 sell silver in e7chan/e of e4uivalent silver9 sell dates in e7chan/e of e4uivalent dates9 sell wheat in e7chan/e of e4uivalent wheat9 sell salt in e7chan/e of e4uivalent salt9 sell barley in e7chan/e of e4uivalent barley9 but if a person transacts in e7cess9 it will be usury 0!iba2: %owever9 sell /old for silver anyway you please on the condition it is handAtoAhand 0spot2 and sell barley for date anyway you please on the condition it is handAtoAhand 0spot2:E "his hadith enumerates B di22erent commodities namely5 18 68 98 :8 =8 B8 Gold (il4er Dates Wheat (alt Barley

These si7 commodities can only be bou/ht and sold in e4ual 4uantities and on spot: =n une4ual sale or a deferred sale of these commodities will constitute !iba: These si7 commodities in fi4h terminolo/y are called E=mwalAeA!ibawiyaE: .oes this hadith apply only to the items mentioned in itH .oes it concern sales of barley or wheat but not riceH <f dates but not raisinsH = complete le/al definition differs in every fi4h: Scholars such as Taoos and "atada hold that !iba =l Fadl includes these specified types only9 however a majority of Islamic scholars believe that some other commodities should also be included: In order to answer the 4uestion9 which other commodities should be included9 some fi4hs hold that the characteristics which are common amon/st these items can be used as basis 0illat2 for !iba =l Fadl: =n illat is the attribute of an event that entails a particular divine rulin/ in all cases possessin/ that attributeI it is the basis for applyin/ analo/y: !ibawi /oods are therefore /oods that e7hibit one of the efficient causes occasionin/ application of !iba rules: +arious schools define these causes differentlyG Imam Abu *ani2a Imam Abu *ani2a sees only t3o common characteristics namely5 18 3ei/ht 68 +olume -eanin/ all these si7 /oods are sold by either wei/ht or volume: Therefore all those commodities9 which have wei/ht or volume and are bein/ e7chan/ed9 with the same commodity will fall under the rules of !iba =l Fadl: Imam (ha2i The two characteristics observed by Imam Shafi areG 18 -edium of E7chan/e or

68 Eatable Therefore this law will apply on everythin/ edible or havin/ the natural ability of becomin/ a medium of e7chan/e 0currency2: Imam Maalik Imam -aali, identified the followin/ two characteristicsG 18 Eatables and 68 6reservable Imam Ahmad Bin *anbal Three citations have been related to himG i8 First citation conforms to the opinion of Imam =bu %anifa: ii8 Second citation conforms to the opinion of Imam Shafai: iii8 Third citation includes three characteristics at the same time namely edible9 wei/ht and volume: =fter a detailed study of the above schools of thou/ht9 it has been declared by Islamic scholars that if a commodity bears both of the two characteristics namelyI it has wei/ht and can be used as a medium of e7chan/e9 then the followin/ two ,inds of transactions are not allowed when the same /oods are bein/ e7chan/edG O = deferred sale of /oods 0= deferred sale is when the /oods are returnedJor paid for after some undetermined period2 O = sale of une4ual 4uantities of the same /oods %owever9 when only one of the two characteristics is present to term the sale as !iba =l Fadl9 then e7chan/e of une4ual /oods are allowed but deferred sale is not allowed: 3isdom behind the prohibition of !iba =l Fadl The prohibition of !iba =l Fadl is intended to ensure justice and remove all forms of e7ploitation throu/h #unfair# e7chan/es and to close all bac,Adoors to !iba =n Fasiyah because in the Islamic Shariah9 anythin/ that serves as a means to the unlawful is also unlawful: "he la3s o2 )iba Al Fadl =fter closely analy8in/ the meanin/ and interpretation of the above ahadith and their e7planation in further ahadith alon/ with issues raised in reference wor, of %anafi fi4h9 the followin/ rules and laws /overnin/ !iba =l Fadl are derivedG 1. It is evident that the e7chan/e of homo/eneous commodities will only be re4uired if they differ in 4uality and characteristic e:/: different /enus of rice and wheat9 superior 4uality /old and inferior 4uality /old9 mineral salt and sea salt etc: The e7chan/e of any of these si7 commodities with itself9 but differin/ in typesJ4uality 0which is called barter in modern terminolo/y29 even when considerin/ mar,et rate9 is prohibited in une4ual amount: The reason bein/ that

by e7chan/in/ these commodities in une4ual amounts there is a fear of developin/ the rationale in a person eventually leadin/ to interest 0sood2 based earnin/s and ille/al benefits: Such transactions mi/ht also lead to defraudin/: For e7ample9 a shrewd trader may claim that a ,ilo/ram of a specific brand of wheat is e4uivalent to 3 ,ilo/rams of the other ,ind because of the e7cellence of its 4uality9 or this uni4ue piece of /old ornament is e4uivalent in value to twice its wei/ht in /oldI in such transactions there undoubtedly is defraudin/ of people and harm to them: =s a step to prevent this state9 the Shariah has made it a law that e7chan/e of any of these si7 commodities with itself but differin/ in 4uality9 is allowed in only one of the followin/ formsG a8 =ny difference in valueJ4uality should be i/nored and the commodities should be e7chan/ed in e4ual amounts 0e4ual wei/ht and volume2: b8 Instead of direct e7chan/e of commodities of the same ,ind9 a person should sell his commodity a/ainst cash at the mar,et value and buy someone else#s commodity in e7chan/e of cash proceeds at the mar,et value: 6. <ne of the ways of transactin/ commodities of the same ,ind is that a person has a raw material and someone else has a product made of that material and both decide to e7chan/e their product: In this case9 one has to see whetherG a8 The characteristics of this product has been totally chan/ed by the industryG For e/: the remar,able chan/es that transform raw cotton into cloth or iron into machinery: In this case9 it is permissible to transact lesser amount of cloth a/ainst /reater amount of raw cotton or raw iron havin/ more wei/ht a/ainst machinery havin/ li/hter wei/ht: b8 1ittle difference has been made to its ori/inal form after its formulationG For e/: /old which chan/es its shape in the form of jewelry: In this case9 the Shariah#h holds that such a transaction should not happen in the first place or if it does9 the e7chan/e should be in e4ual wei/hts in order to discoura/e unfair deals: =nother alternative would be to sell /old a/ainst cash and the cash proceeds are used to buy the needed jewelry: This is because it is not possible in a barter transaction9 e7cept for an e7pert9 to visuali8e the fair e4uivalent of one commodity in terms of all other /oods: %ence9 the e4uivalent may be established only appro7imately thus leadin/ to some injustice to one or the other party: The use of money could therefore help reduce the possibility of an unfair e7chan/e: 9. .ifferent commodities can be une4ually e7chan/ed but deferred payment is not allowed: For e/: one ,/ wheat can be sold a/ainst 2 ,/ date or one /ram of /old can be e7chan/ed a/ainst /rams of silver on the condition that they are spot transactions reason bein/ that such a transaction will surely be carried on the mar,et rate: For e/: a person who wants to e7chan/e silver for /old on spot will only transact as per the mar,et rate: %owever9 if the transaction is on credit9 there is a possibility9 no matter how minor9 of steppin/ into interest that cannot be i/nored: For e/: a buyer who has traded (* tolas silver on credit today on the understandin/ that it will be e7chan/ed a/ainst 2 tolas /old after a month has in fact no means to find in advance that * tolas silver will be e4uivalent to one tola /old after a month: Therefore this ascertainin/ of value in advance actually

si/nifies its roots in interest and /amblin/: Similarly the seller who has accepted credit has in fact yielded to /amblin/ by hopin/ that the ratio of /old and silver mi/ht come down from 1G * to 1G3$: The law of e7chan/in/ different commodities only at spot has been established due to this reason: The /eneral conditions of sale9 however9 should be borne in mind while ma,in/ a trade transaction so that the /oods are specified in addition to the cash aspect of the transaction: The correct way of specifyin/ is that /old and silver should be under the possession of the sellers or delivered at the place of contract because both /oods have the ori/inal 0natural2 price9 which cannot be specified until they are delivered: This rule applies to only e7chan/e of /old and silver: <ther /oods can be e7chan/ed a/ainst each other without delivery and can be specified any other way but will be restricted to cash transaction: For e/: Caid made a spot sale of one ,/ wheat to 5a,ar with 2 ,/ salt a/ainst future delivery after havin/ identified their /oods9 this transaction is allowed in Shariah since it meets both conditionsG P The transaction is on spot: P It is also specified: %owever9 if Caid was sellin/ one tola /old to 5a,ar a/ainst * tola silver9 then it is necessary that both ta,e delivery of their purchased /oods at the place of contract because without delivery9 /oods cannot be specified: To sum up9 the %anafi jurists maintain that in case of commodities that wei/h or measure9 it is ille/al to transact une4ually or on credit: 5ut in case of different commodities une4ual e7chan/e is le/al but credit remains ille/alI the transaction in this case too should be spot:

($&"I%' . II )IBA I"( P)%*IBI"I%' + &#A((IFI&A"I%'(

&ha!ter .D &%MM$)&IA# I'"$)$(" A'D /(/)0 In the 1'th century9 two new technical terms of interest emer/ed after the establishment of ban,in/ system9 namelyG 1. Tijarti Sood 0Commercial Interest2G Interest paid on loan ta,en for productive K profitable purposes: 6. Sarfi Sood 0?sury2G Interest paid on loan ta,en for personal need and e7penses: T%E 5=C@B!<?F. <F 5<T% TL6ESG The present day ban,in/ system9 which has /iven interest the moral and le/al license9 is the bac,bone of the prevalent capitalism: 3hen -uslim countries became subju/ated to west in their economic field9 some westerni8ed -uslims in the 1)th century9 on one side9 saw the increasin/ pro/ress of the west in trade and industry and on the other side saw the shatterin/ economic condition of fellow -uslims states: They also became conscious of the fact that ban,in/ is inevitable in the field of trade and industry not only on national level but also internationally: This prompted them to say that only usury is haram 0ille/al2 but not commercial interest because renderin/ commercial interest haram would pose irresolvable problems to their way up to industriali8ation and economic pro/ress: They only included usury in the term E!ibaE as cate/orically prohibited in "ura#n and sunnah and freed commercial interest from it callin/ it totally different from the western concept of interest: Therefore9 it was concluded that the prohibition of !iba was restricted to usury while commercial interest was perfectly Islamic: There are two schools of thou/ht on this issue: = detailed analysis of their ar/uments is discussed as underG 1. First (chool5 This school presents two ar/uments to support their point that only usury 0not commercial interest2 is prohibited in IslamG

Argument 1 E!iba as practiced durin/ the days of the 6rophet was only ?suryE &ounter argument This claim is /roundless9 since Islam when prohibitin/ somethin/ does not only prohibit one form of it that is prevalent9 but all forms that mi/ht erupt in future: The chan/ed state does not chan/e the rulin/ for e/: "ura#n has prohibited the followin/G a8 #i<uor 7-hamar85 .urin/ the time of 6rophet its form and the way of production was totally different from that of the present day li4uor but the rulin/ remains unchan/ed even thou/h the form has chan/ed: b8 Pork 7-hinzeer85 Irrespective how clean the present day breedin/ of pi/s in hi/h class farms may be9 por, will stay prohibited and cannot be rendered halal 0le/al2: c8 &orru!tionFImmorality 7Al Fahsha85 =lthou/h a lot of sophisticated ways have been developed of this evil from the time of "ura#nic revelations prohibitin/ it9 the rulin/ stands forever: The same applies to interest and /amblin/: 5y claimin/ that it was in a different form durin/ 6rophet#s time does not chan/e its rulin/: It remains unchan/ed just as in case of @hamar9 @hin8eer and =l Fahsha: Argument 6 ECommercial interest did not e7ist in the days of 6rophet E &ounter argument This claim is also wron/: If one /lances throu/h the Islamic and pre Islamic history of =rabia9 it will be evident that the interest type at that time was not restricted to usury but loans were /ranted for commercial and profitable purposes: To 4uote some e7amplesG a8 EThe tribe of ?mro bin =amir used to ta,e interest from the tribe of -u/hairah: =t the advent of Islam9 -u/hairah owed heavy interest to ?mro bin =amir:E In this narration9 the transaction of interest between 2 tribes of =rabia have been pointed out who actually operated as tradin/ companiesI both tribes were very wealthy: Could it be that 2 wealthy tribes transacted interest just for personal need and e7pensesH The interest was simply commercialQ b8 %istory of the city of Ta#if tells us that it was only second to -a,,ah in trade 0their main e7ports bein/ li4uor9 raisins9 currants9 wheat9 wood etc2 and industry 0major bein/ leather and dyein/2: The tribe of #Sa4eef## 0;ewish tribe2 advanced cash on interest9 not only to the natives of Ta#if9 but the business community of -a,,ah as well e/: the tribe of -u/hairah who were their permanent customer: This advancement9 which was not only restricted to cash but also to commodities between wealthy tribes of Taif and -a,,ah who were usually traders and businessmen9 was only for their commercial purposes and not for their consumption and personal needs: <ne of the ways of receivin/ interest was to

double the principle amount plus interest in case of non payment of loan and this practice was applied to both cash as well as commodities: They had become accustomed to it: =t the time of si/nin/ the peace treaty with the people of Ta#if9 the 6rophet imposed conditionsG i2 Total elimination of interest based transactions: ii2 Bivin/ up of interest owed to and from them: c8 The practice of ma,in/ 2 trade trips9 one to Lemen in winters and the other to Syria in summer was started by the tribe of "uraish of -a,,ah: These trips proved to be very profitable especially since bein/ custodians of @aa#ba9 "uraish were loo,ed at with respect9 /ranted special concessions and protected in transit which was a necessity at that time: This way business K trade became their only means of livelihood: Investment became the order of the day in which women also too, part and its circulation flourished and multiplied: 3ith this bac,/round in mind9 one can easily visuali8e that the city of -a,,ah more or less became the clearin/ house or the ban,in/ city and accustomed to their related amenities: It was only natural that interest was one of them: Since they advanced cash for commercial purposes and char/ed compound interest incase of default by the traders9 and this earnin/ of interest was their trade9 they ar/ued when "ura#n rendered interest haram 0ille/al2 that the transaction of interest based loans is a type of trade in which the return on capital can be earned as in the case of rent received from assets: They could not differentiate between e7cess in shape of profit durin/ a trade and e7cess in the shape of interest at the time of repayment of loan: d8 Therefore in pre Islamic days9 we see that Syedna =bbas bin =bdul -uttalib and Syedna @halid bin 3aleed formed a company with joint capital whose prime business was cash advancement on interest: Similarly Syedna ?sman was one of the wealthy businessmen who lent money on interest: There were many other traders dealin/ full time in interest e7tendin/ a networ, of interest based transactions: e8 The way Syedna Cubair bin =wwam9 who was famous for his trustworthiness9 operated was 4uite similar to that of modern ban,in/ system: 6eople used to deposit with him their capital as =manah 0trust or security2: %owever9 Syedna Cubair used to ma,e it clear to the depositors that he would accept the deposits as a #loan# and not as #security# 0=manah2: 5ecause he ,new that he will not be fully liable accordin/ to Shariah in case these =manahs /ot destroyed but in case of havin/ them as a loan9 he will be fully liable to pay them bac,: %e was afraid that in case of losin/ any deposited amount9 his ima/e as the trustworthy careta,er would be dama/ed: %e therefore used the term #loan# for such deposits to ensure /uaranteed payment so that he enjoys everyone#s confidence in him: =nother reason for usin/ the word #loan# was to le/ali8e tradin/ and earnin/ profits on such deposits: 5ecause if he /ot those deposits as =manah9 he could not utili8e it for his business9 as it is not permissible in Shariah to use =manah: This clearly shows that borrowin/ in those days was not only for consumption purposes but for commercial purposes as well: Syedna Cubair left a will with his son Syedna =bdullah bin Cubair before he died to sell his property to repay the loan9 if re4uired: The total amount calculated after his death for repayment by his son was 22 lacs: It is obvious that a rich Sahaba such as Syedna Cubair did not owe this loan of 22 lacs out of any needI rather it was an investment of securities that was

circulatin/ in trade:

A'%"*$) &#$A) A)G/M$'" Syedna =bu %urairah narrated that the 6rophet said9 E%e who does not abandon -o,habara9 will be cau/ht in a war a/ainst =llah K %is 6rophet:E In this narration 6rophet has rendered -o,habara ille/al just li,e riba and has declared a war a/ainst those who indul/e in it just li,e riba: What is MokhabaraG Its actually a division of the crop by a/reement between the landlord and cultivator in which the landlord /ives his land to cultivator for cultivation purposes in order to /et his preAa/reed amounts of the crop irrespective whether the production is low or hi/h: For e/: E=E lends his land to #5# for cultivation on the condition that he will /et a predetermined portion on each crop e/: $ mounds: Such a transaction is called -o,habara: 6rophet had called -o,habara a form of riba: Fow one should thin, over whether he referred to usury as the form of riba or he referred to commercial interest: It is similar to commercial interest as both -o,habara and commercial interest are used for productive businesses: 3hereas in the case of usury9 the borrower uses the loan for personal use and not productive purposes: To sum up9 6rophet included -o,habara in riba that has no similarity with usury9 rather with commercial interest: The fact that durin/ 6rophet#s time9 the dealin/ in commercial interest was common is proven and also that this form is prohibited: 6. (econd (chool5 This /roup present two ar/uments justifyin/ their point of view that are mentioned belowG =r/ument 1 The factor leadin/ to prohibition of !iba 0Interest2 is that if a borrower faces a loss9 he still has to pay an e7cess amount over the principal9 which is basically an e7ploitation of his need whereas the lender on the other hand /ets an increase on his surplus capital without any effort which is unjust: 5ut this factor is not found in commercial interest since both the borrower as well as the lender /ets profitI the borrower on the amount he has circulated in business and the lender in shape of interest over his principle amount: Therefore9 no one faces unfairness or injustice in this transaction: &ounter argument This ar/ument is 4uite appealin/ and attractive at the face value9 as it is based on the assumption that no one suffers in case of commercial interest: 5ut after analysis9 it is proven that "uran has not only prohibited that one party faces a loss and the other /ets profit but has also prohibited one party /ettin/ confirmed profit and the other party unconfirmed profit from the same investment as we have

studied above in the case of -o,habara: Argument 6 This ar/ument is based on the "ura#nic verse E< believers do not devour one another#s possession wron/fullyI rather than that9 let there be tradin/ by mutual consentE 0=l Fisa verse 2)2: In the above verse9 "ura#n has prohibited E3ron/ful devourin/E which will only arise if the consent of one of the parties is absent and naturally the party who is devourin/ consents9 the other party never consentsI he only /ives in since he has no other option: So we come to the conclusion that if the consent and satisfaction of both parties is present in a deal9 it cannot be called E3ron/ful devourin/E: =ccordin/ to this lo/ic9 commercial interest is permissible since the mutual consent is present of both parties whereas riba is prohibited only when one party is /ettin/ the e7cess out of his selfishness and the other party is encounterin/ the loss9 as he has no other alternative: &ounter argument5 This ar/ument is of superficial nature: -utual consent is not the criteria to render anythin/ prohibited or not in Islam: 3ould the act of adultery be allowed if the condition of mutual consent is fulfilledH Similarly9 there are many transactions in business9 which are rendered ille/al even with mutual consent: For reference see E=bwab ul 5uyu al 5atilaE where -uha4ila and Tal4i al ;alab bein/ forms of 5ai where the mutual consent and satisfaction is present and is prohibited by 6rophet : Similarly9 mutual consent is present in commercial interest and /amblin/ too but in spite of that9 it has been prohibited: Therefore no such criteria e7ist in the le/ality of any transaction that both parties approveI rather the approval should be on the transaction9 which has not been prohibited by Shariah: To 4uote the words of "ura#n EE7cept the le/itimate businessRR:E

($&"I%' . II )IBA I"( P)%*IBI"I%' + &#A((IFI&A"I%'(

&ha!ter .E (IMP#$ A'D &%MP%/'D I'"$)$(" )iba an 'asiyah can be classi2ied into t3o ty!es5 H (im!le Interest 7 (ood.e.Mu2rid8 H &om!ound Interest 7(ood.e.Murakkab8 De2inition o2 (im!le Interest5 Interest calculated only on the initial investment: De2inition o2 &om!ound Interest5 !einvestment of each interest payment on money invested9 to earn more interest: .urin/ the preAIslamic era9 when a borrower used to fail to pay bac, the principal and interest char/ed on him9 then the lender used to e7tend the loan on the condition that the interest will also become part of the loan 0essentially Compound Interest2: The followin/ verses of "uran were revealed in order to stop the people from such practicesG E< believers9 ta,e not doubled and redoubled interest9 and fear Bod so that you may prosper:E 0Surah =l #Imran9 verses 13*A12 To eradicate this abominable practice of the period of i/norance9 this verse was revealed: 5y mentionin/ the practice of doublin/ and redoublin/9 it was condemned and declared unlawful in view of its adverse impact on the community and the selfishness that it bred: It does not mean that if there is no doublin/ and redoublin/ 0i:e:9 if there is simple interest9 in today#s jar/on29 then it is lawful: Fo: In Surah =l 5a4arah 0The Cow2 and Surah =n Fisa 0The 3omen29 the prohibition of interest in its entirety and in absolute terms is clearly mentioned9 whether or not there is doublin/ and redoublin/: Since the aforementioned verse prohibits the compound interest only9 some people misinterpret it even today that compound interest alone is forbidden in Islam9 not the simple interest: They fail to see that there is absolute prohibition of simple interest in a number of other "uranic verses: The reason that the above verse specifically uses the words Edoubled and redoubled interest E is to hi/hli/ht the shameful aspect of compound interest and not to limit the scope of riba only to compound interest: This is similar to =llah#s command E.o not bar/ain on my orders for paltry /ains in this world:E The reason for mentionin/ paltry /ains is that even if all conceivable material /oods and lu7uries of this world are obtained in e7chan/e for i/norin/ =llah#s commands9 even then this is a paltry /ain: It does not obviously mean that it is prohibited to obtain paltry /ains but permissible to obtain 0by one#s standard or jud/ment2 a hefty price: Similarly9 in the =yat under consideration9 the mention of doublin/ and redoublin/ is to condemn the shameful practice rather than limit its permissibility: ,erses on absolute !rohibition o2 (im!le and &om!ound Interest E< believers9 fear Bod and /ive up the interest that remains outstandin/ 0i:e: whether it is simple interest or multiplied interest2 if you are believers:E

($&"I%' . III I(#AMI& &%'")A&"

&ha!ter .; In Islamic jurisprudence what is the rulin/ of puttin/ a condition on a contract or a/reementH "here are 2our basic rules 2or >udging the 4alidity o2 conditions in a contract5 18 = condition9 which is not a/ainst the contract9 is a valid condition: 68 = condition9 which seems to be a/ainst the contract9 but it is in the mar,et practice9 that type of condition is not void9 if its voidness is not proven with the clear injunctions of the %oly "uran and Sunnah: For e7ample #=# buys an air conditioner on a condition that the seller will provide him fiveAyear /uarantee and one year free service: This type of condition does not invalidate the contract: 98 = condition that is a/ainst the contract and not in the practice of mar,et but it is in favor of one of the contractors or subject matter9 this type of condition is void: For e7ample if #=# says he sells a car with a condition that he will use it on a fi7ed date every month9 this contract will be void: :8 = condition9 which is a/ainst the contract9 not in the mar,et practices and not in favor of any contractor9 is not a void condition: Fow a 4uestion arises what is the rulin/ of void condition9 whether it invalidates the contract or notH The answer is that there is a detail about the impacts of void condition: Sometimes a void condition invalidates the contract and sometimes it does not invalidate the contract9 however9 the condition itself is annulled: To elaborate this9 Islamic jurists and scholars have written that the compensation 7/<ood Mua3adha8 li,e sale9 purchase9 lease a/reements become void by puttin/ void condition: %owever9 nonAcompensatory 0voluntarily2 a/reements 7/<ood Ghair Mua3adha8 li,e contract of loan 7Aard.e.*asanah89 do not become void because of void condition: The void condition9 however9 becomes itself ineffective: For e7ample if #=# /ives to #5# a loan with a condition of premium at the time of repayment9 this condition of interest is void: %owever9 this condition does not invalidate the contract9 therefore all transaction done by this borrowed money9 will be valid: 5ut the condition of interest itself is revo,edI therefore #5# is not liable for the payment of interest: )ights )es!onsibility and %bligation in a contract5

In Islamic Fi4h9 some contracts are such that ri/hts and obli/ations are also attached to the =/ent doin/ the contract on behalf of the Contractin/ 6arty e/: Sales Contract9 Ijara9 Istisna9 Salam etc: 3hile in others 6rincipal has all the responsibilities9 ri/hts K obli/ations e/: Fi,ah:

($&"I%' I III (A#$

&ha!ter .1C Sale 05ai2 is commonly defined in shari#ah as Ethe e7chan/e of a thin/ of value by another thin/ of value with mutual consentE: -ore specifically it means Ethe sale of a commodity in e7chan/e of cashE 1. ,alid (ale 7Bai (ahih85 = sale becomes valid if the followin/ elements are present as well as the conditions in the attached chart S 2 are complied withG J J J J &ontract 7A<d8 (ub>ect Matter 7Mabe'e8 Price 7"haman8 Possession or deli4ery 7Aabza8

6. ,oidF'on $?isting (ale 7Bai Baatil85 Sale will be void if any one of the conditions of offer and acceptance 01:129 conditions of 5uyer K Seller 01:22 and sold /ood conditions 02:1 A 2:$2 are not complied with: In a void sale9 the buyer does not have title to subject matter and seller does not have title to price: 5oth subject matter and price cannot be used lawfully: The produce of both shall be unlawful: 9. $?isting sale but 4oid due to de2ect 7Bai Fasid8 Sale will e7ist but will be void due to defect if the conditions of contract 01:329 sold /ood conditions 02:& K 2:'2 and conditions of price 03:1 K 3:22 are not complied with: %owever9 if the defect is rectified the sale becomes valid: In a fasid sale9 the buyer should not possess the subject matter: If possessed with the consent of the seller9 title or ownership will pass to the buyer but usa/e of subject matter will be

impermissible: %e must return it to the seller: :. ,alid but disliked sale 7Bai Makrooh85 = sale will be -a,rooh when the transaction is complete and one /ets possession of the /oods but is disli,ed e/: sale after ;uma =8aan9 sale after hoardin/ or where a third party intervenes to buy somethin/ which was under ne/otiation of sale between other parties: "y!es o2 (ales Followin/ are the common types of sales 1. 5ai -usawamahG It refers to normal sale in which cost price is not ,nown: 6. 5ai -urabahaG It refers to a sale in which cost and sale price is ,nown to the buyer: 9. 5ai -u4ayadaG It refers to barter sale e7cludin/ currency sale: :. 5ai SurfG It refers to the sale of /old9 silver and currency: =. 5ai SalamG It is a ,ind of sale in which payment is spot while the delivery of the /ood is deferred: B. 5ai IstisnaG It refers to such sale in which commodity is transacted before it comes into e7istence: It is basically an order to manufacture: D. 5ai -uajjalG It refers to such sale in which payment is delivery is spot while payment is deferred but cost is not ,nown:

($&"I%' . III ,A#ID (A#$

&ha!ter .11 Sale 05ai2 is commonly defined in shari#ah as Ethe e7chan/e of a thin/ of value by another thin/ of value with mutual consentE: -ore specifically it means Ethe sale of a commodity in e7chan/e of cashE

($&"I%' . III FI,$ -*I0A)(

&ha!ter .16 The term ,hiyar refers to the option or ri/ht of the buyer K seller to rescind a contract of sale: "here are 2i4e khiyars in a sale contract 3hich are as 2ollo3s5 a. -hiyar.e.(hart 7%!tional condition85 =t the time of sale 5uyer or Seller can put a condition that he has an option to rescind the sale within the specific days: This option is called @hiyarAeAShart: Specification of the days is necessary for this @hiyar: 3ithin this period9 he has the ri/ht to rescindJdissolve the sale without any reason: If the buyer puts the condition9 it is called @hiyarAeA-ushtari 0option of buyer2 and when put by the seller9 it is called @hiyarAeA5ai 0option of seller2: This @hiyar is not transferred to heirs: b. -hiyar.e.)oiyyat 7%!tion o2 ins!ecting goods85 3here the /oods can be returned after inspection: This applies automatically to all contracts: E/: #=# buys machinery from #5# without seein/: %owever9 #=# has the option to return the machinery after inspection: c. -hiyar.e.Aib 7%!tion o2 de2ect85 3here the /oods can be returned if found defective: It is the responsibility of the seller to supply /oods free of errorJdefect or point out the defect to the buyer: Fo way is he allowed to cover the defect of the /oods which constitutes as fraud: In one of the hadiths9 6rophet has stated E%e is not amon/st us who indul/es in fraud:E Therefore the buyer has the ri/ht to return the /ood in case of a defect which is considered a defect in the mar,et and which depreciates the value of the /oods: E/: #=# buys batteries from #5#: %owever9 #=# has the option to return them to #5# if the batteries are found to be defective or not in wor,in/ condition: d. -hiyar.e.Was2 7%!tion o2 <uality85 3here the /oods are sold by specifyin/ a

certain 4uality by the Seller but which is absent in the /oods: E/: #=# buys a car from #5# who has specified automatic transmission of the car: %owever when #=# uses the car9 he finds the transmission to be manual: Therefore he can return the car to #5# in the absence of a specific 4uality: e. -hiyar.e.Ghaban 7%!tion o2 !rice85 3here the seller sells the /oods at a price which is far e7pensive than the mar,et price9 a 5uyer has the ri/ht to return it to the seller: E/: a 6ar,er pen is sold to #=# by #5# at a price of !s:$**JA: %owever after the sale9 #=# discovers its mar,et price to be !s:2$*JA9 he has the option to return the pen to #5#: I<ala 7)ecession o2 &ontract85 3here parties freely consent to rescind the contract i:e: each party will /ive bac, the consideration received by it: Feither the buyer nor the seller has the sole ri/ht to rescind the contract after e7ecution of a contract: <ften the buyer wants to rescind the contract after buyin/ /oods: In this case9 it is necessary that he /ets the seller#s consent: Therefore this mutual a/reement between buyer and seller to rescind the contract is called I4ala: In one of the hadiths9 6rophet has stated E%e who does the I4ala 0rescindin/ of the contract2 with a -uslim who is not happy with his transaction9 =llah will for/ive his sins on the .ay of ;ud/ment:E %owever9 it may be noted that the price of the /oods bein/ returned under I4ala will remain unchan/ed: Effect on third 6artiesG I4ala is treated as a new sale as if a new contract is entered into between the parties rescindin/ the ori/inal contract:

($&"I%' . I, I(#AMI& M%D$( %F FI'A'&I'G

&ha!ter .19 (M/(*A)A-A* *adees.e.Audsi =llah SubhanAoATallah has declared that %e will become a partner in a business between two -ushari,s until they indul/e in cheatin/ or breach of trust 0@hayanah2:

De2inition and classi2ication o2 Musharakah The literal meanin/ of -ushara,ah is sharin/: The root of the word E-ushara,ahE in =rabic is Shir,ah9 which means bein/ a partner: It is used in the same conte7t as the term Eshir,E meanin/ partner to =llah: ?nder Islamic jurisprudence9 -ushara,ah means a joint enterprise formed for conductin/ some business in which all partners share the profit accordin/ to a specific ratio while the loss is shared accordin/ to the ratio of the contribution: It is an ideal alternative for the interest based financin/ with far reachin/ effects on both production and distribution: The connotation of this term is little limited than the term EShir,ahE more commonly used in the Islamic jurisprudence: For the purpose of clarity in the basic concepts9 it will be pertinent at the outset to e7plain the meanin/ of each term9 as distin/uished from the other: EShir,ahE means ESharin/E and in the terminolo/y of Islamic Fi4h9 it has been divided into two ,indsG 718 (hirkat.ul.milk 7Partnershi! by >oint o3nershi!85 It means joint ownership of two or more persons in a particular property: This ,ind of EShir,ahE may come into e7istence in two different waysG a8 %!tional 7Ikhtiari85 =t the option of the parties e:/:9 if two or more persons purchase e4uipment9 it will be owned jointly by both of them and the relationship between them with re/ard to that property is called EShir,atAulA-il, I,htiariE %ere this relationship has come into e7istence at their own option9 as they themselves elected to purchase the e4uipment jointly: b2 Compulsory 0Bhair I,htiari2G This comes into operation automatically without any effortJaction ta,en by the parties: For e7ample9 after the death of a person9 all his heirs inherit his property9 which comes into their joint ownership as a natural conse4uence of the death of that person: "here are t3o more ty!es o2 @oint o3nershi!s 7(hirkat.ul.Milk85 O Shir,atAulA=in O Shir,atAulA.ain = property in shir,atAulAmil, is jointly owned but not divided yet9 is called -usha: In Shir,atAulAmil, undivided shares or other assets can be used in the followin/ mannerG a8 -ushtari, Intifa#G -utually or jointly usin/ an asset by ta,in/ turns under circumstances where the partners or joint owners are on /ood terms: b8 -uhayaG ?nder this arran/ement the owners will set turns in days for e7ample one may use the product for 1$ days and then the other may use it for the rest of the month: c8 Ta4seemG !eferrin/ to division of the jointly owned asset: This may be applied for property where the asset that is owned can be divided permanently for e7ample jointly ta,in/ a 19*** s4: yards plot and ma,in/ a house on $** yards by each of the 2 owners: d8 ?nder a situation where the partners are not satisfied with -uhaya arran/ement9 the property or asset jointly held can be sold off and proceeds divided between the partners: 768 Shir,atAulA=4d 06artnership by contract2G This is the second type of Shir,ah9 which means9 Ea partnership effected by a mutual contractE: For the purpose of brevity it may also be translated as Ejoint commercial enterprise:E Shir,atAulA=4d

is further divided into three ,indsG 7i8 Shir,atAulA=mwal 06artnership in capital2 where all the partners invest some capital into a commercial enterprise: 7ii8 Shir,atAulA=amal 06artnership in services2 where all the partners jointly underta,e to render some services for their customers9 and the fee char/ed from them is distributed amon/ them accordin/ to an a/reed ratio: For e7ample9 if two people a/ree to underta,e tailorin/ services for their customers on the condition that the wa/es so earned will /o to a joint pool which shall be distributed between them irrespective of the si8e of wor, each partner has actually done9 this partnership will be a shir,atAulAaamal which is also called Shir,atAutAta4abbul or Shir,atAusAsanai or Shir,atAulAabdan: 7iii8 Shir,atAulAwujooh 06artnership in /oodwill2: The word has its root in the =rabic word 3ajahat meanin/ /oodwill: %ere the partners have no investment at all: They purchase commodities on deferred price9 by /ettin/ capital on loan because of their /oodwill and sell them at spot: The profit so earned is distributed between them at an a/reed ratio: Each of the above three types of Shir,atAulA=4d are further divided into two typesG a8 (hirkat.Al.Mu2a3ada5 0Capital K labour at par2G =ll partners share capital9 mana/ement9 profit9 ris, in absolute e4uals: It is a necessary condition for all four cate/ories to be shared amon/st the partnersI if any one cate/ory is not is not shared9 then the partnership becomes Shir,atAulA=inan: Every partner who shares e4ually is a Trustee9 Buarantor and =/ent on behalf of the other partners: b8 (hirkat.ul.Ainan5 = more common type of Shir,atAulA=4d where e4uality in capital9 mana/ement or liability mi/ht be e4ual in one case but not in all respect meanin/ either profit is e4ual but not labour or vice versa: =ll these modes of ESharin/E or partnership are termed as EShir,ahE in the terminolo/y of Islamic Fi4h9 while the term E-ushara,ahE is not found in the boo,s of Fi4h: This term 0i:e: -ushara,ah2 has been introduced recently by those who have written on the subject of Islamic modes of financin/ and it is normally restricted to a particular type of EShir,ahE9 that is9 the Shir,atAulA=mwal9 where two or more persons invest some of their capital in a joint commercial venture: %owever9 sometimes it includes Shir,atAulA=amal also where partnership ta,es place in the business of services: It is evident from this discussion that the term EShir,ahE has a much wider sense than the term E-ushara,ahE as is bein/ used today: The latter is limited to EShir,atAulA=mwal E only i:e: all the partners invest some capital into a commercial enterprise9 while the former includes all types of joint ownership and those of partnership: )ules + &onditions o2 (hirkat.ul.A<d5 Common conditions are three which are as followsG a8 The e7istence of -uta#a4ideen 06artners2G b8 Capability of 6artnersG -ust be sane K mature and be able of enterin/ into a contract: The contract must ta,e place with free consent of the parties without any fraud or misrepresentation: c8 The presence of the commodityG This means the price and commodity itself:

Special conditions are also three which are as followsG a8 The commodity should be capable of an =/encyG The object in the contract must 4ualify as a commodity havin/ value and not as a free /ood which is accessible to all: For e7ample /rass or wood cannot be made the subject matter: =s each partner is responsible for mana/in/ the project9 therefore he will directly influence the overall profitability of the business: =s a result9 each member in Shir,atAulA=4d should duly 4ualify as le/ally bein/ eli/ible of becomin/ an a/ent and of carryin/ on business e/: #=# has written a boo, and owns it9 #5# cannot sell it unless #=# appoints #5# as his a/ent: b8 The rate of profit sharin/ should be determinedG The share of each partner in the profit earned should be identified at the time of the contract: If however9 the ratio is not determined before hand the contract becomes void 0Fasid2: Therefore identifyin/ the profit share is necessary: c8 6rofit K 1oss Sharin/G =ll partners will share in profit as well as loss: 5y placin/ the burden of loss solely on one or a few partners ma,es the partnership invalid: = condition for Shir,atAulA=4d is that the partners will jointly share the profit: %owever9 definin/ an absolute value is not permissible9 therefore only a percenta/e of the total return is allowed: "he basic rules o2 Musharakah -ushara,ah or Shir,atAulAamwal is a relationship established by the parties throu/h a mutual contract: Therefore9 it /oes without sayin/ that all the necessary in/redients of a valid contract must be present here also: For e7ample9 the parties should be capable of enterin/ into a contractI the contract must ta,e place with free consent of the parties without any duress9 fraud or misrepresentation9 etc: 5ut there are certain in/redients9 which are peculiar to the contract of E-ushara,ahE: They are summari8ed hereG Basic rules o2 &a!ital5 The capital in a -ushara,ah a/reement should beG a8 "uantified 0-a#loom2G -eanin/ how much etc: b8 Specified 0-uta#aiyan2G -eanin/ specified currency etc: c8 Fot necessarily be mer/edG The mi7in/ of capital is not re4uired: d8 Fot necessarily be in li4uid formG Capital share may be contributed either in cashJli4uid or in the form of commodities: In case of a commodity9 the mar,et value of the commodity shall determine the share of the partner in the capital: Management o2 Musharakah The normal principle of -ushara,ah is that every partner has a ri/ht to ta,e part in its mana/ement and to wor, for it: %owever9 the partners may a/ree upon a condition that the mana/ement shall be carried out by one of them9 and no other partner shall wor, for the -ushara,ah: 5ut in this case the sleepin/ partner shall be entitled to the profit only to the e7tent of his investment9 and the ratio of profit allocated to him should not e7ceed the ratio of his investment9 as discussed earlier: %owever9 if all the partners a/ree to wor, for the joint venture9 each one of them shall be treated as the a/ent of the other in all matters of business: =ny wor, done by one of them in the normal course of business shall be deemed as

authori8ed by all partners: Basic rules o2 distribution o2 Pro2it 1. The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business and not in proportion to the capital invested by him: E:/: if it is a/reed between them that #=# will /et 1> of his investment9 the contract is not valid: 6. It is not allowed to fi7 a lump sum amount for anyone of the partners or any rate of profit tied up with his investment: Therefore if #=# K #5# enter into a partnership and it is a/reed between them that #=# shall be /iven !s:1*9***JA per month as his share in the profit and the rest will /o to #5#9 the partnership is invalid: 9. If both partners a/ree that each will /et percenta/e of profit based on his capital percenta/e9 whether both wor, or not9 it is allowed: :. It is also allowed that if an investor is wor,in/9 his profit share 0>2 could be more than his capital base 0>2 irrespective whether the other partner is wor,in/ or not: E/: if #=# K #5# have invested !s:1***JA each in a business and it is a/reed that only #=# will wor, and will /et 2J3rd of the profit while #5# will /et 1J3rd: Similarly if the condition of wor, is also imposed on #5# in the a/reement9 then also the proportion of profit for #=# can be more than his investment: =. If a partner has put an e7press condition in the a/reement that he will not wor, for the -ushara,ah and will remain a sleepin/ partner throu/hout the term of -ushara,ah9 then his share of profit cannot be more than the ratio of his investment: %owever9 %anbali school of thou/ht considers fi7in/ the sleepin/ partners share more than his investment to be permissible: B. It is allowed that if a partner is not wor,in/9 his profit share can be established as less than his capital share: D. If both are wor,in/ partners9 the share of profit can differ from the ratio of investment: E/: Caid K 5a,ar both have invested !s:1***JA each: %owever Caid /ets 1J3rd of the total profit and 5a,ar 2J3rd9 this is allowed: This opinion of Imam =bu %anifa is based on the fact that capital is not the only factor for profit but also labour and wor,: Therefore althou/h the investment of two partners is the same but in some cases 4uantity and 4uality of wor, mi/ht differ: E. If only a few partners are active and others are only sleepin/ partners9 then the share in the profit of the active partner could be fi7ed at hi/her than his ratio of investment e/: #=# K #5# put in !s:1** each and it is a/reed that only #=# will wor,9 then #=# can ta,e more than $*> of the profit as his share: The e7cess he receives over his investment will be compensation for his services Basic rules o2 distribution o2 #oss =ll scholars are unanimous on the principle of loss sharin/ in Shariah based on the sayin/ of Syedna =li ibn Talib that is as followsG E1oss is distributed e7actly accordin/ to the ratio of investment and the profit is divided accordin/ to the a/reement of the partners:E Therefore the loss is always subject to the ratio of investment e/: if #=# has invested *> of the capital and #5# &*>9 they must suffer the loss in the same ratio9 not more9 not less: =ny condition contrary to this principle shall render the contract invalid:

Po3ers + )ights o2 Partners in Musharakah5 =fter enterin/ into a -ushara,ah contract9 partners have the followin/ ri/htsG a8 The ri/ht to sell the mutually owned property since all partners are representin/ each other in Shir,ah and all have the ri/ht to buy K sell for business purposes: b8 The ri/ht to buy raw material or other stoc, on cash or credit usin/ funds belon/in/ to Shir,ah to put into business: c8 The ri/ht to hire people to carry out business if needed: d8 The ri/ht to deposit money K /oods of the business belon/in/ to Shir,ah as depositor trust where and when necessary: e8 The ri/ht to use Shir,ah#s fund or /oods in -udarabah: 28 The ri/ht of /ivin/ Shir,ah#s funds as hiba 0/ift2 or loan: If one partner for purpose of investin/ in the business has ta,en a "ardAeA%asana9 then payin/ it becomes liable on both: "ermination o2 Musharakah -ushara,ah will stand terminated in the followin/ casesG 1. If the purpose of formin/ the Shir,ah has been achieved: For e7ample9 if two partners had formed a Shir,ah for a certain project for e:/: buyin/ a specific 4uantity of cloth in order to sell it and the cloth is purchased and sold with mutual investment9 the rules are simple and clear in this case: The distribution of profit will be as per the a/reed rate whereas in case of loss9 each partner will bear the loss accordin/ to his ratio of investment: 6. Every partner has the ri/ht to terminate the -ushara,ah at any time after /ivin/ his partner a notice that will cause the -ushara,ah to end: For dissolvin/ this partnership9 if the assets are li4uidated9 they will be distributed proArata between the partners: %owever9 if this is not the case9 the partners may a/ree eitherG a8 To li4uidate the assets or b8 .istribute the assets as they are: In case of a dispute between partners whether to see, li4uidation of assets or distribute nonAli4uid assets9 the distribution of nonAli4uid assets will be preferred: 5ecause after the termination of -ushara,ah9 all the assets are in the joint ownership of the partners and a coAowner has a ri/ht to see, partition or separation and no one can compel him on li4uidation: 5ut if the assets are in a form that cannot be distributed such as machinery9 then they shall be sold and the saleAproceeds shall be distributed: 9. In case of a death of any one of the partners or any partner becomin/ insane or incapable of effectin/ commercial transaction9 the -ushara,ah stands terminated: :. In case of dama/e to the share capital of one partner before mi7in/ the same in the total investment and before affectin/ the purchase9 the partnership will stand terminated and the loss will only be borne by that particular partner: %owever9 if the share capital of all partners has been mi7ed and could not be identified sin/ly9 then the loss will be shared by all and the partnership will not be terminated: "ermination o2 Musharakah 3ithout closing the business If one of the partners wants termination of the -ushara,ah9 while the other partner or partners li,e to continue with the business9 this purpose can be achieved by mutual a/reement: The partners who want to run the business may purchase the share of the partner who wants to terminate his partnership9 because

the termination of -ushara,ah with one partner does not imply its termination between the other partners: %owever9 in this case9 the price of the share of the leavin/ partner must be determined by mutual consent: If there is a dispute about the valuation of the share and the partners do not arrive at an a/reed price9 the leavin/ partner may compel other partners on the li4uidation or on the distribution of the assets themselves: The 4uestion arises whether the partners can a/ree9 while enterin/ into the contract of the -ushara,ah9 on a condition that the li4uidation or separation of the business shall not be effected unless all the partners or the majority of them wants to do so: =nd that a sin/le partner who wants to come out of the partnership shall have to sell his share to the other partners and shall not force them on li4uidation or separation: This condition may be justified9 especially in the modern situations9 on the /round that the nature of business9 in most cases today9 re4uires continuity for its success9 and the li4uidation or separation at the instance of a sin/le partner only may cause irreparable dama/e to the other partners: If a particular business has been started with hu/e amounts of money which has been invested in a lon/Aterm project9 and one of the partners see,s li4uidation in the infancy of the project9 it may be fatal to the interests of the partners9 as well as to the economic /rowth of the society9 to /ive him such an arbitrary power of li4uidation or separation: Therefore9 such a condition seems to be justified9 and it can be supported by the /eneral principle laid down by the %oly 6rophet in his famous hadithG KAll conditions agreed u!on by the Muslims are u!held e?ce!t a condition 3hich allo3s 3hat is !rohibited or !rohibits 3hat is la32ulK. Dis!ute )esolution There shall be a provision for adjudication by a !eview Committee to resolve any difference that may arise between the ban, and its clients 0partners2 with respect to any of the provisions contained in the -ushara,ah =/reement: (ecurity in Musharakah In case of -ushara,ah a/reement between the 5an, and the client9 the ban, shall in its own ri/ht and discretion9 obtain ade4uate security from the party to ensure safety of the capital investedJ financed as also for the profit that may be earned as per profit projection /iven by the party: The securities obtained by the ban, shall9 also as usual9 be ,ept fully insured at the party#s cost and e7penses till Islamic mode of insurance i:e: Ta,aful becomes operational: The purpose of this security is to utili8e this only in case of dama/e or loss of the principal amount due to the ne/li/ence of the client: "he di22erence bet3een interest based 2inancing and Musharakah5 Interest based financin/ -ushara,ah 1. = fi7ed rate of return on a loan advanced by the financier is

predeterminedirrespective of the profit earned or loss suffered by the debtor: -ushara,ah does not envisa/e a fi7ed rate of return: The return is based on the actual profit earned by the joint venture: 6. The financier cannot suffer loss: The financier can suffer loss9 if the joint venture fails to produce fruits: 3: !esults in injustice either to the creditor or to the debtor: If the debtor suffers a loss9 it is unjust on the part of the creditor to claim a fi7ed rate of profit: =lso if the debtor earns a very hi/h rate of profit9 it is injustice to the creditor to /ive him only small proportion of the profit leavin/ the rest for the debtor: The returns of the creditor are tied up with the actual profits accrued throu/h the enterprise: The /reater the profits of the enterprise9 the hi/her the rate of return to the creditor: If the enterprise earns enormous profits9 all of it cannot be secured by the debtor e7clusively but will be shared by common people e:/: .epositors in the ban,: I((/$( )$#A"I'G "% M/(*A)A-A* -ushara,ah is a mode of financin/ in Islam: Followin/ are some issues relatin/ to the tenure of -ushara,ah9 redemption in -ushara,ah and the mi7in/ of capital in conductin/ mushara,ah: These were discussed previously9 they are e7plained in detail here: #IA/IDI"0 %F &API"A# = 4uestion commonly as,ed in the operation of -ushara,ah is whether the capital invested needs to be in li4uid form or not: The answer as to whether the contract in -ushara,ah can be based on commodities only or on money varies amon/ the different schools of thou/ht in Islam: For e7ample if Caid and 5a,ar a/ree to invest !s:1*** each in a /arment business and both ,eep their investments with themselves: Then if Caid buys cloth with his investment will it be considered belon/in/ to both Caid and 5a,ar or only to CaidH Furthermore if the cloth is sold9 can Caid alone claim the profit or loss on the saleH In order to answer this 4uestion the prime consideration should be whether the partnership becomes effective without mi7in/ the two investments profit or loss: This issue can be resolved in the li/ht of the followin/ schools of thou/ht of different fi4hsG Imam -ali, is of the view that li4uidity is not a condition for the validity of -ushara,ah: Therefore even if a partner contributes in ,ind to the partnership his share can be determined on the basis of the evaluation accordin/ to the prevalent mar,et price at the date of the contract: %owever Imam %anifa and Imam =hmad do not allow capital of investment to be in ,ind: The reason for this restriction is as followsG T Commodities contributed by one partner will always be distin/uishable from the commodities /iven by the other partners therefore they cannot be treated as homo/enous capital: T If in case of redistribution of share capital to the partners tracin/ bac, each partners share becomes difficult: If the share capital was in the form of commodities then redistribution cannot ta,e place because they may have been sold at that time: Imam Shafi has an opinion dividin/ commodities into twoG

T .hawatAulA=mthalG Commodities which if destroyed can be compensated by similar commodities in 4uality and 4uantity: E7ampla rice9 wheat etc: T .hawatAulA"eemahG Commodities that cannot be compensated by similar commodities li,e animals: Imam Shafi is of the view that commodities of the first ,ind may be contributed to -ushara,ah in the capital while the second type of commodities cannot be a part of the capital: In case of .hawatAulA=mthal redistribution of capital may ta,e place by /ivin/ to each partner the similar commodities he had invested and earlier the commodities need to be mi7ed so well to/ether that the commodity of one partner cannot be distin/uished from commodities contributed by the other: Therefore9 it should be remembered that the illi4uid /oods can be made capital of investment and the mar,et value of the commodities shall determine the share of the partner in the capital: MILI'G %F "*$ &API"A# In case of illi4uid capital bein/ used the mi7in/ of capital is an issue: =ccordin/ to Imam Shafi partners# capital should be mi7ed so well that it cannot be discriminated and this mi7in/ should be done before any business is conducted: Therefore9 partnership will not be completely enforceable if any ,ind of discrimination is present in the partners# capital: %is ar/ument is based on the reasonin/ that unless both investments will be mi7ed the investment will remain under the ownership of the ori/inal investor and any profit or loss on trade of that investment will be entitled to the ori/inal investor only: %ence such a partnership is not possible where the investment is not mi7ed: =ccordin/ to Imam =bu %anifa9 Imam -ali, and Imam =hmed bin %unbul the partnership is complete only with an a/reement and the mi7in/ of capital is not important: They are of the opinion that when two partners a/ree to form a partnership without so far mi7in/ their capital of investment9 then if one partner bou/ht some /oods for the partnership with his share of investment of !s: 1**9***9 these /oods will be accepted as bein/ owned by both partners and hence any profit or loss on sale of these /oods should be shared accordin/ to the partnership a/reement: %owever9 if the share of investment of one person is lost before mi7in/ the capital or buyin/ anythin/ for the partnership business9 then the loss will be borne solely by the person who#s owned the capital and will not be shared by other partners: %owever if the capital of both had been mi7ed and then a part of whole had been lost or stolen the loss would have been borne by both: Since in %anafi9 -ali,i and %anbali schools of thou/ht mi7in/ of the capital is not important therefore a very important present day issue is addressed with reference to this principle: If some companies or tradin/ houses enter into partnership for settin/ up an industry to conduct business they need to open 1C for importin/ the machinery: This 1C reaches the importer throu/h his ban,: Fow when the machinery reaches the port and the importin/ companies need to pay for ta,in/ possession the latter need to show those receipts in order to ta,e possession of the /oods:

?nder Shafi school of thou/ht9 the imported /oods cannot become the capital of investment but will remain in the ownership of the person openin/ the 1C because at the time of openin/ the 1C the capital has not been mi7ed and without mi7in/ the capital -ushara,ah cannot come into e7istence: ?nder this situation if the /oods are lost durin/ shipment the burden of loss will fall upon the opener of the 1C9 even thou/h the /oods were bein/ imported for the entire industry: This is because even thou/h a /roup of companies had as,ed for the machinery or imported /oods the importers had not mi7ed their capital at the time of investment: Contrary to this since the other three schools of thou/ht believe that partnership comes into e7istence at the time of a/reement rather than after the capital has been mi7ed therefore the burden of loss will be borne by all: This has two advanta/esG a8 In case of loss the burden of loss will not fall upon one rather will be shared by all firms of the partner: b8 If the capital is provided at the time of the a/reement it stays bloc,ed for the period durin/ which the machinery is bein/ imported: 3hile if the capital was not ,ept idle9 till the actual operation could be conducted with the machinery the same capital could have been used for somethin/ else as well: This shows that the decision of the three combined schools of thou/ht is better e4uipped to handle the current import e7port situation: TEF?!E <F -?S%=!=@=% For conductin/ a -ushara,ah a/reement9 4uestions arise pertainin/ to fi7in/ the period of the a/reement: For fi7in/ the tenure of the -ushara,ah followin/ conditions should be rememberedG a8 The partnership is fi7ed for such a lon/ time that at the end of the tenure no other business can be conducted: b8 Can be for a very short time period durin/ which partnership is necessary and neither partner can dissolve the partnership: ?nder the %anafi school of thou/ht a person can fi7 the tenure of the partnership because it is an a/reement and an a/reement should have a fi7ed period of time: In the %anbal school of thou/ht the tenure can be fi7ed for the partnership as it#s an a/ency a/reement and an a/ency a/reement in this school can be fi7ed: The -ali,i school however says that Shir,ah cannot be subjected to a fi7ed tenure: Shafi school li,e the -ali,i consider fi7in/ the tenure to be not permissible: Their ar/ument is that fi7in/ the period will prohibit conductin/ the business at the end of that period which in turn means that the fi7in/ will prevent them from conductin/ the business: /ses %2 Musharakah F Mudarabah5 These modes can be used in the followin/ areas 0or can replace them accordin/ to

Shariah rules2: Asset (ide Financing U U U U U U U U U U U U U ShortJmediumJlon/ A term financin/ 6roject financin/ Small K medium enterprises setup financin/ 1ar/e enterprise financin/ Import financin/ Import bills drawn under import letters of credit Inland bills drawn under inland letters of credit 5rid/e financin/ 1C without mar/in 0for -udarba2 1C with mar/in 0for -ushara,ah2 E7port financin/ 06reAshipment financin/2 3or,in/ capital Financin/ !unnin/ accounts financin/ J short term advances

#iability (ide Financing U For currentJ savin/Jmahana amdaniJ investment ccounts 0deposit /ivin/ 6rofit based on -ushar,ahJ-udarbah A with predetermined ratio 2 U InterA 5an, lendin/ J borrowin/ U Term Finance Certificates K Certificate of Investment U TA5ill and Federal Investment 5onds J .ebenture: U Securiti8ation for lar/e projects 0based on -ushar,ah2 U Certificate of Investment based on -urabahah 0E/G =l -ee8an !iba Free 2 U Islamic -ushara,ah bonds 0based on projects re4uirin/ lar/e amounts A profit based on the return from the project2

($&"I%' . I, I(#AMI& M%D$( %F FI'A'&I'G

&ha!ter .1: M/DA)ABA*

Glossary5 Mudarib 5 3or,in/ 6artner 0brin/s effort2 )as.ul.Maal 5 Investment )ab.ul.Maal 5 Investor 0brin/s capital2 Wakeel 5 =/ent Ameen 5 Trustee -a2eel 5 Buarantor De2inition5 This is a ,ind of partnership where one partner /ives money to another for investin/ in a commercial enterprise: The investment comes from the first partner who is called E!abAulA-aalE while the mana/ement and wor, is an e7clusive responsibility of the other9 who is called E-udaribE and the profits /enerated are shared in a predetermined ratio: "y!es o2 Mudarabah There are 2 types of -udarabah namelyG 1. =l -udarabah =l -u4ayyadahG !abAulA-aal may specify a particular business or a particular place for the mudarib9 in which case he shall invest the money in that particular business or place: This is called =l -udarabah =l -u4ayyadah 0restricted -udarabah2: 6. =l -udarabah =l -utla4ahG %owever if !abAulAmaal /ives full freedom to -udarib to underta,e whatever business he deems fit9 this is called =l -udarabah =l -utla4ah 0unrestricted -udarabah2: %owever -udarib cannot9 without the consent of !abAulA-aal9 lend money to anyone: -udarib is authori8ed to do anythin/9 which is normally done in the course of business: %owever if they want to have an e7traordinary wor,9 which is beyond the normal routine of the traders9 he cannot do so without e7press permission from !abAulA-aal: %e is also not authori8ed toG a8 ,eep another -udarib or a partner b8 mi7 his own investment in that particular -odarabah without the consent of !abAul -aal: Conditions of <ffer K =cceptance are applicable to both: = !abAulA-aal can contract -udarabah with more than one person throu/h a sin/le transaction: It means that he can offer his money to #=# and #5# both so that each one of them can act for him as -udarib and the capital of the -udarabah shall be utili8ed by both of them jointly9 and the share of the -udarib: .ifference between -ushara,ah and -udarabah Musharakah Mudarabah 1. =ll partners invest: <nly !abAulA-aal invests: 6. =ll partners participate in the mana/ement of the business and can wor, for it: !abAulAmaal has no ri/ht to participate in the mana/ement which is carried out by the -udarib only: 9. =ll partners share the loss to the e7tent of the ratio of their investment: <nly !abAulAmaal suffers loss because the -udarib does not invest anythin/: %owever this is subject to a condition that the -udarib has wor,ed with due dili/ence:

:. The liability of the partners is normally unlimited: If the liabilities of business e7ceed its assets and the business /oes in li4uidation9 all the e7ceedin/ liabilities shall be borne pro rata by all partners: 5ut if the partners a/ree that no partner shall incur any debt durin/ the course of business9 then the e7ceedin/ liabilities shall be borne by that partner alone who has incurred a debt on the business in violation of the aforesaid condition: The liability of !abAulAmaal is limited to his investment unless he has permitted the -udarib to incur debts on his behalf: =s soon as the partners mi7 up their capital in a joint pool9 all the assets become jointly owned by all of them accordin/ to the proportion of their respective investment: =ll partners benefit from the appreciation in the value of the assets even if profit has not accrued throu/h sales: The /oods purchased by the -udarib are solely owned by !abAulAmaal and the -udarib can earn his share in the profit only in case he sells the /oods profitably: In4estment In -udarabah9 !abAulAmaal provides the investment and -udarib the mana/ement therefore the !abAulAmaal should hand over the a/reed investment to -udarib and leaves everythin/ to -udarib with no interference from his side but he has the authority toG a8 <versee the -udarib#s activities and b8 3or, with -udarib if the -udarib consents: In what form should the capital beH Should it be li4uid or nonAli4uid assets li,e e4uipment9 land etc: can these form a capitalH The basic principle is that the capital in -udarabah is valid just the way as it is in Shir,ah which accordin/ to %anafi fi4h should be in li4uid form but accordin/ to other scholars e4uipment9 land etc can also be included as capital: %owever all a/ree on the followin/G =ssets other than cash can be used as an intermediate step9 meanin/G %owever this is subject to the determination of e7act amount of the assets before it is used for -udarabah: If the assets are not correctly evaluated9 the -udarabah is not valid: Mudarabah $?!enses The -udarib shares profit of the -udarabah as per a/reed rate with the investor but his e7penses li,e meals9 clothin/9 conveyance and medical are not borne by -udarabah: %owever9 if he is travelin/ on business and is overstayin/ the ni/ht9 then the above e7penses shall be covered from capital: If -udarib /oes for a journey which constitutes SafarAeASharai 0more than ( miles2 but does not overstay the ni/ht9 his e7penses will not be borne by -udarabah: =ll e7penses which are incidental to the -udarabah#s function li,e wa/es of employeesJwor,ers or Commission in buyin/Jsellin/ or stitchin/9 dyein/ e7penses etc have to be paid by the -udarabah: %owever all e7penses will be included in the cost of commodities which -udarib is sellin/ for e/: if he is sellin/ ready made /arments then the stitchin/9 dyein/9 washin/ e7penses etc: can be included by the

-udarib in the total cost of the /arments: If the -udarib mana/es the -udarabah within his city 9 he will not be allowed any e7penses9 only his profit share: Similarly9 if he ,eeps an employee9 this employee will not be allowed any e7penses9 just his salary: If the -udarabah a/reement becomes Fasid due to any reason9 the -udarib#s status will be li,e an employee9 meanin/G a8 whether he is travelin/ or doin/ business in his city9 will not be entitled to any e7pense such as meals9 conveyance9 clothin/9 medicine etc: b8 he will not be sharin/ any profit and will just /et ?jratAeA-isl 0ordinary pay2 for his job:

Distribution o2 Pro2it + #oss It is necessary for the validity of -udarabah that the parties a/ree9 ri/ht at the be/innin/9 on a definite proportion of the actual profit to which each one of them is entitled: The Shariah has prescribed no particular proportionI rather it has been left to their mutual consent: They can share the profit in e4ual proportions and they can also allocate different proportions for !abAulA-aal and -udarib: %owever in e7treme case where the parties have not predetermined the ratio of profit9 the profit will be calculated at $*G$*: The -udarib K !abAulA-aal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital: For e7ample9 if the capital is !s:1**9***JA9 they cannot a/ree on a condition that !s:1*9*** out of the profit shall be the share of the -udarib nor can they say that 2*> of the capital shall be /iven to !abAulA-aal: %owever they can a/ree that *> of the actual profit shall /o to the -udarib and &*> to the !abAulA -aal or vice versa: It is also allowed that different proportions are a/reed in different situations: For e7ample9 the !abAulA-aal can say to -udarib EIf you trade in wheat9 you will /et $*> of the profit and if you trade in flour9 you will have 33> of the profitE: Similarly9 he can say EIf you do the business in your town9 you will be entitled to 3*> of the profit and if you do it in another town9 your share will be $*> of the profitE: =part from the a/reed proportion of the profit9 as determined in the above manner9 the -udarib cannot claim any periodical salary or a fee or remuneration for the wor, done by him for the -udarabah: =ll schools of Islamic Fi4h are unanimous on this point: %owever9 Imam =hmad has allowed for the -udarib to draw his daily e7penses of food only from the -udarabah =ccount: The %anafi jurists restrict this ri/ht of the -udarib only to a situation when he is on a business trip outside his own city: In this case he can claim his personal e7penses9 accommodation9 food9 etc: but he is not entitled to

/et anythin/ as daily allowances when he is in his own city: If the business has incurred loss in some transactions and has /ained profit in some others9 the profit shall be used to offset the loss at the first instance9 then the remainder9 if any9 shall be distributed between the parties accordin/ to the a/reed ratio: The -udarabah becomes void 0Fasid2 if the profit is fi7ed in any way: In this case9 the entire amount 06rofit V Capital2 will be the !abAulA-aal#s: The -udarib will just be an employee earnin/ ?jratAeA-isl: The remainin/ amount will be called 06rofit2: This profit will be shared in the a/reed 0preAa/reed2 ratio: )oles o2 the Mudarib5 =meen 0Trustee2G To loo, after the investment responsibly9 e7cept in case of natural calamities: 3a,eel 0=/ent2 G To purchase from the funds provided by !abAulA-aal Sharee, 06artner2G Sharin/ in any profit Camin 01iable2G To provide for the loss suffered by the -udarabah due to any act on his part: =jeer 0Employee2G 3hen the -udarabah /ets Fasid due to any reason9 the -udarib is entitled to only the salary9 ?jratAeA-isl: In case there is a loss9 the -udarib will not even /et the ?jratAeA-isl: "ermination o2 Mudarabah The -udarabah will stand terminated when the period specified in the contract e7pires: It can also be terminated any time by either of the two parties by /ivin/ notice: In case !abAulA-aal has terminated services of -udarib9 he will continue to act as -udarib until he is informed of the same and all his acts will form part of -udarabah: If all assets of the -udarabah are in cash form at the time of termination9 and some profit has been earned on the principal amount9 it shall be distributed between the parties accordin/ to the a/reed ratio: %owever9 if the assets of -udarabah are not in cash form9 it will be sold and li4uidated so that the actual profit may be determined: =ll loans and payables of -udarabah will be recovered: The provisional profit earned by -udarib and !abAulA-aal will also be ta,en into account and when total capital is drawn9 the principal amount invested by !abAulA -aal will be /iven to him9 balance will be called profit which will be distributed between -udarib and !abAulA-aal at the a/reed ratio: If no balance is left9 -udarib will not /et anythin/: If the principal amount is not recovered fully9 then the profit shared by -udarib and !abAulA-aal durin/ the term of -udarabah will be withdrawn to pay the principal amount to !abAulA-aal: The balance will be profit9 which will be distributed between -udarib and !abAulA-aal: In this case too if no balance is left9 -udarib will not /et anythin/:

/ses %2 Musharakah F Mudarabah 5 These modes can be used in the followin/ areas 0or can replace them accordin/ to Shariah rules2: Asset (ide Financing U U U U U U U U U U U U U ShortJmediumJlon/ A term financin/ 6roject financin/ Small K medium enterprises setup financin/ 1ar/e enterprise financin/ Import financin/ Import bills drawn under import letters of credit Inland bills drawn under inland letters of credit 5rid/e financin/ 1C without mar/in 0for -udarba2 1C with mar/in 0for -ushara,ah2 E7port financin/ 06reAshipment financin/2 3or,in/ capital financin/ !unnin/ accounts financin/ J short term advances

#iability (ide Financing U For current Jsavin/Jmahana amdaniJinvestment accounts 0deposit /ivin/ 6rofit based on -ushar,ah J -udarabah A with predetermined ratio 2 U InterA 5an, lendin/ J borrowin/ U Term Finance Certificates K Certificate of Investment U TA5ill and Federal Investment 5onds J .ebenture: U Securiti8ation for lar/e projects 0based on -ushar,ah2 U Certificate of Investment based on -urabahah 0E/G =l -ee8an !iba Free 2 U Islamic -ushara,ah bonds 0based on projects re4uirin/ lar/e amounts A profit based on the return from the project2

($&"I%' . I, I(#AMI& M%D$( %F FI'A'&I'G

&ha!ter .1=

DIMI'I(*I'G M/(*A)A-A* =nother form of -ushara,ah9 developed in the near past9 is #.iminishin/ -ushara,ah#: =ccordin/ to this concept9 a financier and his client participate either in the joint ownership of a property or an e4uipment9 or in a joint commercial enterprise: The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically9 thus increasin/ his own share until all the units of the financier are purchased by him so as to ma,e him the sole owner of the property9 or the commercial enterprise9 as the case may be: The .iminishin/ -urabahah based on the above concept has ta,en different shapes in different transactions: Some e7amples are /iven belowG 1. It has been used mostly in house financin/: The client wants to purchase a house for which he does not have ade4uate funds: %e approaches the financier who a/rees to participate with him in purchasin/ the re4uired house: 2*> of the price is paid by the client and (*> of the price by the financier: Thus9 the financier owns (*> of the house while the client owns 2*>: =fter purchasin/ the property jointly9 the client uses the house for his residential re4uirement and pays rent to the financier for usin/ his share in the property: =t the same time9 the share of financier is further divided in ei/ht e4ual units9 each unit representin/ 1*> ownership of the house: The client promises to the financier that he will purchase one unit after three months: =ccordin/ly9 after the first term of three months he purchases one unit of the share of the financier by payin/ 1J1*th of the price of the house: It reduces the share of the financier from (*> to '*>: %ence9 the rent payable to the financier is also reduced to that e7tent: =t the end of the second term9 he purchases another unit increasin/ his share in the property to *> and reducin/ the share of the financier to &*> and conse4uently reducin/ the rent to that proportion: This process /oes on in the same fashion until after the end of two years9 the client purchases the whole share of the financier reducin/ the share of the financier to #8ero# and increasin/ his own share to 1**>: This arran/ement allows the financier to claim rent accordin/ to his proportion of ownership in the property and at the same time allows him periodical return of a part of his principal throu/h purchases of the units of his share: 6. #=# wants to purchase a ta7i to use it for offerin/ transport services to passen/ers and to earn income throu/h fares recovered from them9 but he is short of funds: #5# a/rees to participate in the purchase of the ta7i9 therefore9 both of them purchase a ta7i jointly: (*> of the price is paid by #5# and 2*> is paid by #=#: =fter the ta7i is purchased9 it is employed to provide transport to the passen/ers whereby the net income of !s: 1***JA is earned on daily basis: Since #5# has (*> share in the ta7i9 it is a/reed that (*> of the fare will be /iven to him and the rest of 2*> will be retained by #=# who has a 2*> share in the ta7i: It means that !s: (**JA is earned by #5# and !s: 2**JA by #=# on daily basis: =t the same time the share of #5# is further divided into ei/ht units: =fter three months #=# purchases one unit from the share of #5#: Conse4uently the share of #5# is reduced to '*> and share of #=# is increased to 3*> meanin/ thereby that as from that date #=# will be entitled to !s: 3**JA from the daily income of the ta7i and #5# will earn !s: '**JA: This process will /o on until after the e7piry of two years9 the

whole ta7i will be owned by #=# and #5# will ta,e bac, his ori/inal investment alon/ with income distributed to him as aforesaid: 9. #=# wishes to start the business of readyAmade /arments but lac,s the re4uired funds for that business: #5# a/rees to participate with him for a specified period9 say two years: *> of the investment is contributed by #=# and &*> by #5#: 5oth start the business on the basis of -ushara,ah: The proportion of profit allocated for each one of them is e7pressly a/reed upon: 5ut at the same time #5#s share in the business is divided to si7 e4ual units and #=# ,eeps purchasin/ these units on /radual basis until after the end of two years #5# comes out of the business9 leavin/ its e7clusive ownership to #=#: =part from periodical profits earned by #5#9 he /ains the price of the units of his share which9 in practical terms9 tend to repay to him the ori/inal amount invested by him: =naly8ed from the Shariah point of view this arran/ement is composed of different transactions9 which come to play their role at different sta/es: Therefore9 each one of the fore/oin/ three forms of diminishin/ -ushara,ah is discussed below in the li/ht of the Islamic principlesG %ouse financin/ on the basis of diminishin/ -ushara,ah The proposed arran/ement is composed of the followin/ transactionsG 1. To create joint ownership in the property 0Shir,atAulA-il,2: 6. Bivin/ the share of the financier to the client on rent: 9. 6romise from the client to purchase the units of share of the financier: :. =ctual purchase of the units at different sta/es: =. =djustment of the rental accordin/ to the remainin/ share of the financier in the property: (te!s in detail o2 the arrangement i8 The first step in the above arran/ement is to create a joint ownership in the property: It has already been e7plained in the be/innin/ of this chapter that #Shir,atAulA-il,# 0joint ownership2 can come into e7istence in different ways includin/ joint purchase by the parties: =ll schools of Islamic jurisprudence have e7pressly allowed this: Therefore no objection can be raised a/ainst creatin/ this joint ownership: ii8 The second part of the arran/ement is that the financier leases his share in the house to his client and char/es rent from him: This arran/ement is also above board because there is no difference of opinion amon/ the -uslim jurists in the permissibility of leasin/ one#s undivided share in a property to his partner: If the undivided share is leased out to a third party its permissibility is a point of difference between the -uslim jurists: Imam =bu %anifa and Imam Cufar are of the view that the undivided share cannot be leased out to a third party9 while Imam -ali, and Imam Shafi#i9 =bu Lusuf and -uhammad Ibn %asan hold that the undivided share can be leased out to any person: 5ut so far as the property is leased to the partner himself9 all of them are unanimous on the validity of #Ijarah#: iii8 The third step in the aforesaid arran/ement is that the client purchases different units of the undivided share of the financier: This transaction is also allowed: If the undivided share relates to both land and buildin/9 the sale of both

is allowed accordin/ to all the Islamic schools: Similarly if the undivided share of the buildin/ is intended to be sold to the partner9 it is also allowed unanimously by all the -uslim jurists: %owever9 there is a difference of opinion if it is sold to the third party: It is clear from the fore/oin/ three points that each one of the transactions mentioned herein above is allowed9 but the 4uestion is whether this transaction may be combined in a sin/le arran/ement: The answer is that if all these transactions have been combined by ma,in/ each one of them a condition to the other9 then this is not allowed in Shariah9 because it is a well settled rule in the Islamic le/al system that one transaction cannot be made a preAcondition for another: %owever9 the proposed scheme su//ests that instead of ma,in/ two transactions conditional to each other9 there should be one sided promise from the client9 firstly9 to ta,e share of the financier on lease and pay the a/reed rent9 and secondly9 to purchase different units of the share of the financier of the house at different sta/es: This leads us to the fourth step9 which is the enforceability of such a promise: i48 It is /enerally believed that a promise to do somethin/ creates only a moral obli/ation on the promisor9 which cannot be enforced throu/h courts of law: %owever9 there are a number of -uslim jurists who declare that promises are enforceable9 and the court of law can compel the promisor to fulfill his promise9 especially9 in the conte7t of commercial activities: Some -ali,i and %anafi jurists can be cited9 in particular9 who have declared that the promises can be enforced throu/h courts of law in cases of need: The %anafi jurists have adopted this view with re/ard to a particular sale called #baiAbilwafa#: This baiAbilwafa is a special arran/ement of sale of a house whereby the buyer promises to the seller that whenever the latter /ives him bac, the price of the house9 he will resell the house to him: This arran/ement was in vo/ue in countries of central =sia9 and the %anafi jurists have declared that if the resale of the house to the ori/inal seller is made a condition for the initial sale9 it is not allowed: %owever9 if the first sale is effected without any condition9 but after effectin/ the sale the buyer promises to resell the house whenever the seller offers to him the same price9 this promise is acceptable and it creates not only a moral obli/ation9 but also an enforceable ri/ht of the ori/inal seller: The -uslim jurists allowin/ this arran/ement have based their view on the principle that Ethe promise can be made enforceable at the time of needE: Even if the promise has been made before effectin/ the first sale9 after which the sale has been effected without a condition9 it is also allowed by certain %anafi jurists: <ne may raise an objection that if the promise of resale has been ta,en before enterin/ into an actual sale9 it practically amounts to puttin/ a condition on the sale itself9 because the promise is understood to have been entered into between the parties at the time of sale9 and therefore9 even if the sale is without an e7press condition9 it should be ta,en as conditional because a promise in an e7press term has preceded it: This objection can be answered by sayin/ that there is a bi/ difference between

puttin/ a condition in the sale and ma,in/ a separate promise without ma,in/ it a condition: If the condition is e7pressly mentioned at the time of sale9 it means that the sale will be valid only if the condition is fulfilled9 meanin/ thereby that if the condition is not fulfilled in future9 the present sale will become void: This ma,es the transaction of sale contin/ent on a future event9 which may or may not occur: It leads to uncertainty 0Bharar2 in the transaction9 which is totally prohibited in Shariah: Conversely9 if the sale is without any condition9 but one of the two parties has promised to do somethin/ separately9 then the sale cannot be held to be contin/ent or conditional with fulfillin/ of the promise: It will ta,e effect irrespective of whether or not the promisor fulfills his promise: Even if the promisor bac,s out of his promise9 the sale will remain effective: The most the promisee can do is to compel the promisor throu/h court of law to fulfill his promise and if the promisor is unable to fulfill the promise9 the promisee can claim actual dama/es he has suffered because of the default: This ma,es it clear that a separate and independent promise to purchase does not render the ori/inal contract conditional or contin/ent: Therefore9 it can be enforced: <n the basis of this analysis9 diminishin/ -ushara,ah may be used for %ouse Financin/ with followin/ conditionsG a8 The a/reement of joint purchase9 leasin/ and sellin/ different units of the share of the financier should not be tiedAup to/ether in one sin/le contract: %owever9 the joint purchase and the contract of lease may be joined in one document whereby the financier a/rees to lease his share9 after joint purchase9 to the client: This is allowed because9 as e7plained in the relevant chapter9 Ijarah can be affected for a future date: =t the same time the client may si/n oneAsided promise to purchase different units of the share of the financier periodically and the financier may underta,e that when the client will purchase a unit of his share9 the rent of the remainin/ units will be reduced accordin/ly: b8 =t the time of the purchase of each unit9 sale must be affected by the e7chan/e of offer and acceptance at that particular date: c8 It will be preferable that the purchase of different units by the client is affected on the basis of the mar,et value of the house as prevalent on the date of purchase of that unit9 but it is also permissible that a particular price is a/reed in the promise of purchase si/ned by the client: Diminishing Musharakah 2or carrying business o2 ser4ices5 The second e7ample /iven above for diminishin/ -ushara,ah is the joint purchase of a ta7i run for earnin/ income by usin/ it as a hired vehicle: This arran/ement consists of the followin/ in/redientsG a8 Creatin/ joint ownership in a ta7i in the form of Shir,at ulA-il,: =s already stated9 this is allowed in Shariah:

b8 -ushara,ah in the income /enerated throu/h the services of the ta7i: It is also allowed as mentioned earlier in this chapter: c8 6urchase of different units of the share of the financier by the client: This is a/ain subject to the conditions already detailed in the case of %ouse financin/: %owever9 there is a sli/ht difference between %ouse financin/ and the arran/ement su//ested in this second e7ample: The ta7i9 when used as a hired vehicle9 normally depreciates in value over time9 therefore9 depreciation in the value of the ta7i must be ,ept in mind while determinin/ the price of different units of the share of the financier: Diminishing Musharakah in "rade The third e7ample of diminishin/ -ushara,ah as /iven above is that the financier contributes &*> of the capital for launchin/ a business of readyAmade /arments9 for e7ample: This arran/ement is composed of two in/redients onlyG 18 In the first place9 the arran/ement is simply a -ushara,ah whereby two partners invest different amounts of capital in a joint enterprise: This is obviously permissible subject to the conditions of -ushara,ah already spelled out earlier in this chapter: 68 6urchase of different units of the share of the financier by the client: This may be in the form of a separate and independent promise by the client: The re4uirements of Shariah re/ardin/ this promise are the same as e7plained in the case of %ouse financin/ with one very important difference: %ere the price of units of the financier cannot be fi7ed in the promise to purchase9 because if the price is fi7ed before hand at the time of enterin/ into -ushara,ah9 it will practically mean that the client has ensured the principal invested by the financier with or without profit9 which is strictly prohibited in the case of -ushara,ah: Therefore9 there are two options for the financier about fi7in/ the price of his units to be purchased by the client: <ne option is that he a/rees to sell the units on the basis of valuation of the business at the time of the purchase of each unit: If the value of the business has increased9 the price will be hi/her and if it has decreased the price will be less: Such valuation may be carried out in accordance with the reco/ni8ed principles throu/h the e7perts9 whose identity may be a/reed upon between the parties when the promise is si/ned: The second option is that the financier allows the client to sell these units to any body else at whatever price he can9 but at the same time he offers a specific price to the client9 meanin/ thereby that if he finds a purchaser of that unit at a hi/her price9 he may sell it to him9 but if he wants to sell it to the financier9 the latter will be a/reeable to purchase it at the price fi7ed by him before hand: =lthou/h both these options are available accordin/ to the principles of Shariah9 the second option does not seem to be feasible for the financier9 because it would lead to injectin/ new partners in the -ushara,ah which will disturb the whole arran/ement and defeat the purpose of .iminishin/ -ushara,ah in which the financier wants to /et his money bac, within a specified period: Therefore9 in order to implement the objective of .iminishin/ -ushara,ah9 only the first option is practical:

/ses5 U U U U U =ll 6urchase of Fi7ed =ssets %ouse Financin/ 6lant K Factory Financin/ Car J Transport Financin/ 6roject Financin/ of fi7ed assets:

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&ha!ter .1B M/)ABA*A -urabaha is one of the most commonly used modes of financin/ by Islamic 5an,s and financial institutions: De2inition -urabahah is a particular ,ind of sale where the seller e7pressly mentions the cost of the sold commodity he has incurred9 and sells it to another person by addin/ some profit thereon: Thus9 -urabahah is not a loan /iven on interestI it is a sale of a commodity for cashJdeferred price: The 5ai# -urabahah involves purchase of a commodity by a ban, on behalf of a client and its resale to the latter on costAplusAprofit basis: ?nder this arran/ement the ban, discloses its cost and profit mar/in to the client: In other words rather than advancin/ money to a borrower9 which is how the system would wor, in a conventional ban,in/ a/reement9 the ban, will buy the /oods from a third party and sell those /oods on to the customer for a preAa/reed price: -urabahah is a mode of financin/ as old as -ushara,ah: Today in Islamic ban,s worldAover &&> of all investment transactions are throu/h -urabahah: Di22erence bet3een Murabahah and (ale = simple sale in =rabic is called -usawamah A a bar/ainin/ sale without disclosin/ or referrin/ to what the cost price is: %owever when the cost price is disclosed to

the client it is called -urabahah: = simple -urabahah is one where there is cash payment and -urabahah -uajjal is one on deferred payment basis: Arguments against Murabahah =n ar/ument that arises in -urabahah is that profit or interest both are the same and -urabahah financin/ is the same as conventional ban,in/: Islamic scholars however ar/ue that in several respects a -urabahah financin/ structure is 4uite different to an overdraft or/ani8ed alon/ conventional lines and the former offers several benefits to the ban, and its customers: .epositors are made to share in profits of the ban, as a result of this financin/: The basic difference is however the =4d or the contract which covers the Islamic conditions: If the contract has interest element then it will be void: Basic rules 2or Murabahah Followin/ are the rules /overnin/ a -urabahah transactionG 1. The subject of sale must e7ist at the time of the sale: Thus anythin/ that may not e7ist at the time of sale cannot be sold and its nonAe7istence ma,es the contract void: 6. The subject matter should be in the ownership of the seller at the time of sale: If he sells somethin/ that he has not ac4uired himself then the sale becomes void: 9. The subject of sale must be in physical or constructive possession of the seller when he sells it to another person: Constructive possession means a situation where the possessor has not ta,en physical delivery of the commodity yet it has come into his control and all ri/hts and liabilities of the commodity are passed on to him includin/ the ris, of its destruction: :. The sale must be instant and absolute: Thus a sale attributed to a future date or a sale contin/ent on a future event is void: For e7ample9 #=# tells #5# on 1st ;anuary that he will sell his car on 1st February to #5#9 the sale is void because it is attributed to a future date: =. The subject matter should be a property havin/ value: Thus a /ood havin/ no value cannot be sold or purchased: B. The subject of sale should not be a thin/ used for an unAIslamic purpose: D. The subject of sale must be specifically ,nown and identified to the buyer: For E7ample9 #=# owner of an apartment buildin/ says to #5# that he will sell an apartment to #5#: Fow the sale is void because the apartment to be sold is not specifically mentioned or pointed to the buyer: E. The delivery of the sold commodity to the buyer must be certain and should not depend on a contin/ency or chance: ;. The certainty of price is a necessary condition for the validity of the sale: If the price is uncertain9 the sale is void: 1*: The sale must be unconditional: = conditional sale is invalid unless the condition is reco/ni8ed as a part of the transaction accordin/ to the usa/e of the trade: Step by step -urabahah Financin/ 1. The client and the institution si/n an overall a/reement whereby the institution promises to sell and the client promises to buy the commodity from time to time on an a/reed ratio of profit added to the cost: This a/reement may specify the limit upAto which the facility may be availed: 6. =n a/ency a/reement is si/ned by both parties in which the institution appoints

the client as his a/ent for purchasin/ the commodity on its behalf: 9. The client purchases the commodity on behalf of the institution and ta,es possession as the a/ent of the institution: :. The client informs the institution that it has purchased the commodity and simultaneously ma,es an offer to purchase it from the institution: =. The institution accepts the offer and the sale is concluded whereby ownership as well as ris, is transferred to the client: =ll the above conditions are necessary to effect a valid -urabahah: If the institution purchases the commodity directly from the supplier9 it does not need any a/ency a/reement: The most essential element of the transaction is that the commodity must remain in the ris, of the institution durin/ the period between the third and the fifth sta/e: The above is the only way by which this transaction is distin/uished from an ordinary interestAbased transaction: Issues in Murabahah Followin/ are some of the issues in -urabahah financin/G 1. (ecurities against Murabahah 6ayments comin/ from the sale are receivables and for this9 the client may be as,ed to furnish a security: It can be in the form of a mort/a/e or hypothecation or some ,ind of lien or char/e: 6. Guaranteeing the Murabahah The seller can as, the client to furnish a 3rd party /uarantee: In case of default on payment the seller may have recourse to the /uarantor who will be liable to pay the amount /uaranteed to him: There are two issues relatin/ to thisG a8 The /uarantor cannot char/e a fee from the ori/inal client: The reason bein/ that a person char/in/ a fee for advancin/ a loan comes under the definition of riba: b8 %owever the /uarantor can char/e for any documentation e7penses: 9. Penalty o2 de2ault =nother issue with -urabahah is that if the client defaults in payment of the price at the due date9 the price cannot be chan/ed nor can penalty fees be char/ed: In order to deal with dishonest clients who default in payment deliberately9 they should be made liable to pay compensation to the Islamic 5an, for the loss suffered on account of default: %owever these should be made subject to the followin/ conditionsG a2 The defaulter may be /iven a /race period of atAleast oneAmonth: b2 If it is proven beyond doubt that the client is defaultin/ without valid e7cuse then compensation can be demanded:

:. )ollo4er in Murabahah -urabahah transaction cannot be rolled over for a further period as the old contract ends: It should be understood that -urabahah is not a loan rather the sale of a commodity9 which is deferred to a specific date: <nce this commodity is sold9 its ownership transfers from the ban, to the client and it is therefore no more a property of the seller: Fow what the seller can claim is only the a/reed price and therefore there is no 4uestion of effectin/ another sale on the same commodity between the same parties: =. )ebate on earlier !ayments Sometimes the debtors want to pay early to /et discounts: %owever in Islam9 majority of -uslim Scholars includin/ the major schools of thou/ht consider this to be unAIslamic: %owever if the Islamic ban, or financial institution /ives somebody a rebate on its own9 it is not objectionable especially if the client is needy: B. &alculation o2 cost in Murabahah The -urabahah can only be effected when the seller can ascertain the e7act cost he has incurred in ac4uirin/ the commodity he wants to sell: If the e7act cost cannot be ascertained then -urabahah cannot ta,e place: In this case the sale will ta,e place as -usawamah i:e: sale without reference to cost: D. (ub>ect matter o2 the sale =ll commodities cannot be the subject matter in -urabahah because certain re4uirements need to be fulfilled: The shares of a lawful company can be sold or purchased on -urabahah basis because accordin/ to the principles of Islam the shares represent ownership into assets of the company provided all other basic conditions of the transaction are fulfilled: = buy bac, arran/ement or sellin/ without ta,in/ their possession is not allowed at all: -urabahah is not possible on thin/s that cannot become the subject of sale: For e7ample9 -urabahah is not possible in e7chan/e of currencies: Basic mistakes in Murabahah Financing Some basic mista,es that can be made in practical implications of the concept are as followsG 1. The most common mista,e is to assume that -urabahah can be used for all types of transactions and financin/: This mode can only be used when a commodity is to be purchased by the customer: If funds are re4uired for some other purpose -urabahah cannot be used: 6. The document is si/ned for obtainin/ funds for a specific commodity and therefore it is important to study the subject matter of the -urabahah: 9. In some cases9 the sale of commodity to the client is affected before the commodity is ac4uired from the supplier: This occurs when the various sta/es of the -urabahah are s,ipped and the documents are si/ned all to/ether: It is to be remembered that -urabahah is a pac,a/e of different contracts and they come into play one after another at their respective sta/es:

:. It is observed in some financial institutions that -urabahah is applied on already purchased commodities9 which is not allowed in Shariah and can be effected on not yet purchased commodities: /ses o2 Murabahah5 -urabahah can be used in followin/ conditionsG (hort F Medium F #ong "erm Finance 2or5 U !aw material U Inventory U E4uipment U =sset financin/ U Import financin/ U E7port financin/ 06reAshipment2 U Consumer /oods financin/ U %ouse financin/ U +ehicle financin/ U 1and financin/ U Shop financin/ U 6C financin/ U Tour pac,a/e financin/ U Education pac,a/e financin/ U =ll other services that can be sold in the form of pac,a/e 0i:e: services li,e education9 medical etc: as a pac,a/e2 O Securiti8ation of -urabahah a/reement 0certificate2 is allowed at par value only: <ther wise certain rules of Islamic Finance must be met: Bai' Mua>>al 5ai# -uajjal is the =rabic acronym for Esale on deferred payment basisE: The deferred payment becomes a loan payable by the buyer in a lump sum or installment 0as a/reed between the two parties2: In 5ai# -uajjal all those items can be sold on deferred payment basis which come under the definition of capital where 4uality does not ma,e a difference but the intrinsic value does: Those assets do not come under definition of capital where 4uality can be compensated for by the price and Shariah scholars have an #ijmah# 0consensus2 that demandin/ a hi/h price in deferred payment in such a case is permissible: &onditions 2or Bai' Mua>>al 1. The price to be paid must be a/reed and fi7ed at the time of the deal: It may include any amount of profit without 4ualms about riba: 6. CompleteJtotal possession of the object in 4uestion must be /iven to the buyer9 while the deferred price is to be treated as debt a/ainst him: 9. <nce the price is fi7ed9 it cannot be decreased in case of earlier payment nor can it be increased in case of default: :. In order to secure the payment of price9 the seller may as, the buyer to furnish

a security either in the form of mort/a/e or in the form of an item: =. If the commodity is sold on installments9 the seller may put a condition on the buyer that if he fails to pay any installment on its due date9 the remainin/ installments will become due immediately:

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&ha!ter .1D (A#AM Glossary )abb.us.salam 5 5uyer Muslam ilaih 5 Seller )a's.ul.maal 5 Cash price Muslam 2ih 5 6urchased commodity This mode of financin/ can be used by the modern ban,s and financial institutions especially to finance the a/ricultural sector: In Salam9 the seller underta,es to supply specific /oods to the buyer at a future date in e7chan/e of an advanced price fully paid at spot: The price is in cash but the supply of purchased /oods is deferred: Pur!ose o2 use5 O To meet the need of small farmers who need money to /row their crops and to feed their family up to the time of harvest: 3hen =llah declared !iba haram9 the farmers could not ta,e usurious loans: Therefore %oly 6rophet allowed them to sell their a/ricultural products in advance:

To meet the need of traders for import and e7port business: ?nder Salam9 it is

allowed for them that they sell the /oods in advance so that after receivin/ their cash price9 they can easily underta,e the aforesaid business: Salam is beneficial to the seller because he received the price in advance and it was beneficial to the

buyer also because normally the price in Salam is lower than the price in spot sales: The permissibility of Salam is an e7ception to the /eneral rule that prohibits forward sale and therefore it is subject to strict conditions9 which are as followsG &onditions o2 (alam5 1. It is necessary for the validity of Salam that the buyer pays the price in full to the seller at the time of effectin/ the sale: In the absence of full payment9 it will be tantamount to sale of a debt a/ainst a debt9 which is e7pressly prohibited by the %oly 6rophet : -oreover the basic wisdom for allowin/ Salam is to fulfill the Einstant needE of the seller: If its not paid in full9 the basic purpose will not be achieved: 6. <nly those /oods can be sold throu/h a Salam contract in which the 4uantity and 4uality can be e7actly specified e/: precious stones cannot be sold on the basis of Salam because each stone differ in 4uality9 si8e9 wei/ht and their e7act specification is not possible: 9. Salam cannot be effected on a particular commodity or on a product of a particular field or farm e/: Supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and /iven such possibility9 the delivery remains uncertain: :. =ll details in respect to 4uality of /oods sold must be e7pressly specified leavin/ no ambi/uity9 which may lead to a dispute: $: It is necessary that the 4uantity of the commodity is a/reed upon in absolute terms: It should be measured or wei/hed in its usual measure only9 meanin/ what is normally wei/hed cannot be 4uantified and vice versa: B. The e7act date and place of delivery must be specified in the contract: D. Salam cannot be effected in respect of thin/s9 which must be delivered at spot: E. The commodity for Salam contract should remain in the mar,et ri/ht from the day of contract up to the date of delivery or at least till the date of delivery: ;. The time of delivery should be at least fifteen days or one month from the date of a/reement: 6rice in Salam is /enerally lower than the price in spot sale: The period should be lon/ enou/h to affect prices: 5ut %anafi Fi4h did not specify any minimum period for the validity of Salam: It is all ri/ht to have an earlier date of delivery if the seller consents to it: 1C. Since price in Salam is /enerally lower than the price in spot saleI the difference in the two prices may be a valid profit for the 5an,: 11. = security in the form of a /uarantee9 mort/a/e or hypothecation may be

re4uired for a Salam in order to ensure that the seller delivers: 16. The seller at the time of delivery delivers commodities and not money to the buyer who would have to establish a special cell for dealin/ in commodities: Bene2its5 There are two ways of benefitin/ from the contract of SalamG 1. =fter purchasin/ a commodity by way of Salam9 the financial institution can sell it throu/h a parallel contract of Salam for the same date of delivery: The period of Salam in the second parallel contract is shorter and the price is hi/her than the first contract: The difference between the two prices shall be the profit earned by the institution: The shorter the period of Salam9 the hi/her the price and the /reater the profit: In this way institutions can mana/e their short term financin/ portfolios: 6. The institution can obtain a promise to purchase from a third party: This promise should be unilateral from the e7pected buyer: The buyer does not have to pay the price in advance: 3hen the institution receives the commodity9 it can sell it at a preAdetermined price to a third party accordin/ to the terms of the promise: Parallel (alam 1. In an arran/ement of parallel Salam there must be two different and independent contractsI one where the ban, is a buyer and the other in which it is a seller: The two contracts cannot be tied up and performance of one should not be contin/ent on the other: For e7ample9 if #=# has purchased from #5# 1*** ba/s of wheat by way of Salam to be delivered on 31 .ecember9 #=# can contract a parallel Salam with #C# to deliver to him 1*** ba/s of wheat on 31 .ecember: 5ut while contractin/ 6arallel Salam with #C#9 the delivery of wheat to #C# cannot be conditioned with ta,in/ delivery from #5#: Therefore9 even if #5# did not deliver wheat on 31 .ecember9 #=# is duty bound to deliver 1*** ba/s of wheat to #C#: %e can see, whatever recourse he has a/ainst #5#9 but he cannot rid himself from his liability to deliver wheat to #C#: Similarly9 if #5# has delivered defective /oods9 which do not conform to the a/reed specifications9 #=# is still obli/ated to deliver the /oods to #C# accordin/ to the specifications a/reed with him: 6. = Salam arran/ement cannot be used as a buy bac, facility where the seller in the first contract is also the purchaser in the second: Even if the purchaser in the second contract is a separate le/al entity9 but owned by the seller in the first contractI it would not tantamount to a valid parallel Salam a/reement: For e7ample9 #=# has purchased 1*** ba/s of wheat by way of Salam from #5# A a joint stoc, company: #5# has a subsidiary #C#9 which is a separate le/al entity but is fully owned by #5#: #=# cannot contract the parallel Salam with #C#: %owever9 if #C# is not wholly owned by #5#9 #=# can contract parallel Salam with it9 even if some shareA holders are common between #5# and #C#:

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&ha!ter .1E I("I('A' Istisna# is a sale transaction where a commodity is transacted before it comes into e7istence: It is an order to a manufacturer to manufacture a specific commodity for the purchaser: The manufacturer uses his own material to manufacture the re4uired /oods: In Istisna#9 price must be fi7ed with consent of all parties involved: =ll other necessary specifications of the commodity must also be fully settled: &ancellation o2 contract5 =fter /ivin/ prior notice9 either party can cancel the contract before the manufacturin/ party has be/un its wor,: <nce the wor, starts9 the contract cannot be cancelled unilaterally: .ifference between Istisna# and Salam Istisna' (alam 1. The subject on which transaction of Istisna# is based9 is always a thin/ which needs to be manufactured: The subject can be anythin/ that need manufacturin/ or not: 6. The price in Istisna# does not necessarily need to be paid in full in advance: It is not even necessary to pay the full price at delivery: It can be deferred to any time accordin/ to the a/reement of the parties: The payment may also be made in installments: The price has to be paid in full in advance: 9. The time of delivery does not have to be fi7ed in Istisna#: The time of delivery is an essential part of the sale: :. The contract can be cancelled before the manufacturer starts the wor,: The contract cannot be cancelled unilaterally: Di22erence bet3een Istisna' and I>arah5 Istisna' I>arah 1. The manufacturer either uses his own material and if it is not available with him9 obtains it to ma,e the ordered /oods: The material is provided by the customer and the manufacturer uses only his labor and s,ill meanin/ that his services will be hired for a specified fee paid to him: 6. The purchaser has a ri/ht to reject the /oods after inspection as Shariah

permits somebody who purchases a thin/ not seen by him9 to cancel the sale after seein/ it: The ri/ht of rejection only e7ists if the /oods do not conform to the specifications a/reed upon between the parties at the time of contract: !i/ht of rejection of /oods after inspection does not e7ist: "ime o2 deli4ery =s pointed out earlier9 it is not necessary in Istisna# that the time of delivery is fi7ed: %owever9 the purchaser may fi7 a ma7imum time for delivery which means that if the manufacturer delays the delivery after the appointed time9 he will not be bound to accept the /oods and to pay the price: In order to ensure that the /oods will be delivered within the specified period9 some modern a/reements of this nature contain a penal clause to the effect that in case the manufacturer delays the delivery after the appointed time9 he shall be liable to a penalty which shall be calculated on daily basis: Can such a penal clause be inserted in a contract of Istisna# accordin/ to ShariahH =lthou/h the classical jurists seem to be silent about this 4uestion while they discuss the contract of Istisna#9 yet they have allowed a similar condition in the case of Ijarah: They say that if a person hires the services of a person to tailor his clothes9 the fee may be variable accordin/ to the time of delivery: The hirer may say that he will pay !s: 1**JA in case the tailor prepares the clothes within one day and !s: (*JA in case he prepares them after two days: <n the same analo/y9 the price in Istisna# may be tied up with the time of delivery9 and it will be permissible if it is a/reed between the parties that in the case of delay in delivery9 the price shall be reduced by a specified amount per day: Istisna' as a mode o2 2inancing Istisna# may be used to provide financin/ for house financin/: If the client owns a land and see,s financin/ for the construction of a house9 the financier may underta,e to construct the house on the basis of an Istisna#: If the client does not own the land and wants to purchase that too9 the financier can provide him with a constructed house on a specified piece of land: The financier does not have to construct the house himself: %e can either enter into a parallel Istisna# with a third party or hire the services of a contractor 0other than the client2: %e must calculate his cost and fi7 the price of Istisna# with his client that allows him to ma,e a reasonable profit over his cost: The payment of installments by the client may start ri/ht from the day when the contract of Istisna# is si/ned by the parties: In order to secure the payment of installments9 the title deeds of the house or land9 or any other property of the client may be ,ept by the financier as a security until the last installment is paid by the client: The financier will be responsible to strictly conform to the specifications in the a/reement for the construction of the house: The cost of correctin/ any discrepancy would have to be borne by him: Istisna# may also be used for similar projects li,e installation of an air conditioner plant in the client#s factory9 buildin/ a brid/e or a hi/hway: The modern 5<T 0buy9 operate and transfer2 a/reements may be formali8ed throu/h an Istisna# a/reement as well: So9 if the /overnment wants to build a hi/hway9 it may enter into an Istisna# contract with the builder: The price of Istisna# maybe the ri/ht of the builder to operate the hi/hway and collect tolls for

a specific period: /ses o2 Istisna'5 U U U U U %ouse financin/ Financin/ of plant J factory J buildin/: 5oo,in/ of apartments 5<T arran/ements Construction of buildin/s and plants:

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&ha!ter .1; I("I@)A) Istijrar means purchasin/ /oods time to time in different 4uantities: In Islamic jurisprudence Istijrar is an a/reement where a buyer purchases somethin/ from time to timeI each time there is no offer or acceptance or bar/ain: There is one master a/reement where all terms and conditions are finali8ed: There are two types of IstijrarG U 3hereby the price is determined after all transactions of purchase are complete: U 3hereby the price is determined in advance but the purchase is e7ecuted from time to time: The first ,ind is relevant with the Islamic mode of financin/: This ,ind is permissible with certain conditions: 1. In the case where the seller discloses the price of /oods at the time of each transactionI the sale becomes valid only when the buyer possess the /oods: The amount is paid after all transactions have been completed: 6. If the seller does not disclose each and every time to the buyer the price of the subject matter9 but the contractors ,now that it is bein/ sold on mar,et value and

the mar,et value is specified and determined in such a manner that it does not vary and it does not lead to differences of the contractors: 9. If at the time of possession9 the price of subject matter was un,nown or contractors a/ree that whatever the price shall be9 the sale will be e7ecuted: %owever9 if there is si/nificant difference in the mar,et price and the a/reed price9 it may cause conflict: In such a case9 at the time of possession9 the sale will not be valid: %owever9 at the time of settlement of the payment9 the sale will be valid: The validity will relate to the time of possession: Therefore the ownership of the buyer in the subject matter will be proved from the time of possession: =fter the payment of price the buyer#s usa/e of the subject matter will be valid from the time of the possession: =s far as the use of Istijrar in Islamic ban,s is concerned9 at present they are involved in four ,inds of activities9 namely -urabahah9 Ijarah9 -udarabah and -ushara,ah: <ut of these four9 the concept of Istijrar can be applied to only the first three cases9 due to the reason that Istijrar cannot be applied to borrowers of the ban,: %owever9 the same concept can however be applied to suppliers of the borrower: %owever9 Istijrar can wor, with suppliers of the borrower: In this case9 the ban, enters into a -urabahah with the suppliers on the basis of Istijrar: The ban, enters into an =/reement to 6urchase with the suppliers 0which are mainly tradin/ companies2 that it will purchase assets from them at a mar,et price or at a predetermined discount from the mar,et price: 3henever the ban, has a new customer9 it can purchase the assets from the suppliers on the basis of Istijrar and sell it onwards to the customer on the basis of -urabahah: It mi/ht very well be probable that the ban, mi/ht enter into a pseudoAIstijrar a/reement with the suppliers rather than a true one: This is the case when the ban, enters into an a/reement with the customer that it is /oin/ to sell certain assets in a certain 4uantity to them within a specified time period: The customer may then purchase the assets from the ban,s in tranches rather than at once and complete the whole purchase within the specified time period in order to complete the a/reement: The above type of Istijrar is referred to as Istijrar with 6reAa/reed Sale due to the reason that the customer purchases a /iven amount of assets from the ban, over a period of time but the price of the assets purchased is always ,nown before the sale: Biven the above9 there is no difference of opinion between Shariah scholars as far as acceptin/ this type of transaction as 5aiATa#ati is concerned: %owever9 the use of Ta#ati in case of a -urabahah transaction is not acceptable9 as it leads indirectly to !iba in case the ban, does not ta,e possession of the assets before they are sold to the customer: %ence if Ta#ati is to be used in this case9 then the only way to do it is that the ban, should purchase the assets some time before sellin/ it to the customer: This would ensure possession that is not just constructive but the ban, would have title to the assets before they are sold to the customer: Biven that the above conditions are complied with to their full e7tent9 Istijrar can

be used in case of a -urabahah:

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&ha!ter .6C I@A)A* 7#$A(I'G8 Basic )ules Transferrin/ of usufruct not ownership In leasin/ an owner transfers its usufruct to another person for an a/reed period9 at an a/reed consideration: (ub>ect o2 lessee Should be valuable9 identified and 4uantified: =ll consumable thin/s cannot be leased out The corpus of the leased property remains in the ownership of the seller9 and only its usufruct is transferred to the lessee: Thus9 anythin/9 which cannot be used without consumin/9 cannot be leased out: For e7ample money9 wheat etc: All liabilities o2 o3nershi! is borne by lessor =s the corpus of the leased property remains in the ownership of the lessor9 all the liabilities emer/in/ from the ownership shall be borne by the lessor: Period o2 lease U The period of lease must be determined in clear terms: U It is necessary for a valid lease that the leased asset is fully identified by the parties: #ease 2or s!eci2ic !ur!ose The lessee cannot use the leased asset for any purpose other than the purpose specified in the lease a/reement: %owever9 if no such purpose is specified in the a/reement9 the lessee can use it for whatever purpose it is used in the normal course:

#essee as Ameen U The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or ne/li/ence: U The leased asset shall remain in the ris, of the lessor throu/hout the lease period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lessor: #ease o2 >ointly o3ned !ro!erty U = property jointly owned by two or more persons can be leased out9 and the rental shall be distributed between all joint owners accordin/ to the proportion of their respective shares in the property: U = joint owner of a property can lease his proportionate share only to his coA sharer9 and not to any other person: Determination o2 )ental U The rental must be determined at the time of contract for the whole period of lease: U It is permissible that different amounts of rent are fi7ed for different phases durin/ the lease period9 provided that the amount of rent for each phase is specifically a/reed upon at the time of affectin/ a lease: If the rent for a subse4uent phase of the lease period has not been determined or has been left at the option of the lessor9 the lease is not valid: U The determination of rental on the basis of the a//re/ate cost incurred in the purchase of the asset by the lessor9 as normally done in financial leases9 is not a/ainst the rules of Shariah9 if both parties a/ree to it9 provided that all other conditions of a valid lease prescribed by the Shariah are fully adhered to: U The lessor cannot increase the rent unilaterally9 and any a/reement to this effect is void: U The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee9 but the amount so collected by the lessor shall remain with him as #on account# payment and shall be adjusted towards the rent after its bein/ due: U The lease period shall commence from the date on which the leased asset has been delivered to the lessee: U If the leased asset has totally lost the function for which it was leased9 the contract will stand terminated: U The rentals can be used on or benchmar,ed with some Inde7 as well: In this case the ceilin/ and floor rentals can be identified for validity of lease:WJfontX #ease as a mode o2 2inancing 1ease is not ori/inally a mode of financin/: It is simply a transaction meant to transfer the usufruct of a property from one person to another for an a/reed period a/ainst an a/reed consideration: %owever9 certain financial institutions have adopted leasin/ as a mode of financin/ instead of lon/ term lendin/ on the basis of interest: This transaction of financial lease may be used for Islamic financin/9 subject to certain conditions: It is not sufficient for this purpose to substitute the name of

#interest# by the name of #rent# and replace the name of #mort/a/e# by the name of #leased asset#: There must be a substantial difference between leasin/ and an interestAbearin/ loan: That will be possible only by followin/ all the Islamic rules of leasin/9 some of which have been mentioned earlier: To be more specific9 some basic differences between the contemporary financial leasin/ and the actual leasin/ allowed by the Shariah are indicated belowG "he commencement o2 lease ?nli,e the contract of sale9 the a/reement of Ijarah can be effected for a future date: %ence9 it is different from -urabaha: In most cases of the #financial lease# the lessor i:e: the financial institution purchases the asset throu/h the lessee himself: The lessee purchases the asset on behalf of the lessor who pays its price to the supplier9 either directly or throu/h the lessee: In some lease a/reements9 the lease commences on the very day on which the price is paid by the lessor9 irrespective of whether the lessee has effected payment to the supplier and ta,en delivery of the asset or not: It may mean that lessee#s liability for the rent starts before the lessee ta,es delivery of the asset: This is not allowed in Shariah9 because it amounts to char/in/ rent on the money /iven to the customer9 which is nothin/ but interest9 pure and simple: )ent should be charged a2ter the deli4ery o2 the leased asset The correct way9 accordin/ to Shariah9 is that the rent will be char/ed after the lessee has ta,en delivery of the asset9 and not from the day the price has been paid: If the supplier has delayed the delivery after receivin/ the full price9 the lessee should not be liable for the rent of the period of delay: Di22erent relations o2 the !arties It should be clearly understood that when the lessee himself has been entrusted with the purchase of the asset intended to be leased9 there are two separate relations between the institution and the client9 which come into operation one after the other: In the first instance9 the client is an a/ent of the institution to purchase the asset on latter#s behalf: =t this sta/e9 the relation between the parties is nothin/ more than the relation of a principal and his a/ent: The relation of lessor and lessee has not yet come into operation: The second sta/e be/ins from the date when the client ta,es delivery from the supplier: =t this sta/e9 the relation of lessor and lessee comes to play its role: These two capacities of the parties should not be mi7ed up or confused with each other: .urin/ the first sta/e9 the client cannot be held liable for the obli/ations of a lessee: In this period9 he is responsible to carry out the functions of an a/ent only: 5ut when the asset is delivered to him9 he is liable to dischar/e his obli/ations as a lessee: Di22erence bet3een Murabahah and leasing5 In -urabahah9 as mentioned earlier9 actual sale should ta,e place after the client ta,es delivery from the supplier9 and the previous a/reement of -urabahah is not enou/h for effectin/ the actual sale: Therefore9 after ta,in/ possession of the asset as an a/ent9 he is bound to /ive intimation to the institution9 and ma,e an offer for the purchase from him: The sale ta,es place after the institution accepts the

offer: The procedure in leasin/ is different9 and a little shorter: %ere the parties need not effect the lease contract after ta,in/ delivery: If the institution9 while appointin/ the client its a/ent9 has a/reed to lease the asset with effect from the date of delivery9 the lease will automatically start on that date without any additional procedure: There are two reasons for this difference between -urabahah and leasin/G a8 It is a necessary condition for a valid sale that it should be affected instantly: Thus9 a sale attributed to a future date is invalid in Shariah: 5ut leasin/ can be attributed to a future date: Therefore9 the previous a/reement is not sufficient in the case of -urabahah9 while it is 4uite enou/h in the case of leasin/: b8 The basic principle of Shariah is that one cannot claim a profit or a fee for a property the ris, of which was never borne by him: =pplyin/ this principle to -urabahah9 the seller cannot claim a profit over a property9 which never remained under his ris, for a moment: Therefore9 if the previous a/reement is held to be sufficient for affectin/ a sale between the client and the institution9 the asset shall be transferred to the client simultaneously when he ta,es its possession9 and the asset shall not come into the ris, of the seller even for a moment: That is why the simultaneous transfer is not possible in -urabahah9 and there should be a fresh offer and acceptance after the delivery: In leasin/9 however9 the asset remains under the ris, and ownership of the lessor throu/hout the leasin/ period9 because the ownership has not been transferred: Therefore9 if the lease period be/ins ri/ht from the time when the client has ta,en delivery9 it does not violate the principle mentioned above: E7penses conse4uent to ownership U =s the lessor is the owner of the asset and he has purchased it from the supplier throu/h his a/ent9 he is liable to pay all the e7penses incurred in the process of its purchase and its import to the country of the lessor for e7ample e7penses of frei/ht and customs duty etc: U %e can9 of course9 include all these e7penses in his cost and can ta,e them into consideration while fi7in/ the rentals9 but as a matter of principle9 he is liable to bear all these e7penses as the owner of the asset: =ny a/reement to the contrary9 as is found in the traditional financial leases9 is not in conformity with Shariah: 1essee as =meenJ1iability of the parties in case of loss to the asset =s mentioned in the basic principles of leasin/9 the lessee is responsible for any loss caused to the asset by his misuse or ne/li/ence: %e can also be made liable to the wear and tear9 which normally occurs durin/ its use: 5ut he cannot be made liable to a loss caused by the factors beyond his control: The a/reements of the traditional #financial lease# /enerally do not differentiate between the two situations: In a lease based on the Islamic principles9 both the situations should be dealt with separately: +ariable !entals in 1on/ Term 1eases In the lon/Aterm lease a/reements9 it is mostly not in the benefit of the lessor to fi7 one amount of rent for the whole period of lease9 because the mar,et

conditions chan/e from time to time: In this case9 the lessor has two optionsG 0a2 %e can contract lease with a condition that the rent shall be increased accordin/ to a specified proportion 0e:/: $>2 after a specified period 0li,e one year2: 0b2 %e can contract lease for a shorter period after which the parties can renew the lease at new terms and by mutual consent9 with full liberty to each one of them to refuse the renewal9 in which case the lessee is bound to vacate the leased property and return it bac, to the lessor: These two options are available to the lessor accordin/ to the classical rules of Islamic Fi4h: %owever9 some contemporary scholars have allowed9 in lon/Aterm leases9 to tie up the rental amount with a variable benchmar,9 which is so well ,nown and well defined that it does not leave room for any dispute: For e7ample9 it is permissible accordin/ to them to provide in the lease contract that in case of any increase in the ta7es imposed by the /overnment on the lessor9 the rent will be increased to the e7tent of same amount: Similarly it is allowed by them that the annual increase in the rent is tied up with the rate of inflation: Therefore if there is an increase of $> in the rate of inflation9 it will result in an increase of $> in the rent as well: 5ased on the same principle9 some Islamic ban,s use the rate of interest as a benchmar, to determine the rental amounts: They want to earn the same profit throu/h leasin/ as is earned by the conventional ban,s throu/h advancin/ loans on the basis of interest: Therefore9 they want to tie up the rentals with the rate of interest and instead of fi7in/ a definite amount of rental9 they calculate the cost of purchasin/ the lease assets and want to earn throu/h rentals an amount e4ual to the rate of interest: Therefore9 the a/reement provides that the rental will be e4ual to the rate of interest or to the rate of interest plus somethin/: Since the rate of interest is variable9 it cannot be determined for the whole lease period: Therefore9 these contracts use the interest rate of a particular country 0li,e 1I5<!2 as a benchmar, for determinin/ the periodical increase in the rent: This arran/ement has been critici8ed on two /roundsG a2 The first objection raised a/ainst it is that9 by subjectin/ the rental payments to the rate of interest9 the transaction is rendered a,in to an interest based financin/: This objection can be overcome by sayin/ that9 as fully discussed in the case of -urabahah9 the rate of interest is used as a benchmar, only: So far as other re4uirements of Shariah for a valid lease are properly fulfilled9 the contract may use any benchmar, for determinin/ the amount of rental: The basic difference between an interest based financin/ and a valid lease does not lie in the amount to be paid to the financier or the lessor: The basic difference is that in the case of lease9 the lessor assumes the full ris, of the corpus of the leased asset: If the asset is destroyed durin/ the lease period9 the lessor will suffer the loss: Similarly9 if the leased asset looses its usufruct without any misuse or ne/li/ence on the part of the lessee9 the lessor cannot claim the rent9 while in the case of an interestA based financin/9 the financier is entitled to receive interest9 even if the debtor did not at all benefit from the money borrowed: So far as this basic difference is maintained9 0i:e: the lessor assumes the ris, of the leased asset2 the transaction cannot be cate/ori8ed as an interestAbearin/ transaction9 even thou/h the amount

of rent claimed from the lessee is e4ual to the rate of interest: It is thus clear that the use of the rate of interest merely as a benchmar, does not render the contract invalid as an interest A based transaction: It is9 however9 advisable at all times to avoid usin/ interest even as a benchmar,9 so that an Islamic transaction is totally distin/uished from an unAIslamic one9 havin/ no resemblance of interest whatsoever: b2 The second objection to this arran/ement is that the variations of the rate of interest bein/ un,nown9 the rental tied up with the rate of interest will imply ;ahalah and Bharar which is not permissible in Shariah: It is one of the basic re4uirements of Shariah that the parties must ,now the consideration in every contract when they enter into it: The consideration in a transaction of lease is the rent char/ed from the lessee9 and therefore it must be ,nown to each party ri/ht at the be/innin/ of the contract of lease: If we tie up the rental with the future rate of interest9 which is un,nown9 the amount of rent will remain un,nown as well: This is the ;ahalah or Bharar9 which renders the transaction invalid: !espondin/ to this objection9 one may say that the ;ahalah has been prohibited for two reasonsG O It may lead to dispute between the parties: This reason is not applicable here9 because both parties have a/reed with mutual consent upon a wellAdefined benchmar, that will serve as a criterion for determinin/ the rent9 and whatever amount is determined9 based on this benchmar,9 will be acceptable to both parties: Therefore9 there is no 4uestion of any dispute between them: O The second reason for the prohibition of ;ahalah is that it renders the parties susceptible to an unforeseen loss: It is possible that the rate of interest9 in a particular period9 8ooms up to an une7pected level in which case the lessee will suffer: It is e4ually possible that the rate of interest 8ooms down to an une7pected level9 in which case the lessor may suffer: In order to meet the ris,s involved in such possibilities9 it is su//ested by some contemporary scholars that the relation between rent and the rate of interest is subjected to a limit or ceilin/: For e7ample9 it may be provided in the base contract that the rental amount after a /iven period9 will be chan/ed accordin/ to the chan/e in the rate of interest9 but it will in no case be hi/her than 1$> or lower than $> of the previous monthly rent: It will mean that if the increase in the rate of interest is more than 1$>9 the rent will be increased only up to 1$>: Conversely9 if the decrease in the rate of interest is more than $>9 the rent will not be decreased to more than $>: In our opinion9 this is the moderate view9 which ta,es care of all the aspects involved in the issue: Penalty 2or #ate Payment o2 )ent In some a/reements of financial leases9 a penalty is imposed on the lessee in case he delays the payment of rent after the due date: This penalty9 if meant to add to the income of the lessor9 is not warranted by the Shariah: The reason is that the rent after it becomes due9 is a debt payable by the lessee9 and is subject to all the rules prescribed for a debt: = monetary char/e from a debtor for his late payment is e7actly the riba prohibited by the %oly "uran: Therefore9 the lessor cannot

char/e an additional amount in case the lessee delays payment of the rent: 6enalty of late payment is /iven to charity In order to avoid the adverse conse4uences9 an alternative may be resorted to: The lessee may be as,ed to underta,e that9 if he fails to pay rent on its due date9 he will pay certain amount to a charity: For this purpose the financierJlessor may maintain a charity fund where such amounts may be credited and disbursed for charitable purposes9 includin/ advancin/ interestAfree loans to the needy persons: The amount payable for charitable purposes by the lessee may vary accordin/ to the period of default and may be calculated at per cent9 per annum basis : The a/reement of the lease may contain the followin/ clause for this purposeG EThe 1essee hereby underta,es that9 if he fails to pay rent at its due date9 he shall pay an amount calculated at ::::> p:a: to the charity Fund maintained by the 1essor which will be used by the 1essor e7clusively for charitable purposes approved by the Shariah and shall in no case form part of the income of the 1essor:E This arran/ement9 thou/h does not compensate the lessor for his opportunity cost of the period of default9 yet it may serve as a stron/ deterrent for the lessee to pay the rent promptly: "ermination o2 #ease If the lessee contravenes any term of the a/reement9 the lessor has a ri/ht to terminate the lease contract unilaterally: %owever9 if there is no contravention on the part of the lessee9 the lease cannot be terminated without mutual consent: In some a/reements of the #financial lease# it has been noticed that the lessor has been /iven an unrestricted power to terminate the lease unilaterally whenever he wishes9 accordin/ to his sole jud/ment: This is a/ain contrary to the principles of Shariah: In some a/reements of the #financial lease# a condition has been found to the effect that in case of the termination of lease9 even at the option of the lessor9 the lessee shall pay the rent of the remainin/ lease period: This condition is obviously a/ainst Shariah and the principles of e4uity and justice: The basic reason for insertin/ such conditions in the a/reement of lease is that the main concept behind the a/reement is to /ive an interestAbearin/ loan under the ostensible cover of lease: That is why every effort is made to avoid the lo/ical conse4uences of the lease contract: Faturally9 such a condition cannot be acceptable to Shariah: The lo/ical conse4uence of the termination of lease is that the lessor should ta,e the asset bac,: The lessee should be as,ed to pay the rent as due up to the date of termination: If the termination has been effected due to the misuse or ne/li/ence on the part of the lessee9 he can also be as,ed to compensate the lessor for the loss caused by such misuse or ne/li/ence: 5ut he cannot be compelled to pay the rent of the remainin/ period: Insurance o2 the assets If the leased property is insured under the Islamic mode of Ta,aful9 it should be at the e7pense of the lessor and not at the e7pense of the lessee9 as is /enerally

provided in the a/reements of the current #financial leases#: "he residual 4alue o2 the leased asset =nother important feature of the modern #financial leases# is that after the e7piry of the lease period9 the corpus of the leased asset is normally transferred to the lessee: =s the lessor already recovers his cost alon/ with an additional profit thereon9 which is normally e4ual to the amount of interest which could have been earned on a loan of that amount advanced for that period9 the lessor has no further interest in the leased asset: <n the other hand9 the lessee wants to retain the asset after the e7piry of the leased period: For these reasons9 the leased asset is /enerally transferred to the lessee at the end of the lease9 either free of any char/e or at a nominal to,en price: In order to ensure that the asset will be transferred to the lessee9 sometimes the lease contract has an e7press clause to this effect: Sometimes this condition is not mentioned in the contract e7presslyI however9 it is understood between the parties that the title of the asset will be passed on to the lessee at the end of the lease term: This condition9 whether it is e7press or implied9 is not in accordance with the principles of Shariah: It is a wellAsettled rule of Islamic jurisprudence that one transaction cannot be tied up with another transaction so as to ma,e the former a preAcondition for the other: %ere the transfer of the asset at the end has been made a necessary condition for the transaction of lease that is not allowed in Shariah: The ori/inal position in Shariah is that the asset shall be the sole property of the lessor9 and after the e7piry of the lease period9 the lessor shall be at liberty to ta,e the asset bac,9 or to renew the lease or to lease it out to another party9 or sell it to the lessee or to any other person: The lessee cannot force him to sell it to him at a nominal price9 nor can such a condition be imposed on the lessor in the lease a/reement: 5ut after the lease period e7pires9 and the lessor wants to /ive the asset to the lessee as a /ift or to sell it to him9 he can do so by his free will: %owever9 some contemporary scholars9 ,eepin/ in view the needs of the Islamic financial institutions have come up with an alternative: They say that the a/reement of Ijarah itself should not contain a condition of /ift or sale at the end of the lease period: %owever9 the lessor may enter into a unilateral promise to sell the leased asset to the lessee at the end of the lease period: This promise will be bindin/ on the lessor only: The principle9 accordin/ to them9 is that a unilateral promise to enter into a contract at a future date is allowed whereby the promisor is bound to fulfill the promise9 but the promisee is not bound to enter into that contract : It means that he has an option to purchase9 which he may or may not e7ercise: %owever9 if he wants to e7ercise his option to purchase9 the promisor cannot refuse it because he is bound by his promise: Therefore9 these scholars su//est that the lessor9 after enterin/ into the lease a/reement9 can si/n a separate unilateral promise whereby he underta,es that if the lessee has paid all the amounts of rentals and wants to purchase the asset at a specified mutually acceptable price9 he will sell the leased asset to him for that price: <nce the lessor si/ns this promise9 he is bound to fulfill it and the lessee may e7ercise his option to purchase at the end of the period9 if he has fully paid the amounts of rent accordin/ to the a/reement of lease:

($&"I%' . I, I(#AMI& M%D$( %F FI'A'&I'G

&ha!ter .61 I;=!=% 3= I"TIF= 01E=SIFB =F. 6!<-ISE T< BIFT2 In Islamic Shariah9 it is allowed that instead of sale9 the lessor si/ns a separate promise to /ift the leased asset to the lessee at the end of the lease period9 subject to his payment of all amounts of rent: This arran/ement is called #Ijarah wa i4tina: It has been allowed by a lar/e number of contemporary scholars and is widely acted upon by the Islamic ban,s and financial institutions: The validity of this arran/ement is subject to two basic conditionsG a8 The a/reement of Ijarah itself should not be subjected to si/nin/ this promise of sale or /ift but the promise should be recorded in a separate document: b8 The promise should be unilateral and bindin/ on the promisor only: It should not be a bilateral promise bindin/ on both parties because in this case it will be a full contract effected to a future date9 which is not allowed in the case of sale or /ift: (ub.#ease If the leased asset is used differently by different users9 the lessee cannot subA lease the leased asset e7cept with the e7press permission of the lessor: If the lessor permits the lessee for subleasin/9 he may subAlease it: If the rent claimed from the subAlessee is e4ual to or less than the rent payable to the owner J ori/inal lessor9 all the reco/ni8ed schools of Islamic jurisprudence are unanimous on the permissibility of the sub lease: %owever9 the opinions are different in case the rent char/ed from the subAlessee is hi/her than the rent payable to the owner: Imam Shafi and some other scholars allow it and hold that the sub lessor may

enjoy the surplus received from the subAlessee: This is the preferred view in the %anbali School as well: <n the other hand9 Imam =bu %anifah is of the view that the surplus received from the subAlessee in this case is not permissible for the subAlessor to ,eep and he will have to /ive that surplus in charity: %owever9 if the subAlessor has developed the leased property by addin/ somethin/ to it or has rented it in a currency different from the currency in which he himself pays rent to the ownerJthe ori/inal lessor9 he can claim a hi/her rent from his subAlessee and can enjoy the surplus: =lthou/h the view of Imam =bu %anifah is more precautious which should be acted upon to the best possible e7tent9 in cases of need the view of Shafai and %anbali schools may be followed because there is no e7press prohibition in the %oly "uran or in the Sunnah a/ainst the surplus claimed from the lessee: Ibn "udamah has ar/ued for the permissibility of surplus on forceful /rounds: Assigning o2 the #ease The lessor can sell the leased property to a third party whereby the relation of lessor and lessee shall be established between the new owner and the lessee: %owever9 the assi/nin/ of the lease itself 0without assi/nin/ the ownership in the leased asset2 for a monetary consideration is not permissible: The difference between the two situations is that in the latter case the ownership of the asset is not transferred to the assi/nee9 but he becomes entitled to receive the rent of the asset only: This ,ind of assi/nment is allowed in Shariah only where no monetary consideration is char/ed from the assi/nee for this assi/nment: For e7ample9 a lessor can assi/n his ri/ht to claim rent from the lessee to his son9 or to his friend in the form of a /ift: Similarly9 he can assi/n this ri/ht to any one of his creditors to set off his debt out of the rentals received by him: 5ut if the lessor wants to sell this ri/ht for a fi7ed price9 it is not permissible9 because in this case the money 0the amount of rentals2 is sold for money9 which is a transaction subject to the principle of e4uality: <therwise it will be tantamount to a riba transaction9 hence prohibited:

($&"I%' . , BA'-I'G I' I(#AM

&ha!ter .66 "*$ F$A"/)$( %F A &%',$'"I%'A# BA'The conventional ban,in/9 which is interest based9 performs the followin/ major activitiesG 1. 6. 9. :. =. B. .eposit creation Financin/ 0!efer to section I+2 =/ency services Issuin/ 1Bs =dvisory services <ther related services

3e now would li,e to ma,e a comparison of these activities with Islamic concept of ban,in/G De!osits 7"he liability side8 De!osit . <ard 7loan8 not amanah 7"rust8 The common misconception re/ardin/ EdepositE is that it is a form of amanah 0securityJtrust2: %owever9 accordin/ to Shariah definition9 deposit has more resemblance to 4ard 0loan2 than amanah: This conclusion is based on the fact that in Islam an item is termed as amanah9 if it bears all the features of amanah: .eposits cannot be termed amanah9 as they do not have two of its special

features9 i:e: M =manah cannot be used by the ban, for its business or benefit: M The ban, cannot be liable in case of any dama/e or loss to the amanah resultin/ from circumstances beyond its control: 3hereas in ban,s9 deposits are primarily placed to earn profit9 which is only possible when the ban, uses these deposits to invest in other business: %ence deposits do not fulfill the first condition of amanah9 which says that it should not be used by the careta,er for his own business or benefit: Secondly9 the ban, is held 1**> responsible for these deposits in all circumstances even in case of loss or dama/e to the ban,: This feature releases deposits from the rulin/ of amanah where the assets will not be returned in case of any dama/e to the asset resultin/ from circumstances beyond careta,er#s control: =ccordin/ to this justification9 all three ,inds of deposit namely current accounts9 fi7ed deposits and savin/ accounts are not amanah: They are all /overned by 4ard: <ne school of thou/ht says that only fi7ed deposit and savin/ accounts fall under the laws of 4ard but current account is /overned by amanah: %owever9 this is also not correct because the ban, is as much liable to current account holders as its 61S account holders and is called the E/uarantorE in fi4h terminolo/y: .ue to this feature9 current account is also /overned by 4ard: The depositors are not interested in terminolo/y but the endAresult of holdin/ an account: Therefore if a ban, does not offer security to the assets9 the depositors under normal circumstance will never ,eep their assets at such a ban,: Similarly if the depositors are told that the status of their account will that be of amanah and in case of any loss to the assets9 without any ne/li/ence of the ban,9 will not be returned to them9 not a sin/le person would put his asset in the ban,: Therefore the ban, provides the security to the assets9 which the depositors themselves want: 3e therefore conclude that the main intention of the depositors is not to put the assets in ban,s as amanahI rather as 4ard by havin/ collateral security by appointin/ the ban, as /uarantor: $?am!le o2 (yedna Nubair bin A33am 7)A8 %a8rat Cubair bin =wwam 0!=2 was famous for his honesty and trustworthiness: 6rominent people used to leave with him their properties in trust: 5ased on their needs they would also withdraw all or part of their properties: It has been reported in =l 5u,hari and Taba4aatAeAIbnAeASaad in respect of %a8rat Cubair bin =wwam 0!=2 that he would decline to accept such property as amanah 0trust2 but rather accepted them as 4ard 0loan2: The reason for this action on his part was his fear that the property may be lost and it may be suspected that he was ne/lectful in its safe,eepin/: =s such9 he decided to consider it a loan so that the depositor felt more comfortable and his reputation remained intact: =nother reason for it was that it could become possible

for him to employ these funds for tradin/ and earn profit out of them: The loan amount calculated at 2:2 million at the time of his death by his son Syedna =bdullah bin Cubair was specified as 4ard not amanah: %e also used the term loan while instructin/ his son before his death ESon9 dispose off my property to settle the loansE: &onclusion From the above discussion9 we come to the conclusion that all three forms of ban, deposits are /overned by the law of 4ard as a conse4uence of which the account holder may withdraw only the assets deposited: =ny increase on it will be interest: It has already been discussed in the chapter of commercial interest that if the purpose of the lender is business or security and not providin/ financial assistance9 then to /et an e7cess amount is also interest9 which is prohibited in Islam just li,e usury: It is also clear that there is a consensus of -uslim scholars on the point that the transactions in Fi7ed .eposit and Savin/s =ccount is prohibited because the ban, pays e7cess to their account holders over their actual capital9 which is interest: The Islamic Fi4h =cademy ;eddah in their 2nd session has further endorsed such transactions as interest based transaction: Therefore it is ille/al for a -uslim to ,eep their deposits in such accounts: =s far as the current account is concerned9 the ban, does not pay any e7cess 0interest2 over the actual capital9 therefore holdin/ such an account is allowed: To sum up9 profit /iven on fi7ed deposit and savin/s accounts is interest and therefore prohibited: %owever if the ban,in/ system is based on Islamic principles9 -ushara,ah can play a very important role: Therefore we will now discuss how the ban,s can operate on -ushara,ah basis: =s we already ,now a ban, has two sides9 one where it receives deposits from customers which is called the liability side and the other where it advances finance to investors and businessmen which is called the asset side: 5oth sides can operate on -ushara,ah basis: =s far as deposits are concerned9 -ushara,ah is the only instrument in which money can be received from customers meanin/ that every depositor will become a partner in ban,#s business throu/h their deposited money: %owever9 for the asset or finance side9 there are other instruments apart from -ushara,ah but since those instruments are not covered in our subject9 we will stic, to the operation of -ushara,ah: 3e will be/in by the role of -ushara,ah in the deposits and its relevant laws and will then discuss the procedure of -ushara,ah in the finance side:

)ole o2 the Bank as Agent 5 = ban, under Islamic Shariah can act as an a/ent 0on =lA3a,alah basis2 of the customer and can carry out the transaction on his behalf: -oreover it can char/e a/ency fee for the services: "he agency 2ee can be charged in the 2ollo3ing cases5

 6ayment J receivin/ of cash on behalf of the customer Inward bill of collection <utward bill of collection 1C openin/ and acceptance Collection of e7port bills J bills of e7chan/e: In this case the underta,in/ or
/uarantee commission and ta,eAup commission can be Islami8ed: 5an, will char/e an a/ency fee for acceptin/ the bills9 which is bou/ht at face value:

?nderwritin/ K I6< services

)ole o2 the Bank as Guarantor The ban, or financial institute /ives a /uarantee on behalf of its customer but accordin/ to Shariah9 /uarantee fee cannot be char/ed: Formally conventional ban,s char/e fee for followin/ /uaranteesG

1etter of /uarantee Shippin/ /uarantee

Ad4isory (er4ices -ost of the advisory services provided by the financial institutes can be carried out easily in compliance with Shariah as lon/ as the nature of business is halalG

Financial advisory services 6rivati8ation advisory services E4uity placement -er/er K ac4uisition advise +enture capital Tradin/ 0Capital mar,et operations2 Cash K portfolio mana/ement advice 5ro,era/e services 06urchase K buyin/ of share of companies involved in halal business9 a fee could be char/ed for it2: %ther allo3ed Islamic 2inancial ser4ices + !roducts

!emittance Ca,at deduction: Sale K purchase of forei/n currency Sale K purchase of travelers chec,s 0local forei/n currency2 =T- services Electronic online transfer Tele/raphic transfer 0of cash2 .emand draft 6ay order

 1oc,ers K custodial services Syndicate funds arran/ements services 0nonAinterest or mar,up based2 for
some fee: <penin/ of ban, account 0current K nonAinterest or noAmar,up2 Clearin/ facility Sales K purchase of sharesJstoc, 0of companies involved in halal activities2 Collection of dividends Electronic ban,in/ window Telephone ban,in/:

($&"I%' . , BA'-I'G I' I(#AM

&ha!ter .69 M/(*A)A-A* I' BA'- D$P%(I"( =n important value of an Islamic society is mutual dealin/: It also refers to deposits in ban,s: The operation of fi7ed deposits and savin/s account in Islamic ban,s will be different from conventional ban,s because the Islamic ban,s will be based on -ushara,ah 0combination of Shir,ah K -udarabah2 in which li,e conventional ban,s9 people will invest in two waysG 1. 6articipation in settin/ up the ban, li,e any other company by joint investment and the participants will be called the EshareholdersE: They will have a partnership 0Shir,ah2 effected by a mutual contract since they have used their capital and deed on the ban,I and 6. 6articipation by openin/ their account in fi7ed deposit and savin/s account and participants will be called the Eaccount holdersE: These will not be the actual owner or shareholders of the ban, A rather partners in profit only9 meanin/ that they will have a contract of -udarabah The status of the ban, or the shareholders will be that of a -udarib and the account holders will be !ubbAulAmal: The contract ,nown as -ushara,ah will be a combination of Shir,ah and -udarabah: This is the reason why the profit ratio of depositors is less than the actual shareholders and the depositors will not have any votin/ power or the ri/ht of mana/ement because they are not involved in the deed but has only supplied the capital: This ,ind of dual relationship is not

uncommon in Islamic Fi4h: Therefore if the -udarib 05an, or the shareholders2 wants to mer/e his assets with the assets of depositor9 it is allowed in which case he will be re/arded as owner of half the assets and -udarib of the other half: This has already been discussed at len/th in chapter 13 on -ushara,ah: In the previous chapter9 followin/ facts have been establishedG 1. The actual status of deposits is debt and not amanah: 6. The e7cess paid on loan is interest9 not profit: 9. If a ban, is operatin/ on Islamic principles9 the ban, and the depositor will have a partnership throu/h a contract of Shir,ah or -udarabah in which case the depositor#s capital will not be re/arded as loan: :. The shareholders will act as !ubbAulAmal as well as -udarib: =. The depositors will only act as !ubbAulAmal: B. Fi7ed deposit and savin/ account will be converted into -udarabah account where the distribution of profit for each partner will be determined in proportion to the actual profit accrued to the business and not accordin/ to a fi7ed ratio or in proportion to the capital invested by him: Fi7in/ lump sum amount is not allowed or any rate of profit tied up with any investment: ': The entire set up of the ban, is on -ushara,ah basis where the relationship of the ban, and shareholders is throu/h partnership a/reement 0Shir,ah2 because they are participatin/ in labor as well as investment and the relationship between the ban, and depositors is only that of -udarabah because they have only invested without participatin/ in labor: Therefore this combination of Shir,ah and -udarabah is called -ushara,ah in modern terminolo/y: DI(")IB/"I%' %F P)%FI" /'D$) M/(*A)A-A* AG)$$M$'" The distribution of profit will be done accordin/ to the rules of -ushara,ah: 5efore we be/in the summary of the distribution of profit9 it is found appropriate to mention here that the conventional ban,s do not pay interest to current account holders: Therefore there is no need to convert the operation of current account into any Islamic mode of financin/: %owever the distribution of profit to the rest of the partners and account holders will be made on the followin/ rules /overnin/ -ushara,ahG It is not a condition for the final distribution of profit that all assets are li4uid A rather the profit and loss is calculated on the basis of evaluation of assets: In case of loss9 each partner shall suffer the loss e7actly accordin/ to the ratio of his investment and in case of profitI the profit will be distributed accordin/ to the a/reed ratio between the partners: It should be ta,en into account that both parties are free to determine any ratio of profit of the ban, as the mana/er 0-udarib29 therefore it can be a/reed mutually that !ubbAulAmal will have a hi/her profit mar/in and -udarib lower: %owever as a shareholdin/ partner9 the share of profit of the -udarib cannot be less than the ratio of his investment since he is the sole provider of labor: Same rule will apply on the operation of Islamic 5an,s on the basis of -ushara,ah: The actual shareholders apart from bein/ the mana/er are also shareholdin/ partnersI their ratio of profit cannot be less than their ratio of investment: %owever their ratio of profit as -udarib can be determined at whatever rate they please: "he abo4e may be e?!lained in the 2ollo3ing illustration5

Suppose the total investment of the ban, is !s:1$ million in which the depositors have invested !s:1* million on -udarabah basis and the shareholders as -udarib have invested !s:$ million: This means that one third share of the total capital belon/s to the shareholders and two third to the depositors: The role of -udarib in the 2J3rd capital raised by depositors is played by the shareholders9 therefore their ratio of profit as mana/er 0-udarib2 can be a/reed between themselves throu/h mutual consent but their ratio of profit9 as shareholders cannot be less than 1J3rd: If their share is a/reed at less than 1J3rd9 it would mean that the depositors# share has e7ceeded 2J3rd althou/h it has been established that they will not be mana/in/ the ban, and their share of profit will not e7ceed their ratio of investment: If it has been a/reed in the above e7ample that the shareholders as mana/in/ partners will /et 1J3rd of the profit and the rest 2J3rd will be distributed e4ually between depositors and shareholders as per the -udarabah contract between them9 then if for e/: the profit amount is !s:1$ lacs then the shareholders will /et its 1J3rd i:e: !s:$ lacs as the investor 0!ubbAulAmal2 and half of the 2J3rd profit i:e: !s:$ lacs as the mana/er 0-udarib2 whereas the other half of the 2J3rd profit will /o to the depositor as !ubbAulAmal: The followin/ table will clarify the shares of shareholders and depositorsG To sum up9 the above procedure can be adopted to run the ban, on the principles of -ushara,ah: )/''I'G M/(*A)A-A* A&&%/'" %' "*$ BA(I( %F DAI#0 P)%D/&"(5 -any financial institutions finance the wor,in/ capital of an enterprise by openin/ a runnin/ account for them from where the clients draw different amounts at different intervals9 but at the same time9 they ,eep returnin/ their surplus amounts: Thus the process of debit and credit /oes on upto the date of maturity9 and the interest is calculated on the basis of daily products: Can such an arran/ement be possible under the -ushara,ah or -udarabah modes of financin/H <bviously9 bein/ a new phenomenon9 no e7press answer to this 4uestion can be found in the classical wor,s of Islamic Fi4h: %owever9 ,eepin/ in view the basic principles of -ushara,ah the followin/ procedure may be su//ested for this purposeG U = certain percenta/e of the actual profit must be allocated for the mana/ement: U The remainin/ percenta/e of the profit must be allocated for the investors: U The loss9 if any9 should be borne by the investors only in e7act proportion of their respective investments: U The avera/e balance of the contributions made to the -ushara,ah account calculated on the basis of daily products shall be treated as the share capital of the financier: U The profit accruin/ at the end of the term shall be calculated on daily product

basis9 and shall be distributed accordin/ly: If such an arran/ement is a/reed upon between the parties9 it does not seem to violate any basic principle of the -ushara,ah: %owever9 this su//estion needs further consideration and research by the e7perts of Islamic jurisprudence: 6ractically9 it means that the parties have a/reed to the principle that the profit accrued to the -ushara,ah portfolio at the end of the term will be divided based on the avera/e capital utili8ed per day9 which will lead to the avera/e of the profit earned by each rupee per day: The amount of this avera/e profit per rupee per day will be multiplied by the number of the days each investor has put his money into the business9 which will determine his profit entitlement on daily product basis: Some contemporary scholars do not allow this method of calculatin/ profits on the /round that it is just a conjectural method9 which does not reflect the actual profits really earned by a partner of the -ushara,ah: 5ecause the business may have earned hu/e profits durin/ a period when a particular investor had no money invested in the business at all9 or had a very insi/nificant amount invested9 still9 he will be treated at par with other investors who had hu/e amounts invested in the business durin/ that period: Conversely9 the business may have suffered a /reat loss durin/ a period when a particular investor had hu/e amounts invested in it: Still9 he will pass on some of his loss to other investors who had no investment in that period or their si8e of investment was insi/nificant: This ar/ument can be refuted on the /round that it is not necessary in a -ushara,ah that a partner should earn profit on his own money only: <nce a -ushara,ah pool comes into e7istence9 all the participants9 re/ardless of whether their money is or is not utili8ed in a particular transaction earn the profits accruin/ to the joint pool: This is particularly true of the %anafi School9 which does not deem it necessary for a valid -ushara,ah that the monetary contributions of the partners are mi7ed up to/ether: It means that if #=# has entered into a -ushara,ah contract with #5#9 but has not yet disbursed his money into the joint pool9 he will be still entitled to a share in the profit of the transactions effected by #5# for the -ushara,ah throu/h his own money: =lthou/h his entitlement to a share in the profit will be subject to the disbursement of money underta,en by him9 yet the fact remains that the profit of this particular transaction did not accrue to his money9 because the money disbursed by him at a later sta/e may be used for another transaction: Suppose #=# and #5# entered into a -ushara,ah to conduct a business of !s: 1**9***JA They a/reed that each one of them shall contribute !s: $*9***JA and the profits will be distributed by them e4ually: #=# did not yet invest his !s: $*9***JA into the joint pool: #5# found a profitable deal and purchased two air conditioners for the -ushara,ah for !s: $*9***JA contributed by himself and sold them for !s: &*9***JA9 thus earnin/ a profit of !s: 1*9***JA: #=# contributed his share of !s: $*9***JA after this deal: The partners purchased two refri/erators throu/h this contribution which could not be sold at a /reater price than !s: (***JA meanin/ thereby that this deal resulted in a loss of !s: 2***JA =lthou/h the transaction effected by #=#s money brou/ht loss of !s: 2***JA while the profitable deal of air conditioners was financed entirely by #5#s money in which #=# had no contribution9 yet #=# will be entitled to a share in the profit of the first deal: The loss of !s: 2***JA in the second deal will be set off from the profit of the first deal reducin/ the a//re/ate profit to !s: (***JA: This profit of !s: (***JA will be

shared by both partners e4ually: It means that #=# will /et !s: ***JA9 even thou/h the transaction effected by his money has suffered a loss: The reason is that once the parties enter into a -ushara,ah contract9 all the subse4uent transactions effected for -ushara,ah belon/ to the joint pool9 re/ardless of whose individual money is utili8ed in them: Each partner is a party to each transaction by virtue of his enterin/ into the contract of -ushara,ah: = possible objection to the above e7planation may be that in the above e7ample9 #=# had underta,en to pay !s: $*9***JA and it was ,nown before hand that he would contribute a specified amount to the -ushara,ah: 5ut in the proposed runnin/ account of -ushara,ah where the partners are comin/ in and /oin/ out every day9 nobody has underta,en to contribute any specific amount: Therefore9 the capital contributed by each partner is un,nown at the time of enterin/ into -ushara,ah9 which should render the -ushara,ah invalid: The answer to the above objection is that the classical scholars of Islamic Fi4h have different views about whether it is necessary for a valid -ushara,ah that the capital is preA,nown to the partners: The %anafi scholars are unanimous on the point that it is not a preAcondition: =lA@asani9 the famous %anafi jurist9 writesG =ccordin/ to our %anafi School9 it is not a condition for the validity of -ushara,ah that the amount of capital is ,nown9 while it is a condition accordin/ to Imam Shafi#i: <ur ar/ument is that ;ahalah 0uncertainty2 in itself does not render a contract invalid9 unless it leads to disputes: =nd the uncertainty in the capital at the time of -ushara,ah does not lead to disputes9 because it is /enerally ,nown when the commodities are purchased for the -ushara,ah9 therefore it does not lead to uncertainty in the profit at the time of distribution:E 05adaiAusAsanai v:& p:&32 It is9 therefore9 clear from the above that even if the amount of the capital is not ,nown at the time of -ushara,ah9 the contract is valid: The only condition is that it should not lead to the uncertainty in the profit at the time of distribution: .istribution of profit on daily product basis fulfills this condition: It is true that the concept of a runnin/ -ushara,ah where the partners at times draw some amounts and at other times inject new money and the profits are calculated on daily products basis is not found in the classical boo,s of Islamic Fi4h: 5ut merely this fact cannot render a new arran/ement invalid in Shariah9 so far as it does not violate any basic principle of -ushara,ah: In the proposed system9 all the partners are treated at par: The profit of each partner is calculated on the basis of the period for which his money remained in the joint pool: There is no doubt in the fact that the a//re/ate profits accrued to the pool is /enerated by the joint utili8ation of different amounts contributed by the participants at different times: Therefore9 if all of them a/ree with mutual consent to distribute the profits on daily products basis9 there is no injunction of Shari#ah which ma,es it impermissibleI rather9 it is covered under the /eneral /uidelines /iven by the %oly 6rophet in his famous hadith9 as followsG E-uslims are bound by their mutual a/reements unless they hold a permissible

thin/ as prohibited or a prohibited thin/ as permissible:E If distribution on daily products basis is not accepted9 it will mean that no partner can draw any amount nor can he inject new amounts to the joint pool: Similarly9 nobody will be able to subscribe to the joint pool e7cept at the particular dates of the commencement of a new term: This arran/ement is totally impracticable on the deposit side of the ban,s and financial institutions where the accounts are debited and credited by the depositors many times a day: The rejection of the concept of the daily products will compel them to wait for months before they deposit their surplus money in a profitable account: This will hinder the utili8ation of savin/s for development of industry and trade9 and will ,eep the wheel of financial activities jammed for lon/ periods: There is no other solution for this problem e7cept to apply the method of daily products for the calculation of profits9 and since there is no specific injunction of Shari#ah a/ainst it9 there is no reason why this method should not be adopted:

($&"I%' . ,I

&ha!ter .6: P)%@$&" FI'A'&I'G The concept of -ushara,ah and -udarabah is based on some basic principles: =s lon/ as these principles are fully complied with9 the details of their application may vary from time to time: 1et us have a loo, at these basic principles before touchin/ the detailsG 1: Financin/ throu/h -ushara,ah and -udarabah does never mean the advancin/ of money: It means participation in the business and in the case of -ushara,ah9 sharin/ in the assets of the business to the e7tent of the ratio of financin/: 2: =n investorJfinancier must share the loss incurred by the business to the e7tent of his financin/: 3: The partners are at liberty to determine9 with mutual consent9 the ratio of profit allocated to each one of them9 which may differ from the ratio of investment: %owever9 the partner who has e7pressly e7cluded himself from the responsibility

of wor, for the business cannot claim more than the ratio of his investment: : The loss suffered by each partner must be e7actly in the proportion of his investment: @eepin/ in view these basic principles project financin/ is discussed below: In the case of project financin/9 the traditional method of -ushara,ah or -udarabah can be easily adopted: If the financier wants to finance the whole project9 the form of -udarabah can come into operation: If investment comes from both sides9 the form of -ushara,ah can be adopted: In this case9 if the mana/ement is the sole responsibility of one party9 while the investment comes from both9 a combination of -ushara,ah and -udarabah can be brou/ht into play accordin/ to the rules already discussed: Since -ushara,ah or -udarabah would have been effected from the very inception of the project9 no problem with re/ard to the valuation of capital should arise: Similarly9 the distribution of profits accordin/ to the normal accountin/ standards should not be difficult: %owever9 if the financier wants to withdraw from the -ushara,ah9 while the other party wants to continue the business9 the latter can purchase the share of the former at an a/reed price: In this way the financier may /et bac, the amount he has invested alon/ with a profit9 if the business has earned a profit: The basis for determinin/ the price of his share shall be discussed in detail later on 0while discussin/ the financin/ of wor,in/ capital2: <n the other hand9 the businessman can continue with his project9 either on his own or by sellin/ the first financier#s share to some other person who can substitute the financier: Since financial institutions do not normally want to remain partner of a specific project for /ood9 they can sell their share to other partners of the project as aforesaid: If the sale of the share on one time basis is not feasible for the lac, of li4uidity in the project9 the share of the financier can be divided into smaller units and each unit can be sold after a suitable interval: 3henever a unit is sold9 the share of the financier in the project is reduced to that e7tent9 and when all the units are sold9 the financier totally comes out of the project: Financing o2 a single transaction -ushara,ah and -udarabah can be used more easily for financin/ a sin/le transaction: =part from fulfillin/ the day to day needs of small traders9 these instruments can be employed for financin/ imports and e7ports: =n importer can approach a financier to finance him for that sin/le transaction of import alone on the basis of -ushara,ah or -udarabah: The ban,s can also use these instruments for import financin/: If the letter of credit has been opened without any mar/in9 the form of -udarabah can be adopted9 and if the 1JC is opened with some mar/in9 the form of -ushara,ah or a combination of both will be relevant: =fter the imported /oods are cleared from the port9 their sale proceeds may be shared by the importer and the financier accordin/ to a preAa/reed ratio: In this case9 the ownership of the imported /oods shall remain with the financier to the e7tent of the ratio of his investment: This -ushara,ah can be restricted to an a/reed term9 and if the imported /oods are not sold in the mar,et up to the

e7piry of the term9 the importer may himself purchase the share of the financier9 ma,in/ himself the sole owner of the /oods: %owever9 the sale in this case should ta,e place at the mar,et rate or at a price a/reed between the parties on the date of sale9 and not at preAa/reed price at the time of enterin/ into -ushara,ah: If the price is preAa/reed9 the financier cannot compel the client J importer to purchase it: Similarly9 -ushara,ah will be even easier in the case of e7port financin/: The e7porter has a specific order from abroad: The price on which the /oods will be e7ported is well ,nown before hand9 and the financier can easily calculate the e7pected profit: %e may finance him on the basis of -ushara,ah or -udarabah9 and may share the amount of e7port bill on a preAa/reed percenta/e: In order to secure himself from any ne/li/ence on the part of the e7porter9 the financier may put a condition that it will be the responsibility of the e7porter to e7port the /oods in full conformity with the conditions of the 1JC: In this case9 if some discrepancies are found9 the e7porter alone shall be responsible9 and the financier shall be immune from any loss due to such discrepancies9 because it is caused by the ne/li/ence of the e7porter: %owever9 bein/ a partner of the e7porter9 the financier will be liable to bear any loss9 which may be caused due to any reason other than the ne/li/ence or misconduct of the e7porter:

($&"I%' . ,I W%)-I'G &API"A# FI'A'&I'G

&ha!ter .6= 3here finances are re4uired for the wor,in/ capital of a runnin/ business9 the instrument of -ushara,ah may be used in the followin/ mannerG 1. The capital of the runnin/ business may be evaluated with mutual consentG The value of the business can be treated as the investment of the person who see,s finance9 while the amount /iven by the financier can be treated as his share of investment: The -ushara,ah may be affected for a particular period9 li,e one year or si7 months or less: 5oth the parties a/ree on a certain percenta/e of the profit to be /iven to the financier9 which should not e7ceed the percenta/e of his investment9 because he shall not wor, for the business: <n the e7piry of the term9 all li4uid and nonAli4uid assets of the business are a/ain evaluated9 and the profit may be distributed on the basis of this evaluation: =lthou/h9 accordin/ to the traditional concept9 the profit cannot be determined unless all the assets of the business are li4uidated9 yet the valuation of the assets can be treated as Econstructive li4uidationE with mutual consent of the parties9

because there is no specific prohibition in Shariah a/ainst it: It can also mean that the wor,in/ partner has purchased the share of the financier in the assets of the business9 and the price of his share has been determined on the basis of valuation9 ,eepin/ in view the ratio of profit allocated for him accordin/ to the terms of -ushara,ah: For e7ample9 the total value of the business of #=# is 3* units: #5# finances another 2* units9 raisin/ the total worth to $* unitsI *> havin/ been contributed by #5#9 and &*> by #=#: It is a/reed that #5# shall /et 2*> of the actual profit: =t the end of the term9 the total worth of the business has increased to 1** units: Fow9 if the share of #5# is purchased by #=#9 he should have paid to him * units9 because he owns *> of the assets of the business: 5ut in order to reflect the a/reed ratio of profit in the price of his share9 the formula of pricin/ will be different: =ny increase in the value of the business shall be divided between the parties in the ratio of 2*> and (*>9 because this ratio was determined in the contract for the purpose of distribution of profit: Since the increase in the value of the business is $* units9 these $* units are divided at the ratio of 2*G(*9 meanin/ thereby that #5# will have earned 1* units: These 1* units will be added to his ori/inal 2* units9 and the price of his share will be 3* units: In the case of loss9 however9 any decrease in the total value of the assets should be divided between them e7actly in the ratio of their investment9 i:e:9 in the ratio of *J&*: Therefore9 if the value of the business has decreased9 in the above e7ample9 by 1* units reducin/ the total number of units to *9 the loss of units shall be borne by #5# 0bein/ *> of the loss2: These units shall be deducted from his ori/inal 2* units9 and the price of his share shall be determined as 1& units: 6. Sharin/ in the /ross profit onlyG Financin/ on the basis of -ushara,ah accordin/ to the above procedure may be difficult in a business havin/ a lar/e number of fi7ed assets9 particularly in a runnin/ industry9 because the valuation of all its assets and their depreciation or appreciation may create accountin/ problems /ivin/ rise to disputes: In such cases9 -ushara,ah may be applied in another way: The major difficulties in these cases arise in the calculation of indirect e7penses9 li,e depreciation of the machinery9 salaries of the staff etc: In order to solve this problem9 the parties may a/ree on the principle that9 instead of net profit9 the /ross profit will be distributed between the parties9 that is9 the indirect e7penses shall not be deducted from the distributable profit: It will mean that all the indirect e7penses shall be borne by the industrialist voluntarily9 and only direct e7penses 0li,e those of raw material9 direct labor9 electricity etc:2 shall be borne by the -ushara,ah: 5ut since the industrialist is offerin/ his machinery9 buildin/ and staff to the -ushara,ah voluntarily9 the percenta/e of his profit may be increased to compensate him to some e7tent: This arran/ement may be justified on the /round that the clients of financial institutions do not restrict themselves to the operations for which they see, finance from the financial institutions: Their machinery and staff etc: is9 therefore9 en/a/ed in some other business also which may not be subject to -ushara,ah9

and in such a case the whole cost of these e7penses cannot be imposed on the -ushara,ah: 1et us ta,e a practical e7ample: Suppose a /innin/ factory has a buildin/ worth !s: 22 million9 plant and machinery valuin/ !s: 2 million and the staff is paid !s: $*9***JA per month: The factory sou/ht finance of !s: $9***9***JA from a ban, on the basis of -ushara,ah for a term of one year: It means that after one year the -ushara,ah will be terminated9 and the profits accrued up to that point will be distributed between the parties accordin/ to the a/reed ratio: 3hile determinin/ the profit9 all direct e7penses will be deducted from the income: The direct e7penses may include the followin/G 1. 6. 9. :. The The The The amount spent in purchasin/ raw material: wa/es of the labor directly involved in processin/ the raw material: e7penses for electricity consumed in the process of /innin/: bills for other services directly rendered for the -ushara,ah:

So far as the buildin/9 the machinery and the salary of other staff is concerned9 it is obvious that they are not meant for the business of the -ushara,ah alone9 because the -ushara,ah will terminate within one year9 while the buildin/ and the machinery are purchased for a much lon/er term in which the /innin/ factory will use them for its own business which is not subject to this oneAyear -ushara,ah: Therefore9 the whole cost of the buildin/ and the machinery cannot be borne by this shortAterm -ushara,ah: 3hat can be done at the most is that the depreciation caused to the buildin/ and the machinery durin/ the term of the -ushara,ah is included in its e7penses: 5ut in practical terms9 it will be very difficult to determine the cost of depreciation9 and it may cause disputes also: Therefore9 there are two practical ways to solve this problem: In the first instance9 the parties may a/ree that the -ushara,ah portfolio will pay an a/reed rent to the client for the use of the machinery and the buildin/ owned by him: This rent will be paid to him from the -ushara,ah fund irrespective of profit or loss accruin/ to the business: The second option is that9 instead of payin/ rent to the client9 the ratio of his profit is increased: 3: !unnin/ -ushara,ah =ccount on the 5asis of .aily 6roductsG -any financial institutions finance the wor,in/ capital of an enterprise by openin/ a runnin/ account for them from where the clients draw different amounts at different intervals9 but at the same time9 they ,eep returnin/ their surplus amounts: Thus the process of debit and credit /oes on up to the date of maturity9 and the interest is calculated on the basis of daily products: @eepin/ in view the basic principles of -ushara,ah the followin/ procedure may be su//ested for this purposeG = certain percenta/e of the actual profit must be allocated for the

ana/ement: The remainin/ percenta/e of the profit must be allocated for the investors: The loss9 if any9 should be borne by the investors only in e7act proportion of their respective investments: The avera/e balance of the contributions made to the -ushara,ah account calculated on the basis of daily products shall be treated as the share capital of the financier: The profit accruin/ at the end of the term shall be calculated on daily product basis9 and shall be distributed accordin/ly:

If such an arran/ement is a/reed upon between the parties9 it does not seem to violate any basic principle of the -ushara,ah: %owever9 this su//estion needs further consideration and research by the e7perts of Islamic jurisprudence: 6ractically9 it means that the parties have a/reed to the principle that the profit accrued to the -ushara,ah portfolio at the end of the term will be divided on the capital utili8ed per day9 which will lead to the avera/e of the profit earned by each rupee per day: The amount of this avera/e profit per rupee per day will be multiplied by the number of the days each investor has put his money into the business9 which will determine his profit entitlement on daily product basis:

($&"I%' . ,I IMP%)" FI'A'&I'G

&ha!ter .6B -ushara,ah can be used for Import Financin/ as well: There are two types of ban, char/es on the letter of credit provided to the importerG 1. Service char/es for openin/ an 1C 6. Interest char/ed on 1Cs9 which are not opened on full mar/in: Collectin/ service char/es for this purpose is allowed9 but as interest cannot be char/ed in any case9 e7perts have proposed two methods for financin/ 1CsG 1. 5ased on -ushara,ah J -udarabah 6. 5ased on -urabahah Musharakah FMudarabah5

This is the best substitute for openin/ the 1C: The ban, and the importer can ma,e an a/reement of -udarabah or -ushara,ah before openin/ the 1C: If the 1C is bein/ opened at 8ero mar/in then an a/reement of -udarabah can be made9 in which the ban, will become !4bAulA-aal and the importer -udarib: The ban, will own the /oods that are bein/ imported and the profit will be distributed accordin/ to the a/reement: If the 1C is bein/ opened with a mar/in then a -ushara,ah a/reement can be made: The ban, will pay the remainin/ amount and the /oods that are bein/ imported will be owned by both of them accordin/ to their share of investment: The ban, and the importer9 with their mutual consent can also include a condition in the a/reement9 wherebyI -ushara,ah or -udarabah will end after a certain time period even if the /oods are not sold: In such a case9 the importer will purchase the ban,#s share at the mar,et price: Murabahah5 =t present Islamic ban,s are usin/ -urabahah9 to finance 1C: These ban,s themselves import the re4uired /oods and then sell these /oods to the importer on -urabahah a/reement: -urabahah financin/ re4uires the ban, and the importer to si/n at least two a/reements separatelyI one for the purchase of the /oods9 and the other for appointin/ the importer as the a/ent of the ban, 0a/ency a/reement2: <nce these two a/reements are si/ned9 the importer can ne/otiate and finali8e all terms and conditions with the e7porter on behalf of the ban,:

($&"I%' . ,I $LP%)" FI'A'&I'G

&ha!ter .6D = ban, plays two very important roles in E7ports: It acts as a ne/otiatin/ ban, and char/e a fee for this purpose9 which is allowed in Shariah: Secondly it provides e7portAfinancin/ facility to the e7porters and char/e interest on this service: These

services are of two types 1. 6re shipment financin/ 6. 6ost shipment financin/ =s interest cannot be char/ed in any case9 e7perts have proposed certain methods for financin/ e7ports: Pre (hi!ment Financing5 6re shipment financin/ needs can be fulfilled by two methods 1. -ushara,ah J -udarabah 6. -urabahah Musharakah F Mudarabah5 The most appropriate method for financin/ e7ports is -ushara,ah or -udarbah: 5an, and e7porter can ma,e an a/reement of -udarabah provided that the e7porter is not investin/I other wise -ushara,ah a/reement can be made: =/reement in such case will be easy9 as cost and e7pected profit is ,nown: The e7porter will manufacture or purchase /oods and the profit obtained by e7portin/ it will be distributed between them accordin/ to the predefined ratio: = problem that can be encountered by the ban, is that if the e7porter is not able to deliver the /oods accordin/ to the terms and conditions of the importer9 then the importer can refuse to accept the /oods9 and in this case e7porter#s ban, will ultimately suffer: This problem can be rectified by includin/ a condition in -udarabah or -ushara,ah a/reement that9 if e7porter violates the terms and conditions of import a/reement then the 5an, will not be responsible for any loss which arises due to this ne/li/ence: This condition is allowed in Shariah as the !abbAulAmal is not responsible for any loss that arises due to the ne/li/ence of -udarib: Murabahah -urabahah is bein/ used in many Islamic 5an,s for e7port financin/: 5an,s purchases /oods that are to be e7ported at price that is less than the price a/reed between the e7porter and the importer: It then e7ports /oods at the ori/inal price and thus earns profit: -urabahah financin/ re4uires ban, and e7porter to si/n at least two a/reements separately9 one for the purchase of /oods and the other for appointin/ the e7porter as the a/ent of the ban, 0that is a/ency a/reement2: <nce these two a/reements are si/ned9 the e7porter can ne/otiate and finali8e all the terms and conditions with the importer on behalf of the ban,: Post (hi!ment Financing5 6ost shipment finance is similar to the discountin/ of the bill of e7chan/e: Its alternate Shariah compliant procedure is discussed belowG The e7porter with the bill of e7chan/e can appoint the ban, as his a/ent to collect receivable on his behalf: The ban, can char/e a fee for this service and can

provide interest free loan to the e7porter9 which is e4ual to the amount of the bill9 and the e7porter will /ive his consent to the ban, that it can ,eep the amount received from the bill as a payment of the loan: %ere two processes are separated9 and thus two a/reements will be made: <ne will authori8e the ban, to collect the loan on his behalf as an a/ent9 for which he will char/e a particular fee: The second a/reement will provide interest free loan to the e7porter9 and authori8e the ban, for ,eepin/ the amount received throu/h bill as a payment for loan: These a/reements are correct and allowed accordin/ to Shariah because collectin/ fee for service and /ivin/ interest free loan is permissible

($&"I%' . ,II I(#AMI& I',$("M$'"

&ha!ter .6E ($&/)I"INA"I%' Securiti8ation means issuin/ certificates of ownership a/ainst an investment pool or business enterprise: This chapter discusses the issues9 problems and rules in issuin/ such certificates with respect to the EnatureE of investment pool: 5asic /uidelines are also provided on the ne/otiability and sale of these certificates in the secondary mar,ets: (ecuritization o2 Musharakah -ushara,ah is a mode of financin/ which can be securiti8ed easily9 especially9 in the case of bi/ projects where hu/e amounts are re4uired which a limited number

of people cannot afford to subscribe: Every subscriber can be /iven a -ushara,ah certificate9 which represents his proportionate ownership in the assets of the -ushara,ah9 and after the project is started by ac4uirin/ substantial nonAli4uid assets9 these -ushara,ah certificates can be treated as ne/otiable instruments and can be bou/ht and sold in the secondary mar,et: %owever9 tradin/ in these certificates is not allowed when all the assets of the -ushara,ah are still in li4uid form 0i:e: in the shape of cash or receivables or advances due from others2: For proper understandin/ of this point9 it must be noted that subscribin/ to a -ushara,ah is different from advancin/ a loan: = bond issued to evidence a loan has nothin/ to do with the actual business underta,en with the borrowed money: The bond stands for a loan repayable to the holder in any case9 and mostly with interest: The -ushara,ah certificate9 on the contrary9 represents the direct pro rata ownership of the holder in the assets of the project: If all the assets of the joint project are in li4uid form9 the certificate will represent a certain proportion of money owned by the project: For e7ample9 one hundred certificates9 havin/ a value of !s: one million each9 have been issued: It means that the total worth of the project is !s: 1** million: If nothin/ has been purchased by this money9 every certificate will represent !s: one million: In this case9 this certificate cannot be sold in the mar,et e7cept at par value9 because if one certificate is sold for more than !s:one million9 it will mean that !s: one million are bein/ sold in e7chan/e for more than !s: one million9 which is not allowed in Shariah9 because where money is e7chan/ed for money9 both must be e4ual: =ny e7cess at either side is !iba: %owever9 when the subscribed money is employed in purchasin/ nonAli4uid assets li,e land9 buildin/9 machinery9 raw material9 furniture etc: the -ushara,ah certificates will represent the holders# proportionate ownership in these assets: Thus9 in the above e7ample9 one certificate will stand for one hundredth share in these assets: In this case it will be allowed by the Shariah to sell these certificates in the secondary mar,et for any price a/reed upon between the parties which may be more than the face value of the certificate: Since the subject matter of the sale is a share in the tan/ible assets and not in money alone9 therefore the certificate may be ta,en as any other commodity which can be sold with profit or at a loss: In most cases9 the assets of the project are a mi7ture of li4uid and nonAli4uid assets: This comes to happen when the wor,in/ partner has converted a part of the subscribed money into fi7ed assets or raw material9 while rest of the money is still li4uid: <r9 the project9 after convertin/ all its money into nonAli4uid assets may have sold some of them and has ac4uired their sale proceeds in the form of money: In some cases the price of its sales may have become due on its customers but may have not yet been received: These receivable amounts9 bein/ a debt9 are also treated as li4uid money: The 4uestion arises about the rule of Shariah in a situation where the assets of the project are a mi7ture of li4uid and nonAli4uid assets9 whether the -ushara,ah certificates of such a project can be traded inH The opinions of the contemporary -uslim jurists are different on this point: =ccordin/ to the traditional Shafi school9 this type of certificate cannot be sold: Their classic view is that whenever there is a combination of li4uid and nonA li4uid assets9 it cannot be sold unless the nonAli4uid part of the business is separated and sold independently: The %anafi school9 however9 is of the opinion that whenever there is a combination

of li4uid and nonAli4uid assets9 it can be sold and purchased for an amount /reater than the amount of li4uid assets in combination9 in which case money will be ta,en as sold at an e4ual amount and the e7cess will be ta,en as the price of the nonA li4uid assets owned by the business: Suppose9 the -ushara,ah project contains *> nonAli4uid assets i:e: machinery9 fi7tures etc: and &*> li4uid assets9 i:e: cash and receivables: Fow9 each -ushara,ah certificate havin/ the face value of !s:1**JA represents !s: &*JA worth of li4uid assets9 and !s: *JA worth of nonAli4uid assets: This certificate may be sold at any price more than !s:&*: If it is sold at !s: 11*JA it will mean that !s: &* of the price are a/ainst !s: &*JA contained in the certificate and !s:$*JA is a/ainst the proportionate share in the nonAli4uid assets: 5ut it will never be allowed to sell the certificate for a price of !s:&*JA or less9 because in the case of !s: &*JA it will not set off the amount of !s: &*9 let alone the other assets: =ccordin/ to the %anafi view9 no specific proportion of nonAli4uid assets in the whole is prescribed: Therefore9 even if the nonAli4uid assets represent less than $*> in the whole9 its tradin/ accordin/ to the above formula is allowed: %owever9 most of the contemporary scholars9 includin/ those of Shafi school9 have allowed tradin/ in the units of the whole only if the nonAli4uid assets of the business are more than $*>: Therefore9 for a valid tradin/ of the -ushara,ah certificates acceptable to all schools9 it is necessary that the portfolio of -ushara,ah consists of nonAli4uid assets valuin/ more than $*> of its total worth: %owever9 if %anafi view is adopted9 tradin/ will be allowed even if the nonAli4uid assets are less than $*> but the si8e of the nonAli4uid assets should not be ne/li/ible:

(ecuritization o2 Murabahah -urabahah is a transaction9 which cannot be securiti8ed for creatin/ a ne/otiable instrument to be sold and purchased in secondary mar,et: The reason is obvious: If the purchaserJclient in a -urabahah transaction si/ns a paper to evidence his indebtedness towards the sellerJfinancier9 the paper will represent a monetary debt receivable from him: In other words9 it represents money payable by him: Therefore transfer of this paper to a third party will mean transfer of money: It has already been e7plained that where money is e7chan/ed for money 0in the same currency2 the transfer must be at par value: It cannot be sold or purchased at a lower or a hi/her price: Therefore9 the paper representin/ a monetary obli/ation arisin/ out of a -urabahah transaction cannot create a ne/otiable instrument: If the paper is transferred9 it must be at par value: %owever9 if there is a mi7ed portfolio consistin/ of a number of transactions li,e -ushara,ah9 leasin/ and -urabahah9 then this portfolio may issue ne/otiable certificates subject to certain conditions: (ecuritization o2 I>arah The arran/ement of Ijarah has a /ood potential of securiti8ation9 which may help create a secondary mar,et for the financiers on the basis of Ijarah: Since the lessor in Ijarah owns the leased assets9 he can sell the asset9 in whole or in part9

to a third party who may purchase it and may replace the seller in the ri/hts and obli/ations of the lessor with re/ard to the purchased part of the asset: Therefore9 if the lessor9 after enterin/ into Ijarah9 wishes to recover his cost of purchase of the asset with a profit thereon9 he can sell the leased asset wholly or partly either to one party or to a number of individuals: In the latter case9 the purchase of a proportion of the asset by each individual may be evidenced by a certificate9 which may be called #Ijarah certificate#: This certificate will represent the holder#s proportionate ownership in the leased asset and he will assume the ri/hts and obli/ations of the ownerJlessor to that e7tent: Since the assets is already leased to the lessee9 lease will continue with the new owners9 each one of the holders of this certificate will have the ri/ht to enjoy a part of the rent accordin/ to his proportion of ownership in the asset: Similarly he will also assume the obli/ations of the lessor to the e7tent of his ownership: Therefore9 in the case of total destruction of the asset9 he will suffer the loss to the e7tent of his ownership: These certificates9 bein/ an evidence of proportionate ownership in a tan/ible asset9 can be ne/otiated and traded freely in the mar,et and can serve as an instrument easily convertible into cash: Thus they may help in solvin/ the problems of li4uidity mana/ement faced by the Islamic ban,s and financial institutions: It should be remembered9 however9 that the certificate must represent ownership of an undivided part of the asset with all its ri/hts and obli/ations: -isunderstandin/ this basic concept9 some 4uarters tried to issue Ijarah certificates representin/ the holder#s ri/ht to claim certain amount of the rental only without assi/nin/ to him any ,ind of ownership in the asset: It means that the holder of such a certificate has no relation with the leased asset at all: %is only ri/ht is to share the rentals received from the lessee: This type of securiti8ation is not allowed in Shariah: =s e7plained earlier in this chapter9 the rent after bein/ due is a debt payable by the lessee: The debt or any security representin/ debt only is not a ne/otiable instrument in Shariah9 because tradin/ in such an instrument amounts to trade in money or in monetary obli/ation which is not allowed9 e7cept on the basis of e4uality9 and if the e4uality of value is observed while tradin/ in such instruments9 the very purpose of securiti8ation is defeated: Therefore9 this type of Ijarah certificates cannot serve the purpose of creatin/ a secondary mar,et: It is9 therefore9 necessary that the Ijarah certificates are desi/ned to represent real ownership of the leased assets9 and not only a ri/ht to receive rent:

($&"I%' . ,II I(#AMI& I',$("M$'"

&ha!ter .9C "*$ P)I'&IP#$ %F #IMI"$D #IABI#I"0 5y ;ustice -ohammad Ta4i ?smani The concept of #limited liability# has now become an inseparable in/redient of the lar/eAscale enterprises of trade and industry throu/hout the modern world9 includin/ the -uslim countries: The present chapter aims to e7plain this concept and evaluate it from the Shariah point of view in order to ,now whether or not this principle is acceptable in a pure Islamic economy: The limited liability in the modern economic and le/al terminolo/y is a condition under which a partner or a shareholder of a business secures himself from bearin/ a loss /reater than the amount he has invested in a company or partnership with limited liability: If the business incurs a loss9 the ma7imum a shareholder can suffer is that he may lose his entire ori/inal investment: 5ut the loss cannot e7tend to his personal assets9 and if the assets of the company are not sufficient to dischar/e all its liabilities9 the creditors cannot claim the remainin/ part of their receivables from the personal assets of the shareholders: =lthou/h the concept of #limited liability# was9 in some countries applied to the partnership also9 yet9 it was most commonly applied to the companies and corporate bodies: !ather9 it will be truer9 perhaps9 to say that the concept of #limited liability# ori/inally emer/ed with the emer/ence of the corporate bodies and joint stoc, companies: The basic purpose of the introduction of this principle was to attract the ma7imum number of investors to the lar/eAscale joint ventures and to assure them that their personal fortunes will not be at sta,e if they wish to invest their savin/s in such a joint enterprise: In the practice of modern trade9 the concept proved itself to be a vital force to mobili8e lar/e amounts of capital from a wide ran/e of investors: Fo doubt9 the concept of #limited liability# is beneficial to the shareholders of a company: 5ut9 at the same time9 it may be injurious to its creditors: If the liabilities of a limited company e7ceed its assets9 the company becomes insolvent and is conse4uently li4uidated9 the creditors may lose a considerable amount of their claims9 because they can only receive the li4uidated value of the assets of the company9 and have no recourse to its shareholders for the rest of their claims: Even the directors of the company who may be responsible for such an unfortunate situation cannot be held responsible for satisfyin/ the claims of the creditors: It is this aspect of the concept of #limited liability# which re4uires consideration and research from the Shariah viewpoint: =lthou/h the concept of #limited liability# in the conte7t of the modern commercial practice is a new concept and finds no e7press mention as such in the ori/inal sources of Islamic Fi4h9 yet the Shariah viewpoint about it can be sou/ht in the

principles laid down by the %oly "uran9 the Sunnah of the %oly 6rophet and the Islamic jurisprudence: This e7ercise re4uires some sort of ijtihad carried out by the persons 4ualified for it: This ijtihad should preferably be underta,en by the Shariah scholars at a collective level9 yet9 as a preAre4uisite9 there should be some individual effort9 which may serve as a basis for the collective e7ercise: =s a humble student of Shariah9 this author have been considerin/ the issue since lon/9 and what is /oin/ to be presented in this article should not be treated as a final verdict on this subject9 nor an absolute opinion on the point: It is the outcome of initial thin,in/ on the subject9 and the purpose of this article is to provide a foundation for further research: The 4uestion of #limited liability# it can be said9 is closely related to the concept of juridical personality of the modern corporate bodies: =ccordin/ to this concept9 a jointAstoc, company in itself enjoys the status of a separate entity as distin/uished from the individual entities of its shareholders: The separate entity as a fictive person has le/al personality and may thus sue and be sued9 may ma,e contracts9 may hold property in its name9 and has the le/al status of a natural person in all its transactions entered into in the capacity of a juridical person: The basic 4uestion9 it is believed9 is whether the concept of a #juridical person# is acceptable in Shariah or not: <nce the concept of #juridical person# is accepted and it is admitted that9 despite its fictive nature9 a juridical person can be treated as a natural person in respect of the le/al conse4uences of the transactions made in its name9 we will have to accept the concept of #limited liability# which will follow as a lo/ical result of the former concept: The reason is obvious: If a real person i:e: a human bein/ dies insolvent9 his creditors have no claim e7cept to the e7tent of the assets he has left behind: If his liabilities e7ceed his assets9 the creditors will certainly suffer9 no remedy bein/ left for them after the death of the indebted person: Fow9 if we accept that a company9 in its capacity of a juridical person9 has the ri/hts and obli/ations similar to those of a natural person9 the same principle will apply to an insolvent company: = company9 after becomin/ insolvent9 is bound to be li4uidatedG and the li4uidation of a company corresponds to the death of a person9 because a company after its li4uidation cannot e7ist any more: If the creditors of a real person can suffer9 when he dies insolvent9 the creditors of a juridical person may suffer too9 when its le/al life comes to an end by its li4uidation: Therefore9 the basic 4uestion is whether or not the concept of #juridical person# is acceptable to Shariah: =lthou/h the idea of a juridical person9 as envisa/ed by the modern economic and le/al systems has not been dealt with in the Islamic Fi4h9 yet there are certain precedents wherefrom the basic concept of a juridical person may be derived by inference: 1. Wa<2 The first precedent is that of a 3a4f: = 3a4f is a le/al and reli/ious institution wherein a person dedicates some of his properties for a reli/ious or a charitable

purpose: The properties9 after bein/ declared as 3a4f9 no lon/er remain in the ownership of the donor: The beneficiaries of a 3a4f can benefit from the corpus or the proceeds of the dedicated property9 but they are not its owners: Its ownership vests in =llah =lmi/hty alone: It seems that the -uslim jurists have treated the 3a4f as a separate le/al entity and have ascribed to it some characteristics similar to those of a natural person: This will be clear from two rulin/s /iven by the fu4aha 0-uslim jurists2 in respect of 3a4f: Firstly9 if a property is purchased with the income of a 3a4f9 the purchased property cannot become a part of the 3a4f automatically: !ather9 the jurists say9 the property so purchased shall be treated9 as a property owned by the 3a4f: It clearly means that a 3a4f9 li,e a natural person9 can own a property: Secondly9 the jurists have clearly mentioned that the money /iven to a mos4ue as donation does not form part of the 3a4f9 but it passes to the ownership of the mos4ue: %ere a/ain the mos4ue is accepted to be an owner of money: Some jurists of the -ali,i School have e7pressly mentioned this principle also: They have stated that a mos4ue is capable of bein/ the owner of somethin/: This capability of the mos4ue9 accordin/ to them9 is constructive9 while the capability enjoyed by a human bein/ is physical: =nother renowned -ali,i jurist9 namely9 =hmad =lA.ardir9 validates a be4uest made in favor of a mos4ue9 and /ives the reason that a mos4ue can own properties: Fot only this9 he e7tends the principle to an inn and a brid/e also9 provided that they are 3a4f: It is clear from these e7amples that the -uslim jurists have accepted that a 3a4f can own properties: <bviously9 a 3a4f is not a human bein/9 yet they have treated it as a human bein/ in the matter of ownership: <nce its ownership is established9 it will lo/ically follow that it can sell and purchase9 may become a debtor and a creditor and can sue and be sued9 and thus all the characteristics of a #juridical person# can be attributed to it: 6. Baitul.Mal =nother e7ample of #juridical person# found in our classic literature of Fi4h is that of the 5aitulAmal 0the e7che4uer of an Islamic state2: 5ein/ public property9 all the citi8ens of an Islamic state have some beneficial ri/ht over the 5aitulAmal9 yet9 nobody can claim to be its owner: Still9 the 5aitulAmal has some ri/hts and obli/ations: Imam =lASara,hsi9 the wellA,nown %anafi jurist9 says in his wor, E=lA -absutEG EThe 5aitulAmal has some ri/hts and obli/ations9 which may possibly be undetermined:E =t another place the same author saysG EIf the head of an Islamic state needs money to /ive salaries to his army9 but he finds no money in the @haraj department of the 5aitulAmal 0wherefrom the salaries are /enerally /iven2 he can /ive salaries from the sada4ah 0Ca,ah2 department9 but the amount so ta,en from

the sada4ah department shall be deemed to be a debt on the @haraj departmentE: It follows from this that not only the 5aitulAmal9 but also the different departments therein can borrow and advance loans to each other: The liability of these loans does not lie on the head of state9 but on the concerned department of 5aitulAmal: It means that each department of 5aitulAmal is a separate entity and in that capacity it can advance and borrow money9 may be treated a debtor or a creditor9 and thus can sue and be sued in the same manner as a juridical person does: It means that the Fu4aha of Islam have accepted the concept of juridical person in respect of 5aitulAmal: 9. @oint (tock =nother e7ample very much close to the concept of #juridical person# in a joint stoc, company is found in the Fi4h of Imam Shafai: =ccordin/ to a settled principle of Shafai School9 if more than one person run their business in partnerAship9 where their assets are mi7ed with each other9 the Ca,ah will be levied on each of them individually9 but it will be payable on their jointAstoc, as a whole9 so much so that even if one of them does not own the amount of the nisab9 but the combined value of the total assets e7ceeds the prescribed limit of the nisab9 8a,ah will be payable on the whole jointAstoc, includin/ the share of the former9 and thus the person whose share is less than the nisab shall also contribute to the levy in proportion to his ownership in the total assets9 whereas he was not subject to the levy of 8a,ah9 had it been levied on each person in his individual capacity: The same principle9 which is called the principle of #@hultahAalAShuyu# is more forcefully applied to the levy of Ca,ah on the livestoc,: Conse4uently9 a person sometimes has to pay more Ca,ah than he was liable to in his individual capacity9 and sometimes he has to pay less than that: That is why the %oly 6rophet has saidG #The separate assets should not be joined to/ether nor the joint assets should be separated in order to reduce the amount of Ca,ah levied on them#: This principle of #@hultahAalAShuyu# which is also accepted to some e7tent by the -ali,i and %anbali schools with some variance in details9 has a basic concept of a juridical person underlyin/ it: It is not the individual9 accordin/ to this principle9 who is liable to Ca,ah: It is the #jointAstoc,# that has been made subject to the levy: It means that the #jointAstoc,# has been treated a separate entity9 and the obli/ation of Ca,ah has been diverted towards this entity which is very close to the concept of a #juridical person#9 thou/h it is not e7actly the same: : Inheritance under debt The fourth e7ample is the property left by a deceased person whose liabilities e7ceed the value of all the property left by him: For the purpose of brevity we can refer to it as #inheritance under debt#: =ccordin/ to the jurists9 this property is neither owned by the deceased9 because he is no more alive9 nor is it owned by his heirs9 for the debts on the deceased have a preferential ri/ht over the property as compared to the ri/hts of the heirs: It is not even owned by the creditors9 because the settlement has not yet ta,en place: They have their claims over it9 but it is not their property unless it is actually divided between them: 5ein/ property of nobody9 it has its own e7istence and it can be termed a le/al entity: The heirs of the deceased or his nominated

e7ecutor will loo, after the property as mana/ers9 but they are not the owners: If the process of the settlement of debt re4uires some e7penses9 the same will be met by the property itself: 1oo,ed at from this an/le9 this #inheritance under debt# has its own entity which may sell and purchase9 becomes debtor and creditor9 and has the characteristics very much similar to those of a #juridical person:# Fot only this9 the liability of this #juridical person# is certainly limited to its e7istin/ assets: If the assets do not suffice to settle all the debts9 there is no remedy left with its creditors to sue anybody9 includin/ the heirs of the deceased9 for the rest of their claims: These are some instances where the -uslim jurists have affirmed a le/al entity9 similar to that of a juridical person: These e7amples would show that the concept of #juridical person# is not totally forei/n to the Islamic jurisprudence9 and if the juridical entity of a jointAstoc, company is accepted on the basis of these precedents9 no serious objection is li,ely to be raised a/ainst it: =s mentioned earlier9 the 4uestion of limited liability of a company is closely related to the concept of a #juridical person#: If a #juridical person# can be treated a natural person in its ri/hts and obli/ations9 then9 every person is liable only to the limit of the assets he owns9 and in case he dies insolvent no other person can bear the burden of his remainin/ liabilities9 however closely related to him he may be: <n this analo/y the limited liability of a jointAstoc, company may be justified: "he limited liability o2 the master o2 a sla4e %ere I would li,e to cite another e7ample with advanta/e9 which is the closest e7ample to the limited liability of a jointAstoc, company: The e7ample relates to a period of our past history when slavery was in vo/ue9 and the slaves were treated as the property of their masters and were freely traded in: =lthou/h the institution of slavery with reference to our a/e is somethin/ past and closed9 yet the le/al principles laid down by our jurists while dealin/ with various 4uestions pertainin/ to the trade of slaves are still beneficial to a student of Islamic jurisprudence9 and we can avail of those principles while see,in/ solutions to our modern problems and in this respect9 it is believed that this e7ample is the most relevant to the 4uestion at issue: The slaves in those days were of two ,inds: The first ,ind was of those who were not permitted by their masters to enter into any commercial transaction: = slave of this ,ind was called #"inn#: 5ut there was another ,ind of slaves who were allowed by their masters to trade: = slave of this ,ind was called =bde -a8oon in =rabic: The initial capital for the purpose of trade was /iven to such a slave by his master9 but he was free to enter into all the commercial transactions: The capital invested by him totally belon/ed to his master: The income would also vest in him9 and whatever the slave earned would /o to the master as his e7clusive property: If in the course of trade9 the slave incurred debts9 the same would be set off by the cash and the stoc, present in the hands of the slave: 5ut if the amount of such cash and stoc, would not be sufficient to set off the debts9 the creditors had a ri/ht to sell the slave and settle their claims out of his price: %owever9 if their claims would not be satisfied even after sellin/ the slave9 and the slave would die in that state of indebtedness9 the creditors could not approach his master for the rest of their claims: %ere9 the master was actually the owner of the whole business9 the slave bein/

merely an intermediary tool to carry out the business transactions: The slave owned nothin/ from the business: Still9 the liability of the master was limited to the capital he invested includin/ the value of the slave: =fter the death of the slave9 the creditors could not have a claim over the personal assets of the master: This is the nearest e7ample found in the Islamic Fi4h9 which is very much similar to the limited liability of the share holders of a company9 which can be justified on the same analo/y: <n the basis of these five precedents9 it seems that the concepts of a juridical person and that of limited liability do not contravene any injunction of Islam: 5ut at the same time9 it should be emphasi8ed9 that the concept of #limited liability# should not be allowed to wor, for cheatin/ people and escapin/ the natural liabilities conse4uent to a profitable trade: So9 the concept could be restricted9 to the public companies only who issue their shares to the /eneral public and the number of whose shareholders is so lar/e that each one of them cannot be held responsible for the dayAtoAday affairs of the business and for the debts e7ceedin/ the assets: =s for the private companies or the partnerships9 the concept of limited liability should not be applied to them9 because9 practically9 each one of their shareholders and partners can easily ac4uire ,nowled/e of the dayAtoAday affairs of the business and should be held responsible for all its liabilities: There may be an e7ception for the sleepin/ partners or the shareholders of a private company who do not ta,e part in the business practically and their liability may be limited as per a/reement between the partners: If the sleepin/ partners have a limited liability under this a/reement9 it means9 in terms of Islamic jurisprudence9 that they have not allowed the wor,in/ partners to incur debts e7ceedin/ the value of the assets of the business: In this case9 if the debts of the business increase from the specified limit9 it will be the sole responsibility of the wor,in/ partners who have e7ceeded the limit: The upshot of the fore/oin/ discussion is that the concept of limited liability can be justified9 from the Shariah viewpoint9 in the public jointAstoc, companies and those corporate bodies only who issues their shares to /eneral public: The concept may also be applied to the sleepin/ partners of a firm and to the shareholders of a private company who ta,e no active part in the business mana/ement: 5ut the liability of the active partners in a partnership and active shareholders of a private company should always be unlimited: =t the end9 we should a/ain recall what has been pointed out at the outset: The issue of limited liability9 bein/ a modern issue9 which re4uires a collective effort to find out its solution in the li/ht of Shariah9 the above discussion should not be deemed to be a final verdict on the subject: This is only the outcome of an initial thin,in/9 which always remains subject to further study and research: